8-K

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): June 19, 2007

The Allied Defense Group, Inc.
__________________________________________
(Exact name of registrant as specified in its charter)

Delaware	1-11376	04-2281015
_____________________ (State or other jurisdiction	_____________ (Commission	______________ (I.R.S. Employer
of incorporation)	File Number)	Identification No.)
8000 Towers Crescent Drive, Suite 260, Vienna, Virginia		22182
_________________________________ (Address of principal executive offices)		___________ (Zip Code)

Registrant’s telephone number, including area code: (703) 847-5268

Not Applicable
______________________________________________
Former name or former address, if changed since last report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[  ]  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[  ]  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[  ]  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[  ]  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry into a Material Definitive Agreement.

On March 9, 2006, The Allied Defense Group, Inc. ("Allied") entered into a Securities Purchase Agreement (the "Purchase Agreement") with the purchasers named therein (the "Purchasers") for the private placement of senior subordinated convertible notes (the "Initial Notes") in the principal amount of $30 million and related warrants (the "Warrants") to purchase common stock of Allied (the "Transactions"). In connection with the Transactions, Allied entered into a Registration Rights Agreement with the Purchasers.

On February 26, 2007, March 20, 2007, and March 26, 2007, Allied filed Current Reports on Form 8-K announcing the receipt of letters from the Purchasers asserting the existence of an event of default under the Initial Notes. In addition, one of the Purchasers filed suit against Allied based on the alleged default.

On June 19, 2007, Allied and each Purchaser entered into an Amended and Restated Securities Purchase Agreement (the "Amendment Agreement") to refinance the terms of the origi nal transaction and providing for the issuance of additional convertible notes totaling up to $15 million. Pursuant to the Amendment Agreement, each Purchaser agreed to withdraw the purported default notice, if any, delivered by such Purchaser and to dismiss the lawsuit. In addition, Allied and each Purchaser entered into a mutual release.

Specifically, Allied has agreed to:

(a) exchange the Initial Notes for 1,288,000 shares of its common stock (the "Shares") and approximately $27.1 million of Senior Secured Convertible Notes (the "Amended Notes"); and

(b) sell to the Investors additional Senior Secured Convertible Notes in the aggregate original principal amount of up to $15,000,000 (the "New Notes").

The Amended Notes and the New Notes will carry an 8.95% coupon, payable quarterly, and convertible into shares of Allied common stock at a price of $9.35 per share.

This transaction is subject to various closing conditions, including approval of the American Stock Exchang e, and is expected to close within five (5) business days.

The exchange of the Initial Notes for the Amended Notes and the Shares will be exempt from the registration provisions of the Securities Act under Section 3(a)(9) of the Securities Act and the issuance of the New Notes will be exempt from the registration provisions of the Securities Act under Section 4(2) of the Securities Act. Allied has agreed to register the resale of the shares of common stock issuable to the investors upon conversion of the Amended Notes and the New Notes as well as the issuance of shares of our common stock in satisfaction of the interest obligations thereunder.

The Amended Notes and the New Notes are referred to collectively herein as the "Notes". The Notes will bear interest at the rate of 8.95% per year, payable quarterly in arrears. The Notes mature three (3) years after the date of issuance, subject to the right of the Purchasers to demand repayment eighteen (18) months after closing.

The Purchaser s can choose to convert all or a portion of the principal amount outstanding under the Notes into shares of our common stock at any time before maturity. The Notes will be convertible into common stock at a fixed conversion price equal to the closing bid price on June 19, 2007 ($9.35). Upon certain conversions of the Notes prior to the third anniversary of the closing, the Purchasers will also be entitled to receive three (3) full years of interest, less any interest payments received to date.


On June 20, 2007, Allied issued a press release announcing the execution of the Amendment Agreement. A copy of this press release is filed as an exhibit to this report and is incorporated in this report by reference.

The foregoing description of the Amendment Agreement is qualified by reference to the full text thereof attached as an Exhibit to this Form 8-K.

Item 3.02 Unregistered Sales of Equity Securities.

The information contained in Item 1.01 is incorporated herein by reference. The issuance of the Shares, the Amended Notes, and the New Notes will be exempt from registration pursuant to Section 3(a)(9) and Section 4(2) of the Securities Act of 1933, as amended.

Item 9.01 Financial Statements and Exhibits.

Exhibit 10.1 Amended and Restated Securities Purchase Agreement, dated as of June 19, 2007, between The Allied Defense Group, Inc. and the Purchasers.

Exhibit 10.2 Form of Notes.

Exhibit 10.3 Form of Amended and Restated Registration Rights Agreement.

Exhibit 99.1 Press Release, dated as of June 20, 2007.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS: This Current Report on Form 8-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because statements iclude risks and uncertainties, actual results may differ materially from those expressed or implied and include, but are not limited to, those discussed in filings by the Company with the Securities and Exchange Commission.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	The Allied Defense Group, Inc.
June 20, 2007	By:	Monte L. Pickens
		Name: Monte L. Pickens
		Title: Chief Operating Officer and Executive Vice President

Exhibit Index

Exhibit No.	Description
10.1	Amended and Restated Securities Purchase Agreement, dated as of June 19, 2007
10.2	Form of Notes
10.3	Form of Amended and Restated Registration Rights Agreement
99.1	Press Release, dated as of June 20, 2007

EX-10.1

AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT

AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of June 19, 2007, by and among The Allied Defense Group, Inc., a Delaware corporation with its corporate headquarters located at 8000 Towers Crescent Drive, Suite 260, Vienna, Virginia 22182 (the "Company”), and the investors listed on the Schedule of Buyers attached hereto (individually, a "Buyer” and collectively, the “Buyers”).

WHEREAS:

A. The Company and the Buyers entered into that certain Securities Purchase Agreement, dated as of March 9, 2006 (the “Original Closing Date”) (as amended from time to time in accordance with its terms, the “Original Securities Purchase Agreement”), whereby the Company, among other things, issued (i) that aggregate principal amount of senior subordinated convertible notes (the “Original Notes”), set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers and (ii) warrants (the “Warrants”), to acquire up to that number of additional shares of the Company’s common stock, par value $0.10 per share (the "Common Stock”) set forth opposite such Buyer’s name in column (9) of the Schedule of Buyers (as exercised, collectively, the “Warrant Shares”).

B. The Company has authorized a new series of senior secured convertible notes of the Company, in substantially the form attached hereto as Exhibit A-2, which shall be convertible into Common Stock in accordance with the terms of such Notes.

C. Each Buyer and the Company wishes to exchange in the Initial Closing (as defined in Section 1(a)(i) below), upon the terms and conditions stated in this Agreement, that aggregate principal amount of Original Notes set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers (which aggregate amount for all Buyers is $30,000,000) for (i) that aggregate principal amount of Notes, in substantially the form attached hereto as Exhibit A-2 (collectively, the “Amended Notes”), as set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers (which aggregate amount for all Buyers shall be the sum of (x) $27,132,192 and (y) the product of (I) the number of calendar days during the period commencing on the date hereof and ending on the Initial Closing Date and (II) $10,273.97) (the Common Stock received upon such conversion, collectively, the “Amended Conversion Shares”), (ii) that aggregate number of shares (the “144 Common Shares”) of the Common Stock, set forth opposite such Buyer’s name in column (7) on the Schedule of Buyers attached hereto (which aggregate amount for all Buyers shall be 613,142) and (iii) that aggregate number of shares (the “Other Common Shares”, and together with the 144 Common Shares, the “Common Shares”) of the Common Stock, set forth opposite such Buyer’s name in column (8) on the Schedule of Buyers attached hereto (which aggregate amount for all Buyers shall be 674,858).

D. The issuance of the Amended Notes and Common Shares pursuant to this Agreement in exchange for the surrender (and cancellation) of the Original Notes is being made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended (the “1933 Act”).

E. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and conditions stated in this Agreement, in the Initial Closing (as defined in Section 1(a)(i) below), that aggregate principal amount of Notes, in substantially the form attached hereto as Exhibit A-2 (collectively, the “Initial Notes”), set forth opposite such Buyer’s name in column (5) on the Schedule of Buyers (which aggregate amount for all Buyers shall be the sum of (x) $5,000,000 and (y) the Legal Counsel Fee Amount) (as converted, collectively, the “Initial Conversion Shares”).

F. Subject to the terms and conditions set forth in this Agreement, upon the satisfaction of certain conditions, the Buyers shall have the right to purchase or may be required to purchase in an Additional Closing (as defined in Section 1(a)(ii) below), that aggregate principal amount of Notes, in substantially the form attached hereto as Exhibit A-2 (collectively, the "Additional Notes” and, together with the Amended Notes and Initial Notes, the “Notes”), set forth opposite such Buyer’s name in column (6) on the Schedule of Buyers (which aggregate amount for all Buyers shall be $10,000,000) (as converted, collectively, the “Additional Conversion Shares” and, collectively with the Amended Conversion Shares and Initial Conversion Shares, the “Conversion Shares”).

G. The Notes bear interest, which at the option of the Company, subject to certain conditions, may be paid in shares of Common Stock (the “Interest Shares”).

H. The issuance of the Initial Notes and Additional Notes pursuant to this Agreement is being made in reliance upon the exemption from registration afforded by Section 4(2) of the 1933 Act and Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.

I. On or prior to the Initial Closing Date, unless the Company directs otherwise in a written notice to the Buyers (an “Escrow Waiver Event”), the parties hereto and Wilmington Trust Company, a financial institution chartered under the laws of the State of Delaware, as escrow agent (the "Escrow Agent”) are executing and delivering an escrow agreement, in the form attached hereto as Exhibit K (the “Escrow Agreement”), pursuant to which the Buyers have agreed to deposit with the Escrow Agent such amount set forth opposite such Buyer’s name in column (12) on the Schedule of Buyers (which aggregate amount for all Buyers shall be $5,000,000) (the “Escrow Amount”), which shall be held in escrow by the Escrow Agent in accordance with the terms and conditions of the Escrow Agreement and, subject to the satisfaction of certain conditions, applied as payment in part of the Additional Purchase Price (as defined below) in the Additional Closing.

J. On the Initial Closing Date, the parties hereto are executing and delivering an Amended and Restated Registration Rights Agreement, substantially in the form attached hereto as Exhibit C (as amended or modified from time to time in accordance with its terms, the “Registration Rights Agreement”), pursuant to which the Company has agreed to provide certain registration rights with respect to the Conversion Shares, the Warrant Shares under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws. The Registration Rights Agreement amends and restates the terms and conditions of that certain Registration Rights Agreement, by and among the Company and the Buyers, dated as of the Original Closing Date.

K. The Notes, the Conversion Shares, the Common Shares, the Interest Shares, the Warrants and the Warrant Shares, collectively, are referred to herein as the “Securities”.

L. The Notes will rank senior to all outstanding and future indebtedness of the Company, subject to Permitted Senior Indebtedness (as defined in the Notes), and will be secured by a first priority, perfected security interest in all of the assets of the Company and the stock and assets of each of the Company’s United States subsidiaries and 65% of the stock of ARC Europe, S.A. and Allied Research Corporation Limited, as evidenced by (i) a security agreement, in the form attached hereto as Exhibit H (as amended or modified from time to time in accordance with its terms, the “ Security Agreement”), (ii) a pledge agreement, in the form attached hereto as Exhibit I (as amended or modified from time to time in accordance with its terms, the “ Pledge Agreement”), and (iii) the guarantees of certain subsidiaries of the Company in the form attached hereto as Exhibit J (as amended or modified from time to time in accordance with its terms, the “Guarantees” and together with the Pledge Agreement, the Security Agreement, and any ancillary documents related thereto, collectively the “Security Documents”).

NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

1. EXCHANGE OF ORIGINAL NOTES FOR AMENDED NOTES AND COMMON SHARES; PURCHASE AND SALE OF ADDITIONAL NOTES.

(a) Issuance of Notes and Common Shares.

(i) Cancellation of Original Notes; Issuance of Amended Notes, Initial Notes and Common Shares. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6(a) and 7(a) below, on the Initial Closing Date (as defined below), (I) (i) the Company shall issue, sell and deliver to each applicable Buyer, and each such Buyer severally, but not jointly, agrees to accept and purchase, (x) a principal amount of Amended Notes as is set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers and (y) that aggregate number of Common Shares as is set forth opposite such Buyer’s name in column (7) on the Schedule of Buyers, and (ii) each Buyer shall surrender to the Company at the Initial Closing (as defined below) contemplated by this Agreement, the Original Note issued to such Buyer and (II) the Company shall issue and sell to, and each such Buyer severally, but not jointly, agrees to purchase from the Company on the Initial Closing Date, such principal amount of Initial Notes as is set forth opposite such Buyer’s name in column (5) on the Schedule of Buyers (collectively, the “Initial Closing”).

(ii) Additional Notes. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 1(c), 6(b) and 7(b) below, the Company shall issue and sell to each Buyer required to participate in such Additional Closing pursuant to Section 1(c) below, and each such Buyer severally, but not jointly, agrees to purchase from the Company on such Additional Closing Date (as defined below), a principal amount of Additional Notes as is set forth opposite such Buyer’s name in column (6) on the Schedule of Buyers (each, an “Additional Closing”).

(iii) Closing. The Initial Closing and the Additional Closings are each referred to in this Agreement as a “Closing”. Each Closing shall occur on the applicable Closing Date at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.

(iv) Purchase Price. The Amended Notes and Common Shares shall be issued to each Buyer in exchange for the Original Notes and without the payment of any additional consideration. The purchase price for each Buyer of the Initial Notes to be purchased by each such Buyer at the Initial Closing shall be the amount set forth opposite such Buyer’s name in column (10) of the Schedule of Buyers (collectively, the “Initial Purchase Price”). The purchase price for each Buyer of the Additional Notes to be purchased by each such Buyer at the Additional Closing shall be the amount set forth opposite such Buyer’s name in column (11) of the Schedule of Buyers (collectively, the “Additional Purchase Price”, and together with the Initial Purchase Price, the “Purchase Price”).

(v) Escrow Agreement. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6(a) and 7(a) below, on the Initial Closing Date (as defined below), unless an Escrow Waiver Event has occurred prior to the Initial Closing Date, each Buyer shall deposit its Escrow Amount with the Escrow Agent. The parties hereto agree that if the Additional Closing does not occur prior to the thirtieth (30th) calendar day after the Initial Closing Date (the “Escrow Termination Date”) and an Escrow Waiver Event has not occurred prior to the Initial Closing Date, such parties shall jointly instruct the Escrow Agent to return the Escrow Amount to the Buyers. On the Additional Closing Date, if any, unless an Escrow Waiver Event has occurred prior to the Initial Closing Date, such parties shall jointly instruct the Escrow Agent to release the Escrow Amount to the Company.

(b) Initial Closing Date. The date and time of the Initial Closing (the “Initial Closing Date”) shall be 10:00 a.m., New York City Time, on the date hereof after notification of satisfaction (or waiver) of the conditions to the Initial Closing set forth in Sections 6(a) and 7(a) below (or such later date as is mutually agreed to by the Company and each Buyer).

(c) Additional Closing Date.

(i) The date and time of the Additional Closings (the “Additional Closing Date,” and together with the Initial Closing Date, each a “Closing Date” and collectively, the “Closing Dates”) shall be 10:00 a.m., New York City Time, on the date specified in the applicable Additional Closing Notice (as defined below), subject to satisfaction (or waiver) of the conditions to each Additional Closing set forth in Sections 6(b) and 7(b) and the conditions contained in this Section 1(c) (or such later date as is mutually agreed to by the Company and the applicable Buyer).

(ii) Subject to the requirements of Sections 6(b) and 7(b) and the conditions contained in this Section 1(c), following (x) the delivery of a certificate of the Company in the form attached hereto as Exhibit L (the “MECAR Certificate”), certifying that the MECAR Contract (I) has been duly executed and delivered by the parties thereto (the date of the execution thereof, the "MECAR Execution Date”) and (II) is a validly binding and enforceable agreement of the parties thereto and (y) the public announcement of the execution of the MECAR Contract (as defined in the MECAR Certificate) and the filing of the MECAR Certificate as an exhibit to a filing by the Company with the SEC, at any time prior to the Escrow Termination Date, the Company shall have the right to require each Buyer to purchase, at one Closing, the principal amount of Additional Notes as is set forth opposite such Buyer’s name in column (6) on the Schedule of Buyers (as provided by the Company, a “Additional Closing Notice”); provided, that if the Company elects to deliver a Additional Closing Notice to any Buyer, it must deliver an identical Additional Closing Notice to all Buyers. Any Additional Closing Notice delivered by the Company shall be irrevocable. Notwithstanding anything herein to the contrary, at any time on or after the MECAR Execution Date, upon the Company’s receipt of one or more written notices by the holders of a majority of the Notes then outstanding, in the aggregate, electing to cause the Additional Closing to occur, the Company shall within one (1) Business Day thereafter deliver Additional Closing Notices to the Buyers. Each Additional Closing Notice shall contain a proposed Additional Closing Date that shall be at least five (5) Business Days but not more than ten (10) Business Days following the date of delivery of such Additional Closing Notice to the Buyers. Each Additional Closing Notice shall set forth (i) the principal amount of Additional Notes to be purchased by each Buyer at the Additional Closing and (ii) the proposed Additional Closing Date. As used herein, “Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

(d) Form of Payment. On the Initial Closing Date, (i) each Buyer shall deliver, or cause to be delivered, for cancellation, the Original Note of such Buyer to the Company for the Amended Notes (in such principal amounts as such Buyer has agreed, and in the manner the Buyer may reasonably request, in accordance with Section 1 of this Agreement) and Common Shares (in such amounts as such Buyer has agreed, and in the manner the Buyer may reasonably request, in accordance with Section 1 of this Agreement) to by issued and sold to such Buyer at the Initial Closing and (ii) each Buyer shall pay the Initial Purchase Price (less, in the case of Kings Road Investments Ltd. and Castlerigg Master Investments Ltd., the amounts withheld pursuant to Section 4(g) below) to the Company for the Initial Notes to be issued and sold to such Buyer at the Initial Closing by wire transfer of immediately available funds for such Initial Purchase Price in accordance with the Company’s written wire instructions. The parties acknowledge that the amount to be paid by the Buyers to the Company, in the aggregate, on the Initial Closing Date from the Initial Purchase Price (net of the amounts deducted to pay the Legal Counsel Fee Amount pursuant to Section 4(g) below) shall equal $5,000,000. On the Additional Closing Date, each Buyer shall pay the Additional Purchase Price (less (x) the Escrow Amount if the Escrow Waiver Event has not occurred prior to the Initial Closing Date and (y) in the case of Kings Road Investments Ltd. and Castlerigg Master Investments Ltd., the amounts withheld pursuant to Section 4(g)) to the Company for the Additional Notes to be issued and sold to such Buyer at the Additional Closing by wire transfer of immediately available funds for such Additional Purchase Price (less the Escrow Amount) in accordance with the Company’s written wire instructions. At each Closing, the Company shall deliver to each Buyer the Notes (in the principal amounts as such Buyer is entitled, in such manner as the Buyer may reasonably request) and, as applicable, the Common Shares (in such amounts as such Buyer is entitled, in such manner as the Buyer may reasonably request) which such Buyer is then purchasing duly executed on behalf of the Company and registered in the name of such Buyer or its designee.

(e) Holding Period. For the purposes of Rule 144, the Company acknowledges that the holding period of the Amended Notes and the Common Shares may be tacked onto the holding period of the Original Notes, and the Company agrees not to take a position contrary to this Section 1(e), including, without limitation, with respect to the application of the terms and conditions set forth in Section 2(g) below. The Company acknowledges that the 144 Common Shares shall be issued to each Buyer without any restrictive legend on the Initial Closing Date in reliance upon the exemption from registration provided by Section 3(a)(9) of the 1933 Act and Rule 144.

(f) Mutual Releases.

(i) For purposes of this Agreement, “Existing Claims” shall mean any and all claims, liabilities, rights and causes of action, whether known or unknown, relating to the purported events of default set forth in any Event of Default Notice (as defined in the Original Notes) delivered to the Company prior to the Initial Closing Date and any other potential claims arising under, based on or related to any fact, matter, act or omission, cause, transaction, occurrence or thing arising under or related to any of the Transaction Documents (as defined in the Original Securities Purchase Agreement) or any of the transactions contemplated thereby. In consideration of the release set forth in Section 1(f)(ii) and the transactions contemplated by this Agreement, effective as of the Initial Closing, each Buyer, only on behalf of itself and, to the extent permitted by law, its current and former heirs, executors, administrators, devisees, trustees, partners, directors, officers, shareholders, employees, consultants, representatives, predecessors, principals, agents, parents, associates, affiliates, subsidiaries, attorneys, accountants, successors, successors-in-interest and assignees (collectively, the “Buyer Releasing Persons”), hereby waives and releases, to the fullest extent permitted by law, any and all claims, rights and causes of action relating to the Existing Claims that any of the Buyer Releasing Persons had, currently has or may have, that are directly or indirectly related to, based upon, arise out of, or arise in connection with any fact, matter, act or omission, cause, transaction, occurrence or thing occurring up to the date of this release, including, without limitation, any Existing Claims arising out of any of the Transaction Documents (as defined pursuant to the Original Securities Purchase Agreement), against (w) the Company, (x) any of the Company’s current or former parents, affiliates, subsidiaries, predecessors, assigns, attorneys or counsel, accountants, auditors, advisors, employees, consultants or representatives, (y) any of the Company’s or such other persons’ or entities’ current or former officers, directors, employees, agents, principals, and signatories or, (z) in the case of any person or entity described in clauses (x) or (y) above (other than the Company or any of its Subsidiaries), such other persons’ or entities’ current or former officers, directors, members, partners, shareholders, employees, agents, principals, Buyers, signatories, advisors, consultants, spouses, heirs, estates, executors, attorneys, auditors and associates and members of their immediate families (collectively, the “Company Released Persons”). For the avoidance of doubt, claims that relate to events or circumstances occurring, or actions taken or failed to be taken, after the date of this release are not waived or released hereby. Any claims, rights or causes of action other than the Existing Claims are not waived or released hereby either.

(ii) In further consideration of each Buyer entering into this Agreement, effective as of the date of this Agreement, the Company on behalf of itself and, to the extent permitted by law, its current and former administrators, devisees, trustees, partners, directors, officers, shareholders, employees, consultants, representatives, predecessors, principals, agents, parents, associates, affiliates, subsidiaries, attorneys, accountants, successors, successors-in-interest and assignees (collectively, the “Company Releasing Persons”), hereby waives and releases, to the fullest extent permitted by law, any and all claims, rights and causes of action relating to the Existing Claims that any of the Company Releasing Persons had, currently has or may have, that are directly or indirectly related to, based upon, arise out of, or arise in connection with any fact, matter, act or omission, cause, transaction, occurrence or thing occurring up to the date of this release, including, without limitation, any Existing Claims arising out of any of the Transaction Documents (as defined pursuant to the Original Securities Purchase Agreement), against (x) each Buyer, (y) each Buyer’s current or former parents, affiliates, subsidiaries, predecessors, assigns, attorneys or counsel, accountants, auditors, advisors, employees, consultants or representatives, members, partners, shareholders, affiliates, subsidiaries, predecessors or assigns, (z) any of such Buyer’s or such other persons’ or entities’ current or former officers, directors, members, partners, shareholders, employees, agents, principals, Buyers, signatories, advisors, consultants, spouses, heirs, estates, executors, attorneys, auditors and associates and members of their immediate families (collectively, the “Buyer Released Persons”). For the avoidance of doubt, claims that relate to events or circumstances occurring, or actions taken or failed to be taken, after the date of this release are not waived or released hereby. Any claims, rights or causes of action other than the Existing Claims are not waived or released hereby either.

(iii) Promptly after the consummation of the Initial Closing, and in any event no later than ten (10) Business Days thereafter, Kings Road Investments Ltd. shall dismiss with prejudice the suit filed against the Company in the United States District Court for the Southern District of New York.

2. BUYER’S REPRESENTATIONS AND WARRANTIES.

Each Buyer represents and warrants, with respect to only itself, that:

(a) No Public Sale or Distribution. Such Buyer is acquiring (or has acquired, as applicable) the Notes, the Common Shares and the Warrants and upon conversion of the Notes and exercise of the Warrants (other than pursuant to a Cashless Exercise (as defined in the Warrants)) will acquire the Conversion Shares issuable upon conversion of the Notes, the Interest Shares issuable pursuant to the terms of the Notes and the Warrant Shares issuable upon exercise of the Warrants for investment purposes, for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the 1933 Act; provided, however, that by making the representations herein, such Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act. Such Buyer is acquiring the Securities hereunder in the ordinary course of its business. Such Buyer does not presently have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities.

(b) Buyer Status. Such Buyer is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D. Such Buyer is not a registered broker-dealer under Section 15 of the Securities Exchange Act of 1934, as amended (the “1934 Act”).

(c) Reliance on Exemptions. Such Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Buyer’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire the Securities.

(d) Information. Such Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities that have been requested by such Buyer. Such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company and have received what the Buyer believes to be satisfactory answers to any such inquiries. Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify, amend or affect such Buyer’s right to rely on the Company’s representations and warranties contained herein. Such Buyer understands that its investment in the Securities involves a high degree of risk. Such Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities.

(e) No Governmental Review. Such Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

(f) Transfer or Resale. Such Buyer understands that, except as provided in the Registration Rights Agreement: (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws and consequently such Buyer may have to bear the risk of owning the Securities for an indefinite period (ii) such Buyer agrees that if it decides to offer, sell or otherwise transfer any of the Notes, Conversion Shares, Other Common Shares, Warrants or Warrant Shares, such Notes, Conversion Shares, Other Common Shares, Warrants and Warrant Shares may be offered, sold or otherwise transferred only: (A) pursuant to an effective registration statement under the 1933 Act; (B) to the Company; (C) (1) in accordance with the exemption from registration under the 1933 Act provided by Rule 144 or Rule 144A thereunder, if available, and in compliance with any applicable state securities laws or (2) in a transaction that does not require registration under the 1933 Act or applicable state securities laws, and the seller has provided the Company with an opinion of counsel reasonably acceptable to the Company, prior to such offer, sale or transfer, that such Securities may be so offered, sold or transferred in a transaction that does not require registration under the 1933 Act or applicable state securities laws.

(g) Legends. Such Buyer understands that the certificates or other instruments representing the Notes, the Other Common Shares and the Warrants and, until such time as the resale of the Conversion Shares, the Other Common Shares, the Interest Shares and the Warrant Shares have been registered under the 1933 Act as contemplated by the Registration Rights Agreement, the stock certificates representing the Conversion Shares, the Interest Shares and the Warrant Shares, except as set forth below, shall bear any legend as required by the “blue sky” laws of any state and a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates):

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED(THE “1933 ACT”), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED OR ASSIGNED, UNLESS (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE 1933 ACT, OR (B) PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. NOTHING IN THE PRECEDING WILL PROHIBIT THE PLEDGE OF THE SECURITIES IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities upon which it is stamped, if, unless otherwise required by state securities laws, (i) such Securities are registered for resale under the 1933 Act, or (ii) following a sale or transfer of such Securities pursuant to Rule 144 (assuming the transferor is not an affiliate of the Company), (iii) while such Securities are eligible for sale under Rule 144(k), or (iv) if such legend is not required under applicable requirements of the 1933 Act (including judicial interpretations and pronouncements issued by the Staff of the SEC).

If the Company shall fail for any reason or for no reason to issue to the holder of the Securities within three (3) Trading Days (as defined in the Notes) after the occurrence of, and notice of, any of (i) through (iv) above, a certificate without such legend to the holder or to issue such Securities to such holder by electronic delivery at the applicable balance account at DTC, and if on or after such Trading Day the holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the holder of such Securities that the holder anticipated receiving without legend from the Company (a “Buy-In"), then the Company shall, within three (3) Business Days after such three (3) Trading Day period, and at the holder’s request and in the holder’s discretion, either (i) pay cash to the holder in an amount equal to the holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price"), at which point the Company’s obligation to deliver such unlegended Securities shall terminate, or (ii) promptly honor its obligation to deliver to the holder such unlegended Securities as provided above and pay cash to the holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Weighted Average Price (as defined in the Notes) of the Common Stock on the date of exercise.

(h) Validity; Enforcement. This Agreement, the Escrow Agreement, the Registration Rights Agreement and the Security Documents to which it is a party have been duly and validly authorized, executed and delivered on behalf of such Buyer and constitute the legal, valid and binding obligations of such Buyer enforceable against such Buyer in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

(i) No Conflicts. The execution, delivery and performance by such Buyer of this Agreement, the Escrow Agreement, the Registration Rights Agreement and the Security Documents to which it is a party and the consummation by such Buyer of the transactions contemplated hereby and thereby will not (i) result in a violation of the organizational documents of such Buyer or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree applicable to such Buyer, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of such Buyer to perform its obligations hereunder.

(j) Residency. Such Buyer is a resident of that jurisdiction specified below its address on the Schedule of Buyers.

(k) Certain Trading Activities. Neither the Buyer nor any of its affiliates has directly or indirectly, and no Person acting on behalf of the Buyer or its affiliates has directly or indirectly, engaged in any transactions in the securities of the Company (including, without limitation, any Short Sales involving the Company’s securities) since May 1, 2007, provided, however, that, with respect to LB I Group, the foregoing representation is made solely by, and shall apply solely to, the Global Trading Strategies group of Lehman Brothers Inc. and not made by, or applicable to, any other persons, affiliates or affiliated or associated business units of Lehman Brothers Holdings Inc. “Short Sales” include, without limitation, all “short sales” as defined in Rule 200 promulgated under Regulation SHO under the 1934 Act and all types of direct and indirect stock pledges, forward sale contracts, options, puts, calls, short sales, swaps and similar arrangements (including on a total return basis), and sales and other transactions through non-US broker dealers or foreign regulated brokers. The Buyer covenants that neither it, its affiliates, nor any Person acting on its or its affiliates’ behalf will engage in any transactions in the securities of the Company (including Short Sales) prior to the time that the transactions contemplated by this Agreement are publicly disclosed. Notwithstanding the foregoing, for avoidance of doubt, nothing contained herein shall constitute a representation or warranty, or preclude any actions, with respect to the identification of the availability of, or securing of, available shares to borrow in order to effect Short Sales or similar transactions in the future.

(l) General Solicitation. Such Buyer is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar.

(m) No Known Event of Default. Buyer has no actual knowledge of any Default or Event of Default (as defined in the Notes), after giving effect to the terms of this Agreement, that has occurred and is continuing as of the time immediately following the Initial Closing Date.

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to each of the Buyers as follows:

(a) Organization and Qualification. The Company and its “Subsidiaries” (which for purposes of this Agreement means any “Significant Subsidiary” as such term is defined in Rule 1-02 of Regulation S-X of the 1933 Act) are entities duly organized and validly existing and in good standing under the laws of the jurisdiction in which they are formed, and have the requisite power and authorization to own their properties and to carry on their business as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign entity to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any of (i) a material and adverse effect on the legality, validity or enforceability of any Transaction Document (as defined in Section 3(b) below), (ii) a material and adverse effect on the results of operations, assets, prospects, business or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) an adverse impairment to the Company’s ability to perform on a timely basis its obligations under any Transaction Document. The Company has no Subsidiaries except as set forth on Schedule 3(a).

(b) Authorization; Enforcement; Validity. The Company has the requisite power and authority to enter into and perform its obligations under this Agreement, the Notes, the Registration Rights Agreement, the Security Documents, the Escrow Agreement, the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), the Warrants and each of the other agreements entered into by the parties hereto in connection with the transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and to issue the Securities in accordance with the terms hereof and thereof. The execution and delivery of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby, including, without limitation, the issuance of the Notes, the Common Shares and the Warrants, the reservation for issuance and the issuance of the Conversion Shares issuable upon conversion or redemption of the Notes, the reservation for issuance and the issuance of the Interest Shares issuable pursuant to the terms of the Notes and the reservation for issuance and issuance of Warrant Shares issuable upon exercise of the Warrants have been duly authorized by the Company’s Board of Directors and, other than (i) the filing with the SEC of one or more Registration Statements in accordance with the requirements of the Registration Rights Agreement, (ii) the filing of a Form D with respect to the Notes and the Warrants as required under Regulation D, (iii) such filings as are required by the Principal Market (as defined below), which will be made prior to each Closing, (iv) such filings required under applicable securities or “Blue Sky” laws of the states of the United States and (v) the Stockholder Approval as contemplated in Section 4(q) (all of the foregoing, the “Required Approvals”), no further filing, consent, or authorization is required by the Company or of its Board of Directors or its stockholders to enter into the Transaction Documents and consummate the transactions contemplated by the Transaction Documents, including, without limitation, the issuance of the Notes, the Common Shares and the Warrants, the reservation for issuance and the issuance of the Conversion Shares issuable upon conversion or redemption of the Notes, the reservation for issuance and the issuance of the Interest Shares issuable pursuant to the terms of the Notes and the reservation for issuance and issuance of Warrant Shares issuable upon exercise of the Warrants. This Agreement and the other Transaction Documents of even date herewith have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies. Any of the Transaction Documents dated after the date hereof, upon execution and delivery, will have been duly executed and, when delivered by the Company, will constitute the legal, valid and binding obligations of the Company, enforceable, subject to the Required Approvals against the Company in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

(c) Issuance of Securities. The issuance of the Notes, the Common Shares and the Warrants are (or were, as applicable) duly authorized and are free from all taxes, liens and charges with respect to the issue thereof and, upon the Company’s receipt of the applicable consideration therefor, the Common Shares are fully paid and nonassessable. As of the Initial Closing, the Company shall have reserved from its duly authorized capital stock not less than the sum of 120% of the maximum number of shares of Common Stock (A) issuable upon conversion of the Notes issuable at such Closing and issued at any prior Closing (assuming for purposes hereof, that the Notes are convertible at the initial Conversion Price and without taking into account any limitations on the conversion of the Notes set forth in the Notes and assuming such conversion occurred at such Closing), (B) issuable as Interest Shares pursuant to the terms of the Notes and (C) issuable upon exercise of the Warrants (without taking into account any limitations on the exercise of the Warrants set forth in the Warrants and assuming such exercise occurred at such Closing). Upon issuance or conversion and payment of all consideration then due from the holder in respect thereof in accordance with the terms thereof, in accordance with the Notes or exercise in accordance with the Warrants, as the case may be, the Conversion Shares, the Interest Shares and the Warrant Shares, respectively, will be validly issued, fully paid and nonassessable and free from all preemptive or similar rights, taxes, liens and charges with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock. Based in part upon the accuracy of the representations and warranties of the Buyers’ set forth in Article 2, the offer and issuance by the Company of the Notes, Warrants, the Interest Shares, the Common Shares, the Conversion Shares and the Warrant Shares (when issued) are exempt from registration under the 1933 Act.

(d) No Conflicts. Subject to the Required Approvals, the execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Notes, the Common Shares and the Warrants and reservation for issuance and issuance of the Conversion Shares, the Interest Shares and the Warrant Shares) will not (i) result in a violation of the Articles of Incorporation, any capital stock of the Company or any of its Subsidiaries, the bylaws or any of the organizational documents of the Company or any of its Subsidiaries or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the American Stock Exchange (the “Principal Market”)) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected; except in the case of each of clauses (ii) and (iii), such as would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.

(e) Consents. Other than the Required Approvals, neither the Company nor any of its Subsidiaries is required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency or any regulatory or self-regulatory agency or any other Person in order for it to execute, deliver or perform any of its obligations under or contemplated by the Transaction Documents, in each case in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations (which the Company is required to obtain pursuant to the preceding sentence) have been obtained or effected, or will have been obtained or effected, on or prior to the Initial Closing Date, and the Company and its Subsidiaries are unaware of any facts or circumstances that might prevent the Company from obtaining or effecting any of the registration, application or filings pursuant to the preceding sentence. Except as described in Schedule 3(e), the Company is not in violation of the listing requirements of the Principal Market and has no knowledge of any facts that would reasonably lead to delisting or suspension of the Common Stock in the foreseeable future.

(f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company acknowledges and agrees that each Buyer is acting solely in the capacity of arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby and that no Buyer is (i) an officer or director of the Company, (ii) to the Company’s knowledge, an “affiliate” of the Company or any of its Subsidiaries (as defined in Rule 144 under the 1933 Act) or (iii) to the knowledge of the Company, a “beneficial owner” of more than 10% of the shares of Common Stock (as defined for purposes of Rule 13d-3 of the 1934 Act). The Company further acknowledges that no Buyer is acting as a financial advisor or fiduciary of the Company or any of its Subsidiaries (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby, and any advice given by a Buyer or any of its representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to such Buyer’s purchase of the Securities. The Company further represents to each Buyer that the Company’s decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives.

(g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor any of its Subsidiaries or affiliates, nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities. The Company shall be responsible for the payment of any placement agent’s fees, financial advisory fees, or brokers’ commissions (other than for Persons engaged by any Buyer or its investment advisor) relating to or arising out of the transactions contemplated hereby.

(h) No Integrated Offering. None of the Company, its Subsidiaries, any of their affiliates, or any Person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Securities under the 1933 Act or cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of the Principal Market such that the representation set forth in the last sentence of either Section 3(c) or Section 3(d)(iii) would not be accurate. None of the Company, its Subsidiaries, their affiliates or any Person acting on their behalf will take any action or steps referred to in the preceding sentence that would require registration under the 1933 Act of any of the Securities to be issued by the Company at such Closing prior to such issuance or cause the offering of the Securities to be integrated with other offerings.

(i) Dilutive Effect. The Company understands and acknowledges that the number of Conversion Shares issuable upon conversion or redemption of the Notes and the Warrant Shares issuable upon exercise of the Warrants will increase in certain circumstances. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion or redemption of the Notes in accordance with this Agreement and the Notes and its obligation to issue the Warrant Shares upon exercise of the Warrants in accordance with this Agreement and the Warrants is, in each case, absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company.

(j) Application of Takeover Protections; Rights Agreement. The Company and its board of directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Articles of Incorporation or the laws of the jurisdiction of its incorporation which is or would become applicable to any Buyer as a result of the transactions contemplated by this Agreement, including, without limitation, the Company’s issuance of the Securities and any Buyer’s ownership of the Securities. Except as set forth on Schedule 3(j), the Company has not adopted a stockholder rights plan or similar arrangement relating to accumulations of beneficial ownership of Common Stock or a change in control of the Company.

(k) SEC Documents; Financial Statements. During the two (2) years prior to the date hereof, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements, notes and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the “SEC Documents”). The Company has delivered to the Buyers or their respective representatives true, correct and complete copies of the SEC Documents not available on the EDGAR system. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Buyers which is not included in the SEC Documents, including, without limitation, information referred to in Section 2(d) of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstance under which they are or were made, not misleading. The provisions of this Section 3(k) are qualified in their entirety by the disclosure set forth on Schedule 3(k).

(l) Absence of Certain Changes. Since the time the Company’s most recently filed audited financial statements contained in a Form 10-K were filed, there has been no material adverse change and no material adverse development in the business, properties, operations, condition (financial or otherwise), results of operations or prospects of the Company and the Subsidiaries (excluding News/Sports Microwave Rental, Inc., Titan Systems, Inc., SeaSpace Corporation, MECAR USA, Inc., and Global Microwave Systems, Inc.), taken as a whole. Since the time the Company’s most recently filed audited financial statements contained in a Form 10-K were filed, neither the Company nor any of its Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets, individually or in the aggregate, in excess of $200,000 outside of the ordinary course of business or (iii) capital expenditures, in the aggregate, have not exceeded $3,200,000. The Company has no knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact that would reasonably lead a creditor to do so. The Company and its Subsidiaries, on a consolidated basis, are not as of the date hereof (following the closing of the Transaction Documents), and after giving effect to the transactions contemplated hereby to occur at the applicable Closing, will not be Insolvent (as defined below). For purposes of this Section 3(l), “Insolvent” means, with respect to the Company and its Subsidiaries on a consolidated basis (the “Corporate Group”), (i) the present fair saleable value of the Corporate Group’s assets is less than the amount required to pay the Corporate Group’s total Indebtedness (as defined in Section 3(s)), (ii) the Corporate Group is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, (iii) the Corporate Group intends to incur or believes that it will incur debts that would be beyond its ability to pay as such debts mature or (iv) the Corporate Group has unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted.

(m) No Undisclosed Events, Liabilities, Developments or Circumstances. No event, liability, development or circumstance has occurred or exists with respect to the Company or its Subsidiaries or their respective business, properties, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement on Form S-1 filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced.

(n) Conduct of Business; Regulatory Permits. Neither the Company nor its Subsidiaries is in violation of any term of or in default under its Articles of Incorporation or Bylaws or their organizational charter or certificate of incorporation or bylaws, respectively. Neither the Company nor any of its Subsidiaries is in violation of any judgment, decree or order or any law, statute, ordinance, rule or regulation applicable to the Company or its Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct its business in violation of any of the foregoing, except for possible violations that would not, individually or in the aggregate, have a Material Adverse Effect. Without limiting the generality of the foregoing, except as set forth in Schedule 3(n), the Company is not in violation of any of the rules, regulations or requirements of the Principal Market and has no knowledge of any facts or circumstances that would reasonably lead to delisting or suspension of the Common Stock by the Principal Market in the foreseeable future. During the two (2) years prior to the date hereof, (i) the Common Stock have been designated for quotation on the Principal Market, (ii) trading in the Common Stock has not been suspended by the SEC or the Principal Market and (iii) except as set forth in Schedule 3(n), the Company has received no communication, written or oral, from the SEC or the Principal Market regarding the suspension or delisting of the Common Stock from the Principal Market. The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate regulatory authorities necessary to conduct their respective businesses, except where the failure to possess such certificates, authorizations or permits would not have, individually or in the aggregate, a Material Adverse Effect, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.

(o) Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee or other Person acting on behalf of the Company or any of its Subsidiaries has, in the course of its actions for, or on behalf of, the Company or any of its Subsidiaries (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

(p) Sarbanes-Oxley Act. The Company is in material compliance with any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any and all applicable rules and regulations promulgated by the SEC thereunder that are effective as of the date hereof.

(q) Transactions With Affiliates. Except as set forth in the SEC Documents filed at least ten days prior to the date hereof and other than the grant of stock options disclosed on Schedule 3(q), none of the officers, directors or employees of the Company or any of its Subsidiaries is presently a party to any transaction with the Company or any of its Subsidiaries (other than for ordinary course services as employees, officers or directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any such officer, director or employee or, to the knowledge of the Company or any of its Subsidiaries, any corporation, partnership, trust or other entity in which any such officer, director, or employee has a substantial interest or is an officer, director, trustee or partner.

(r) Equity Capitalization. As of the date hereof, the authorized capital stock of the Company consists of (i) 30,000,000 shares of Common Stock, of which as of the date hereof, 6,473,635 are issued and outstanding, 980,836 shares are reserved for issuance pursuant to the Company’s stock option and purchase plans and 70,000 shares are reserved for issuance pursuant to securities (other than the Original Notes, the Notes and the Warrants) exercisable or exchangeable for, or convertible into, shares of Common Stock and (ii) 1,000,000 shares of undesignated preferred stock, no par value, of which as of the date hereof none of which is issued and outstanding or reserved for issuance. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Except as disclosed in Schedule 3(r): (i) none of the Company’s capital stock is subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any capital stock of the Company or any of its Subsidiaries; (iii) there are no outstanding debt securities, notes, credit agreements, credit facilities or other agreements, documents or instruments evidencing Indebtedness (as defined in Section 3(s)) of the Company or any of its Subsidiaries or by which the Company or any of its Subsidiaries is or may become bound; (iv) there are no financing statements securing obligations in any material amounts, either singly or in the aggregate, filed in connection with the Company or any of its Subsidiaries; (v) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except pursuant to the Registration Rights Agreement); (vi) there are no outstanding securities or instruments of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries; (vii) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities; (viii) the Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement; and (ix) the Company and its Subsidiaries have no liabilities or obligations required to be disclosed in the SEC Documents but not so disclosed in the SEC Documents, other than those incurred in the ordinary course of the Company’s or its Subsidiaries’ respective businesses and which, individually or in the aggregate, do not or would not reasonably be expected to have a Material Adverse Effect. The Company has made available to the Buyer true, correct and complete copies of the Company’s Certificate of Incorporation, as amended and as in effect on the date hereof (the “Articles of Incorporation”), and the Company’s Bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the terms of all securities convertible into, or exercisable or exchangeable for, shares of Common Stock and the material rights of the holders thereof in respect thereto.

(s) Indebtedness and Other Contracts. Except as disclosed in Schedule 3(s), neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined below), (ii) is a party to any contract, agreement or instrument, the violation of which, or default under which, by the other party(ies) to such contract, agreement or instrument would reasonably be expected to result in a Material Adverse Effect, (iii) is in violation of any term of or in default under any contract, agreement or instrument relating to any Indebtedness, except where such violations and defaults would not result, individually or in the aggregate, in a Material Adverse Effect, or (iv) is a party to any contract, agreement or instrument relating to any Indebtedness, the performance of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse Effect. Schedule 3(s) provides a description of the material terms of any such outstanding Indebtedness. For purposes of this Agreement: (x) "Indebtedness” of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services, including (without limitation) “capital leases” in accordance with generally accepted accounting principles (other than trade payables entered into in the ordinary course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with generally accepted accounting principles, consistently applied for the periods covered thereby, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; and (z) “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

(t) Absence of Litigation. Except as set forth in Schedule 3(t), there is no action, suit, proceeding, inquiry or investigation before or by the Principal Market, any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries, the Common Stock or any of the Company’s Subsidiaries or any of the Company’s or its Subsidiaries’ officers or directors in their capacities as such, which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(u) Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company nor any such Subsidiary, during the prior two years, has been refused any insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially exceed market costs for similar businesses to the Company.

(v) Employee Relations. (i) Except as set forth in Schedule 3(v), neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or employs any member of a union. Except as set forth in Schedule 3(v), the Company and its Subsidiaries believe that their relations with their employees are good. Except as set forth in Schedule 3(v), no executive officer of the Company or any of its Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the Company or any such Subsidiary that such officer intends to leave the Company or any such Subsidiary or otherwise terminate such officer’s employment with the Company or any such Subsidiary. No executive officer of the Company or any of its Subsidiaries, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters.

(ii) The Company and its Subsidiaries are in compliance with all federal, state, local and foreign laws and regulations respecting labor, employment and employment practices and benefits, terms and conditions of employment and wages and hours, except where failure to be in compliance would not, either individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

(w) Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects except such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and any of its Subsidiaries. Any real property and facilities held under lease by the Company or any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries.

(x) Intellectual Property Rights. The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, service marks and all applications and registrations therefor, trade names, patents, patent rights, copyrights, original works of authorship, inventions, trade secrets, licenses, approvals, governmental authorizations and other intellectual property rights (“Intellectual Property Rights”) necessary to conduct their respective businesses as now conducted. None of the Company’s or its Subsidiaries’ Intellectual Property Rights have expired, terminated or have been abandoned, or are expected to expire, terminate or be abandoned, within three years from the date of this Agreement. The Company does not have any knowledge of any infringement by the Company or any of its Subsidiaries of Intellectual Property Rights of others. There is no claim, action or proceeding being made or brought, or to the knowledge of the Company, being threatened against the Company or any of its Subsidiaries regarding its Intellectual Property Rights. Neither the Company nor any of its Subsidiaries is aware of any facts or circumstances which might give rise to any of the foregoing infringements or claims, actions or proceedings. The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their Intellectual Property Rights.

(y) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with any and all Environmental Laws (as hereinafter defined), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so comply would be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.

(z) Subsidiary Rights. Except as set forth in Schedule 3(z), the Company or one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations imposed by applicable law) to receive dividends and distributions on, all capital securities of its Subsidiaries as owned by the Company or such Subsidiary.

(aa) Tax Status. Except as set forth in Schedule 3(aa), the Company and each of its Subsidiaries (i) has made or filed all foreign, federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and (iii) has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

(bb) Internal Accounting and Disclosure Controls. Except as set forth in Schedule 3(bb), the Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset and liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in accordance with management’s general or specific authorization and (iv) the recorded accountability for assets and liabilities is compared with the existing assets and liabilities at reasonable intervals and appropriate action is taken with respect to any difference. The Company maintains disclosure controls and procedures (as such term is defined in Rule 13a-14 under the 1934 Act) that are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC, including, without limitation, controls and procedures designed in to ensure that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the Company’s management, including its principal executive officer or officers and its principal financial officer or officers, as appropriate, to allow timely decisions regarding required disclosure.

(cc) Off Balance Sheet Arrangements. There is no transaction, arrangement, or other relationship between the Company and an unconsolidated or other off balance sheet entity that is required to be disclosed by the Company in its 1934 Act filings and is not so disclosed or that otherwise would be reasonably likely to have a Material Adverse Effect.

(dd) Ranking of Notes. Except as set forth in Schedule 3(dd) or as otherwise permitted in the Transaction Documents, no Indebtedness of the Company is senior to or ranks pari passu with the Notes in right of payment, whether with respect of payment of redemptions, interest, damages or upon liquidation or dissolution or otherwise.

(ee) Transfer Taxes. On the applicable Closing Date, all stock transfer or other taxes (other than income or similar taxes) which are required to be paid in connection with the sale and transfer of the Securities to be sold to each Buyer hereunder will be, or will have been, fully paid or provided for by the Company, and all laws imposing such taxes will be or will have been complied with.

(ff) Acknowledgement Regarding Buyers’ Trading Activity. Except as set forth in the Transaction Documents, it is understood and acknowledged by the Company (i) that following the public disclosure of the transactions contemplated by the Transaction Documents in accordance with the terms hereof, none of the Buyers have been asked to agree, nor has any Buyer agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Securities for any specified term; (ii) that any Buyer, and counter parties in “derivative” transactions to which any such Buyer is a party, directly or indirectly, which were established prior to their learning of the transactions contemplated by the Transaction Documents, presently may have a “short” position in the Common Stock, and (iii) that each Buyer shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction. The Company further understands and acknowledges that following the public disclosure of the transactions contemplated by the Transaction Documents in accordance with the terms hereof, one or more Buyers may engage in hedging and/or trading activities at various times during the period that the Securities are outstanding and (b) such hedging and/or trading activities, if any, can reduce the value of the existing stockholders’ equity interest in the Company both at and after the time the hedging and/or trading activities are being conducted. The Company acknowledges that such aforementioned hedging and/or trading activities do not constitute a breach of this Agreement, the Notes, the Warrants or any of the documents executed in connection herewith.

(gg) Form S-1 Eligibility. The Company is currently eligible to register the Conversion Shares, the Interest Shares and the Warrant Shares for resale by the Buyers using Form S-1 promulgated under the 1933 Act.

(hh) Manipulation of Price. The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company.

(ii) Investment Company Status. The Company is not, and upon consummation of the sale of the Securities will not be, an “investment company,” a company controlled by an “investment company” or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment company” as such terms are defined in the Investment Company Act of 1940, as amended.

(jj) U.S. Real Property Holding Corporation. The Company is not, nor has ever been, a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon Buyer’s request.

(kk) Disclosure. The Company confirms that neither it nor any other Person acting on its behalf has provided any of the Buyers or their agents or counsel with any information that constitutes or would reasonably be expected to constitute material, nonpublic information, except to the extent that the knowledge of the transactions contemplated by the Transaction Documents may constitute such information. The Company understands and confirms that each of the Buyers will rely on the foregoing representations in effecting transactions in the Securities. All disclosures provided to the Buyers regarding the Company and its Subsidiaries, their business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company are true and correct and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each press release issued by the Company or its Subsidiaries during the twelve (12) months preceding the date of this Agreement did not at the time of release contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.

(ll) No Event of Default. The Company represents and warrants that after giving effect to the terms of this Agreement, no Default or Event of Default (as defined in the Notes) shall have occurred and be continuing as of the time immediately following the applicable Closing Date.

4. COVENANTS.

(a) Best Efforts. Each party shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.

(b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before each Closing Date, take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Securities for sale to the Buyers at each Closing pursuant to this Agreement under applicable securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to the Buyers on or prior to each Closing Date. The Company shall make all filings and reports relating to the offer and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of the United States following each Closing Date.

(c) Reporting Status. Except as set forth in Schedule 4(c), until the date on which the Buyers shall have sold all the Conversion Shares, the Common Shares, the Interest Shares and Warrant Shares and none of the Notes or Warrants is outstanding (the “Reporting Period”), the Company shall timely file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall continue to timely file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would otherwise no longer require such filings.

(d) Use of Proceeds. The Company and its subsidiaries will use the proceeds from the sale of the Securities for (A) professional fees and costs and restructuring fees and costs, and (B) working capital purposes (including payment of accounts payable), and except as set forth herein and in Schedule 4(d), not for the (i) repayment of any other outstanding Indebtedness of the Company or any of its Subsidiaries or (ii) redemption or repurchase of any of its equity securities.

(e) Financial Information. The Company agrees to send the following to each Investor (as defined in the Registration Rights Agreement) during the Reporting Period (i) unless the following are filed with the SEC through EDGAR and are available to the public through the EDGAR system, within one (1) Business Day after the filing thereof with the SEC, a copy of its Annual Reports and Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or any consolidated balance sheets, income statements, stockholders’ equity statements and/or cash flow statements for any period other than annual, any Current Reports on Form 8-K and any registration statements (other than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimile copies of all press releases issued by the Company or any of its Subsidiaries, which are attached to a Current Report on Form 8-K, and (iii) copies of any notices and other information made available or given to the stockholders of the Company generally, contemporaneously with the making available or giving thereof to the stockholders. As used herein “Business Day” means any other day other than a Saturday, Sunday, or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

(f) Listing. The Company shall as promptly as permitted by the Principal Market secure the listing of all of the Registrable Securities (as defined in the Registration Rights Agreement) upon each national securities exchange and automated quotation system, if any, upon which the Common Stock is then listed (subject to official notice of issuance) and shall maintain such listing of all Registrable Securities from time to time issuable under the terms of the Transaction Documents. The Company shall use its best efforts to maintain the authorization of the Common Stock for quotation on the Principal Market. Neither the Company nor any of its Subsidiaries shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock on the Principal Market; provided, however, that the Company makes no covenant regarding the trading price of the Common Stock. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 4(f).

(g) Fees. Subject to Section 8 below, at each Closing, the Company shall pay (i) an expense allowance to Kings Road Investments Ltd. (a Buyer) or its designee(s) to cover the reasonable fees and expenses reasonably incurred by Kings Road Investments Ltd. or any professionals engaged by Kings Road Investments Ltd. in relation to due diligence, investment documentation and enforcement of the Transaction Documents and the Transaction Documents (as defined in the Original Securities Purchase Agreement) (less any other expense amounts previously paid to Schulte Roth & Zabel LLP) (the “SRZ Legal Counsel Fee Amount”), which amount may be withheld by such Buyer from its Purchase Price at each Closing; provided, however that any fees and expenses with respect to any litigation including in the SRZ Legal Counsel Fee Amount shall not exceed $150,000 in the aggregate and (ii) an expense allowance to Castlerigg Master Investments Ltd. (a Buyer) or its designee(s) to cover the reasonable fees and expenses reasonably incurred by Castlerigg Master Investments Ltd. or any professionals engaged by Castlerigg Master Investments Ltd. in relation to due diligence, investment documentation and enforcement of the Transaction Documents and the Transaction Documents (as defined in the Original Securities Purchase Agreement) (less any other expense amounts previously paid to McDermott Will & Emery LLP) (the “MWE Legal Counsel Fee Amount”, and together with the SRZ Legal Counsel Fee Amount, the “Legal Counsel Fee Amount”), which amount may be withheld by such Buyer from its Purchase Price at each Closing; provided, however that any fees and expenses with respect to any litigation including in the MWE Legal Counsel Fee Amount shall not exceed $50,000 in the aggregate. The Company shall be responsible for the payment of any placement agent’s fees, financial advisory fees, or broker’s commissions (other than for Persons engaged by any Buyer) (collectively, “Possible Placement Fees”) relating to or arising out of the transactions contemplated hereby. The Company shall pay, and hold each Buyer harmless against, any liability, loss or expense (including, without limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in connection with any claim relating to any such Possible Placement Fees. Except as otherwise set forth in the Transaction Documents, each party to this Agreement shall bear its own expenses in connection with the sale of the Securities to the Buyers.

(h) Pledge of Securities. The Company acknowledges and agrees that the Securities may be pledged by an Investor (as defined in the Registration Rights Agreement) in connection with a bona fide margin agreement or other loan or financing arrangement that is secured by the Securities. The pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and no Investor effecting a pledge of Securities shall be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Document. The Company hereby agrees to execute and deliver such documentation as a pledgee of the Securities may reasonably request in connection with a pledge of the Securities to such pledgee by an Investor. No legal opinion of legal counsel to the pledgee, secured party or pledgor shall be required in connection with the pledge, but such legal opinion may be required in connection with a subsequent transfer following default by the Investor transferee of the pledge.

(i) Disclosure of Transactions and Other Material Information. On or before 8:30 a.m., New York time, on the first Business Day following the date on which this Agreement is fully executed and delivered by the Company and all of the Buyers, the Company shall issue a press release reasonably acceptable to the Buyers disclosing all material terms of the transactions contemplated hereby. On or before 8:30 a.m., New York time, on the second Business Day following the date on which this Agreement is fully executed and delivered by the Company and all of the Buyers, the Company shall file a Current Report on Form 8-K describing the terms of the transactions contemplated by the Transaction Documents in the form required by the 1934 Act and attaching the material Transaction Documents (including, without limitation, this Agreement (and all schedules to this Agreement), the form of each of the Notes, the forms of Security Documents, the form of Escrow Agreement and the Registration Rights Agreement) as exhibits to such filing (including all attachments, the “Initial 8-K Filing”). On or before 8:30 a.m., New York City Time, on the second Trading Day following the MECAR Execution Date, the Company shall file a Current Report on Form 8-K with the SEC describing the transactions contemplated by the MECAR Contract and attaching the MECAR Certificate (the “MECAR 8-K Filing”). On or before 8:30 a.m., New York City Time, on the first Trading Day following the Additional Closing Date, the Company shall file a Current Report on Form 8-K with the SEC describing the transaction consummated on such date (the "Additional 8-K Filing,” and together with the Initial 8-K Filing and the MECAR 8-K Filing, the "8-K Filings”). From and after the Initial 8-K Filing with the SEC, no Buyer shall be in possession of any material, nonpublic information received from the Company or any of its Subsidiaries or any of its respective officers, directors, employees or agents, that is not disclosed in the Initial 8-K Filing. The Company shall not, and shall cause each of its Subsidiaries and its and each of their respective officers, directors, employees and agents, not to, provide any Buyer with any material, nonpublic information regarding the Company or any of its Subsidiaries from and after the Initial 8-K Filing with the SEC without the express written consent of such Buyer. If a Buyer reasonably believes that the Company or its agents have distributed to it any such material, nonpublic information regarding the Company or any of its Subsidiaries, it shall provide the Company with written notice thereof. The Company shall, within five (5) Trading Days of receipt of such notice, make public disclosure of such material, nonpublic information. In the event of a breach of the foregoing covenant by the Company, any of its Subsidiaries, or any of its or their respective officers, directors, employees and agents, in addition to any other remedy provided herein or in the Transaction Documents, a Buyer shall have the right to make a public disclosure, in the form of a press release, public advertisement or otherwise, of such material, nonpublic information without the prior approval by the Company, its Subsidiaries, or any of its or their respective officers, directors, employees or agents. No Buyer shall have any liability to the Company, its Subsidiaries, or any of its or their respective officers, directors, employees, stockholders or agents for any such disclosure. Subject to the foregoing, neither the Company, its Subsidiaries nor any Buyer shall issue any press releases or any other public statements with respect to the transactions contemplated hereby; provided, however, that the Company shall be entitled, without the prior approval of any Buyer, to make any press release or other public disclosure with respect to such transactions (i) in substantial conformity with the Initial 8-K Filing and contemporaneously therewith and (ii) as is required by applicable law and regulations (provided that in the case of clause (i) each Buyer shall be consulted by the Company in connection with any such press release or other public disclosure prior to its release). Without the prior written consent of any applicable Buyer, neither the Company nor any of its Subsidiaries shall disclose the name of any Buyer in any filing, announcement or press release, unless such disclosure is required by law, regulation or the Principal Market (and in such case, the Company shall have consulted with such Buyer in connection with any such press release or other public disclosure prior to its release).

(j) Restriction on Redemption and Dividends; Additional Registration Statements. So long as any Notes or Warrants are outstanding, the Company shall not, directly or indirectly, redeem, repurchase or otherwise acquire for value or declare or pay any dividend or distribution on, the Common Stock without the prior express written consent of the holders of Notes representing not less than a majority of the aggregate principal amount of the then outstanding Notes. Until the Effective Date (as defined in the Registration Rights Agreement), the Company shall not file a registration statement under the 1933 Act relating to securities that are not the Securities (other than on Form S-8).

(k) Other Notes; Variable Securities; Dilutive Issuances. (i) So long as any Notes remain outstanding, the Company will not issue any Notes (other than to the Buyers as contemplated hereby) and the Company shall not issue any other securities that would cause a breach or default under the Notes. For so long as any Notes or Warrants remain outstanding, the Company shall not, in any manner, issue or sell any rights, warrants or options to subscribe for or purchase Common Stock or directly or indirectly convertible into or exchangeable or exercisable for Common Stock at a price which varies or may vary with the market price of the Common Stock, including by way of one or more reset(s) to any fixed price unless the conversion, exchange or exercise price of any such security cannot be less than the then applicable Conversion Price (as defined in the Notes) with respect to the Common Stock into which any Note is convertible or the then applicable Exercise Price (as defined in the Warrants) with respect to the Common Stock into which any Warrant is exercisable. For so long as any Notes or Warrants remain outstanding, the Company shall not, in any manner, enter into or affect any Dilutive Issuance (as defined in the Notes) if the effect of such Dilutive Issuance is to cause the Company to be required to issue upon conversion of any Note or exercise of any Warrant any shares of Common Stock in excess of that number of shares of Common Stock which the Company may issue upon conversion of the Notes and exercise of the Warrants without breaching the Company’s obligations under the rules or regulations of any Eligible Market (as defined in the Notes). As of any date, unless either (i) the Stockholder Approval has been obtained prior to such date and the Equity Conditions (as defined in the Notes) are satisfied as of such date or (ii) no Notes or Warrants remain outstanding, the Company shall not, in any manner, enter into or affect any Dilutive Issuance if the effect of such Dilutive Issuance would, but for the application of the Conversion Floor Price (as defined in the Notes) or the Exercise Floor Price (as defined in the Warrant), as applicable, cause either (i) the Conversion Price (as defined in the Notes) to be reduced below the Conversion Floor Price or (ii) the Exercise Price (as defined in the Warrant) to be reduced below the Exercise Floor Price.

(ii) None of the Company, its Subsidiaries, any of their affiliates, or any Person acting on their behalf shall, directly or indirectly, make any offers or sales of any security or solicit any offers to buy any security, under circumstances that would require registration of any of the Securities under the 1933 Act or cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of the Principal Market such that the representation set forth in the last sentence of either Section 3(c) or Section 3(d)(iii) would not be accurate as if such representations were made as of such time.

(l) Corporate Existence. So long as any Notes are outstanding, the Company shall not be party to any Fundamental Transaction (as defined in the Notes) unless the Company is in compliance with the applicable provisions governing Fundamental Transactions set forth in the Notes and the Warrants.

(m) Reservation of Shares. The Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, after the Initial Closing Date, 120% of the maximum number of shares of Common Stock (i) issuable upon conversion or redemption of the Notes issuable at such Closing and issued at any prior Closing (assuming for purposes hereof, that the Notes are convertible at the initial Conversion Price and without taking into account any limitations on the conversion of the Notes set forth in the Notes and assuming such conversion occurred at such Closing), (ii) issuable as Interest Shares pursuant to the terms of the Notes and (iii) issuable upon exercise of the Warrants (without taking into account any limitations on the exercise of the Warrants set forth in the Warrants and assuming such exercise occurred at such Closing) and (iii) any capital stock of the Company issued or issuable with respect to the Conversion Shares, the Interest Shares, the Common Shares, the Notes, the Warrant Shares or the Warrants.

(n) Conduct of Business. The business of the Company and its Subsidiaries shall not be conducted in violation of any law, ordinance or regulation of any governmental entity, except where such violations would not result, either individually or in the aggregate, in a Material Adverse Effect.

(o) Additional Issuances of Securities.

(i) For purposes of this Section 4(o), the following definitions shall apply.

(1) “Convertible Securities” means any stock or securities (other than Options) convertible into or exercisable or exchangeable for shares of Common Stock.

(2) “Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.

(3) “Common Share Equivalents” means, collectively, Options and Convertible Securities.

(4) “Subsequent Placement” means any offer, sale, grant, disposition or announcement by the Company, directly or indirectly, to offer, sell or grant or any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition of) any of its or its Subsidiaries’ equity or equity equivalent securities, including, without limitation, any debt, preferred stock or other instrument or security that is, at any time during its life and under any circumstances, convertible into or exchangeable or exercisable for shares of Common Stock or Common Share Equivalents.

(ii) As long as any applicable Buyer holds no less than 25% of the original principal amount of the Notes issued to such Buyer at the Closings, from the date hereof until the later of (x) the fifteen month anniversary of the date hereof and (y) the Stockholder Approval Date (as defined below), the Company will not, directly or indirectly, effect any Subsequent Placement unless the Company shall have first complied with this Section 4(o)(ii).

(1) The Company shall deliver to each such Buyer by facsimile a written notice (the "Offer Notice”) of any proposed or intended issuance or sale or exchange (the "Offer”) of the securities being offered (the “Offered Securities”) in a Subsequent Placement within one Business Day of the determination of the terms of such Subsequent Placement, which Offer Notice shall (w) identify and describe the Offered Securities, (x) describe the price and other final terms upon which they are to be issued, sold or exchanged, and the number or amount of the Offered Securities to be issued, sold or exchanged, (y) identify the persons or entities (if known) to which or with which the Offered Securities are to be offered, issued, sold or exchanged and (z) offer to issue and sell to or exchange with such Buyers (which offer being non-transferable to any successor to such Buyer) a pro rata portion of at least thirty percent (30%) of the Offered Securities allocated among such Buyers (a) based on such Buyer’s pro rata portion of the aggregate principal amount of Notes purchased hereunder (the “Basic Amount”), and (b) with respect to each Buyer that elects to purchase its Basic Amount, any additional portion of the Offered Securities attributable to the Basic Amounts of other Buyers as such Buyer shall indicate it will purchase or acquire should the other Buyers subscribe for less than their Basic Amounts (the “Undersubscription Amount”).

(2) To accept an Offer, in whole or in part, such Buyer must deliver a written notice to the Company prior to the end of the second (2^nd) full Business Day after such Buyer’s receipt of the Offer Notice (for purposes of this Section 4(a)(iii)(2), notwithstanding the provisions of Section 9(f), receipt of the Offer Notice shall not be deemed to have occurred until the Buyer shall have physically received such Offer Notice and until such Offer Notice contains the final terms of the Offer) (the “Offer Period”), setting forth the portion of such Buyer’s Basic Amount that such Buyer elects to purchase and, if such Buyer shall elect to purchase all of its Basic Amount, the Undersubscription Amount, if any, that such Buyer elects to purchase (in either case, the “Notice of Acceptance”). If the Basic Amounts subscribed for by all Buyers are less than the total of all of the Basic Amounts, then each Buyer who has set forth an Undersubscription Amount in its Notice of Acceptance shall be entitled to purchase, in addition to the Basic Amounts subscribed for, the Undersubscription Amount it has subscribed for; provided, however, that if the Undersubscription Amounts subscribed for exceed the difference between the total of all the Basic Amounts and the Basic Amounts subscribed for (the “Available Undersubscription Amount”), each Buyer who has subscribed for any Undersubscription Amount shall be entitled to purchase only that portion of the Available Undersubscription Amount as the Basic Amount of such Buyer bears to the total Basic Amounts of all Buyers that have subscribed for Undersubscription Amounts, subject to rounding by the Company to the extent it deems reasonably necessary.

(3) The Company shall have ten (10) Business Days from the expiration of the Offer Period above to offer, issue, sell or exchange all or any part of such Offered Securities as to which a Notice of Acceptance has not been given by the Buyers (the “Refused Securities”), but only to the offerees described in the Offer Notice (if so described therein) and only upon terms and conditions (including, without limitation, unit prices and interest rates) that are not more favorable to the acquiring person or persons or less favorable to the Company than those set forth in the Offer Notice.

(4) In the event the Company shall propose to sell less than all the Refused Securities (any such sale to be in the manner and on the terms specified in Section 4(o)(ii)(3) above), then each Buyer may, at its sole option and in its sole discretion, reduce the number or amount of the Offered Securities specified in its Notice of Acceptance to an amount that shall be not less than the number or amount of the Offered Securities that such Buyer elected to purchase pursuant to Section 4(o)(ii)(2) above multiplied by a fraction, (i) the numerator of which shall be the number or amount of Offered Securities the Company actually proposes to issue, sell or exchange (including Offered Securities to be issued or sold to Buyers pursuant to Section 4(o)(ii)(3) above prior to such reduction) and (ii) the denominator of which shall be the original amount of the Offered Securities. In the event that any Buyer so elects to reduce the number or amount of Offered Securities specified in its Notice of Acceptance, the Company may not issue, sell or exchange more than the reduced number or amount of the Offered Securities unless and until such securities have again been offered to the Buyers in accordance with Section 4(o)(ii)(1) above.

(5) Upon the closing of the issuance, sale or exchange of all or less than all of the Refused Securities, the Buyers shall acquire from the Company, and the Company shall issue to the Buyers, the number or amount of Offered Securities specified in the Notices of Acceptance, as reduced pursuant to Section 4(o)(ii)(3) above if the Buyers have so elected, upon the terms and conditions specified in the Offer. The purchase by the Buyers of any Offered Securities is subject in all cases to (i) the preparation, execution and delivery by the Company and the Buyers of a purchase agreement relating to such Offered Securities reasonably satisfactory in form and substance to the Buyers and their respective counsel, (ii) the Buyers’ satisfaction, in their sole discretion, with the final terms and/or conditions that differ from those contained in the Offer Notice, and (iii) the Buyers’ reasonable satisfaction with the identity of the other persons or entities to which the Offered Securities will be sold.

(6) Any Offered Securities not acquired by the Buyers or other persons in accordance with this Section 4(o)(ii) may not be issued, sold or exchanged until they are again offered to the Buyers under the procedures specified in this Agreement.

(iii) The restrictions contained in subsection (ii) of this Section 4(o) shall not apply in connection with the issuance of any Excluded Securities (as defined in the Notes).

(p) Holding Period. For the purposes of Rule 144, the Company acknowledges that under current regulations, the holding period of the Conversion Shares may be tacked onto the holding period of the Notes (unless the holder thereof is an affiliate of the Company) and the Company agrees not to take a position contrary to this Section 4(p).

(q) Stockholder Approval. The Company shall provide each stockholder entitled to vote at a special or annual meeting of stockholders of the Company (the “Stockholder Meeting”), which initially shall be promptly called and held not later than March 3, 2008 (the “Stockholder Meeting Deadline”), a proxy statement, substantially in the form which has been previously reviewed by the Buyers and a counsel of their choice at the expense of the Company, soliciting each such stockholder’s affirmative vote at the Stockholder Meeting for approval of resolutions (the "Resolutions”) providing for the Company’s issuance of all of the Securities as described in the Transaction Documents in accordance with applicable law and the rules and regulations of the Principal Market (such affirmative approval being referred to herein as the “Stockholder Approval” and the date such approval is obtained (the “Stockholder Approval Date”)), and the Company shall use its reasonable best efforts to solicit its stockholders’ approval of the Resolutions and to cause the Board to recommend to the stockholders that they approve the Resolutions. If, despite the Company’s best efforts the Stockholder Approval is not obtained on or prior to the Stockholder Meeting Deadline, the Company shall solicit the Stockholder Approval at each subsequent special or annual meeting of stockholders of the Company until such Stockholder Approval is obtained.

(r) Collateral Agent. Each Buyer hereby (a) appoints Portside Growth & Opportunity Fund, as the collateral agent hereunder and under the other Security Documents (in such capacity, the “Collateral Agent”), and (b) authorizes the Collateral Agent (and its officers, directors, employees and agents) to take such action on such Buyer’s behalf in accordance with the terms hereof and thereof. The Collateral Agent shall not have, by reason hereof or any of the other Security Documents, a fiduciary relationship in respect of any Buyer. Neither the Collateral Agent nor any of its officers, directors, employees and agents shall have any liability to any Buyer for any action taken or omitted to be taken in connection hereof or any other Security Document except to the extent caused by its own gross negligence or willful misconduct, and each Buyer agrees to defend, protect, indemnify and hold harmless the Collateral Agent and all of its officers, directors, employees and agents (collectively, the “Indemnitees”) from and against any losses, damages, liabilities, obligations, penalties, actions, judgments, suits, fees, costs and expenses (including, without limitation, reasonable attorneys’ fees, costs and expenses) incurred by such Indemnitee, whether direct, indirect or consequential, arising from or in connection with the performance by such Indemnitee of the duties and obligations of Collateral Agent pursuant hereto or any of the Security Documents. The Collateral Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the holders of at least two-thirds in principal amount of the Notes then outstanding, and such instructions shall be binding upon all holders of Notes; provided, however, that the Collateral Agent shall not be required to take any action which, in the reasonable opinion of the Agent, exposes the Agent to liability or which is contrary to this Agreement or any other Transaction Document or applicable law. The Collateral Agent shall be entitled to rely upon any written notices, statements, certificates, orders or other documents or any telephone message believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the other Transaction Documents and its duties hereunder or thereunder, upon advice of counsel selected by it.

(s) Successor Collateral Agent.

(i) The Collateral Agent may resign from the performance of all its functions and duties hereunder and under the other Transaction Documents at any time by giving at least thirty (30) Business Days’ prior written notice to the Company and each holder of Notes. Such resignation shall take effect upon the acceptance by a successor Collateral Agent of appointment pursuant to clauses (ii) and (iii) below or as otherwise provided below.

(ii) Upon any such notice of resignation, the holders of at least two-thirds in principal amount of the Notes then outstanding shall appoint a successor collateral agent. Upon the acceptance of any appointment as collateral agent hereunder by a successor agent, such successor collateral agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the collateral agent, and the Collateral Agent shall be discharged from its duties and obligations under this Agreement and the other Transaction Documents. After the Collateral Agent’s resignation hereunder as the collateral agent, the provisions of this Section 4(s) shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Collateral Agent under this Agreement and the other Transaction Documents.

(iii) If a successor collateral agent shall not have been so appointed within said thirty (30) Business Day period, the Collateral Agent shall then appoint a successor collateral agent who shall serve as the collateral agent until such time, if any, as the holders of at least two-thirds in principal amount of the Notes then outstanding appoint a successor collateral agent as provided above.

5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

(a) Register. The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to each holder of Securities), a register for the Notes and the Warrants in which the Company shall record the name and address of the Person in whose name the Notes and the Warrants have been issued (including the name and address of each transferee), the principal amount of Notes held by such Person, the number of Conversion Shares issuable upon conversion of the Notes and the number of Warrant Shares issuable upon exercise of the Warrants held by such Person. The Company shall keep the register open and available at all times during business hours for inspection of any Buyer or its legal representatives upon reasonable notice.

(b) Transfer Agent Instructions. The Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue certificates or credit shares to the applicable balance accounts at The Depository Trust Company (“DTC”), registered in the name of each Buyer or its respective nominee(s), for the Common Shares, the Conversion Shares, the Interest Shares and the Warrant Shares issued upon conversion of the Notes or as Interest Shares under the Notes or exercise of the Warrants in such amounts as specified from time to time by each Buyer to the Company upon conversion of the Notes or exercise of the Warrants in the form of Exhibit D-1 and Exhibit D-2 attached hereto (collectively, the “Irrevocable Transfer Agent Instructions”), bearing the restrictive legend as and when specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5(b), and stop transfer instructions to give effect to Section 2(g) hereof, will be given by the Company to its transfer agent, and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the other Transaction Documents. If a Buyer effects a sale, assignment or transfer of the Securities in accordance with Section 2(f), the Company shall permit the transfer and the Company shall promptly instruct its transfer agent to issue one or more certificates or credit shares to the applicable balance accounts at DTC in such name and in such denominations as specified by such Buyer to effect such sale, transfer or assignment. In the event that such sale, assignment or transfer involves Common Shares, Conversion Shares, Interest Shares or Warrant Shares sold, assigned or transferred pursuant to an effective registration statement or pursuant to Rule 144, the transfer agent shall issue such Securities to the Buyer, assignee or transferee, as the case may be, without any restrictive legend to the extent otherwise permitted by this Agreement, including Section 2(g). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to a Buyer. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5(b) will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Section 5(b), that a Buyer shall be entitled, in addition to all other available remedies, to an order and/or injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required.

6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

(a) The obligation of the Company hereunder to exchange the Original Notes for the Amended Notes and Common Shares and to issue and sell the Initial Notes to each Buyer at the Initial Closing is subject to the satisfaction, at or before the Initial Closing Date, of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof:

(i) Such Buyer and each other Buyers shall have executed each of the Transaction Documents to which it is a party and delivered the same to the Company.

(ii) Such Buyer and each other Buyer shall have delivered to the Company the Initial Purchase Price (less, in the case of Kings Road Investments Ltd. and Castlerigg Master Investments Ltd., the amounts withheld pursuant to Section 4(g) above) for the Initial Notes being purchased by such Buyer at the Initial Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company, which wire transfers, in the aggregate shall total $5,000,000.

(iii) The representations and warranties of such Buyer shall be true and correct in all material respects as of the date when made and as of the Initial Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Buyer at or prior to the Initial Closing Date.

(iv) No litigation, status, rule regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated, or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby that prohibits the consummation of the transactions contemplated by the Transaction Documents.

(b) The obligation of the Company hereunder to issue and sell the Additional Notes to each Buyer at the Additional Closing is subject to the satisfaction, at or before the Additional Closing Date, of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof:

(i) Such Buyer and each other Buyer shall have executed each of the Transaction Documents to which it is a party and delivered the same to the Company.

(ii) Such Buyer and each other Buyer shall have delivered to the Company the Additional Purchase Price (less (x) the Escrow Amount if the Escrow Waiver Event has not occurred prior to the Initial Closing Date and (y) in the case of Kings Road Investments Ltd., the amounts withheld pursuant to Section 4(g)) for the Additional Notes being purchased by such Buyer at the Additional Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company.

(iii) The representations and warranties of such Buyer shall be true and correct in all material respects as of the date when made and as of the Additional Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Buyer at or prior to the Additional Closing Date.

(iv) No litigation, status, rule regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated, or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby that prohibits the consummation of the transactions contemplated by the Transaction Documents.

7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

(a) The obligation of each Buyer hereunder to exchange the Original Notes for the Amended Notes and Common Shares and to purchase the Initial Notes at the Initial Closing is subject to the satisfaction, at or before the Initial Closing Date, of each of the following conditions, provided that these conditions are for each Buyer’s sole benefit and may be waived by such Buyer at any time in its sole discretion by providing the Company with prior written notice thereof:

(i) The Company shall have duly executed and delivered to such Buyer: (A) (x) the Amended Notes (in such principal amounts as such Buyer has agreed, and in the manner the Buyer may reasonably request, in accordance with Section 1 of this Agreement) to be received by such Buyer at the Initial Closing pursuant to this Agreement, (y) the Initial Notes (in such principal amounts as such Buyer has agreed, and in the manner the Buyer may reasonably request, in accordance with Section 1 of this Agreement) and (z) the Other Common Shares (in such amounts as such Buyer shall request in accordance with Section 1 of this Agreement) being purchased by such Buyer at the Initial Closing pursuant to this Agreement and (B) each of the other Transaction Documents.

(ii) The Company shall have delivered an irrevocable instruction letter to the Transfer Agent directing the Transfer Agent, in conjunction with the broker or agent (of each of the Buyers each a "Buyer Broker”), concurrently with the Initial Closing, to effect the deposit of the 144 Common Shares (in such amounts as such Buyer shall request) to be received by each Buyer at the Initial Closing pursuant to this Agreement to the account of each Buyer Broker at DTC through a Deposit/Withdrawal at Custodian with respect to such Common Shares.

(iii) Such Buyer shall have received the opinion of Baxter, Baker, Sidle, Conn & Jones, the Company’s outside counsel, dated as of the Initial Closing Date, in substantially the form of Exhibit E-1 attached hereto.

(iv) The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent Instructions, in the form of Exhibit D-1 attached hereto, which instructions shall have been delivered to and acknowledged in writing by the Company’s transfer agent.

(v) The Company shall have delivered to such Buyer a certificate evidencing the formation and good standing of the Company and each of its domestic Subsidiaries in each such entity’s jurisdiction of formation issued by the Secretary of State (or comparable office) of such jurisdiction, as of a date within 10 days of the Initial Closing Date.

(vi) The Company shall have delivered to such Buyer a certificate evidencing the Company’s qualification as a foreign corporation and good standing issued by the Secretary of State (or comparable office) of each jurisdiction in which the Company, as applicable, conducts business, as of a date within 10 days of the Initial Closing Date.

(vii) The Company shall have delivered to such Buyer a certified copy of the Certificate of Incorporation of the Company as certified by the Secretary of State of Delaware within ten (10) days of the Initial Closing Date.

(viii) The Company shall have delivered to such Buyer a certificate, executed by the Secretary of the Company dated as of the Initial Closing Date, as to (i) the resolutions consistent with Section 3(b) as adopted by the Company’s Board of Directors in a form reasonably acceptable to such Buyer, (ii) the Articles of Incorporation, as in effect at the Initial Closing and (iii) the Bylaws, as in effect at the Initial Closing, in the form attached hereto as Exhibit F.

(ix) The representations and warranties of the Company shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the date when made and as of the Initial Closing Date as though made at that time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Initial Closing Date. Such Buyer shall have received a certificate, executed by an executive officer of the Company, dated as of the Initial Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer in the form attached hereto as Exhibit G.

(x) The Company shall have delivered to such Buyer a letter from the Company’s transfer agent certifying the number of shares of Common Stock outstanding as of a date within five days of the Initial Closing Date.

(xi) The Common Stock (i) shall be designated for quotation or listed on the Principal Market and (ii) shall not have been suspended, as of the Initial Closing Date, by the SEC or the Principal Market from trading on the Principal Market nor shall suspension by the SEC or the Principal Market have been threatened, as of the Initial Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by falling below the minimum listing maintenance requirements of the Principal Market.

(xii) The Company shall have obtained all governmental, regulatory or third party consents and approvals, if any, necessary for the sale of the Securities.

(xiii) Within five (5) Business Days prior to the Closing, the Company shall have delivered or caused to be delivered to each Buyer (i) true copies of UCC search results, listing all effective financing statements which name as debtor the Company or any of its domestic Subsidiaries filed in the prior five years to perfect an interest in any assets thereof, together with copies of such financing statements, none of which, except as otherwise agreed in writing by the Buyers, shall cover any of the Collateral (as defined in the Security Documents) and the results of searches for any tax lien and judgment lien filed against such Person or its property, which results, except as otherwise agreed to in writing by the Buyers shall not show any such Liens (as defined in the Security Documents); and (ii) a perfection certificate, duly completed and executed by the Company and each of its Subsidiaries, in form and substance satisfactory to the Buyers.

(xiv) The Company shall have delivered to such Buyer duly executed voting agreements of Pirate Capital LLC and Wynnefield Capital, Inc. (the “Stockholders”), in the form attached hereto as Exhibit M (the “Voting Agreements”), whereby the Stockholders shall agree to vote in favor of the Resolutions.

(xv) No litigation, status, rule regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated, or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby that prohibits the consummation of the transactions contemplated by the Transaction Documents.

(xvi) The Company shall have delivered to such Buyer such other documents relating to the transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request.

(b) The obligation of each Buyer hereunder to purchase the Additional Notes at the Additional Closing is subject to the satisfaction, at or before the Additional Closing Date, of each of the following conditions, provided that these conditions are for each Buyer’s sole benefit and may be waived by such Buyer at any time in its sole discretion by providing the Company with prior written notice thereof:

(i) The Company shall have duly executed and delivered to such Buyer: (A) the Additional Notes (in such principal amounts as such Buyer has agreed, and in the manner the Buyer may reasonably request, in accordance with Section 1 of this Agreement) being purchased by such Buyer at the Additional Closing pursuant to this Agreement and (B) each of the other Transaction Documents.

(ii) Such Buyer shall have received the opinion of Baxter, Baker, Sidle, Conn & Jones, the Company’s outside counsel, dated as of the Additional Closing Date, in substantially the form of Exhibit E-2 attached hereto.

(iii) The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent Instructions, in the form of Exhibit D-2 attached hereto, which instructions shall have been delivered to and acknowledged in writing by the Company’s transfer agent.

(iv) The Company shall have delivered to such Buyer a certificate evidencing the formation and good standing of the Company and each of its domestic Subsidiaries in each such entity’s jurisdiction of formation issued by the Secretary of State (or comparable office) of such jurisdiction, as of a date within 10 days of the Additional Closing Date.

(v) The Company shall have delivered to such Buyer a certificate evidencing the Company’s qualification as a foreign corporation and good standing issued by the Secretary of State (or comparable office) of each jurisdiction in which the Company, as applicable, conducts business, as of a date within 10 days of the Additional Closing Date.

(vi) The Company shall have delivered to such Buyer a certified copy of the Certificate of Incorporation of the Company as certified by the Secretary of State of Delaware within ten (10) days of the Additional Closing Date.

(vii) The Company shall have delivered to such Buyer a certificate, executed by the Secretary of the Company dated as of the Additional Closing Date, as to (i) the resolutions consistent with Section 3(b) as adopted by the Company’s Board of Directors in a form reasonably acceptable to such Buyer, (ii) the Articles of Incorporation, as in effect at the Additional Closing and (iii) the Bylaws, as in effect at the Additional Closing, in the form attached hereto as Exhibit F.

(viii) The representations and warranties of the Company shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all respects) as of the date when made and as of the Additional Closing Date as though made at that time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Additional Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of the Additional Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer in the form attached hereto as Exhibit G.

(ix) The Company shall have delivered to such Buyer a letter from the Company’s transfer agent certifying the number of shares of Common Stock outstanding as of a date within five days of the Additional Closing Date.

(x) The Common Stock (i) shall be designated for quotation or listed on the Principal Market and (ii) shall not have been suspended, as of the Additional Closing Date, by the SEC or the Principal Market from trading on the Principal Market nor shall suspension by the SEC or the Principal Market have been threatened, as of the Additional Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by falling below the minimum listing maintenance requirements of the Principal Market.

(xi) The Company shall have obtained all governmental, regulatory or third party consents and approvals, if any, necessary for the sale of the Securities.

(xii) No litigation, status, rule regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated, or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby that prohibits the consummation of the transactions contemplated by the Transaction Documents.

(xiii) The Company shall have delivered to such Buyer such other documents relating to the transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request.

8. TERMINATION.

In the event that the Initial Closing shall not have occurred with respect to a Buyer on or before five (5) Business Days from the date hereof due to the Company’s or such Buyer’s failure to satisfy the conditions set forth in Sections 6(a) and 7(a) above (and the nonbreaching party’s failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the option to terminate this Agreement with respect to such breaching party at the close of business on such date without liability of any party to any other party; provided, however, that if this Agreement is terminated pursuant to this Section 8 due to the failure of the Company to satisfy any of the conditions to Initial Closing set forth in Section 7(a), the Company shall remain obligated to reimburse the non-breaching Buyers for the expenses described in Section 4(g) above. In the event of termination of this Agreement pursuant to this Section 8, this Agreement shall be null and void and all parties shall retain all rights, remedies, claims, and obligations as if this Agreement had never been executed, except as provided otherwise in this Paragraph 8.

9. MISCELLANEOUS.

(a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

(b) Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature.

(c) Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.

(d) Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

(e) Entire Agreement; Amendments. This Agreement and the other Transaction Documents supersede all other prior oral or written agreements between the Buyers, the Company, their affiliates and Persons acting on their behalf with respect to the matters discussed herein and therein, and this Agreement, the other Transaction Documents and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the holders of at least a majority of the aggregate principal amount of Notes issued and issuable hereunder, and any amendment to this Agreement made in conformity with the provisions of this Section 9(e) shall be binding on all Buyers and holders of Securities, as applicable. No provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. No such amendment shall be effective to the extent that it applies to less than all of the holders of the applicable Securities then outstanding. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration also is offered to all of the parties to the Transaction Documents, holders of Notes or holders of the Warrants, as the case may be. The Company has not, directly or indirectly, made any agreements with any Buyers relating to the terms or conditions of the transactions contemplated by the Transaction Documents except as set forth in the Transaction Documents. Without limiting the foregoing, the Company confirms that, except as set forth in this Agreement, no Buyer has made any commitment or promise or has any other obligation to provide any financing to the Company or otherwise.

(f) Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Business Day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company:
The Allied Defense Group, Inc.
8000 Towers Crescent Drive Suite 260 Vienna, Virginia 22182 Telephone: Facsimile:	(703) 847-5268
Attention:

With a copy (for informational purposes only) to:

Baxter, Baker, Sidle, Conn & Jones

Sun Trust Building

Suite 2100

120 E. Baltimore Street

Baltimore, Maryland 21202

Tel: (410) 230-8122

Fax: (410) 230-3801

Attention: James E. Baker, Jr., Esq.

If to the Transfer Agent:

Mellon Investor Services, LLC
85 Challenger Road
Ridgefield, New Jersey 07660

If to a Buyer, to its address and facsimile number set forth on the Schedule of Buyers, with copies to such Buyer’s representatives as set forth on the Schedule of Buyers,

with a copy (for informational purposes only) to:
Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022 Telephone:		(212) 756-2000
Facsimile:		(212) 593-5955
Attention:	Eleazer N. Klein, Esq.

or to such other address and/or facsimile number and/or to the attention of such other Person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by an overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (i), (ii) or (iii) above, respectively.

(g) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Notes or the Warrants. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the holders of at least a majority of the aggregate principal amount of Notes issued and issuable hereunder, including by way of a Fundamental Transaction (unless the Company is in compliance with the applicable provisions governing Fundamental Transactions set forth in the Notes and the Warrants). A Buyer may assign some or all of its rights hereunder without the consent of the Company in which event such assignee shall be deemed to be a Buyer hereunder with respect to such assigned rights.

(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

(i) Survival. Unless this Agreement is terminated under Section 8, the representations and warranties of the Company and the Buyers contained in Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and 9 shall survive the Closings. Each Buyer shall be responsible only for its own representations, warranties, agreements and covenants hereunder.

(j) Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

(k) Indemnification. In consideration of each Buyer’s execution and delivery of the Transaction Documents and acquiring the Securities thereunder and in addition to all of the Company’s other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless each Buyer and each other holder of the Securities and all of their shareholders, partners, members, officers, directors, employees and direct or indirect investors and any of the foregoing Persons’ agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the “Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any inaccuracy in any representation or warranty made by the Company in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby or (c) any cause of action, suit or claim brought or made against such Indemnitee by a third party (including for these purposes a derivative action brought on behalf of the Company) and arising out of or resulting from (i) the execution, delivery, performance or enforcement of the Transaction Documents or any other certificate, instrument or document contemplated hereby or thereby, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Securities, (iii) any disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status of such Buyer or holder of the Securities as an investor in the Company pursuant to the transactions contemplated by the Transaction Documents. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities that is permissible under applicable law. Except as otherwise set forth herein, the mechanics and procedures with respect to the rights and obligations under this Section 9(k) shall be the same as those set forth in Section 6 of the Registration Rights Agreement.

(l) No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

(m) Remedies. Each Buyer and each holder of the Securities shall have all rights and remedies set forth in the Transaction Documents and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. Any Person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. Furthermore, the Company recognizes that in the event that it fails to perform, observe, or discharge any or all of its obligations under the Transaction Documents, any remedy at law may prove to be inadequate relief to the Buyers. The Company therefore agrees that the Buyers shall be entitled to seek temporary and permanent injunctive relief in any such case without the necessity of proving actual damages and without posting a bond or other security.

(n) Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever any Buyer exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such Buyer may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.

(o) Payment Set Aside. To the extent that the Company makes a payment or payments to the Buyers hereunder or pursuant to any of the other Transaction Documents or the Buyers enforce or exercise their rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other Person under any law (including, without limitation, any bankruptcy law, federal or state, foreign law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

(p) Independent Nature of Buyers’ Obligations and Rights. The obligations of each Buyer under any Transaction Document are several and not joint with the obligations of any other Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any other Buyer under any Transaction Document. Nothing contained herein or in any other Transaction Document, and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to constitute the Buyers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Buyers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents and the Company acknowledges that the Buyers are not acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Each Buyer confirms that it has independently participated in the negotiation of the transaction contemplated hereby with the advice of its own counsel and advisors. Each Buyer shall be entitled to independently protect and enforce its rights, including, without limitation, the rights arising out of this Agreement or out of any other Transaction Documents, and it shall not be necessary for any other Buyer to be joined as an additional party in any proceeding for such purpose.

[Signature Page Follows]

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Amended and Restated Securities Purchase Agreement to be duly executed as of the date first written above.

COMPANY:

THE ALLIED DEFENSE GROUP, INC.
By:

Name:

Title:

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Amended and Restated Securities Purchase Agreement to be duly executed as of the date first written above.

BUYERS:

KINGS ROAD INVESTMENTS LTD.
By:

Name:

Title:

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Amended and Restated Securities Purchase Agreement to be duly executed as of the date first written above.

BUYERS:

PORTSIDE GROWTH & OPPORTUNITY FUND
By:

Name:

Title:

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Amended and Restated Securities Purchase Agreement to be duly executed as of the date first written above.

BUYERS:

CASTLERIGG MASTER INVESTMENTS LTD.
By:

Name:

Title:

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Amended and Restated Securities Purchase Agreement to be duly executed as of the date first written above.

BUYERS:

LB I GROUP INC.
By:

Name:

Title:

SCHEDULE OF BUYERS

(1)	(2)		(3)		(4)			(5)			(6)		(7)		(8)		(9)			(10)			(11)		(12)		(13)
			Aggregate Principal		Aggregate Principal			Aggregate Principal			Aggregate Principal
	Address and		Amount of Original		Amount of Amended			Amount of Initial			Amount of		Number of 144		Number of Other		Number of		Warrant			Initial		Additional			Legal Representative's
Buyer	Facsimile Number		Notes		Notes			Notes			Additional Notes		Common Shares		Common Shares		Shares†			Purchase Price			Purchase Price		Escrow Amount		Address and Facsimile Number
	c/o Polygon Investment Partners
	LP
	399 Park Avenue, 22nd Floor																										Schulte Roth & Zabel LLP
	New York, NY 10022																										919 Third Avenue
	Attention: Erik M.W. Caspersen																										New York, New York 10022
	and Brandon L. Jones																										Attention: Eleazer Klein,
	Facsimile: (212) 359-7303																										Esq.
Kings Road	Telephone: (212) 359-7300																										Facsimile: (212) 593-5955
Investments Ltd.	Residence: Cayman Islands		$	12,500,000	$	11,305.080	**	$	2,083,333	*	$	4,166,667		153,286		383,381		141,985		$	2,083,333	*	$	4,166,667	$	2,083,333	Telephone: (212) 756-2376
	c/o Ramius Capital Group, L.L.C.
	666 Third Avenue, 26th Floor
	New York, New York 10017
	Attention: Jeffrey Smith
	Owen Littman
	Facsimile: (212) 845-7999
		(212) 845-7995
	Telephone: (212) 845-7955
Portside Growth &		(212) 201-4841
Opportunity Fund	Residence: Cayman Islands		$	7,500,000	$	6,783,048	**	$	1,250,000	*	$	2,500,000		153,286		168,715		86,991		$	1,250,000	*	$	2,500,000	$	1,250,000		N/A
	c/o Sandell Asset Management
	40 West 57th St
	26th Floor																										McDermott Will & Emery LLP
	New York, NY 10019																										340 Madison Avenue
	Attention: Cem Hacioglu /																										New York, New York 10173-1922
	Matthew Pliskin																										Attention: Stephen Older,
Castlerigg	Telephone: 212-603-5700																										Esq.
Master Investments	Fax: 212-603-5710																										Facsimile: (212) 547-5444
Ltd.	Residence: British Virgin Islands		$	6,000,000	$	5,426,438	**	$	1,000,000	*	$	2,000,000		153,286		104,315		69,593		$	1,000,000	*	$	2,000,000	$	1,000,000	Telephone: (212) 547-5649
	c/o Lehman Brothers Inc.
	399 Park Ave
	NY, NY 10022
	Attention: Will Yelsits
LB I Group Inc.	Eric Salzman		$	4,000,000	$	3,617,626	**	$	666,667	*	$	1,333,333		153,286		18,448		46,395		$	666,667	*	$	1,333,333	$	666,667		N/A
TOTAL			$	30,000,000	$	27,132,192	**	$	5,000,000	*	$	10,000,000		613,142		674,858		347,963		$	5,000,000	*	$	10,000,000	$	5,000,000

* Legal Counsel Fee Amount as of Initial Closing Date (pro rata to each Buyer) to be added.

** The product of (I) the number of calendar days during the period commencing on the date hereof and ending on the Initial Closing Date and (II) $10,273.97 per calendar day (pro rata to each Buyer) to be added.

† Reflects antidilution adjustments to Warrants as of the date immediately following the Initial Closing Date

EXHIBITS

Exhibit A-1
Exhibit A-2
Exhibit B
Exhibit C
Exhibit D-1
Exhibit D-2
Exhibit E-1
Exhibit E-2
Exhibit F
Exhibit G
Exhibit H
Exhibit I
Exhibit J
Exhibit K
Exhibit L
Exhibit M Form of Original Notes
Form of Notes
Form of Warrants
Form of Amended and Restated Registration Rights Agreement
Irrevocable Transfer Agent Instructions re: Initial Closing
Irrevocable Transfer Agent Instructions re: Additional Closing
Form of Counsel Opinion re: Initial Closing
Form of Counsel Opinion re: Additional Closing
Form of Secretary’s Certificate
Form of Officer’s Certificate
Form of Security Agreement
Form of Pledge Agreement
Form of Guarantee
Form of Escrow Agreement
MECAR Certificate
Form of Voting Agreement

SCHEDULES

Schedule 3(a)
Schedule 3(d)
Schedule 3(j)
Schedule 3(k)
Schedule 3(n)
Schedule 3(q)
Schedule 3(r)
Schedule 3(s)
Schedule 3(t)
Schedule 3(v)
Schedule 3(z)
Schedule 3(aa)
Schedule 3(bb)
Schedule 3(dd)
Schedule 4(c) Subsidiaries
No Conflicts
Application of Takeover Protections; Rights Agreement
SEC Documents; Financial Statements
Conduct of Business; Regulatory Permits
Transactions with Affiliates
Equity Capitalization
Indebtedness and Other Contracts
Absence of Litigation
Employee Relations
Subsidiary Rights
Tax Status
Internal Accounting and Disclosure Controls
Ranking of Notes
Reporting Status

Schedule 3(e)

Consents

• On March 23, 2007, the staff of the Division of Enforcement of the SEC informed the Company that the staff is conducting an inquiry to determine whether there have been any violations of the federal securities laws and requested that the Company voluntarily produce information relating to the Company’s Form 8-K filed with the SEC on February 9, 2007, which reported certain errors in the Company’s financial statements for the three and nine month periods ended September 30, 2006.

• On May 23, 2007, the Company received a letter from the Principal Market stating that the Company may not be in compliance with the Principal Market’s listing requirements as a result of the Company’s sustained losses and/or financial condition. On June 1, 2007, the Company received a follow up letter from the Principal Market stating that, based on the information furnished by the Company on May 30, 2007, the Principal Market had rescinded its previous letter dated May 23, 2007.

Schedule 3(j)

Application of Takeover Protections; Rights Agreement

The Board of Directors of the Company adopted a Rights Agreement in 2001 and amended the agreement in June 2006 and again in November 2006. The Rights Agreement provides each stockholder of record a dividend distribution of one “right” for each outstanding share of common stock. Rights become exercisable the earlier of ten days following: (1) a public announcement that an acquiring person has purchased or has the right to acquire 25% or more of the Company’s common stock, or (2) the commencement of a tender offer which would result in an offeror beneficially owning 25% or more of the outstanding common stock. All rights held by an acquiring person or offeror expire on the announced acquisition date and all rights expire at the close of business on May 31, 2011.

Each right under the Rights Agreement entitles a stockholder to acquire at a purchase price of $50, one-hundredth of a share of preferred stock which carries voting and dividend rights similar to one share of common stock. Alternatively, a right holder may elect to purchase for $50 an equivalent number of common shares (or in certain circumstances, cash, property or other securities of the Company) at a price per share equal to one-half of the average market price for a specified period. In lieu of the purchase price, a right holder may elect to acquire one-half of the common shares available under the second option. The purchase price and the preferred share fractional amount are subject to adjustment for certain events as described in the Rights Agreement.

Rights also entitle the holder to receive a specified number of shares of an acquiring company’s common stock in the event that the Company is not the surviving corporation in a merger or if 50% or more of the Company’s assets are sold or transferred.

At the discretion of a majority of the Board of Directors of the Company and within a specified time period, the Company may redeem all of the rights at a price of $.01 per right. The Board may also amend any provision of the Agreement prior to exercise of the rights. The Rights Agreement will not be triggered by the transactions contemplated by the Transaction Documents.

Schedule 3(k)

SEC Documents; Financial Statements

In the Company’s 10-K for the fiscal year ended December 31, 2006, filed on March 23, 2007, the Company summarized in Management’s Report on Internal Controls over Financial Reporting (Item 9A) and reported by the auditors in the Report of Independent Registered Public Accounting Firm, that the Company had two material weaknesses outstanding in its internal control over financial reporting. One weakness was that Mecar did not have proper maintenance of an appropriate contract cost accounting ledger, and the other weakness related to the Company’s financial reporting processes. While the Company has taken actions to remediate these weaknesses, the Company has not completed its testing and determined whether these weaknesses have been remediated as of the date hereof. Therefore, these material weaknesses may continue to exist. In addition to the material weaknesses reported by the Company, the Company’s internal control testing identified two significant deficiencies in internal controls that exist at the Company that were not required to be disclosed pursuant to the terms of the Sarbanes-Oxley Act of 2002. These deficiencies relate to general IT controls and a lack of segregation of duties. These deficiencies, if combined, could create a material weakness in the Company’s internal controls.

Schedule 3(n)

Conduct of Business; Regulatory Permits

During the two (2) years prior to the date hereof, the Company has had communications from and with the SEC or Principal Market regarding the suspension or delisting of the Common Stock from the Principal Market with respect to the following:

• In the period April through September 2006, the Company had numerous communications with the Principal Market regarding a potential delisting as a result of the Company’s failure to file timely SEC filings regarding the Company’s financial results.

• On May 23, 2007, the Company received a letter from the Principal Market stating that the Company may not be in compliance with the Principal Market’s listing requirements as a result of the Company’s sustained losses and/or financial condition. On June 1, 2007, the Company received a follow-up letter from the Principal Market stating that, based on the information furnished by the Company on May 30, 2007, the Principal Market had rescinded its previous letter dated May 23, 2007. However, the Company may receive similar letters from the Principal Market in the future.

• On March 23, 2007, the staff of the Division of Enforcement of the SEC informed the Company that the staff is conducting an inquiry to determine whether there have been any violations of the federal securities laws and requested that the Company voluntarily produce information relating to the Company’s Form 8-K filed with the SEC on February 9, 2007, which reported certain errors in the Company’s financial statements for the three and nine month periods ended September 30, 2006.

Schedule 3(q)

Transactions with Affiliates

The Company’s subsidiary, News/Sports Microwave Rental, Inc., has loaned $100,000 to the subsidiary’s current president as evidenced by a note dated March 1, 2004. The note accrues interest at 5% per annum and is forgivable based on the president achieving certain performance goals at News/Sports Microwave Rental, Inc. The principal and unpaid interest on the note is due March 1, 2009.

Schedule 3(r)

Equity Capitalization

The Company has the following agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the 1933 Act:

• Those shares of Common Stock of the Company referenced in Schedules 2(c)(i) and 2(c)(ii) of the Registration Rights Agreement

• 41,793 shares of the Company’s Common Stock that are issuable upon the conversion of warrants issued to Cowen and Company, LLC associated with the Original Securities Purchase Agreement

• 28,000 shares of the Company’s Common Stock that are issuable upon the conversion of warrants issued to Patriot Capital Funding, Inc. in 2004 and 2005.

Schedule 3(s)

Indebtedness and Other Contracts

The material terms of the Company’s Indebtedness and disclosures related to any contract, agreement or instrument the violation of which or default under which, by the other party(ies) to such contract, agreement or instrument would reasonably be expected to result in a Material Adverse Effect or is in violation of any term of or in default under any contract, agreement, or instrument relating to any Indebtedness, except where such violation and defaults would not result, individually or in the aggregate, in a Material Adverse Effect or is a party to any contract, agreement, or instrument relating to any Indebtedness, the performance of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse Effect, have been provided in the Company’s Form 10-K filed with the SEC for December 31, 2006, including but not limited to, the notes to the financial statements provided in the Form 10-K, as listed:

• Note K – Bank Credit Facility

• Note L – Accrued Losses on Contracts, Deferred Compensation, and Warranty Reserves

• Note M – Long Term Debt

• Note P – Contingencies and Commitments

• Note Q – Fair Value of Financial Instruments

• Note R – Derivative Financial Instruments

• Note U – Income Taxes

• Note Y – Off Balance Sheet Transaction

The following are obligations for which financing statements or other security documents have been filed to secure payment of the obligations:

Entity	Party/ Description	Approximate Amount
Mecar USA, Inc.	Wachovia Bank / Performance Bond	$	48,672
Mecar USA, Inc.	Bankcorp South	$	31,250
News/Sports Microwave Rental, Inc.	TCF Equipment Finance / Equipment Lease	$	81,683

See also the Indebtedness enumerated in Schedule 3(d)(d)

Schedule 3(t)

Absence of Litigation

On March 23, 2007, the staff of the Division of Enforcement of the SEC informed the Company that the staff is conducting an inquiry to determine whether there have been any violations of the federal securities laws and requested that the Company voluntarily produce information relating to the Company’s Form 8-K filed with the SEC on February 9, 2007, which reported certain errors in the Company’s financial statements for the three and nine month periods ended September 30, 2006. The Company believes, at this time, that the inquiry remains open.

On April 24, 2007, Kings Road Investments Ltd. filed a Complaint against the Company in the United States District Court for the Southern District of New York (Civil Action No. 07-CV-03262), requesting money damages of not less than $16,664,854 plus interest, costs and attorneys’ fees.

Suit has been filed in Belgium against one of the members of the VSK Group for alleged breach of contract, seeking damages of less than $150,000.

A former employee filed suit in Belgium against the Company and Mecar S.A. for unpaid severance and other amounts totaling less than $400,000.

Schedule 3(v)

Employee Relations

Mecar USA, Inc.’s (“Mecar”) hourly workers are represented by a labor union. The relations with the labor union are explained by the Company in the Company’s Form 10-K filed with the SEC for the period ended December 31, 2006 under Item 1. Business.

Schedule 3(z)

Subsidiary Rights

Mecar S.A.’s current credit facility arrangement prohibits Mecar S.A. from making dividends.

Schedule 3(aa)

Tax Status

As explained in the Company’s Form 10-K for the period ending December 31, 2006, Mecar S.A. is currently under examination by Belgian taxing authorities. The audit covers the 2004 tax year and relates to undocumented management fees, the calculation of inventory reserves and the calculation of interest expense related to a timing difference on the recognition of unrealized/realized currency exchange gains and losses. The audit is not expected to be completed until the third quarter of 2007. Based on discussions with the tax inspector, the Company believes that the appropriate supporting documentation for the calculation of inventory reserves has been provided and no adjustment will be required. However, management believes that it will be required to pay tax on the unrealized/realized foreign currency gain in 2004, which will be offset by a deduction in 2005 when the company recorded the gain in its statutory books. Accordingly, as of December 31, 2006, the Company recorded a liability of $3,194,000 for the tax on the foreign currency gains.

Schedule 3(bb)

Internal Accounting and Disclosure Controls

In the Company’s 10-K for the fiscal year ended December 31, 2006, filed on March 23, 2007, the Company summarized in Management’s Report on Internal Controls over Financial Reporting (Item 9A) and reported by the auditors in the Report of Independent Registered Public Accounting Firm, that the Company had two material weaknesses outstanding in its internal control over financial reporting. One weakness was that Mecar did not have proper maintenance of an appropriate contract cost accounting ledger, and the other weakness related to the Company’s financial reporting processes. While the Company has taken actions to remediate these weaknesses, the Company has not completed its testing and determined whether these weaknesses have been remediated as of the date hereof. Therefore, these material weaknesses may continue to exist. In addition to the material weaknesses reported by the Company, the Company’s internal control testing identified two significant deficiencies in internal controls that exist at the Company that were not required to be disclosed pursuant to the terms of the Sarbanes-Oxley Act of 2002. These deficiencies relate to general IT controls and a lack of segregation of duties. These deficiencies, if combined, could create a material weakness in the Company’s internal controls.

Schedule 3(dd)

Ranking of Notes

Each of the following debts is senior to, or ranks pari passu with, the Notes:

Description	Borrower	Amount		Agreement		(Lender)	31-May-07
2003 Van	News/Sports Microwave Rental, Inc.	$	26,732.00		07/01/03	GMAC	$	6,237.81
Forklift	News/Sports Microwave Rental, Inc.	$	197,402.57		09/01/05	One Source/ TCF Eqpt Finance	$	87,268.07
						Crown Credit Company/ Crown
Forklift	SeaSpace Corporation	$	18,390.00		08/01/05	Equipment Company	$	10,266.23
Intellectual Property	SeaSpace Corporation	$	250,000.00		08/01/05	LJT & Associates	$	250,000.00
GMS Purchase	The Allied Defense Group, Inc.	$	6,700,000.00		11/01/05	Sam Nasiri	$	5,862,500.00
Telephone System	The Allied Defense Group, Inc.	$	10,072.61		04/01/04	Inter-Tel Leasing, Inc.	$	4,755.85
Dell Computer	The Allied Defense Group, Inc.	$	2,766.15		02/16/06	Dell Financial Services	$	1,370.63
Dell Computer (5)	The Allied Defense Group, Inc.	$	10,751.58		04/14/06	Dell Financial Services	$	4,718.68
Dell Desktops (3)	The Allied Defense Group, Inc.	$	3,549.54		04/19/06	Dell Financial Services	$	3,414.18
Dell Computer (3)	The Allied Defense Group, Inc.	$	6,570.96		08/30/06	Dell Financial Services	$	6,320.38
Dell Computer	The Allied Defense Group, Inc.	$	1,499.93		04/01/07	Dell Financial Services	$	1,378.25
CMS Purchase	VSK Electronics N.V.	$	400,000.00		08/01/04		$	100,000.00
Vigitec Mortgage	VIGITEC, S.A.		433,813.67 €		03/25/99	CBC Bank		103,073.00 €
Phone Lease	VSK Electronics N.V.		43,948.00 €		03/29/02	Siemens		16,536.00 €
Scientific Research Loan	VSK Electronics N.V.		107,283.00 €		1984???	Gvt Export Agency		107,283.00 €

Schedule 4(c)

Reporting Status

For the 10-Q required for the period ending June 30, 2007, based on the Initial Closing Date of this transaction and the bifurcation and valuation services that will be required in order to properly reflect this transaction in the financial statements, the Company may file its Form 10-Q after the SEC date required for the filing of that Form. In view of potential transactions, including this transaction, for the 10-Q required for the period ending September 30, 2007, the Company may file its Form 10-Q after the SEC date required for the filing of that form.

Schedule 4(d)

Use of Proceeds

Senior Permitted Indebtedness, including the Company’s Note obligations to Sam Nasiri.

Payments required for capital leases.

[FORM OF [FOR AMENDED NOTES: AMENDED AND RESTATED] SENIOR SECURED CONVERTIBLE NOTE]

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS NOTE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED OR ASSIGNED UNLESS (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. NOTHING IN THE PRECEDING SHALL PROHIBIT THE PLEDGE OF THE SECURITIES IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 19(a) HEREOF. THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

The Allied Defense Group, Inc.

[FOR AMENDED NOTES: Amended and Restated] Senior Secured Convertible Note

[FOR AMENDED NOTES:: Original Issuance Date: March 9, 2006] Exchanged for New Note with Issuance Date: [     ], 2007] [FOR INITIAL NOTES:
Issuance Date: [     ], 2007]	Original Principal Amount: U.S. $[     ]1

FOR VALUE RECEIVED, The Allied Defense Group, Inc., a Delaware corporation (the “Company”), hereby promises to pay to [PORTSIDE GROWTH & OPPORTUNITY FUND][OTHER BUYERS] or registered assigns (“Holder”) the amount set out above as the Original Principal Amount (as reduced pursuant to the terms hereof pursuant to redemption, conversion or otherwise, and including any Capitalized Interest (as defined in Section 2 below) thereon, the “Principal”) when due, whether upon the Maturity Date (as defined below), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest (including, any amounts of Additional Interest required to be paid pursuant to Section 2(d), “Interest”) on any outstanding Principal at a rate per annum equal to the Interest Rate (as defined below), from June [     ], 2007, the date set out above as the Issuance Date, (the “Issuance Date”) until the same becomes due and payable, whether upon an Interest Date (as defined below), the Maturity Date, acceleration, conversion, redemption or otherwise (in each case in accordance with the terms hereof). [FOR AMENDED NOTES: This Amended and Restated Senior Secured Convertible Note (including all Senior Secured Convertible Notes issued in exchange, transfer or replacement hereof, this “Note”) amends, supplements, modifies and completely restates and supersedes the Senior Subordinated Convertible Note, dated March 9, 2006 (the "Existing Note”), issued by the Company to the Holder in the Original Principal Amount of $[     ], but shall not, except as specifically amended hereby or as set forth in the Securities Purchase Agreement, constitute a release, satisfaction or novation of any of the obligations under any other Transaction Document (as defined in the Securities Purchase Agreement). This Note is one of an issue of Amended and Restated Senior Secured Convertible Notes issued pursuant to the Securities Purchase Agreement by and between each of the Buyers (as defined in the Securities Purchase Agreement) and the Company (collectively, the “Notes” and such other Amended and Restated Senior Secured Convertible Notes, the “Other Notes”).] [FOR INITIAL NOTES: This Senior Secured Convertible Note (including all Senior Secured Convertible Notes issued in exchange, transfer or replacement hereof, this “Note”) is one of an issue of Senior Secured Convertible Notes issued pursuant to the Securities Purchase Agreement on the Closing Date (collectively, the “Notes” and such other Senior Secured Convertible Notes, the “Other Notes”).] Certain capitalized terms used herein are defined in Section 30.

(1) MATURITY. On the Maturity Date, the Holder shall surrender this Note to the Company and the Company shall pay to the Holder an amount in cash representing all outstanding Principal, accrued and unpaid Interest and accrued and unpaid Late Charges, if any. The “Maturity Date” shall be [     ], 2010, as may be extended at the option of the Holder (i) in the event that, and for so long as, an Event of Default (as defined in Section 4(a)) shall have occurred and be continuing or any event shall have occurred and be continuing which with the passage of time and the failure to cure would result in an Event of Default and (ii) through the date that is ten days after the consummation of a Change of Control in the event that a Change of Control is publicly announced or a Change of Control Notice (as defined in Section 5) is delivered prior to the Maturity Date.

(2) INTEREST. (a) Interest on this Note shall commence accruing on the Issuance Date and shall be computed on the basis of a 365-day year and actual days elapsed and shall be payable in arrears on the last day of each Calendar Quarter during the period beginning on the Issuance Date and ending on, and including, the Maturity Date (each, an “Interest Date”) with the first Interest Date being September 30, 2007. Interest shall be payable on each Interest Date, to the record holder of this Note on the applicable Interest Date, in shares of Common Stock (as defined below) (“Interest Shares”) so long as there has been no Equity Conditions Failure; provided however, that the Company may, at its option following notice to the Holder, pay Interest on any Interest Date in cash (“Cash Interest”) or in a combination of Cash Interest and Interest Shares; provided, further, however, that Company may capitalize any such Interest accruing through [           ],² 2007 on and as of each applicable Interest Date by adding it to the then outstanding Principal of this Note (the “Capitalized Interest”). The Company shall deliver a written notice (each, an “Interest Election Notice”) to each holder of the Notes on or prior to the Interest Notice Due Date (the date such notice is delivered to all of the holders, the “Interest Notice Date”) which notice (1) (A) either (x) confirms that Interest to be paid on such Interest Date shall be paid entirely in Interest Shares or (y) elects to pay Interest as Cash Interest or a combination of Cash Interest and Interest Shares and specifies the amount of Interest that shall be paid as Cash Interest and the amount of Interest, if any, that shall be paid in Interest Shares and (B) certifies that there has been no Equity Conditions Failure, (2) in the event the Company has elected to pay Interest on an Interest Date as Capitalized Interest, states the Company’s election to capitalize such Interest and (3) states the aggregate amount of Interest to be paid to the Holder on the applicable Interest Date; provided, however, that with respect to the Interest Dates on March 30, 2008 and June 30, 2008, the Company shall be permitted to pay Interest in Interest Shares regardless of whether the Equity Conditions set forth in clauses (i) and (vii) of the definition thereof are satisfied (and only so long as there is no Equity Conditions Failure with respect to any other clauses in the definition of Equity Conditions) at the Adjusted Interest Conversion Price. If any portion of Interest for a particular Interest Date shall be paid in Interest Shares, then the Company shall pay to the Holder, in accordance with Section 2(b), a number of shares of Common Stock equal to (x) the amount of Interest payable on the applicable Interest Date in Interest Shares divided by (y) the Interest Conversion Price or the Adjusted Interest Conversion Price, as applicable. Interest to be paid on an Interest Date in Interest Shares shall be paid in a number of fully paid and nonassessable shares of Common Stock (rounded to the nearest whole share). Except as provided above with respect to the Interest Dates on March 30, 2008 and June 30, 2008, if the Equity Conditions are not satisfied as of the Interest Notice Date, the Interest Notice shall indicate that unless the Holder waives the Equity Conditions, the Interest shall be paid in cash. If the Equity Conditions were satisfied as of the Interest Notice Date but the Equity Conditions are no longer satisfied at any time prior to the Interest Date, the Company shall provide the Holder a subsequent notice to that effect indicating that unless the Holder waives the Equity Conditions prior to the Interest Date, the Interest shall be paid in cash on the Interest Date. In the event of a dispute as to the amount of Interest to be paid on any Interest Date, including without limitation, any dispute relating to the Cash Interest payable or the number of Interest Shares issuable to the Holder in connection with such Interest Date, the Company shall pay to the Holder the amount of Interest (whether in the form of Cash Interest or Interest Shares) not in dispute and resolve such dispute in accordance with Section 24.

(b) When any Interest Shares are to be paid on an Interest Date, the Company shall (i) (A) provided that the Company’s transfer agent (the “Transfer Agent”) is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program, credit such aggregate number of Interest Shares to which the Holder shall be entitled to the Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system, or (B) if the foregoing shall not apply, issue and deliver on the applicable Interest Date, to the address set forth in the register maintained by the Company for such purpose pursuant to the Securities Purchase Agreement or to such address as specified by the Holder in writing to the Company at least two (2) Business Days prior to the applicable Interest Date, a certificate, registered in the name of the Holder or its designee, for the number of Interest Shares to which the Holder shall be entitled and (ii) with respect to each Interest Date, pay to the Holder, in cash by wire transfer of immediately available funds, the amount of any Cash Interest.

(c) Prior to the payment of Interest on an Interest Date, Interest on this Note shall accrue at the Interest Rate and be payable in cash upon any conversion in accordance with Section 3(c)(i). Upon the occurrence and during the continuance of an Event of Default, the Interest Rate shall be increased to twelve and one-half percent (12.5%). In the event that such Event of Default is subsequently cured, the adjustment referred to in the preceding sentence shall cease to be effective as of the date of such cure; provided that the Interest as calculated at such increased rate during the continuance of such Event of Default shall continue to apply to the extent relating to the days after the occurrence of such Event of Default through and including the date of cure of such Event of Default. The Company shall pay any and all taxes that may be payable with respect to the issuance and delivery of Interest Shares; provided that the Company shall not be required to pay any tax that may be payable in respect of the issuance and delivery of any Interest Shares to any Person other than the Holder or with respect to any income tax due by the Holder with respect to such Interest Shares.

(d) Upon the occurrence of any Dilutive Issuance (as defined in Section 7(a)) prior to the second (2^nd) anniversary of the Issuance Date, the Company shall pay to the Holder, as additional interest (the “Additional Interest”), an amount equal to the product of (i) the Interest Pro Rata Amount multiplied by (ii) five percent (5.0%) of the gross proceeds received by the Company from such Dilutive Issuance. Such amounts of Additional Interest shall be paid in cash to the Holder on the date the Company receives such proceeds in connection with such Dilutive Issuance and the date of any such payment shall be considered an “Interest Date” hereunder.

(3) CONVERSION OF NOTES. This Note shall be convertible into shares of common stock of the Company, $0.10 par value per share (the “Common Stock”), on the terms and conditions set forth in this Section 3.

(a) Conversion Right. Subject to the provisions of Section 3(d), at any time or times on or after the Issuance Date, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable shares of Common Stock in accordance with Section 3(c), at the Conversion Rate (as defined below). The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up to the nearest whole share. The Company shall pay any and all taxes that may be payable with respect to the initial issuance and delivery of Common Stock upon conversion of any Conversion Amount; provided that the Company shall not be required to pay any tax that may be payable in respect of the issuance and delivery of any shares of Common Stock upon conversion to any Person other than the Holder or with respect to any income tax due by the Holder with respect to such shares of Common Stock.

(b) Conversion Rate. The number of shares of Common Stock issuable upon conversion of any Conversion Amount pursuant to Section 3(a) shall be determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the “Conversion Rate”).

(i) “Conversion Amount” means the portion of the Principal to be converted, redeemed or otherwise with respect to which this determination is being made.

(ii) “Conversion Price” means, as of any Conversion Date (as defined below) or other date of determination, $[     ]³, subject to adjustment as provided herein.

(c) Mechanics of Conversion.

(i) Optional Conversion. To convert any Conversion Amount into shares of Common Stock on any date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Company and (B) if required by Section 3(c)(iv), surrender this Note to a nationally recognized overnight delivery service for delivery to the Company (or an indemnification undertaking with respect to this Note in the case of its loss, theft or destruction). On or before the second (2^nd) Trading Day following the date of receipt of a Conversion Notice, the Company shall transmit by facsimile a confirmation of receipt of such Conversion Notice to the Holder and the Transfer Agent. On or before the third (3^rd ) Trading Day following the date of receipt of a Conversion Notice (the “Share Delivery Date”), the Company shall (1) (X) provided that the Transfer Agent is participating in the Fast Automated Securities Transfer Program of the DTC credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system or (Y) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled, (2) pay to the Holder in cash an amount equal to the accrued and unpaid Interest on the Conversion Amount up to and including the Conversion Date and (3) for any conversions prior to the third (3^rd) anniversary of the Issuance Date, pay any applicable Make-Whole Amount in accordance with Section 3(c)(ii). If this Note is physically surrendered for conversion as required by Section 3(c)(iv) and the outstanding Principal of this Note is greater than the Principal portion of the Conversion Amount being converted, then the Company shall as soon as practicable and in no event later than three Business Days after receipt of this Note and at its own expense, issue and deliver to the holder a new Note (in accordance with Section 19(d)) representing the outstanding Principal not converted. The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

(ii) Make-Whole Amount. If prior to the third (3^rd) anniversary of the Issuance Date, the Holder converts all or any portion of this Note pursuant to Section 3(c)(i) or the Company converts all or any portion of this Note pursuant to Section 9(a), then upon such conversion or redemption, the Holder shall receive the Make-Whole Amount; provided, however, that in the event that the Closing Sale Price of the Common Stock exceeds 140% of the initial Conversion Price (as adjusted for any stock split, combination, reclassification or similar transaction) for each of twenty (20) Trading Days out of the thirty (30) consecutive Trading Day period ended on the Trading Day immediately prior to the Conversion Date, then the Holder shall not be entitled to receive the Make-Whole Amount. The Company shall pay any Make-Whole Amount in cash.

(iii) Company’s Failure to Timely Convert. If the Company shall fail to issue a certificate to the Holder or credit the Holder’s balance account with DTC, as applicable, for the number of shares of Common Stock to which the Holder is entitled upon conversion of any Conversion Amount on or prior to the date which is five (5) Trading Days after the Conversion Date (a “Conversion Failure”), then (A) the Company shall pay damages to the Holder for each Trading Day of such Conversion Failure in an amount equal to 1.0% of the product of (I) the sum of the number of shares of Common Stock not issued to the Holder on or prior to the Share Delivery Date and to which the Holder is entitled, and (II) the Closing Sale Price of the Common Stock on the Share Delivery Date and (B) the Holder, upon written notice to the Company, may void its Conversion Notice with respect to, and retain or have returned, as the case may be, any portion of this Note that has not been converted pursuant to such Conversion Notice; provided that the voiding of a Conversion Notice shall not affect the Company’s obligations to make any payments which have accrued prior to the date of such notice pursuant to this Section 3(c)(iii) or otherwise. In addition to the foregoing, if within three (3) Trading Days after the Company’s receipt of the facsimile copy of a Conversion Notice the Company shall fail to issue and deliver a certificate to the Holder or credit the Holder’s balance account with DTC for the number of shares of Common Stock to which the Holder is entitled upon such holder’s conversion of any Conversion Amount, and if on or after such Trading Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by the Holder of Common Stock issuable upon such conversion that the Holder anticipated receiving from the Company (a “Buy-In"), then the Company shall, within three (3) Trading Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the “Buy-In Price"), at which point the Company’s obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Bid Price on the Conversion Date.

(iv) Registration; Book-Entry. The Company shall maintain a register (the “Register”) for the recordation of the names and addresses of the holders of each Note and the principal amount of the Notes held by such holders (the “Registered Notes”). The entries in the Register shall be conclusive and binding for all purposes absent manifest error. The Company and the holders of the Notes shall treat each Person whose name is recorded in the Register as the owner of a Note for all purposes, including, without limitation, the right to receive payments of principal and interest hereunder, notwithstanding notice to the contrary. A Registered Note may be assigned or sold in whole or in part only by registration of such assignment or sale on the Register. Upon its receipt of a request to assign or sell all or part of any Registered Note by a Holder, the Company shall record the information contained therein in the Register and issue one or more new Registered Notes in the same aggregate principal amount as the principal amount of the surrendered Registered Note to the designated assignee or transferee pursuant to Section 19. Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless (A) the full Conversion Amount represented by this Note is being converted or (B) the Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting reissuance of this Note upon physical surrender. The Holder and the Company shall maintain records showing the Principal converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Note upon conversion.

(v) Pro Rata Conversion; Disputes. In the event that the Company receives a Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company can convert some, but not all, of such portions of the Notes submitted for conversion, the Company, subject to Section 3(d), shall convert from each holder of Notes electing to have Notes converted on such date a pro rata amount of such holder’s portion of its Notes submitted for conversion based on the principal amount of Notes submitted for conversion on such date by such holder relative to the aggregate principal amount of all Notes submitted for conversion on such date. In the event of a dispute as to the number of             shares of Common Stock issuable to the Holder in connection with a conversion of this Note, the Company shall issue to the Holder the number of shares of Common Stock not in dispute and resolve such dispute in accordance with Section 24.

(d) Limitations on Conversions.

(i) Beneficial Ownership. The Company shall not effect any conversion of this Note, and the Holder of this Note shall not have the right to convert any portion of this Note pursuant to Section 3(a), to the extent that after giving effect to such conversion, the Holder (together with the Holder’s affiliates) would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the number of shares of Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which the determination of such sentence is being made, but shall exclude the number of             shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted portion of this Note beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any Other Notes or warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(d)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes of this Section 3(d)(i), in determining the number of outstanding             shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-KSB, Form 10-K, Form 10-QSB, Form 10-Q or Form 8-K, as the case may be (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. For any reason at any time, upon the written request of the Holder, the Company shall within two (2) Business Days confirm in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. By written notice to the Company, the Holder may from time to time increase or decrease the Maximum Percentage to any other percentage not in excess of 9.99% specified in such notice; provided that (i) any such increase will not be effective until the sixty-first (61^st) day after such notice is delivered to the Company, and (ii) any such increase or decrease will apply only to the Holder and not to any other holder of Notes.

(ii) Principal Market Regulation. The Company shall not be obligated to issue any shares of Common Stock upon conversion of this Note, and the Holder of this Note shall not have the right to receive upon conversion of this Note any shares of Common Stock, if the issuance of such shares of Common Stock would exceed the aggregate number of shares of Common Stock which the Company may issue upon conversion or exercise, as applicable, of the Notes and Warrants without breaching the Company’s obligations under the rules or regulations of the Principal Market (the number of shares which may be issued without violating such rules and regulations, the “Exchange Cap”), except that such limitation shall not apply in the event that the Company (A) obtains the approval of its stockholders as required by the applicable rules of the Principal Market for issuances of Common Stock in excess of such amount or (B) obtains a written opinion from outside counsel to the Company that such approval is not required, which opinion shall be reasonably satisfactory to the Required Holders. Unless and until such approval or written opinion is obtained, no purchaser of the Notes pursuant to the Securities Purchase Agreement (the “Purchasers”) shall be issued in the aggregate, upon conversion or exercise, as applicable, of Notes or Warrants, shares of Common Stock in an amount greater than the product of the Exchange Cap multiplied by a fraction, the numerator of which is the principal amount of Notes issued to such Purchaser pursuant to the Securities Purchase Agreement on the Closing Date and the denominator of which is the aggregate principal amount of all Notes issued to the Purchasers pursuant to the Securities Purchase Agreement on the Closing Date (with respect to each Purchaser, the “Exchange Cap Allocation”). In the event that any Purchaser shall sell or otherwise transfer any of such Purchaser’s Notes, the transferee shall be allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, and the restrictions of the prior sentence shall apply to such transferee with respect to the portion of the Exchange Cap Allocation allocated to such transferee. In the event that any holder of Notes shall convert all of such holder’s Notes into a number of shares of Common Stock which, in the aggregate, is less than such holder’s Exchange Cap Allocation, then the difference between such holder’s Exchange Cap Allocation and the number of shares of Common Stock actually issued to such holder shall be allocated to the respective Exchange Cap Allocations of the remaining holders of Notes on a pro rata basis in proportion to the aggregate principal amount of the Notes then held by each such holder.

(4) RIGHTS UPON EVENT OF DEFAULT.

(a) Event of Default. Each of the following events shall constitute an “Event of Default”:

(i) the failure of the applicable Registration Statement required to be filed pursuant to the Registration Rights Agreement to be declared effective by the SEC on or prior to the date that is sixty (60) days after the applicable Effectiveness Deadline (as defined in the Registration Rights Agreement), or, while the applicable Registration Statement is required to be maintained effective pursuant to the terms of the Registration Rights Agreement, the effectiveness of the applicable Registration Statement lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to any holder of the Notes for sale of all of such holder’s Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the Registration Rights Agreement, and such lapse or unavailability continues for a period of ten (10) consecutive days or for more than an aggregate of thirty (30) days in any 365-day period (other than days during an Allowable Grace Period (as defined in the Registration Rights Agreement));

(ii) the suspension from trading or failure of the Common Stock to be listed on an Eligible Market for a period of five (5) consecutive Trading Days or for more than an aggregate of ten (10) Trading Days in any 365-day period;

(iii) the Company’s (A) failure to cure a Conversion Failure by delivery of the required number of shares of Common Stock within ten (10) Business Days after the applicable Conversion Date or (B) written notice to any holder of the Notes, including by way of public announcement or through any of its agents, at any time, of its intention not to comply with a request for conversion of any Notes into shares of Common Stock that is tendered in accordance with the provisions of the Notes;

(iv) at any time following the tenth (10^th) consecutive Business Day that the Holder’s Authorized Share Allocation is less than the number of shares of Common Stock that the Holder would be entitled to receive upon a conversion of the full Conversion Amount of this Note (without regard to any limitations on conversion set forth in Section 3(d) or otherwise);

(v) the Company’s failure to pay to the Holder any amount of Principal (including, without limitation, the Company’s failure to pay any redemption or make-whole payments), Interest, Late Charges or other amounts when and as due under this Note or any other Transaction Document (as defined in the Securities Purchase Agreement) or any other agreement, document, certificate or other instrument delivered in connection with the transactions contemplated hereby and thereby to which the Holder is a party, except, in the case of a failure to pay Interest and Late Charges when and as due, in which case only if such failure continues for a period of at least five (5) Business Days;

(vi) except as provided otherwise in Schedule 4(a)(vi), the occurrence of any default under, redemption of or acceleration prior to maturity of any Indebtedness of the Company, Mecar or any Subsidiary in the VSK Group which, individually or in the aggregate, exceeds $250,000 (as defined in Section 3(a) of the Securities Purchase Agreement), other than with respect to any Other Notes and Permitted Deferred Indebtedness;

(vii) the Company, Mecar or any Subsidiary in the VSK Group, pursuant to or within the meaning of Title 11, U.S. Code, or any similar Federal, foreign or state law for the relief of debtors (collectively, “Bankruptcy Law”), (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a receiver, trustee, assignee, liquidator or similar official (a “Custodian”), (D) makes a general assignment for the benefit of its creditors or (E) admits in writing that it is generally unable to pay its debts as they become due;

(viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for relief against the Company, Mecar or any Subsidiary in the VSK Group in an involuntary case, (B) appoints a Custodian of the Company, Mecar or any Subsidiary in the VSK Group or (C) orders the liquidation of the Company, Mecar or any Subsidiary in the VSK Group;

(ix) a final judgment or judgments for the payment of money aggregating in excess of $100,000, other than with respect to Permitted Deferred Indebtedness, are rendered against the Company, Mecar or any Subsidiary in the VSK Group and which judgments are not, within sixty (60) days after the entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within sixty (60) days after the expiration of such stay; provided, however, that any judgment which is covered by insurance or an indemnity from a credit worthy party shall not be included in calculating the $100,000 amount set forth above so long as the Company provides the Holder a written statement from such insurer or indemnity provider (which written statement shall be reasonably satisfactory to the Holder) to the effect that such judgment is covered by insurance or an indemnity and the Company will receive the proceeds of such insurance or indemnity within thirty (30) days of the issuance of such judgment;

(x) the Company breaches any representation, warranty, covenant (including without limitation the Company’s agreement to file with the SEC timely reports and other documents) or other material term or condition of any Transaction Document, except, in the case of a breach of a covenant which is curable, only if such breach continues for a period of at least ten (10) consecutive Business Days;

(xi) any breach or failure in any respect to comply with Section 15 of this Note; or

(xii) [FOR AMENDED NOTES: any Event of Default (as defined in the Other Notes or the Initial Notes, as applicable) occurs with respect to any Other Notes or any Initial Notes] [FOR INITIAL NOTES: any Event of Default (as defined in the Other Notes or the Amended Notes, as applicable) occurs with respect to any Other Notes or any Amended Notes].

(b) Redemption Right. Upon the occurrence of an Event of Default with respect to this Note or any Other Note, the Company shall within two (2) Business Days deliver written notice thereof via facsimile and overnight courier (an “Event of Default Notice”) to the Holder. At any time after the earlier of the Holder’s receipt of an Event of Default Notice and the Holder becoming aware of an Event of Default, the Holder may require the Company to redeem (an “Event of Default Redemption”) all or any portion of this Note by delivering written notice thereof (the "Event of Default Redemption Notice”) to the Company, which Event of Default Redemption Notice shall indicate the portion of this Note the Holder is electing to redeem. Each portion of this Note subject to redemption by the Company pursuant to this Section 4(b) shall be redeemed by the Company at a price equal to the sum of (i) any accrued and unpaid Interest on the Conversion Amount to be redeemed and any accrued and unpaid Late Charges on such Conversion Amount and Interest and (ii) the greater of (A) the product of (1) the Conversion Amount to be redeemed and (2) the Redemption Premium and (B) the product of (1) the Conversion Rate with respect to such Conversion Amount in effect at such time as the Holder delivers an Event of Default Redemption Notice and (2) the Closing Sale Price of the Common Stock on the date immediately preceding such Event of Default (the “Event of Default Redemption Price”). Redemptions required by this Section 4(b) shall be made in accordance with the provisions of Section 12. To the extent redemptions required by this Section 4(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the Note by the Company, such redemptions shall be deemed to be voluntary prepayments. The parties hereto agree that in the event of the Company’s redemption of any portion of the Note under this Section 4(b), the Holder’s damages would be uncertain and difficult to estimate because of the parties’ inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder. Accordingly, any Redemption Premium due under this Section 4(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its investment opportunity and not as a penalty.

(5) RIGHTS UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

(a) Assumption. The Company shall not enter into or be party to a Fundamental Transaction (other than a Change of Control or Sale Event) unless (i) the Successor Entity assumes in writing all of the obligations of the Company under this Note and the other Transaction Documents in accordance with the provisions of this Section 5(a) pursuant to written agreements in form and substance satisfactory to the Required Holders and approved by the Required Holders prior to such Fundamental Transaction, including agreements to deliver to each holder of Notes in exchange for such Notes a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Notes, including, without limitation, having a principal amount and interest rate equal to the principal amounts and the interest rates of the Notes held by such holder, having similar conversion rights as the Notes and having similar ranking to the Notes and (ii) the Successor Entity (including its Parent Entity) is a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note with the same effect as if such Successor Entity had been named as the Company herein. Upon consummation of such Fundamental Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be issued upon conversion or redemption of this Note at any time after the consummation of such Fundamental Transaction, in lieu of the shares of Common Stock (or other securities, cash, assets or other property) issuable upon the conversion of the Notes prior to such Fundamental Transaction, such shares of publicly traded common stock (or their equivalent) of the Successor Entity, as adjusted in accordance with the provisions of this Note. The provisions of this Section shall apply similarly and equally to such successive Fundamental Transactions and shall be applied without regard to any limitations on the conversion of this Note.

(b) Redemption Right. In connection with any Change of Control, the Company shall redeem (a “Change of Control Redemption”) all of the Conversion Amount then remaining under this Note in cash at a price equal to the sum of (i) [FOR AMENDED NOTES: 100% of the Conversion Amount] [FOR INITIAL NOTES: 115% of the Conversion Amount] and (ii) the amount of any accrued and unpaid Interest on such Conversion Amount through the date of such redemption payment (the “Change of Control Redemption Price”). No sooner than fifteen (15) days nor later than ten (10) days prior to the consummation of a Change of Control, but not prior to the public announcement of such Change of Control, the Company shall deliver written notice thereof via confirmed facsimile and overnight courier to all, but not less than all, of the holders of Notes (a “Change of Control Redemption Notice” and the date such notice is delivered to all the holders is referred to as the “Change of Control Redemption Notice Date”). The Change of Control Redemption Notice shall be irrevocable. The Change of Control Redemption Notice shall (A) describe such Change of Control and (B) state the Change of Control Redemption Date (as defined below). Redemptions required by this Section 5 shall be made in accordance with the provisions of Section 12 and shall have priority to payments to shareholders in connection with a Change of Control. To the extent redemptions required by this Section 5(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the Note by the Company, such redemptions shall be deemed to be voluntary prepayments. Notwithstanding anything to the contrary in this Section 5, until the Change of Control Redemption Price (together with any interest thereon) is paid in full, the Conversion Amount submitted for redemption under this Section 5(c) may be converted, in whole or in part, by the Holder into shares of Common Stock, or in the event the Conversion Date is after the consummation of the Change of Control, shares of publicly traded common stock (or their equivalent) of the Successor Entity pursuant to Section 3. The parties hereto agree that in the event of the Company’s redemption of any portion of the Note under this Section 5(b), the Holder’s damages would be uncertain and difficult to estimate because of the parties’ inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder. Accordingly, any redemption premium due under this Section 5(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its investment opportunity and not as a penalty.

(6) RIGHTS UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

(a) Purchase Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without taking into account any limitations or restrictions on the convertibility of this Note) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

(b) Other Corporate Events. In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate provision to insure that the Holder will thereafter have the right to receive upon a conversion of this Note, at the Holder’s option, (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which the Holder would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event (without taking into account any limitations or restrictions on the convertibility of this Note) or (ii) in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of shares of Common Stock in connection with the consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had this Note initially been issued with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the Conversion Rate. The provisions of this Section shall apply similarly and equally to successive Corporate Events and shall be applied without regard to any limitations on the conversion or redemption of this Note.

(7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

(a) Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever on or after the Subscription Date, the Company issues or sells, or in accordance with this Section 7(a) is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding shares of Common Stock deemed to have been issued or sold by the Company in connection with any Excluded Security) for a consideration per share less than a price (the “Applicable Price”) equal to the Conversion Price in effect immediately prior to such issue or sale (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the Conversion Price then in effect shall be reduced to an amount equal the product of (A) the Conversion Price in effect immediately prior to such Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the Conversion Price in effect immediately prior to such Dilutive Issuance and the number of shares of Common Stock Deemed Outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any, received by the Company upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the Conversion Price in effect immediately prior to such Dilutive Issuance by (II) the number of shares of Common Stock Deemed Outstanding immediately after such Dilutive Issuance. For purposes of determining the adjusted Conversion Price under this Section 7(a), the following shall be applicable:

(i) Issuance of Options. If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 7(a)(i), the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion or exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made upon the actual issuance of such share of Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange or exercise of such Convertible Securities.

(ii) Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this Section 7(a)(ii), the “lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion or exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price shall be made upon the actual issuance of such share of Common Stock upon conversion or exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or are to be made pursuant to other provisions of this Section 7(a), no further adjustment of the Conversion Price shall be made by reason of such issue or sale.

(iii) Change in Option Price or Rate of Conversion. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 7(a)(iii), if the terms of any Option or Convertible Security that was outstanding as of the Subscription Date are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. No adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect.

(iv) Calculation of Consideration Received. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for a consideration of $.01. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the net amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration as determined in good faith by the Board of Directors other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Closing Sale Price of such securities on the date of receipt. If any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined in good faith by the Board of Directors.

(v) Record Date. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

(vi) Floor Price. Until such time as the Company receives the Stockholder Approval, no adjustment pursuant to Section 7(a) shall cause the Conversion Price to be less than $[     ]⁴, as adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction (the “Conversion Floor Price”).

(b) Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. If the Company at any time on or after the Subscription Date subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time on or after the Subscription Date combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased.

(c) Other Events. If any event occurs of the type contemplated by the provisions of this Section 7 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the Holder under this Note; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 7.

(8) HOLDER’S REDEMPTIONS.

(a) Holder Optional Redemption. On [     ], 200[_]⁵(the “Holder Optional Redemption Date”), the Holder shall have the right, in its sole discretion, to require that the Company redeem (each, a “Holder Optional Redemption”) up to all of the Conversion Amount of this Note plus any accrued and unpaid Interest with respect to such Principal and Interest and any accrued and unpaid Late Charges, if any, with respect to such Principal and Interest (the "Available Holder Optional Redemption Amount”) by delivering written notice thereof (a “Holder Optional Redemption Notice”) to the Company not less than seventy-five (75) days prior to such Holder Optional Redemption Date. The Holder Optional Redemption Notice shall indicate the amount of the Available Holder Optional Redemption Amount the Holder is electing to have redeemed (the "Holder Optional Redemption Amount”). The portion of this Note subject to redemption pursuant to this Section 8(a) shall be redeemed by the Company in cash on the Holder Optional Redemption Date at a price equal to the Holder Optional Redemption Amount being redeemed (the “Holder Optional Redemption Price”). Redemptions required by this Section 8(a) shall be made in accordance with the provisions of Section 12. Notwithstanding anything to the contrary in this Section 8(a), but subject to Section 3(d), until the Holder receives the Holder Optional Redemption Price, (a) the Holder Optional Redemption Amount may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 3, and any such conversion shall reduce the Holder Optional Redemption Amount in the manner set forth by the Holder in the applicable Conversion Notice and (b) the Holder shall have the right to void the Holder Optional Redemption Notice delivered to the Company hereunder at any time prior to the Holder Optional Redemption Date in the event that the Company has publicly announced a material change after the date of delivery of the Holder Optional Redemption Notice and prior to the Holder Optional Redemption Date. The Company may incur Permitted Pari Passu Indebtedness and use the proceeds of such Indebtedness to pay the Holder Optional Redemption Amount.

(b) Asset Sale Redemption. No earlier than fifteen (15) days prior to nor later than ten (10) days following the consummation of any Asset Sale, the Company shall deliver written notice thereof via facsimile and overnight courier (an “Asset Sale Notice”) to the Holder. At any time prior to the later of (i) ten (10) days following the consummation of any Asset Sale and (ii) ten (10) days following receipt of the Asset Sale Notice, the Holder may require the Company to redeem (an “Asset Sale Redemption”), with the Net Asset Sale Proceeds of such Asset Sale, the applicable Asset Sale Redemption Amount by delivering written notice thereof (the “Asset Sale Redemption Notice”) to the Company. The Asset Sale Redemption Notice shall state (i) the date the Company is required to pay to the Holder the Asset Sale Redemption Price (as defined below), which date shall be no earlier than two (2) Business Days following the date of delivery of such Asset Sale Redemption Notice and (ii) the allocation of such Asset Sale Redemption Amount between this Note and [FOR THE AMENDED NOTES: any Initial Notes] [FOR THE INITIAL NOTES: any Amended Notes] held by the Holder. Each portion of this Note subject to redemption pursuant to this Section 8(b) shall be redeemed by the Company at a price equal to 100% of the applicable Asset Sale Redemption Amount together with accrued and unpaid Interest with respect to such Conversion Amount and accrued and unpaid Late Charges, if any, with respect to such amount (the “Asset Sale Redemption Price”). Redemptions required by this Section 8(b) shall be made in accordance with the provisions of Section 12.

(9) MANDATORY CONVERSIONS AND REDEMPTIONS.

(a) Mandatory Conversion.

(i) General. If at any time, and from time to time, from and after the second (2^nd) anniversary of the Issuance Date (the “Mandatory Conversion Eligibility Date”), (i) the average Closing Sale Price of the Common Stock for any twenty (20) Trading Days out of any thirty (30) consecutive Trading Day period exceeds 175% of the Conversion Price then in effect following the Mandatory Conversion Eligibility Date (the “Mandatory Conversion Measuring Period”) and (ii) there has been no Equity Conditions Failure, the Company shall have the right to require the Holder to convert up to the Conversion Amount of this Note together with the amount of any accrued and unpaid Interest with respect to such Conversion Amount and accrued and unpaid Late Charges, if any, thereon (the “Mandatory Conversion Amount”) as designated in the Mandatory Conversion Notice (as defined below) into fully paid, validly issued and nonassessable shares of Common Stock in accordance with Section 3(c) hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined below) (a “Mandatory Conversion”). The Company may exercise its right to require conversion under this Section 9(a) by delivering within not more than two (2) Trading Days following the end of such Mandatory Conversion Measuring Period a written notice thereof by facsimile and overnight courier to all, but not less than all, of the holders of Notes and the Transfer Agent (the “Mandatory Conversion Notice” and the date all of the holders received such notice by facsimile is referred to as the “Mandatory Conversion Notice Date”) and each Mandatory Conversion Notice shall be irrevocable. The Mandatory Conversion Notice shall (1) state the date on which the Mandatory Conversion shall occur (the “Mandatory Conversion Date”) which date shall not be less than five (5) Trading Days nor more than thirty (30) Trading Days after the Mandatory Conversion Notice Date, (2) state the aggregate Conversion Amount of the Notes which the Company has elected to be subject to Mandatory Conversion from all of the holders of the Notes pursuant to this Section 9 (and analogous provisions under the Other Notes) on the Mandatory Conversion Date, (3) state the number of shares of Common Stock to be issued to such Holder on the Mandatory Conversion Date, (4) the Make-Whole Amount to be paid to the Holder in cash on the Mandatory Conversion Date and (5) certify that there has been no Equity Conditions Failure. The Company may not effect more than one (1) Mandatory Conversion during any consecutive thirty (30) Trading Day period.

(ii) Pro Rata Conversion Requirement. If the Company elects to cause a conversion of any Conversion Amount of this Note pursuant to Section 9(a), then it must simultaneously take the same action in the same proportion with respect to the Other Notes. If the Company elects a Mandatory Conversion of this Note pursuant to Section 9(a) (or similar provisions under the Other Notes) with respect to less than all of the Conversion Amounts of the Notes then outstanding, then the Company shall require conversion of a Conversion Amount from each of the holders of the Notes equal to the product of (i) the aggregate Conversion Amount of Notes which the Company has elected to cause to be converted pursuant to Section 9(a) and analogous provisions of the Other Notes, multiplied by (ii) the fraction, the numerator of which is the sum of the aggregate Original Principal Amount of the Notes purchased by such holder of outstanding Notes and the denominator of which is the sum of the aggregate Original Principal Amount of the Notes purchased by all holders holding outstanding Notes (such fraction with respect to each holder is referred to as its "Conversion Allocation Percentage,” and such amount with respect to each holder is referred to as its “Pro Rata Conversion Amount”); provided, however, that in the event that any holder’s Pro Rata Conversion Amount exceeds the outstanding Principal amount of such holder’s Note, then such excess Pro Rata Conversion Amount shall be allocated amongst the remaining holders of Notes in accordance with the foregoing formula. In the event that the initial holder of any Notes shall sell or otherwise transfer any of such holder’s Notes, the transferee shall be allocated a pro rata portion of such holder’s Conversion Allocation Percentage and the Pro Rata Conversion Amount.

(b) Mandatory Redemption upon a Sale Event. Upon the consummation of a Sale Event, the Company shall redeem (a “Company Mandatory Redemption”) all of the Conversion Amount then remaining under this Note (the “Company Mandatory Redemption Amount”) in cash at a price equal to the sum of (i) [FOR AMENDED NOTES: 100% of the Conversion Amount] [FOR INITIAL NOTES: 115% of the Conversion Amount] and (ii) the amount of any accrued and unpaid Interest on such Conversion Amount through the date of such redemption payment (the “Company Mandatory Redemption Price”). The Company shall deliver written notice of a Mandatory Redemption by confirmed facsimile and overnight courier to all, but not less than all, of the holders of Notes (the “Company Mandatory Redemption Notice” and the date such notice is delivered to all the holders is referred to as the “Company Mandatory Redemption Notice Date”). The Company Mandatory Redemption Notice shall be irrevocable. The Company Mandatory Redemption Notice shall (A) state that a Sale Event has occurred and (B) state the date on which the Company Mandatory Redemption shall occur (the “Company Mandatory Redemption Date”) which date shall be not less than five (5) Business Days after the Company Mandatory Redemption Notice Date. Notwithstanding anything to the contrary in this Section 9(b), until the Company Mandatory Redemption Price is paid in full, the Company Mandatory Redemption Amount may be converted, in whole or in part, by the holders of Notes into shares of Common Stock pursuant to Section 3. All Conversion Amounts converted by the Holder after the Company Mandatory Redemption Notice Date shall reduce the Conversion Amount of this Note required to be redeemed on the Company Mandatory Redemption Date. Redemptions made pursuant to this Section 9(b) shall be made in accordance with Section 12.

(10) NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will not, by amendment of its Certificate of Incorporation, Bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Note, and will at all times in good faith carry out all of the provisions of this Note and take all action as may be required to protect the rights of the Holder of this Note.

(11) RESERVATION OF AUTHORIZED SHARES.

(a) Reservation. The Company initially shall reserve out of its authorized and unissued Common Stock a number of shares of Common Stock for each of the Notes equal to 120% of the Conversion Rate with respect to the Conversion Amount of each such Note as of the Issuance Date. So long as any of the Notes are outstanding, the Company shall take all action necessary to reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of the Notes, 120% of the number of shares of Common Stock as shall from time to time be necessary to effect the conversion of all of the Notes then outstanding; provided that at no time shall the number of shares of Common Stock so reserved be less than the number of shares required to be reserved of the previous sentence (without regard to any limitations on conversions) (the “Required Reserve Amount”). The initial number of shares of Common Stock reserved for conversions of the Notes and each increase in the number of shares so reserved shall be allocated pro rata among the holders of the Notes based on the principal amount of the Notes held by each holder at the Closing (as defined in the Securities Purchase Agreement) or increase in the number of reserved shares, as the case may be (the “Authorized Share Allocation”). In the event that a holder shall sell or otherwise transfer any of such holder’s Notes, each transferee shall be allocated a pro rata portion of such holder’s Authorized Share Allocation. Any shares of Common Stock reserved and allocated to any Person which ceases to hold any Notes shall be allocated to the remaining holders of Notes, pro rata based on the principal amount of the Notes then held by such holders.

(b) Insufficient Authorized Shares. If at any time while any of the Notes remain outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Notes at least a number of shares of Common Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then the Company shall immediately take all action necessary to increase the Company’s authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the Required Reserve Amount for the Notes then outstanding. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than ninety (90) days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its shareholders for the approval of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the Company shall provide each shareholder with a proxy statement and shall use its best efforts to solicit its shareholders’ approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the shareholders that they approve such proposal.

(12) HOLDER’S REDEMPTIONS.

(a) Mechanics. The Company shall deliver the applicable Event of Default Redemption Price to the Holder within five (5) Business Days after the Company’s receipt of the Holder’s Event of Default Redemption Notice. The Company shall deliver the applicable Change of Control Redemption Price to the Holder concurrently with the consummation of such Change of Control if the Change of Control Redemption Notice Date is prior to the consummation of such Change of Control and within five (5) Business Days after the Change of Control Redemption Notice Date otherwise (such date, the “Change of Control Redemption Date”). The Company shall deliver the applicable Asset Sale Redemption Price to the Holder on the applicable Asset Sale Redemption Date. The Company shall deliver the Company Mandatory Redemption Amount on the Company Mandatory Redemption Date. In the event of a redemption of less than all of the Conversion Amount of this Note, the Company shall promptly cause to be issued and delivered to the Holder a new Note (in accordance with Section 19(d)) representing the outstanding Principal which has not been redeemed. In the event that the Company does not pay the applicable Redemption Price to the Holder within the time period required, at any time thereafter and until the Company pays such unpaid Redemption Price in full, the Holder shall have the option, in lieu of redemption, to require the Company to promptly return to the Holder all or any portion of this Note representing the Conversion Amount that was submitted for redemption and for which the applicable Redemption Price (together with any Late Charges thereon) has not been paid. Upon the Company’s receipt of such notice, (x) the Redemption Notice shall be null and void with respect to such Conversion Amount, (y) the Company shall immediately return this Note, or issue a new Note (in accordance with Section 19(d)) to the Holder representing such Conversion Amount and (z) the Conversion Price of this Note or such new Notes shall be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the Redemption Notice is voided and (B) the lowest Closing Bid Price during the period beginning on and including the date on which the Redemption Notice is delivered by or to the Company (as applicable) and ending on and including the date on which the Redemption Notice is voided. The Holder’s delivery of a notice voiding a Redemption Notice and exercise of its rights following such notice shall not affect the Company’s obligations to make any payments of Late Charges which have accrued prior to the date of such notice with respect to the Conversion Amount subject to such notice.

(b) Redemption by Other Holders. Upon the Company’s receipt of notice from any of the holders of the Other Notes for redemption or repayment as a result of an event or occurrence substantially similar to the events or occurrences described in Section 4(b), Section 5(b) or Section 8 (each, an “Other Redemption Notice”), the Company shall immediately, but no later than one (1) Business Day of its receipt thereof), forward to the Holder by facsimile a copy of such notice. If the Company receives a Redemption Notice and one or more Other Redemption Notices, during the seven (7) Business Day period beginning on and including the date which is three (3) Business Days prior to the Company’s receipt of the Holder’s Redemption Notice and ending on and including the date which is three Business Days after the Company’s receipt of the Holder’s Redemption Notice and the Company is unable to redeem all principal, interest and other amounts designated in such Redemption Notice and such Other Redemption Notices received during such seven (7) Business Day period, then the Company shall redeem a pro rata amount from each holder of the Notes (including the Holder) based on the principal amount of the Notes submitted for redemption pursuant to such Redemption Notice and such Other Redemption Notices received by the Company during such seven (7) Business Day period.

(13) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the Notes have been converted, redeemed or otherwise satisfied in accordance with their terms, the Company shall not, directly or indirectly, redeem, repurchase or declare or pay any cash dividend or distribution on its capital stock without the prior express written consent of the Required Holders.

(14) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this Note, except as required by law, including but not limited to the Delaware General Corporation Law, and as expressly provided in this Note.

(15) COVENANTS.

(a) Rank. All payments due under this Note (a) shall rank pari passu with all Other Notes and the Permitted Pari Passu Indebtedness and (b) shall be senior to all other Indebtedness of the Company and any of its Subsidiaries (other than any Foreign Subsidiary (as defined in the Security Documents)), other than Permitted Senior Indebtedness.

(b) Indebtedness. So long as this Note is outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness, other than Permitted Indebtedness.

(c) Existence of Liens. So long as this Note is outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by the Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted Liens.

(d) Restricted Payments. The Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Permitted Indebtedness (other than Permitted Deferred Indebtedness and Permitted Restricted Payments), whether by way of payment in respect of principal of (or premium, if any) or interest on, such Indebtedness if at the time such payment is due or is otherwise made or, after giving effect to such payment, an event constituting, or that with the passage of time and without being cured would constitute, an Event of Default has occurred and is continuing.

(e) EBITDA Tests. So long as this Note is outstanding, the Company shall maintain the following covenants (the “EBITDA Tests”) for each Fiscal Quarter of the Company after the Issuance Date (the periods set forth in the covenants below, the “EBITDA Test Periods”):

(i) For the Fiscal Quarter ended September 30, 2007, (A) Consolidated EBITDA shall not be less than negative Three Million Five Hundred Thousand Dollars (-$3,500,000), and (B) Cash Balance shall not be less than Two Million Dollars ($2,000,000);

(ii) For the three (3)-month period ended December 31, 2007, the quotient of (x) Consolidated Net Debt at December 31, 2007, divided by (y) the product of (I) Consolidated EBITDA for the three (3)-month period ended December 31, 2007 multiplied by (II) four (4), shall not be more than 6.0;

(iii) For the six (6) month period ended March 31, 2008, (I) the quotient of (x) Consolidated Net Debt at March 31, 2008, divided by (y) Consolidated EBITDA for the six (6)-month period ended March 31, 2008 multiplied by (II) two (2) shall not be more than 5.0;

(iv) For the nine (9) month period ended June 30, 2008, (I) the quotient of (x) Consolidated Net Debt at June 30, 2008, divided by (y) the product of (I) Consolidated EBITDA for the nine (9) month period ended June 30, 2008 multiplied by (II) the quotient of (A) four (4) divided by (B) three (3) shall not be more than 4.5; and

(v) For the trailing twelve (12) month period ended September 30, 2008 and each subsequent trailing twelve (12) month period ended as of such Fiscal Quarter, the quotient of (x) Consolidated Net Debt at the last day of such period divided by (y) Consolidated EBITDA for such period ended shall not be more than 4.5.

(f) Announcement of Operating Results. Commencing with the Fiscal Quarter ended September 30, 2007, the Company shall release its operating results (the “Operating Results”) for the first three Fiscal Quarters of each Fiscal Year no later than the forty-fifth (45^th) day after the end of each such Fiscal Quarter and for each Fiscal Year no later than the ninetieth (90^th) day after the end of each such Fiscal Year and such release shall include the amount of the Consolidated EBITDA, Consolidated Net Debt and Consolidated Net Interest Expense and Consolidated Net Income for any applicable EBITDA Test Periods and whether such EBITDA Tests have been met (the “Operating Release”). Concurrently with the Operating Release, the Company shall also provide to the holders of Notes a written certification as to the calculations of any applicable EBITDA Tests and whether such EBITDA Tests have been met for the applicable EBITDA Test Periods. To the extent the foregoing written certification or calculations contain material non-public information, the Company shall also make publicly available (as part of a Quarterly Report on Form 10-Q or on a Current Report on Form 8-K, or otherwise) such material non-public information. In addition, if the Company has failed to meet the EBITDA Tests set forth in Section 15(e) above, the Company shall also make publicly available (as part of a Quarterly Report on Form 10-Q or on a Current Report on Form 8-K, or otherwise) the Operating Results and the fact that the holders have a right to require an Event of Default Redemption of the Notes.

(g) Sale Event. The Company shall not, directly or indirectly, consummate any Sale Event unless, following the consummation of such Sale Event, the amount equal to the sum of (i) the aggregate Net Asset Sale Proceeds from any Asset Sales relating to the sale of Mecar and/or any Specified VSK Entity and (ii) the proceeds to be received upon consummation of such Sale Event, exceeds the sum of (A) the aggregate outstanding principal amount of the Notes and [FOR AMENDED NOTES: the Initial Notes] [FOR INITIAL NOTES: the Amended Notes], (B) any accrued and unpaid interest thereon and Late Charges, if any, thereon and (C) the premium, if any, to be paid to the holder of the Notes and [FOR AMENDED NOTES: the Initial Notes] [FOR INITIAL NOTES: the Amended Notes] pursuant to Section 9(b) hereof and analogous provisions of such [FOR AMENDED NOTES: Initial Notes] [FOR INITIAL NOTES: Amended Notes].

(16) RIGHTS UPON DISTRIBUTION OF ASSETS. Subject to the provisions of Section 4(j) of the Securities Purchase Agreement, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, shares or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Note, then, in each such case any Conversion Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Conversion Price by a fraction of which (i) the numerator shall be the Closing Bid Price of the Common Stock on the Trading Day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company’s Board of Directors) applicable to one share of Common Stock, and (ii) the denominator shall be the Closing Bid Price of the Common Stock on the Trading Day immediately preceding such record date.

(17) VOTE TO ISSUE, OR CHANGE THE TERMS OF, NOTES. No term of this Note may be amended or modified unless pursuant to a writing signed by the Company and the Required Holders; provided, however, that any amendment or modification that pursuant to the terms of the Transaction Documents adversely and disproportionately affects any holder of Notes that holds at least $1 million in principal amount of Notes (and not because of the nature or situation of such holder of Notes) shall require the prior written consent of such holder. The affirmative vote at a meeting duly called for such purpose or the written consent without a meeting of the Required Holders shall be required for any change or amendment to this Note or the Other Notes.

(18) TRANSFER. This Note may be offered, sold, assigned or transferred by the Holder without the consent of the Company, subject only to the provisions of Section 2(f) of the Securities Purchase Agreement; provided, however, that no such sale, assignment or transfer of this Note shall be in a denomination less than the lesser of (a) $500,000 and (b) the remaining outstanding Principal of this Note, the accrued and unpaid Interest with respect to such Principal and the accrued and unpaid Late Charges with respect to such Principal and Interest.

(19) REISSUANCE OF THIS NOTE.

(a) Transfer. If this Note is to be transferred, the Holder shall surrender this Note to the Company, whereupon the Company will, subject to the satisfaction of the transfer provisions of the Securities Purchase Agreement, forthwith issue and deliver upon the order of the Holder a new Note (in accordance with Section 19(d)), registered in the name of the registered transferee or assignee, representing the outstanding Principal being transferred by the Holder and, if less then the entire outstanding Principal is being transferred, a new Note (in accordance with Section 19(d)) to the Holder representing the outstanding Principal not being transferred. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of Section 3(c)(iii) and this Section 19(a), following conversion or redemption of any portion of this Note, the outstanding Principal represented by this Note may be less than the Principal stated on the face of this Note.

(b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to the Holder a new Note (in accordance with Section 19(d)) representing the outstanding Principal.

(c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes (in accordance with Section 19(d) and in principal amounts of at least $100,000) representing in the aggregate the outstanding Principal of this Note, and each such new Note will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.

(d) Issuance of New Notes. Whenever the Company is required to issue a new Note pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii) shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or in the case of a new Note being issued pursuant to Section 19(a) or Section 19(c), the Principal designated by the Holder which, when added to the principal represented by the other new Notes issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv) shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid Interest and Late Charges on the Principal and Interest of this Note, from the Issuance Date.

(20) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

(21) PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors’ rights and involving a claim under this Note, then the Company shall pay the costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, attorneys’ fees and disbursements.

(22) CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly drafted by the Company and all the Purchasers and shall not be construed against any person as the drafter hereof. The headings of this Note are for convenience of reference and shall not form part of, or affect the interpretation of, this Note.

(23) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

(24) DISPUTE RESOLUTION. In the case of a dispute as to the determination of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price or the arithmetic calculation of Interest or Late Charges, the Conversion Rate or any Redemption Price, the Company or the Holder, as applicable, shall submit the disputed determinations or arithmetic calculations via facsimile within two (2) Business Days of receipt, or deemed receipt, of the Interest Election Notice, Conversion Notice or Redemption Notice or other event giving rise to such dispute, as the case may be, to the Holder or the Company, as the case may be. If the Holder and the Company are unable to agree upon such determination or calculation within two (2) Business Days of such disputed determination or arithmetic calculation being submitted to the Holder or the Company, as applicable, then the Company shall, within two (2) Business Days submit via facsimile (i) the disputed determination of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price to an independent, reputable investment bank selected by the Company and approved by the Holder or (ii) the disputed arithmetic calculation of Interest or Late Charges, the Conversion Rate or any Redemption Price to the Company’s independent, outside accountant. The Company, at the Company’s expense, shall cause the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than five (5) Business Days from the time it receives the disputed determinations or calculations. Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error.

(25) NOTICES; PAYMENTS.

(a) Notices. Whenever notice is required to be given under this Note, unless otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Note, including in reasonable detail a description of such action and the reason therefore. Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least twenty (20) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder.

(b) Payments. Whenever any payment of cash is to be made by the Company to any Person pursuant to this Note, such payment shall be made in lawful money of the United States of America by a check drawn on the account of the Company and sent via overnight courier service to such Person at such address as previously provided to the Company in writing (which address, in the case of each of the Purchasers, shall initially be as set forth on the Schedule of Buyers attached to the Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash via wire transfer of immediately available funds by providing the Company with prior written notice setting out such request and the Holder’s wire transfer instructions. Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a Business Day and, in the case of any Interest Date which is not the date on which this Note is paid in full, the same shall instead be due on the next succeeding day which is a Business Day. Any amount of Principal or other amounts due under the Transaction Documents, other than Interest, which is not paid when due shall result in a late charge being incurred and payable by the Company in an amount equal to interest on such amount at the rate of twelve and one-half percent (12.5%) per annum from the date such amount was due until the same is paid in full (“Late Charge”). In the event of a dispute as to the amount of Late Charges to be paid on any date, the Company shall pay to the Holder the amount of Late Charges not in dispute and resolve such dispute in accordance with Section 24.

(c) Currency. For the purpose of converting any amount hereunder from or into United States Dollars, the conversion shall be made at the exchange rate between United States Dollars and such other currency as reported in the New York edition of The Wall Street Journal prevailing on the Business Day immediately preceding the date of determination.

(26) CANCELLATION. After all Principal, accrued Interest and other amounts at any time owed on this Note have been paid in full, this Note shall automatically be deemed canceled, shall be surrendered to the Company for cancellation and shall not be reissued.

(27) WAIVER OF NOTICE. To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the Securities Purchase Agreement.

(28) GOVERNING LAW; JURISDICTION; JURY TRIAL. This Note shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Note shall be governed by, the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. The Company hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. The Company hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address it set forth in the Securities Purchase Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against the Company in any other jurisdiction to collect on the Company’s obligations to the Holder, to realize on any collateral or any other security for such obligations, or to enforce a judgment or other court ruling in favor of the Holder. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

(29) SECURITY. This Note and the Other Notes are secured to the extent and in the manner set forth in the Security Documents (as defined in the Securities Purchase Agreement).

(30) CERTAIN DEFINITIONS. For purposes of this Note, the following terms shall have the following meanings:

(a) "Adjusted Interest Conversion Price” means, with respect to any applicable Interest Date in accordance with Section 2, that price which shall be the lower of (i) the applicable Conversion Price and (ii) the price computed as 80% of the arithmetic average of the Weighted Average Price of the Common Stock on each of the ten (10) consecutive Trading Days ending on the Trading Day immediately preceding such applicable Interest Date (each, an “Interest Measuring Period”). All such determinations to be appropriately adjusted for any stock split, stock dividend, stock combination or other similar transaction that proportionately decreases or increases the Common Stock during the applicable Interest Measuring Period.

(b) [FOR INITIAL NOTES: "Amended Notes” has the meaning ascribed to such term in the Securities Purchase Agreement, and shall include all notes issued in exchange therefor or replacement thereof.]

(c) "Approved Stock Plan” means any employee benefit plan or long term stock incentive plan which has been approved by the Board of Directors of the Company, pursuant to which the Company’s securities may be issued to any employee, consultant, officer or director for services provided to the Company.

(d) "Asset Sale” means a sale, lease or sub-lease (as lessor or sublessor), sale and leaseback, assignment, conveyance, transfer or other disposition to, or any exchange of property with, any non-affiliated Person, in an arm’s length transaction or a series of such transactions, of all or any part of the Company’s or any of its Subsidiaries’ businesses, assets or properties of any kind, whether real, personal, or mixed and whether tangible or intangible, whether now owned or hereafter acquired, including the sale or issuance of Capital Stock of any of the Company’s Subsidiaries, with a fair market value of (i) in the case of one Asset Sale or a series of related Asset Sale transactions, $250,000 or (ii) in the case of a series of unrelated successive Asset Sale transactions, an aggregate value of $1,000,000, other than (A) inventory (or other assets) sold or leased in the ordinary course of business of the Company or the sale or disposition of obsolete, worn out or surplus property or (B) a Sale Event.

(e) "Asset Sale Redemption Amount” means, with respect to any Asset Sale, the product of (i) the Holder Pro Rata Amount and (ii) (A) 85% of the Net Asset Sale Proceeds for such Asset Sale or, (B) in the case of any Asset Sales described in clause (ii) of the definition thereof, 85% of the aggregate Net Asset Sale Proceeds for such Asset Sales.

(f) "Bloomberg” means Bloomberg Financial Markets.

(g) "Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

(h) "Calendar Quarter” means each of: the period beginning on and including January 1 and ending on and including March 31; the period beginning on and including April 1 and ending on and including June 30; the period beginning on and including July 1 and ending on and including September 30; and the period beginning on and including October 1 and ending on and including December 31.

(i) "Capital Stock” means: (i) in the case of a corporation, corporate stock; (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock; (iii) in the case of a partnership or limited liability company, partnership interests (whether general or limited) or membership interests; and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person, but excluding from all of the foregoing any debt securities convertible into Capital Stock, whether or not such debt securities include any right of participation with Capital Stock.

(j) "Cash Balance” means, at any date, an amount equal to the aggregate amount of cash and cash equivalents (not including restricted cash) and short term investments reported on the Company’s balance sheet as at such date.

(k) "Change of Control” means any Fundamental Transaction other than (i) any reorganization, recapitalization or reclassification of the Common Stock in which holders of the Company’s voting power immediately prior to such reorganization, recapitalization or reclassification continue after such reorganization, recapitalization or reclassification to hold publicly traded securities and, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities, or (ii) pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the Company.

(l) "Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the last closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price, as the case may be, then the last bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as mutually determined by the Company and the Holder. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 24. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.

(m) "Closing Date” shall have the meaning set forth in the Securities Purchase Agreement, which date is the date the Company issued Notes pursuant to the terms of the Securities Purchase Agreement.

(n) "Common Stock Deemed Outstanding” means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections 7(a)(i) and 7(a)(ii) hereof regardless of whether the Options or Convertible Securities are actually exercisable at such time, but excluding any Common Stock owned or held by or for the account of the Company or issuable upon conversion or exercise, as applicable, of the Notes and the Warrants.

(o) "Consolidated Total Debt” means, as at any date of determination: (A) the aggregate stated balance sheet amount of all Indebtedness (excluding the aggregate outstanding face amount of the Performance Bonds) of the Company and its Subsidiaries, determined on a combined consolidated basis in accordance with GAAP, plus or minus (B) any adjustment required to include the Amended Notes at their face amount rather than fair value that is used for GAAP purposes.

(p) "Consolidated EBITDA” means, with respect to any Person for any period, the Consolidated Net Income of such Person and its Subsidiaries plus without duplication, the sum of the following amounts of such Person and its Subsidiaries for such period plus, to the extent deducted in determining Consolidated Net Income of such Person for such period: (i) Consolidated Net Interest Expense, (ii) income tax expense, (iii) depreciation expense, (iv) amortization expense, and (v) any non-cash impact of foreign currency transactions, and non-cash impact of hedge or non-hedge derivative accounting adjustments.

(q) "Consolidated Net Debt” means, as to any date of determination the sum of: (A) the aggregate stated balance sheet amount of all Indebtedness of the Company and its Subsidiaries, determined on a combined consolidated basis in accordance with GAAP, plus or minus (B) any adjustment required to include the Amended Notes at their face amount rather than fair value that is used for GAAP purposes, minus (C) the aggregate stated balance sheet amount of cash and cash equivalents of the Company and its Subsidiaries determined on a combined consolidated basis in accordance with GAAP. In no event shall Indebtedness include the aggregate outstanding face amounts of Performance Bonds, nor shall cash amounts include any restricted cash balances maintained for the benefit of issuers of Performance Bonds.

(r) "Consolidated Net Income” means, with respect to any Person for any period, the net income(loss) of such Person and its Subsidiaries for such period, determined on a consolidated basis and in accordance with GAAP, but excluding from the determination of Consolidated Net Income (without duplication) (i) any extraordinary or non-recurring gains or losses or gains or losses from dispositions of assets (including transaction and professional fees and expenses paid from proceeds), (ii) non-cash restructuring charges that do not result in future cash obligations, (iii) other income or expenses associated with fair value accounting for debt, warrants or other securities, (iv) non-cash expenses associated with compensation expense associated with FAS123(r) that do not result in future cash obligations, (v) any tax refunds, use of net operating losses to offset taxes or other net tax benefits and (vi) other noncash charges that do not result in future cash obligations.

(s) "Consolidated Net Interest Expense” mean, with respect to any Person for any period, gross interest expense of such Person and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP (including, without limitation, interest expense paid to affiliates of such Person), less (i) the sum of (A) interest income for such period and (B) gains for such period on hedging agreements (to the extent not included in interest income above and to the extent not deducted in the calculation of gross interest expense), plus (ii) the sum of (A) losses for such period on hedging agreements (to the extent not included in gross interest expense) and (B) the upfront cost or fees for such period associated with hedging agreements (to the extent not included in gross interest expense), in each case, determined on a consolidated basis in accordance with GAAP.

(t) "Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.

(u) "Convertible Securities” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.

(v) "Effective Date” has the meaning set forth in the Registration Rights Agreement.

(w) "Eligible Market” means , the Principal Market, The New York Stock Exchange, Inc., The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ Capital Market.

(x) "Equity Conditions” means that each of the following conditions is satisfied: (i) on each day during the period beginning six (6) months prior to the applicable date of determination and ending on and including the applicable date of determination (the “Equity Conditions Measuring Period”), either (x) the Registration Statement filed pursuant to the Registration Rights Agreement shall be effective and available for the resale of all remaining Registrable Securities in accordance with the terms of the Registration Rights Agreement, no Cutback Shares (as defined in the Registration Rights Agreement) remain or exist unless such shares are eligible for sale without restriction pursuant to Rule 144(k) and any applicable state securities laws and there shall not be in effect any Grace Periods (as defined in the Registration Rights Agreement) or (y) all shares of Common Stock issuable upon conversion of the Notes (including, without limitation, any shares of Common Stock issuable as Interest Shares) and exercise of the Warrants shall be eligible for sale without restriction and without the need for registration under any applicable federal or state securities laws; (ii) on each day during the Equity Conditions Measuring Period, the Common Stock is designated for quotation on the Principal Market and shall not have been suspended from trading on such exchange or market (other than suspensions of not more than two days and occurring prior to the applicable date of determination due to business announcements by the Company) nor shall delisting or suspension by such exchange or market been threatened or pending either (A) in writing by such exchange or market or (B) by falling below the minimum listing maintenance requirements of such exchange or market; (iii) during the one (1) year period ending on and including the date immediately preceding the applicable date of determination, the Company shall have delivered Conversion Shares upon conversion of the Notes and shares of Common Stock upon exercise of the Warrants to the holders on a timely basis as set forth in Section 3(c)(i) hereof (and analogous provisions under the Other Notes) and Section 1(a) of the Warrants; (iv) any applicable shares of Common Stock to be issued in connection with the event requiring determination may be issued in full without violating Section 3(d) hereof and the rules or regulations of the Principal Market; (v) during the Equity Conditions Measuring Period, the Company shall not have failed to timely make any payments within five (5) Business Days of when such payment is due pursuant to any Transaction Document; (vi) during the Equity Conditions Measuring Period, there shall not have occurred either (A) the public announcement of a pending, proposed or intended Fundamental Transaction which has not been abandoned, terminated or consummated or (B) an Event of Default or an event that with the passage of time or giving of notice would constitute an Event of Default; (vii) the Company shall have no knowledge of any fact that would cause (x) the Registration Statements required pursuant to the Registration Rights Agreement not to be effective and available for the resale of all remaining Registrable Securities in accordance with the terms of the Registration Rights Agreement or (y) any shares of Common Stock issuable upon conversion of the Notes (including, without limitation, any shares of Common Stock issuable as Interest Shares) and shares of Common Stock issuable upon exercise of the Warrants not to be eligible for sale without restriction pursuant to Rule 144(k) and any applicable state securities laws; (viii) the Company otherwise shall have been in material compliance with and shall not have materially breached any provision, covenant, representation or warranty of any Transaction Document; and (ix) the Stockholder Approval shall have been obtained.

(y) "Equity Conditions Failure” means that (i) on any day during the period commencing ten (10) Trading Days prior to the applicable Interest Notice Date through the applicable Interest Date or (ii) on any day during the period commencing ten (10) Trading Days prior to the applicable Mandatory Conversion Notice Date through the applicable Mandatory Conversion Date, the Equity Conditions have not been satisfied (or waived in writing by the Holder).

(z) "Excluded Securities” means any Common Stock issued or issuable: (i) in connection with any Approved Stock Plan; (ii) upon conversion, adjustment or redemption of the Notes, or the exercise of the Warrants; (iii) in connection with the payment of any Interest Shares on the Notes; (iv)pursuant to a bona fide firm commitment underwritten public offering with a nationally recognized underwriter which generates gross proceeds to the Company in excess of $35,000,000 (other than an “at the market” offering as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, and “equity lines”); (v) in connection with any strategic acquisition or strategic transaction, whether through an acquisition of shares or a merger of any business, assets or technologies, the primary purpose of which is not to raise equity capital in an amount not to exceed, in the aggregate twenty percent (20%) of the outstanding shares of Common Stock in any twelve (12) month period; (vi) upon conversion, exercise or exchange of any Options or Convertible Securities which are outstanding on the day immediately preceding the Subscription Date, provided that the conversion price, exercise price or any other economic terms of such Options or Convertible Securities are not amended, modified or changed on or after the Subscription Date; and (vii) in connection with any stock split, stock dividend, recapitalization or similar transaction by the Company for which adjustment is made pursuant to Section 7(b).

(aa) "Fiscal Quarter” means each of the fiscal quarters adopted by the Company for the financial reporting purposes that correspond to the Company’s Fiscal Year, or such other fiscal quarter adopted by the Company for financial reporting purposes in accordance with GAAP.

(bb) "Fiscal Year” means the Company’s fiscal year that ends on December 31, or such other fiscal year adopted by the Company for the financial reporting purposes in accordance with GAAP.

(cc) "Fundamental Transaction” means (A) that the Company shall, directly or indirectly, in one or more related transactions, (i) consolidate or merge with or into (whether or not the Company is the surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company to another Person, or (iii) allow another Person or Persons to make a purchase, tender or exchange offer that is accepted by the holders of more than the 50% of the outstanding shares of Voting Stock (not including any shares of Voting Stock held by the Person or Persons making or party to, or associated or affiliated with the Person or Persons making or party to, such purchase, tender or exchange offer), or (iv) consummate a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than the 50% of either the outstanding shares of Voting Stock (not including any shares of Voting Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock purchase agreement or other business combination), (v) reorganize, recapitalize or reclassify its Common Stock or (B) that any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate Voting Stock of the Company. Notwithstanding anything herein to the contrary, no Asset Sale shall be considered a Fundamental Transaction hereunder.

(dd) "GAAP” means United States generally accepted accounting principles, consistently applied.

(ee) "Holder Pro Rata Amount” means, for any date of determination, a fraction (i) the numerator of which is the sum of (A) the outstanding Principal amount of this Note on such date and (B) the outstanding principal amount of [FOR AMENDED NOTES: any Initial Notes] [FOR INITIAL NOTES: any Amended Notes] held by Holder on such date and (ii) the denominator of which is the Consolidated Total Debt as of such date.

(ff) "Indebtedness” of any Person means, without duplication (i) all indebtedness for borrowed money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of property or services, including (without limitation) “capital leases” in accordance with generally accepted accounting principles (other than trade payables entered into in the ordinary course of business), (iii) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (v) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (vi) all monetary obligations under any leasing or similar arrangement which, in connection with generally accepted accounting principles, consistently applied for the periods covered thereby, is classified as a capital lease, (vii) all indebtedness referred to in clauses (i) through (vi) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (viii) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (i) through (vii) above.

(gg) [FOR AMENDED NOTES: "Initial Notes” has the meaning ascribed to such term in the Securities Purchase Agreement, and shall include all notes issued in exchange therefor or replacement thereof.]

(hh) "Interest Conversion Price” means, with respect to any Interest Date that price which shall be the lower of (i) the applicable Conversion Price and (ii) the price computed as 90% of the arithmetic average of the Weighted Average Price of the Common Stock on each of the ten (10) consecutive Trading Days ending on the Trading Day immediately preceding the applicable Interest Date (each, an “Interest Measuring Period”). All such determinations to be appropriately adjusted for any stock split, stock dividend, stock combination or other similar transaction that proportionately decreases or increases the Common Stock during the applicable Interest Measuring Period.

(ii) "Interest Notice Due Date” means the twelfth (12^th) Trading Day prior to the applicable Interest Date.

(jj) "Interest Pro Rata Amount” means a fraction (i) the numerator of which is the Original Principal Amount of this Note and (ii) the denominator of which is the aggregate original principal amount of all Notes issued to the purchasers pursuant to the Securities Purchase Agreement on the Closing Date.

(kk) "Interest Rate” means, eight and ninety-five one-hundredths percent (8.95%) per annum, subject to adjustment as set forth herein.

(ll) "Make-Whole Amount” means, as to any Conversion Amount being converted pursuant to Section 3(c)(ii) or Section 9(a), an amount equal to the sum of (i) any accrued and unpaid Interest on such Conversion Amount and (ii) any remaining Interest that, but for the applicable conversion or redemption would have been due on such Conversion Amount through the third (3^rd) anniversary of the Issuance Date. For purposes of this definition, Interest shall be computed on the basis of a 360-day year. By way of illustration, assuming the initial Interest Rate is in effect and assuming conversion or redemption occurs on the initial Issuance Date on a Principal amount equal to $1,000, the Make-Whole Amount shall equal $268.50 ($1,000 x (1080/360 x 8.95%)).

(mm) "Mecar” means Mecar S.A.

(nn) "Mecar Facility” means the Mecar Credit Facility as described in the Company’s Form 10-K filed with SEC for the fiscal year ended December 31, 2006 in Note K to the financial statements. This credit agreement is a demand facility. This credit agreement may be amended, restated, renewed, refinanced or extended from time to time and/or new lenders may be added from time to time, including without limitation Sogepa, provided that the principal amount is not increased, except as provided by the limits on Permitted Senior Indebtedness.

(oo) "Net Asset Sale Proceeds” means, with respect to any Asset Sale, an amount equal to: (A) the sum of cash payments and cash equivalents received by the Company or any of its Subsidiaries, from such Asset Sale (including any cash or cash equivalents received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received), minus (B) any reasonable direct out-of-pocket actual and estimated professional fees and other costs or expenses incurred in connection with such Asset Sale, including (1) income or gains taxes paid or payable by the seller as a result of any gain recognized in connection with such Asset Sale during the tax period the sale occurs (after taking into account any available tax credits or deductions and any tax-sharing arrangements) and (2) payment of the outstanding principal amount of, premium or penalty, if any, and interest on (x) any Indebtedness that is secured by a Lien on the stock or assets in question or (y) in the case of a sale of a Subsidiary, any Indebtedness owed by such Subsidiary, which, in the case of each of clause (x) and (y), is required to be repaid under the terms thereof as a result of such Asset Sale.

(pp) "Options” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

(qq) "Parent Entity” of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.

(rr) "Performance Bonds” means a bond, guarantee or standby letter of credit issued by a bank or lending institution to guarantee the performance of the Company or one of its Subsidiaries or to guarantee the advance payment of funds by the other party in a contract or other transaction with the Company and/or one of its other Subsidiaries. Performance Bonds include guarantees issued with and without secured deposits..

(ss) "Permitted Deferred Indebtedness” means (A) the Note dated November 1, 2005 payable to Sam Nasiri in the original principal amount of $6,700,000, the balance of which was $5,862,500 as of May 31, 2007, (B) the Note dated September 1, 2005, in the original principal amount of $197,402.57 payable to One Source/TCF Equipment Finance with a balance of $87,268.07 as of May 31, 2007, (C) suit filed in Belgium against one of the members of the VSK Group for an alleged breach of contract, seeking damages of less than $150,000, and (D) the suit filed in Belgium against the Company and Mecar S.A. for unpaid severance and other amounts totaling less than $400,000.

(tt) "Permitted Indebtedness” means (A) Permitted Senior Indebtedness, (B) Indebtedness evidenced by this Note, the Other Notes [FOR AMENDED NOTES: and the Initial Notes] [FOR INITIAL NOTES: and the Amended Notes], (C) other unsecured Indebtedness incurred by the Company and/or any of its Subsidiaries that is made expressly subordinate in right of payment to the Indebtedness evidenced by this Note, as reflected in a written agreement acceptable to the Holder and approved by the Holder in writing, and which Indebtedness does not provide at any time for (1) the payment, prepayment, repayment, repurchase or defeasance, directly or indirectly, of any principal or premium, if any, thereon until ninety-one (91) days after the Maturity Date or later and (2) total interest and fees at a rate in excess of the Interest Rate hereunder, (D) Indebtedness secured by Permitted Liens, (E) Indebtedness to trade creditors incurred in the ordinary course of business, (F) amendments, extensions, refinancings and renewals of any items of Permitted Indebtedness, provided that the principal amount is not increased or the terms modified to impose more burdensome terms upon the Company or its Subsidiary, as the case may be, (G) a Promissory Note, dated as of November 1, 2005, issued to Sam Nasiri in the aggregate principal amount of $6,700,000.00 with a current principal amount outstanding of approximately $5,862,500.00, (H) certain earn out payments based on the performance of Global Microwave Systems, Inc., payable to Sam Nasiri and not to exceed $4,000,000.00 in the aggregate, (I) Permitted Pari Passu Indebtedness, (J) the loan dated August 1, 2004 in the original principal amount of $400,000, to VSK Electronics N.V., the balance of which was $100,000 as of May 31, 2007, (K) the indebtedness of SeaSpace Corporation to LJT & Associates in the amount of $250,000 as of May 31, 2007, and (L) the indebtedness of News Sports Microwave Rental, Inc. to One Source/TCF Equipment Finance dated September 1, 2005 in the original amount of $197,402.57, the balance of which was $87,268.07 as of May 31, 2007.

(uu) "Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent, (iii) any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other similar liens, arising in the ordinary course of business with respect to a liability that is not yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv) Liens securing the Company’s obligations under the Notes, (v) Liens (A) upon or in any equipment (as defined in the Security Agreement) acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such equipment, or (B) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment, (vi) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (i) and (v) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the Indebtedness being extended, renewed or refinanced does not increase, (vii) Liens securing the obligations under Permitted Senior Indebtedness; (viii) leases or subleases and licenses and sublicenses granted to others in the ordinary course of the Company’s business, not interfering in any material respect with the business of the Company and its Subsidiaries taken as a whole, (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payments of custom duties in connection with the importation of goods (x) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 4(a)(ix) and (xi) Liens securing the Company’s obligations under the Permitted Pari Passu Indebtedness.

(vv) "Permitted Pari Passu Indebtedness” means the principal of (and premium, if any), interest on, and all fees and other amounts (including, without limitation, any reasonable out-of-pocket costs, enforcement expenses (including reasonable out-of-pocket legal fees and disbursements), collateral protection expenses and other reimbursement or indemnity obligations relating thereto) payable by the Company under or in connection with any secured Indebtedness the proceeds of which are used solely to pay to the Holder and the holders of the Other Notes any Holder Optional Redemption Price required the terms of the Notes; provided, however, that the aggregate amount of such Permitted Pari Passu Indebtedness does not at any time exceed 105% of the aggregate Conversion Amount of all Notes required to be redeemed by the Company pursuant to Section 8 of this Note and analogous provisions of the Other Notes.

(ww) "Permitted Restricted Payments” means payments made pursuant to the terms of the Permitted Indebtedness described in clauses (J), (K) and (L) of the definition thereof.

(xx) "Permitted Senior Indebtedness” means (i) the Mecar Facility, (ii) the Indebtedness set forth in Schedule 30(xx) hereto and (iii) the principal of (and premium, if any), interest on, and all fees and other amounts (including, without limitation, any reasonable out-of-pocket costs, enforcement expenses (including reasonable out-of-pocket legal fees and disbursements), collateral protection expenses and other reimbursement or indemnity obligations relating thereto) payable by Company and/or its Subsidiaries under or in connection with any credit facility to be entered into by the Company and/or its Subsidiaries with one or more financial institutions (together with any amendments, restatements, renewals, refundings, refinancings or other extensions thereof); provided, however, that no Indebtedness pursuant to clause (iii) hereof shall be permitted unless (A) [the Company and/or Mecar shall have executed an agreement for, and publicly disclosed the terms of such agreement on a Current Report on Form 8-K or otherwise, orders for the delivery of product for a minimum aggregate value of €110,000,000, which agreement provides for (1) such products to be [delivered] in two (2) tranches and (2) the products to be delivered in the first (1st) tranche shall have a value of €60,000,000 and shall be delivered no later than one (1) year from the initial execution of such agreement and (B) the aggregate outstanding amount of such Indebtedness permitted pursuant to clause (iii) (taking into account the maximum amounts which may be advanced under the loan documents evidencing such Permitted Senior Indebtedness) does not at any time exceed €10,000,000].

(yy) "Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.

(zz) "Principal Market” means the American Stock Exchange.

(aaa) “Redemption Notices” means, collectively, the Event of Default Redemption Notices, Change of Control Redemption Notices, the Holder Optional Redemption Notice, the Asset Sale Redemption Notice and the Company Mandatory Redemption Notice and, each of the foregoing, individually, a Redemption Notice.

(bbb) “Redemption Premium” means (i) in the case of the Events of Default described in Section 4(a)(i) — (iii), (v), (vi) and (ix), 125%, (ii) in the case of the Events of Default described in Section 4(a)(iv), (x) and (xi), 120%, (iii) in the case of the Events of Default described in Section 4(a)(vii) — (viii), 100% and (iv) in the case of an Event of Default described in Section 4(a)(xii), the corresponding premium for such Event of Default as set forth in [FOR AMENDED NOTES: the Other Notes or any Initial Notes, as applicable] [FOR INITIAL NOTES: the Other Notes or any Amended Notes, as applicable].

(ccc) "Redemption Prices” means, collectively, the Event of Default Redemption Price, Change of Control Redemption Price, the Asset Sale Redemption Price, the Holder Optional Redemption Price and the Company Mandatory Redemption Price and, each of the foregoing, individually, a Redemption Price.

(ddd) “Registration Rights Agreement” means that certain amended and restated registration rights agreement dated as of [     ], 2007 by and among the Company and the holders of the Notes relating to, among other things, the registration of the resale of the Common Stock issuable upon conversion of the Notes and exercise of the Warrants, as such agreement may be amended, modified or supplemented,.

(eee) “Required Holders” means the holders of Notes representing at least a majority of the aggregate principal amount of the Notes then outstanding.

(fff) “Sale Event” means a sale, assignment, conveyance, transfer or other disposition to, or any exchange of property with, any Person, in one transaction or a series of transactions, of (i) all or substantially all of the assets of any of the following: (x) VSK Electronics N.V., (y) Télé Technique Générale S.A., or (z) Intelligent Data Capturing Systems N.V. (collectively the "Specified VSK Entities”) and Mecar or (ii) a majority of the Voting Stock, directly or indirectly, of Mecar and any of the Specified VSK Entities or (iii) any transaction or series of transactions, whereafter Mecar and any of the Specified VSK Entities shall cease to be, directly or indirectly, wholly-owned subsidiaries of the Company; provided, however, that in the event only one of Mecar or any of Specified VSK Entities is a party to any such transaction or series of transactions, such transaction or series shall be deemed an Asset Sale and subject to the Asset Sale Redemption terms and conditions set forth in Section 8(b) above; provided, further, that if after such transaction Mecar or any of the Specified VSK Entities that had previously not been part of such transaction is assigned, conveyed, transferred or otherwise disposed of in accordance with the provisions of clauses (i), (ii) or (iii) above, then such subsequent transaction shall be considered a Sale Event.

(ggg) “SEC” means the United States Securities and Exchange Commission.

(hhh) “Securities Purchase Agreement” means that certain amended and restated securities purchase agreement dated as of [     ], 2007 by and among the Company and each holder of an Existing Note, as such agreement may be amended, modified or supplemented.

(iii) [FOR AMENDED NOTES: "Subscription Date” means March 9, 2006.]

(jjj) [FOR INITIAL NOTES: "Subscription Date” means June [     ], 2007.]

(kkk) “Successor Entity” means the Person, which may be the Company, formed by, resulting from or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction shall have been made, provided that if such Person is not a publicly traded entity whose common stock or equivalent equity security is quoted or listed for trading on an Eligible Market, Successor Entity shall mean such Person’s Parent Entity.

(lll) “Trading Day” means any day on which the shares of Common Stock are traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the shares of Common Stock are then traded; provided that “Trading Day” shall not include any day on which the shares of Common Stock are scheduled to trade on any such exchange or market for less than 4.5 hours or any day that the shares of Common Stock are suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on any such exchange or market, then during the hour ending at 4:00:00 p.m., New York time).

(mmm) “Voting Stock” of a Person means capital stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power to elect, or the general power to appoint, at least a majority of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time capital stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).

(nnn) “VSK Group” means, collectively, VSK Electronics N.V., Télé Technique Générale S.A., Intelligent Data Capturing Systems (IDCS), N.V. and VIGITEC S.A., for so long as it is owned, directly or indirectly, by the Company.

(ooo) “Warrants” has the meaning ascribed to such term in the Securities Purchase Agreement, and shall include all warrants issued in exchange therefor or replacement thereof.

(ppp) “Weighted Average Price” means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market during the period beginning at 9:30:01 a.m., New York time (or such other time as the Principal Market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York time (or such other time as the Principal Market publicly announces is the official close of trading) as reported by Bloomberg through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York time (or such other time as such market publicly announces is the official open of trading), and ending at 4:00:00 p.m., New York time (or such other time as such market publicly announces is the official close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average Price cannot be calculated for such security on such particular date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the Required Holders. If the Company and the Required Holders are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 24. All such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during the applicable calculation period.

(31) DISCLOSURE. Upon receipt or delivery by the Company of any notice in accordance with the terms of this Note, unless the Company has in good faith determined that the matters relating to such notice do not constitute material, nonpublic information relating to the Company or its Subsidiaries, the Company shall within two (2) Business Days after any such receipt or delivery publicly disclose such material, nonpublic information on a Current Report on Form 8-K or otherwise. In the event that the Company believes that a notice contains material, nonpublic information, relating to the Company or its Subsidiaries, the Company shall indicate to the Holder contemporaneously with delivery of such notice, and in the absence of any such indication, the Holder shall be allowed to presume that all matters relating to such notice do not constitute material, nonpublic information relating to the Company or its Subsidiaries.

[Signature Page Follows]

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the Issuance Date set out above.

THE ALLIED DEFENSE GROUP, INC.

By:

Name:

Title:

Schedule 4(a)(vi)

It shall not be a default under Section 4(a)(vi) of the Note if the lenders under the Mecar Facility demand payment of the amounts due under the Mecar Facility as of February 2008.

1

Schedule 30(xx)

Permitted Senior Indebtedness

• Mortgages for the VSK property of approximately $137,000 described in note M of the Company’s financial statements as provided to the SEC in the Form 10-K for the fiscal year ended December 31, 2006, and Form 10-Q for the fiscal quarter ended March 31, 2007.

• Capital leases for capital expenditures used in the ordinary course of business, as described in note M of the Company’s financial statements as provided to the SEC in the Form 10-K for the fiscal year ended December 31, 2006, and Form 10-Q for the fiscal quarter ended March 31, 2007.

1

				Euro Balance
Description	Initial Amount	Date of Agreement	Debt Holder (Lender)	31-May-07	Comments
Equipment and Other Leases
	954,991.40 €	various	Fortis Lease	461,932.31 €	Detailed contracts attached
	6,155,021.59 €	various	KBC Lease	1,093,593.55 €	Detailed contracts attached
	32,833.37 €	2002	Volvo Lease	3,304.25 €	Detailed contracts attached ends
					in 2007
				1,558,830.11 €	May 31, 2007 balance

2

MECAR LEASE DETAILS

N° Compte	N° Contrat		n° immo		description	TOTAL		1998		1999		2000		2001		2002		2003		2004		2005		2006		2007		2008		2009	2010	Contrôle
253000		35283		120005	Mach recyclage solvent		6,047.99		0.00		0.00		0.00		0.00		1,082.93		1,142.85		1,206.12		1,272.89		1,343.20		0.00		0.00				0.00
					Sortie leasing janvier 2007		-6,047.99										-1,082.93		-1,142.85		-1,206.12		-1,272.89		-1,343.20								0.00
253000		39644		120022	Mach de tampographie		15,349.56		0.00		0.00		0.00		0.00		2,035.97		2,852.03		3,017.43		3,192.38		3,377.48		874.27		0.00				0.00
					Sortie leasing avril 2007		-15,349.56										-2,035.97		-2,852.03		-3,017.43		-3,192.38		-3,377.48		-874.27
253000		36530		120021	Generateur		56,640.00		0.00		0.00		0.00		0.00		7,487.50		10,502.42		11,128.04		11,790.90		12,493.24		3,237.90		0.00				0.00
					Sortie leasing avril 2007		-56,640.00										-7,487.50		-10,502.42		-11,128.04		-11,790.90		-12,493.24		-3,237.90
253000		38396		120039	Appareil videoconference		141,501.19		0.00		0.00		0.00		0.00		16,568.15		26,092.79		27,660.81		29,323.07		31,085.21		10,771.16		0.00				0.00
					Sortie leasing mai 2007		-141,501.19										-16,568.15		-26,092.79		-27,660.81		-29,323.07		-31,085.21		-10,771.16
253000		40419		120057	Mach a flexible		2,361.60		0.00		0.00		0.00		0.00		208.08		433.67		458.13		483.96		511.27		266.49		0.00				0.00
253000		40420		120058	Cisaille motorisee		18,755.33		0.00		0.00		0.00		0.00		1,652.56		3,444.30		3,638.58		3,843.83		4,060.63		2,115.43		0.00				0.00
253000		40421		120059	Tour		10,917.00		0.00		0.00		0.00		0.00		960.76		2,003.20		2,117.25		2,237.78		2,365.19		1,232.82		0.00				0.00
253000		40180		120060	Tour + options + ravitailleurs		237,977.78		0.00		0.00		0.00		0.00		20,993.19		43,738.16		46,182.35		48,763.11		51,488.10		26,812.87		0.00				0.00
253000		40417		120060-1	Tour + options + ravitailleurs		2,064.00		0.00		0.00		0.00		0.00		152.45		379.52		399.50		420.58		442.75		269.20		0.00				0.00
253000		40418		120060-2	Tour + options + ravitailleurs		2,064.00		0.00		0.00		0.00		0.00		152.45		379.52		399.50		420.58		442.75		269.20		0.00				0.00
253000		39628		120061	Tour + options + ravitailleurs		237,977.78		0.00		0.00		0.00		0.00		20,993.19		43,738.16		46,182.35		48,763.11		51,488.10		26,812.87		0.00				0.00
253000		42022		120062	Tour		76,800.00		0.00		0.00		0.00		0.00		4,551.07		14,111.59		14,826.19		15,576.96		16,365.74		11,368.45		0.00				0.00
253000		29342		120063	Ext, modif melting & casting plant		668,731.18		0.00		0.00		0.00		0.00		39,676.28		122,983.99		129,147.43		135,619.70		142,416.38		98,887.40		0.00				0.00
253000		41746		120064	Equipement surveillance		211,270.73		0.00		0.00		0.00		0.00		12,519.66		38,819.97		40,785.74		42,851.09		45,021.00		31,273.27		0.00				0.00
253000		37361		120065	Syst transport		115,534.08		0.00		0.00		0.00		0.00		5,149.55		21,219.52		22,249.68		23,329.86		24,462.47		19,123.00		0.00				0.00
253000		43300		120066	Mach à scier		34,560.00		0.00		0.00		0.00		0.00		2,050.48		6,355.82		6,674.37		7,008.82		7,360.09		5,110.42		0.00				0.00
253000		41461		120075	Projecteur Baty		37,548.48		0.00		0.00		0.00		0.00		1,110.74		6,855.88		7,195.87		7,552.75		7,927.30		6,905.94		0.00				0.00
253000		38395		120088	Ligne d'essorage continu		130,887.78		0.00		0.00		0.00		0.00		5,819.55		23,995.33		25,185.33		26,434.32		27,745.28		21,707.97		0.00				0.00
253000		42603		120089	Tour a poupee mobile gital		196,800.00		0.00		0.00		0.00		0.00		5,807.05		35,864.50		37,680.62		39,588.70		41,593.44		36,265.69		0.00				0.00
					Centre d'usinage verticalDeckel
253000		41764		120092	Maho		226,881.60		0.00		0.00		0.00		0.00		3,370.37		41,466.48		43,414.65		45,454.39		47,589.93		45,585.78		0.00				0.00
253000		41790		120093	Groupe électrogène SDMO		112,038.72		0.00		0.00		0.00		0.00		1,664.36		20,476.99		21,439.04		22,446.32		23,500.90		22,511.11		0.00				0.00
253000		42595		120094	Machine Biglia		176,640.00		0.00		0.00		0.00		0.00		2,624.02		32,283.96		33,800.73		35,388.77		37,051.41		35,491.11		0.00				0.00
253000		42587		120095	Machine Biglia		176,640.00		0.00		0.00		0.00		0.00		2,624.02		32,283.96		33,800.73		35,388.77		37,051.41		35,491.11		0.00				0.00

3

253000		44632	130020	Machine à profiler	101,518.08	0.00	0.00	0.00	0.00	0.00	18,560.49	19,393.81	20,264.56	21,174.39	22,124.83	0.00		0.00
253000	41746 bis		120064	Equipement surveillance ajout	51,219.31	0.00	0.00	0.00	0.00	0.00	9,337.94	10,680.80	11,221.55	11,789.72	8,189.30	0.00		0.00
253000		47499	130025	Tour Biglia	139,323.84	0.00	0.00	0.00	0.00	0.00	21,309.51	26,537.49	27,632.31	28,772.53	29,959.71	5,112.29		0.00
253000		43419	130026	Chaudière Dedietricht	36,933.68	0.00	0.00	0.00	0.00	0.00	6,191.55	7,038.15	7,346.80	7,669.05	8,005.39	682.74		0.00
				Gerbeur électrique à timon ac levée
253000		47346	130045	auxiliaire	9,693.12		0.00	0.00	0.00	0.00	1,321.85	1,831.58	1,913.81	1,999.74	2,089.53	536.61		0.00
253000		47336	130046	Chargeur téléscopique Merlo	87,475.20		0.00	0.00	0.00	0.00	11,928.66	16,528.56	17,270.68	18,046.10	18,856.32	4,844.88		0.00
253000		47498	130066	Tour Biglia B470 YS 2M + options	235,961.38		0.00	0.00	0.00	0.00	32,177.15	44,585.27	46,587.07	48,678.74	50,864.33	13,068.82		0.00
253000		48400	130069	Tour Biglia B1200 M	141,673.92		0.00	0.00	0.00	0.00	17,354.16	26,879.50	27,932.80	29,027.40	30,164.89	10,315.17		0.00
253000		48401	130070	Tour Biglia B1200 M	141,673.92		0.00	0.00	0.00	0.00	17,354.16	26,879.50	27,932.80	29,027.40	30,164.89	10,315.17		0.00
253000		48398	130072	Tour Biglia B1200 M	141,673.92		0.00	0.00	0.00	0.00	17,315.31	26,841.64	27,921.29	29,044.37	30,212.61	10,338.70		0.00
253000		48399	130073	Tour Biglia B1200 M	141,673.92		0.00	0.00	0.00	0.00	17,315.31	26,841.64	27,921.29	29,044.37	30,212.61	10,338.70		0.00
253000		49885	130090	Tour Gildemeister GD32-6A	235,200.00		0.00	0.00	0.00	0.00	17,625.08	43,686.10	45,715.83	47,839.85	50,062.52	30,270.62		0.00
253000		50745	130095	Presse 15 tonnes	21,816.96						976.01	4,018.03	4,206.80	4,404.44	4,611.38	3,600.30		0.00
253000		49953	130101	Tour Universel Gildemeister	115,377.60						3,417.32	21,086.93	22,121.66	23,207.16	24,345.95	21,198.58		0.00
253000		49060	110102	Sensor for Tension and Compression	11,040.00						164.42	2,021.81	2,114.69	2,211.84	2,313.44	2,213.80		0.00
253000		53337	130103	Chaudière Dedietricht	36,933.68						550.05	6,763.72	7,074.46	7,399.48	7,739.40	7,406.57		0.00
253000		52653	140022	Enceinte de températureVT7120	21,101.76							3,537.54	4,021.23	4,197.61	4,381.69	4,573.87	389.82	0.00
				Workstation for bldg 67 profile
253000		53338	140023	serie 4	19,709.84							3,300.64	3,753.71	3,920.32	4,094.27	4,275.98	364.92	0.00
253000		41458	140043	Extension of electric ctrl press vpp	52,800.00							7,208.10	9,983.30	10,426.35	10,889.03	11,372.26	2,920.96	0.00
253000		56990	140064	Tour Biglia B470 YS 2M + options	260,267.52							27,408.88	48,709.44	50,972.52	53,340.77	55,819.05	24,016.86	0.00
253000		56995	140065	Tour Biglia B1200M pr lunette	146,082.40							15,348.83	27,298.65	28,595.62	29,953.83	31,376.78	13,509.69	1.00
253000		57001	140066	Tour Biglia B1200M pr lunette	146,082.40							15,348.83	27,298.65	28,595.62	29,953.83	31,376.78	13,509.69	1.00
253000		57003	140067	Tour Biglia B1200M ac lunette+options	166,012.44							17,440.54	31,019.19	32,492.71	34,036.25	35,653.11	15,350.64	-20.00
253000		57009	140068	Tour Biglia B1200M ac lunette+options	166,012.44							17,440.54	31,019.19	32,492.71	34,036.25	35,653.11	15,350.64	-20.00
253000		51577	140080	Banc Magnétoscopique Type universal	32,743.53							2,865.18	5,984.85	6,340.96	6,718.24	7,117.97	3,716.27	-0.06
253000		54143	140107	Syst. Sécurité+adaptation accès usine	83,127.89							4,992.05	15,422.27	16,114.69	16,838.20	17,594.22	12,166.46	0.00

4

253000 52868		140119+	120 Electro		nic ballistic camera 40mm 291,730	.56						8,804.1	5              54,089.	15               56,320.	88               58,644.	69               61,064.	39             52,807.	30	0.00
					Install de radioscopie
253000		51457001		140122	MV2000/320KV	299,245.00							9,373.72	115,640.17	121,676.60	52,554.51				0.00
					Sortie leasing mai 2007	-299,245.00							-9,373.72	-115,640.17	-121,676.60	-52,554.51
253000		53037/1		150072	Tour Biglia B1200M	163,422.69								9,856.60	30,414.81	31,723.28	33,087.98	34,511.45	23,828.57	0.00
253000		53037/2		150073	Tour Biglia B1200Y	201,405.95								12,148.08	37,483.83	39,096.37	40,778.29	42,532.60	29,366.78	0.00
253000		53037/3		160010	Tour Biglia B470 YS2M	258,174.23									47,379.09	49,417.44	51,543.37	53,760.77	56,073.56	0.00
254000		21552		100072	Renault	20,132.70	0.00	0.00	11,933.35	3,835.90	4,044.66	318.79	0.00	0.00	0.00	0.00	0.00			0.00
254000		980359		98056	Volvo	21,623.60	4,116.74	5,103.98	5,486.53	5,897.83	1,018.52	0.00	0.00	0.00	0.00	0.00	0.00			0.00
254000		310N/00011623		98059	Opel Vectra	22,628.51	1,259.37	5,232.64	5,559.38	5,906.51	4,670.61	0.00	0.00	0.00	0.00	0.00	0.00			0.00
254000		31556		120009	BMW 735i	56,565.19	0.00	0.00	0.00	0.00	9,185.82	10,591.44	11,221.25	11,888.47	12,595.40	1,082.81	0.00			0.00
254000					Sortie leasing février 2007	-56,565.19					-9,185.82	-10,591.44	-11,221.25	-11,888.47	-12,595.40	-1,082.81
254000		18005520		120067	Volvo V70 XC AWD	32,833.37	0.00	0.00	0.00	0.00	2,681.99	5,237.53	5,660.98	6,118.66	6,613.35	6,520.86	0.00			0.00
254000		40259		130059	Toyota Hilux 2500CC D4D rouge	17,848.00		0.00	0.00	0.00	0.00	3,413.01	4,299.58	4,533.54	4,780.24	821.63	0.00			0.00
					Sortie leasing avril 2007	-17,848.00						-3,413.01	-4,299.58	-4,533.54	-4,780.24	-821.63
254000		50540		130094	Camion MAN tga type 19313 FLC	61,800.00		0.00	0.00	0.00	0.00	2,764.72	11,381.73	11,916.46	12,476.33	13,062.50	10,198.26			0.00
254000		55464		130094-1	Accessoires camion MAN	23,520.00		0.00	0.00	0.00	0.00		1,766.69	4,375.88	4,574.63	4,782.40	4,999.60	3,020.80		0.00
254000		58740		150054	Ford Transit 430 L/EF	32,799.00		0.00	0.00	0.00	0.00	0.00	0.00	2,942.30	6,097.30	6,392.36	6,701.66	7,025.96	3,639.42	0.00
	Total par an					6,549,649.43	5,376.12	10,336.61	22,979.26	15,640.25	144,495.61	692,054.53	969,697.25	1,172,709.41	1,323,730.05	1,211,299.49	573,429.63	294,954.83	112,908.33	-38.06

5
EXHIBIT I

THE ALLIED DEFENSE GROUP, INC.

CONVERSION NOTICE

Reference is made to the [FOR AMENDED NOTES: Amended and Restated] Senior Secured Convertible Note (the “Note”) issued to the undersigned by The Allied Defense Group, Inc. (the "Company”). In accordance with and pursuant to the Note, the undersigned hereby elects to convert the Conversion Amount (as defined in the Note) of the Note indicated below into shares of Common Stock par value $0.10 per share (the “Common Stock”), as of the date specified below.

Date of Conversion:

Aggregate Conversion Amount to be converted:

Please confirm the following information:

Conversion Price:

Number of shares of Common Stock to be issued:

Please issue the Common Stock into which the Note is being converted in the
following name and to the following address:

Issue to:

Facsimile Number:

Authorization:

By:

Title:

Dated:

Account Number:

(if electronic book entry transfer)

Transaction Code Number:

(if electronic book entry transfer)

¹ FOR AMENDED NOTES: Accrued and unpaid Interest through the closing shall be added to the Original Principal Amount of the Note.

² Insert date that is 6 months from Issuance Date.

³ Insert a price equal to the higher of (a) the Closing Bid Price as of the Trading Day immediately prior to date of signing and (b) $8.00.

⁴ Insert Closing Bid Price on the date of signing of the Amended and Restated Securities Purchase Agreement.

⁵ Insert 18 month anniversary of the Issuance Date.

MELLON INVESTOR SERVICES, LLC*

[FOR AMENDED NOTES: AMENDED AND RESTATED] SENIOR SECURED CONVERTIBLE NOTE
CONVERSION INSTRUCTIONS

The Allied Defense Group, Inc. shares are to be debited from [Reserve 2006 — Convertible Notes]

Section A: Compete this section if Certificate Issuance:

Number of Shares:
Issue to Name and Address:
Tax ID / SSN:
Requires Restrictive Legend:	Yes       No
Mailing Address:
(if different from address
above)

Section B: Complete this section if the shares are to be delivered to the Broker by DWAC:

Number of Shares:

Issue to Name:

Broker:

Broker’s DTC Number:

Broker Contact and Phone:

FOR THE ALLIED DEFENSE GROUP, INC. USE ONLY

Control Number:

*or such other Transfer Agent that may succeed Mellon Investor Services, LLC

2
ACKNOWLEDGMENT

The Company hereby acknowledges this Conversion Notice and hereby directs Mellon Investor Services, LLC to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated      , 2007 from the Company and acknowledged and agreed to by Mellon Investor Services, LLC.

Date:     

THE ALLIED DEFENSE GROUP, INC.

By:

Name:

Title:

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of June      , 2007, by and among The Allied Defense Group, Inc., a Delaware corporation, with headquarters located at 8000 Towers Crescent Drive, Suite 260, Vienna, Virginia 22182 (the "Company”), and the undersigned buyers (each, a “Buyer”, and collectively, the “Buyers”).

WHEREAS:

A. The Company and the Investor (collectively with any other investors that may become a party to this Agreement, the “Investors”) are parties to that certain Securities Purchase Agreement, dated as of March 9, 2006 (the “Original Securities Purchase Agreement”), pursuant to which, among other things, the Investors purchased from the Company (i) senior subordinated convertible notes, dated March 9, 2006 (the “Original Notes”) and (ii) warrants (the “Warrants”), which are exercisable to purchase shares of the Company’s common stock, par value $0.10 per share (the "Common Stock”) (as exercised, collectively, the “Warrant Shares”).

B. In connection with the Amended and Restated Securities Purchase Agreement by and among the parties hereto, dated June 19, 2006 (the “Securities Purchase Agreement”), the Company has agreed, upon the terms and subject to the conditions set forth in the Securities Purchase Agreement (a) to cancel the Original Notes and to issue to the Buyers, in exchange therefor, (i) certain shares of Common Stock (the “Common Shares”) and (ii) certain senior secured convertible notes (the “Amended Notes”) (as converted, the “Amended Conversion Shares”) and (b) to issue and sell to each Buyer (i) at the Initial Closing (as defined in the Securities Purchase Agreement), certain senior secured convertible notes of the Company (the “Initial Notes”) and (ii) at the Additional Closing (as defined in the Securities Purchase Agreement), certain senior secured convertible notes of the Company (the “Additional Notes”, and together with the Amended Notes and the Initial Notes, the "Notes”), in each case, which Notes will, among other things, be convertible into shares of Common Stock (as converted, the “Conversion Shares”) in accordance with the terms of the Notes.

C. The Notes bear interest, which at the option of the Company, subject to certain conditions, may be paid in shares of Common Stock (the “Interest Shares”).

D. To induce the Buyers to execute and deliver the Securities Purchase Agreement, the Company has agreed to execute and deliver this Agreement which amends, and restates in full the terms and conditions of that certain Registration Rights Agreement, by and among the Company and the Investors, dated as of March 9, 2006 whereby the Company agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the “1933 Act”), and applicable state securities laws.

NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each of the Buyers hereby agree as follows:

1. Definitions.

Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Securities Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings:

a. "Additional Effectiveness Date” means the date the Additional Registration Statement is declared effective by the SEC.

b. "Additional Effectiveness Deadline” means the date which is sixty (60) calendar days after the earlier of the Additional Filing Date and the Additional Filing Deadline or in the event that the Registration Statement is subject to a review by the SEC, one-hundred and twenty (120) calendar days after the earlier of the Additional Filing Date and the Additional Filing Deadline.

c. "Additional Filing Date” means the date on which the Additional Registration Statement is filed with the SEC.

d. "Additional Filing Deadline” means if Cutback Shares are required to be included in the Additional Registration Statement, the later of (i) the date sixty (60) days after the date substantially all of the Registrable Securities registered under the immediately preceding Registration Statement are sold and (ii) the date six (6) months from the Initial Effective Date or the last Additional Effective Date, as applicable.

e. "Additional Registrable Securities” means, (i) any Cutback Shares not previously included on a Registration Statement and (ii) any share capital of the Company issued or issuable with respect to the Notes, the Conversion Shares, the Interest Shares, the Warrants, the Warrant Shares, the Common Shares or Cutback Shares, as applicable, as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitations on exercises of the Notes and the Warrants.

f. "Additional Registration Statement” means a registration statement or registration statements of the Company filed under the 1933 Act covering any Additional Registrable Securities.

g. "Additional Required Registration Amount” means any Cutback Shares not previously included on a Registration Statement, all subject to adjustment as provided in Section 2(f), without regard to any limitations on exercises of the Notes and the Warrants.

h. "Business Day” means any day other than Saturday, Sunday or any other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

i. "Cutback Shares” means any of the Initial Required Registration Amount (without regard to clause (II) in the definition thereof) of Registrable Securities not included in all Registration Statements previously declared effective hereunder as a result of a limitation on the maximum number of shares of Common Stock of the Company permitted by the staff of the SEC to be registered pursuant to Rule 415. For the purpose of determining the Cutback Shares, in order to determine any applicable Required Registration Amount, first the Warrant Shares shall be excluded on a pro rata basis until all of the Warrant Shares have been excluded, then the Common Shares shall be excluded on a pro rata basis until all of the Common Shares have been excluded and lastly the Amended Conversion Shares shall be excluded on a pro rata basis until all of the Amended Conversion Shares have been excluded.

j. "Effective Date” means the Initial Effective Date and the Additional Effective Date, as applicable.

k. "Effectiveness Deadline” means the Initial Effectiveness Deadline and the Additional Effectiveness Deadline, as applicable.

l. "Initial Effective Date” means the date that the Registration Statement has been declared effective by the SEC.

m. "Initial Effectiveness Deadline” means the date which is 365 days after the Initial Closing Date (as defined in the Securities Purchase Agreement).

n. "Initial Registrable Securities” means (i) the Conversion Shares issued or issuable upon conversion of the Notes, (ii) the Interest Shares issued or issuable with respect to the Notes, (iii) the Warrant Shares issued or issuable upon exercise of the Warrants, (iv) the Common Shares and (v) any capital stock of the Company issued or issuable, with respect to the Notes, the Conversion Shares, the Interest Shares, the Warrant Shares, the Warrants or the Common Shares as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitations on exercises of the Warrants.

o. "Initial Required Registration Amount” means (I) 120% of the sum of (w) the number of Conversion Shares issued and issuable pursuant to the Notes as of the trading day immediately preceding the applicable date of determination, (x) the number of Warrant Shares issued and issuable pursuant to the Warrants as of the trading day immediately preceding the applicable date of determination, (y) the maximum number of Interest Shares issued or issuable pursuant to the terms of the Notes as of the trading date immediately preceding the applicable date of determination and (z) the number of Common Shares issued as of the trading day immediately preceding the applicable date of determination, excluding the 144 Common Shares (as defined in the Securities Purchase Agreement), subject to adjustment as provided in Section 2(f), without regard to any limitations on conversions or redemptions of the Notes or exercises of the Warrants or (II) such other amount as may be required by the staff of the SEC pursuant to Rule 415.

p. "Initial Registration Statement” means a registration statement or registration statements of the Company filed under the 1933 Act covering the Initial Registrable Securities.

q. "Investor” means a Buyer or any transferee or assignee thereof to whom a Buyer assigns its rights under this Agreement in accordance with the requirements of the Transaction Documents and who agrees to become bound by the provisions of this Agreement in accordance with Section 9 and any transferee or assignee thereof to whom a transferee or assignee assigns its rights under this Agreement in accordance with the requirements of the Transaction Documents and who agrees to become bound by the provisions of this Agreement in accordance with Section 9.

r. "Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

s. "register,” “registered,” and “registration” refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act and pursuant to Rule 415 and the declaration or ordering by the SEC of the effectiveness of such Registration Statement(s).

t. "Registrable Securities” means the Initial Registrable Securities and the Additional Registrable Securities. As to any particular Registrable Securities, they shall cease to be Registrable Securities when they (i) have been sold pursuant to an effective registration statement or in compliance with Rule 144 or (ii) are eligible to be sold pursuant to Rule 144(k) or any similar rule then in force.

u. "Registration Statement” means a registration statement or registration statements of the Company filed under the 1933 Act covering the Registrable Securities.

v. "Required Holders” means the holders of at least a majority of the Registrable Securities.

w. "Required Registration Amount” means either the Initial Required Registration Amount or the Additional Required Registration Amount, as applicable.

x. "Rule 415” means Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous or delayed basis.

y. "SEC” means the United States Securities and Exchange Commission.

2. Registration.

a. Mandatory Registration. The Company shall prepare, and, as soon as practicable after the Initial Closing Date but in no event later than the earlier to occur of (i) forty-five (45) days after the Company obtains the Stockholder Approval (as defined in the Securities Purchase Agreement) and (ii) March 3, 2008, file with the SEC the Initial Registration Statement on Form S-3, if available, covering the resale of all of the Initial Registrable Securities. In the event that Form S-3 is unavailable to the Company for such a registration, the Company shall use such other form as is available for such a registration on another appropriate form reasonably acceptable to the Required Holders, subject to the requirements of Section 2(e). The Initial Registration Statement prepared pursuant hereto shall register for resale at least that number of shares of Common Stock equal to the Initial Required Registration Amount determined as of the date such Initial Registration Statement is initially filed with the SEC. The Initial Registration Statement shall contain (except if otherwise directed by the Required Holders or the SEC) the "Selling Stockholders” and “Plan of Distribution” sections in substantially the form attached hereto as Exhibit B. The Company shall use its best efforts to have the Initial Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the Initial Effectiveness Deadline. By 9:30 am on the Business Day following the Initial Effective Date, the Company shall file with the SEC in accordance with Rule 424 under the 1933 Act the final prospectus to be used in connection with sales pursuant to such Registration Statement.

b. Additional Mandatory Registrations. The Company shall prepare, and, as soon as practicable but in no event later than the Additional Filing Deadline, file with the SEC Additional Registration Statements on Form S-3 covering the resale of all of the Additional Registrable Securities not previously registered on an Additional Registration Statement hereunder. To the extent the staff of the SEC does not permit the Additional Required Registration Amount to be registered on an Additional Registration Statement, the Company shall file Additional Registration Statements successively seeking to register on each such Additional Registration Statement the maximum number of remaining Additional Registrable Securities until the Additional Required Registration Amount has been registered with the SEC. In the event that Form S-3 is unavailable for such a registration, the Company shall use such other form as is available for such a registration on another appropriate form reasonably acceptable to the Required Holders, subject to the provisions of Section 2(e). Each Additional Registration Statement prepared pursuant hereto shall register for resale at least that number of shares of Common Stock equal to the Additional Required Registration Amount as of the date the Registration Statement is initially filed with the SEC. Each Additional Registration Statement shall contain (except if otherwise directed by the Required Holders or the SEC) the “Selling Stockholders” and “Plan of Distribution” sections in substantially the form attached hereto as Exhibit B. The Company shall use its best efforts to have each Additional Registration Statement declared effective by the SEC as soon as practicable, but in no event later than the Additional Effectiveness Deadline. By 9:30 a.m. New York time on the date following the Additional Effective Date, the Company shall file with the SEC in accordance with Rule 424 under the 1933 Act the final prospectus to be used in connection with sales pursuant to such Registration Statement.

c. Allocation of Registrable Securities. The initial number of Registrable Securities included in any Registration Statement and any increase in the number of Registrable Securities included therein shall be allocated pro rata among the Investors based on the number of Registrable Securities held by each Investor at the time the Registration Statement covering such initial number of Registrable Securities or increase thereof is declared effective by the SEC. In the event that an Investor sells or otherwise transfers any of such Investor’s Registrable Securities, each transferee shall be allocated a pro rata portion of the then remaining number of Registrable Securities included in such Registration Statement for such transferor. Any shares of Common Stock included in a Registration Statement and which remain allocated to any Person which ceases to hold any Registrable Securities covered by such Registration Statement shall be allocated to the remaining Investors, pro rata based on the number of Registrable Securities then held by such Investors which are covered by such Registration Statement. The Company shall not include any securities other than Registrable Securities (other than (i) on the Initial Registration Statement, the shares described on Schedule 2(c)(i) and (ii) on the Additional Registration Statement, the shares described on Schedule 2(c)(ii)) without the prior written consent of the Required Holders.

d. Legal Counsel. Subject to Section 5 hereof, the Required Holders shall have the right to select one legal counsel to review and participate in any registration pursuant to this Section 2 (“Legal Counsel”), which shall be Schulte Roth & Zabel LLP or such other counsel as thereafter designated by the Required Holders. The Company and Legal Counsel shall reasonably cooperate with each other in performing the Company’s obligations under this Agreement.

e. Ineligibility for Form S-3. In the event that Form S-3 is not available for the registration of the resale of Registrable Securities hereunder, the Company shall (i) register the resale of the Registrable Securities on another appropriate form reasonably acceptable to the Required Holders and (ii) undertake to register the Registrable Securities on Form S-3 as soon as such form is available, provided that the Company shall maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC.

f. Sufficient Number of Shares Registered. In the event the number of shares available under a Registration Statement filed pursuant to Section 2(a) is insufficient to cover all of the Registrable Securities required to be covered by such Registration Statement or an Investor’s allocated portion of the Registrable Securities pursuant to Section 2(c), the Company shall amend the applicable Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover at least the Required Registration Amount as of the trading day immediately preceding the date of the filing of such amendment or new Registration Statement, in each case, as soon as practicable, but in any event not later than fifteen (15) days after the necessity therefor arises. The Company shall use its best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed “insufficient to cover all of the Registrable Securities” if at any time the number of shares of Common Stock available for resale under the Registration Statement is less than the product determined by multiplying (i) the Required Registration Amount as of such time by (ii) 0.90. The calculation set forth in the foregoing sentence shall be made without regard to any limitations on the conversion of the Notes or the exercise of the Warrants and such calculation shall assume that the Notes are then convertible into shares of Common Stock at the then prevailing Conversion Rate (as defined in the Notes) and that the Warrants are then exercisable for shares of Common Stock at the then prevailing Exercise Price (as defined in the Warrants).

g. Effect of Failure to File and Obtain and Maintain Effectiveness of Registration Statement. If (i) (A) the Additional Registration Statement is not filed with the SEC on or before the Additional Filing Deadline (a “Filing Failure”) or (B) a Registration Statement covering all of the Registrable Securities required to be covered thereby and required to be filed by the Company pursuant to this Agreement is not declared effective by the SEC on or before the respective Effectiveness Deadline (an “Effectiveness Failure”) or (ii) on any day after the Effective Date sales of all of the Registrable Securities required to be included on such Registration Statement cannot be made for any reason (other than during an Allowable Grace Period (as defined in Section 3(q)) pursuant to such Registration Statement (including, without limitation, because of a failure to keep such Registration Statement effective, to disclose such information as is necessary for sales to be made pursuant to such Registration Statement or to register, subject to the grace periods set forth in Section 3(q) a sufficient number of shares of Common Stock to enable resale of 100% of the shares of Common Stock issuable upon conversion of the Notes and exercise of the Warrants without regard to limitations on conversion, redemption and exercise of such Notes and Warrants and assuming such conversion, redemption or exercise occurred on the date of the filing of the Registration Statement or a suspension or delisting of the Common Stock on its principal trading exchange or market) (a “Maintenance Failure”) then, as partial relief for the damages to any holder by reason of any such delay in or reduction of its ability to sell the underlying shares of Common Stock (which remedy shall not be exclusive of any other remedies available at law or in equity), the Company shall pay to each holder of Registrable Securities relating to such Registration Statement an amount in cash equal to one percent (1.0%) of the aggregate Purchase Price (as such term is defined in the Securities Purchase Agreement) of such Investor’s Registrable Securities included in such Registration Statement on each of the following dates: (i) the day of a Filing Failure and on every thirtieth day (pro rated for periods totaling less than thirty days) after a Filing Failure until such Filing Failure is cured; (ii) the day of an Effectiveness Failure and on every thirtieth day (pro rated for periods totaling less than thirty days) after an Effectiveness Failure until such Effectiveness Failure is cured; and (iii) the initial day of a Maintenance Failure and on every thirtieth day (pro rated for periods totaling less than thirty days) after a Maintenance Failure until such Maintenance Failure is cured; provided, however, that in no event shall the Company be liable for more than one percent (1%) of penalties during any thirty day period or for multiple events during any thirty day period. The payments to which a holder shall be entitled pursuant to this Section 2(g) are referred to herein as “Registration Delay Payments.” Registration Delay Payments shall be paid on the day of the Filing Failure, Effectiveness Failure and the initial day of a Maintenance Failure, as applicable, and thereafter on the earlier of (I) the thirtieth day after the event or failure giving rise to the Registration Delay Payments has occurred and (II) the third Business Day after the event or failure giving rise to the Registration Delay Payments is cured. In the event the Company fails to make Registration Delay Payments in a timely manner, such Registration Delay Payments shall bear interest at the rate of one percent (1.0%) per month (prorated for partial months) until paid in full. The parties agree that the Company will not be liable for Registration Delay Payments under this Section in respect of the Warrants.

3. Related Obligations.

At such time as the Company is obligated to file a Registration Statement with the SEC pursuant to Section 2(a), 2(b), 2(e) or 2(f), and subject to any Allowable Grace Periods, the Company will use its best efforts to effect the registration of the Registrable Securities in accordance with the intended method of disposition thereof and, pursuant thereto, the Company shall have the following obligations:

a. The Company shall submit to the SEC, within two (2) Business Days after the Company learns that no review of a particular Registration Statement will be made by the staff of the SEC or that the staff has no further comments on a particular Registration Statement, as the case may be, a request for acceleration of effectiveness of such Registration Statement to a time and date not later than 48 hours after the submission of such request. Subject to Allowable Grace Periods, the Company shall keep each Registration Statement effective pursuant to Rule 415 at all times until the earlier of (i) the date as of which the Investors may sell all of the Registrable Securities covered by such Registration Statement pursuant to Rule 144(k) (or any successor thereto) promulgated under the 1933 Act or (ii) the date on which the Investors shall have sold all of the Registrable Securities covered by such Registration Statement (the “Registration Period”). The Company shall ensure that each Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein (in the case of prospectuses, in the light of the circumstances in which they were made) not misleading.

b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 3(b)) by reason of the Company filing a report on Form 10-Q, Form 10-K or any analogous report under the Securities Exchange Act of 1934, as amended (the “1934 Act”), the Company shall have incorporated such report by reference into such Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement such Registration Statement.

c. The Company shall (A) permit Legal Counsel to review and comment upon (i) a Registration Statement at least three (3) Business Days prior to its filing with the SEC and (ii) all amendments and supplements to all Registration Statements (except for any periodic reports under the 1934 Act) within a reasonable number of days prior to their filing with the SEC, and (B) not file any Registration Statement or amendment or supplement thereto in a form to which Legal Counsel reasonably objects; provided, however, that no liquidated damages under Section 2 shall be due to any Investor if Legal Counsel shall have unreasonably objected to the filing or effectiveness of any Registration Statements such as to delay its filing or effectiveness. The Company shall not submit a request for acceleration of the effectiveness of a Registration Statement or any amendment or supplement thereto without the prior approval of Legal Counsel, which consent shall not be unreasonably withheld. The Company shall furnish to Legal Counsel, without charge, (i) copies of any correspondence from the SEC or the staff of the SEC to the Company or its representatives relating to any Registration Statement, (ii) promptly after the same is prepared and filed with the SEC, one copy of any Registration Statement and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, if requested by an Investor (if not available pursuant to Rule 424(b)), and all exhibits. The Company shall reasonably cooperate with Legal Counsel in performing the Company’s obligations pursuant to this Section 3.

d. The Company shall furnish to each Investor whose Registrable Securities are included in any Registration Statement, without charge, (i) if the Company shall not have filed a final prospectus in accordance with Rule 424 per Section 2(a) or 2(b), as applicable, upon the effectiveness of any Registration Statement, ten (10) copies of the prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (ii) such other documents, including copies of any preliminary or final prospectus, as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor.

e. The Company shall use its best efforts to (i) register and qualify, unless an exemption from registration and qualification applies, the resale by Investors of the Registrable Securities covered by a Registration Statement under such other securities or “blue sky” laws of all applicable jurisdictions in the United States, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(e), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify Legal Counsel and each Investor who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or “blue sky” laws of any jurisdiction in the United States or its receipt of notice of the initiation or threatening of any proceeding for such purpose.

f. The Company shall notify Legal Counsel and each Investor in writing of the happening of any event, as promptly as practicable after becoming aware of such event, as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and, subject to Section 3(q), promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission. The Company shall also promptly notify Legal Counsel and each Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to Legal Counsel and each Investor by facsimile on the same day of such effectiveness and by overnight mail) and (ii) of the Company’s reasonable determination that a post-effective amendment to a Registration Statement would be appropriate.

g. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify Legal Counsel and each Investor who holds Registrable Securities being sold of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose.

h. To the extent any Investor is deemed, alleged or reasonably believes may be alleged, to be an underwriter, at the reasonable request of any Investor, the Company shall furnish to such Investor, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as an Investor may reasonably request (i) a letter, dated such date, from the Company’s independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the Investors, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Investors.

i. To the extent any Investor is deemed, alleged or reasonably believes may be alleged, to be an underwriter, the Company shall make available for inspection by (i) any Investor, (ii) Legal Counsel and (iii) one firm of accountants or other agents retained by the Investors (collectively, the “Inspectors”), all pertinent financial and other records, and pertinent corporate documents and properties of the Company (collectively, the “Records”), as shall be reasonably deemed necessary by each Inspector, and cause the Company’s officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall agree to hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other Transaction Document. Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. Nothing herein (or in any other confidentiality agreement between the Company and any Investor) shall be deemed to limit the Investors’ ability to sell Registrable Securities in a manner which is otherwise consistent with applicable laws and regulations.

j. The Company shall hold in confidence and not make any disclosure of information concerning an Investor provided to the Company unless (i) disclosure of such information is necessary or advisable to comply with federal or state securities laws, (ii) the disclosure of such information is necessary or advisable to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement (provided that in the case of clauses (i) and (ii) such Investor shall be consulted by the Company in connection with any such release or other disclosure prior to its release). The Company agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Investor and allow such Investor, at the Investor’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.

k. The Company shall use its best efforts either to (i) cause all of the Registrable Securities covered by a Registration Statement to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii) secure designation and quotation of all of the Registrable Securities covered by a Registration Statement on either The NASDAQ Global Market or The NASDAQ Global Select Market or (iii) if, despite the Company’s best efforts to satisfy the preceding clauses (i) and (ii), the Company is unsuccessful in satisfying the preceding clauses (i) or (ii), to secure the inclusion for quotation on The NASDAQ Capital Market or the NASD’s OTC Bulletin Board for such Registrable Securities and, without limiting the generality of the foregoing, to use its best efforts to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. (“NASD”) as such with respect to such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(k).

l. The Company shall cooperate with the Investors who hold Registrable Securities being offered and, to the extent applicable, facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered and resold pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Investors may reasonably request and registered in such names as the Investors may request.

m. If requested by an Investor, the Company shall (i) as soon as practicable incorporate in a prospectus supplement or post-effective amendment such information as an Investor reasonably requests to be included therein relating to the sale and distribution of Registrable Securities, including, without limitation, information with respect to the number of Registrable Securities being offered or sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities to be sold in such offering; (ii) as soon as practicable make all required filings of such prospectus supplement or post-effective amendment after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment; and (iii) as soon as practicable, supplement or make amendments to any Registration Statement if reasonably requested by an Investor holding any Registrable Securities.

n. The Company shall use its best efforts to cause the Registrable Securities covered by a Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.

o. The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

p. Within two (2) Business Days after a Registration Statement which covers Registrable Securities is declared effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A.

q. Notwithstanding anything to the contrary herein, at any time after the Effective Date, the Company may delay the disclosure of material, non-public information concerning the Company the disclosure of which at the time is not, in the good faith opinion of the Board of Directors of the Company (following consultation with its counsel), in the best interest of the Company (a “Grace Period”); provided, that the Company shall promptly (i) notify the Investors in writing that such determination has been made (provided that in each notice the Company will not disclose the content of such material, non-public information to the Investors) and the date on which the Grace Period will begin, and (ii) notify the Investors in writing of the date on which the Grace Period ends; and, provided further, that during any three hundred sixty five (365) day period such Grace Periods shall not exceed an aggregate of twenty (20) days and the first day of any Grace Period must be at least two (2) trading days after the last day of any prior Grace Period (each, an “Allowable Grace Period”). During an Allowable Grace Period, the Investors will cease all sales under the applicable Registration Statement until the end of such Allowable Grace Period. For purposes of determining the length of a Grace Period above, the Grace Period shall begin on and include the date the Investors receive the notice referred to in clause (i) and shall end on and include the later of the date the Investors receive the notice referred to in clause (ii) and the date referred to in such notice. The provisions of Section 3(g) hereof shall not be applicable during the period of any Allowable Grace Period. Upon expiration of the Grace Period, the Company shall again be bound by the first sentence of Section 3(f) with respect to the information giving rise thereto unless such material, non-public information is no longer applicable. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended shares of Common Stock to a transferee of an Investor in accordance with the terms of the Securities Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale, and delivered a copy of the prospectus included as part of the applicable Registration Statement (unless an exemption from such prospectus delivery requirement exists), prior to the Investor’s receipt of the notice of a Grace Period and for which the Investor has not yet settled.

4. Obligations of the Investors.

a. At least five (5) Business Days prior to the first anticipated filing date of a Registration Statement, the Company shall notify each Investor in writing of the information the Company requires from each such Investor if such Investor elects to have any of such Investor’s Registrable Securities included in such Registration Statement. It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement, and any time deadlines for the Company hereunder shall be extended for the number of days an Investor does not comply with this Section 4, with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company a “Selling Stockholder Questionnaire”, in the form attached hereto as Exhibit C, and such other information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the effectiveness of the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request.

b. Each Investor, by such Investor’s acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of any Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor’s election to exclude all of such Investor’s Registrable Securities from such Registration Statement.

c. Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of 3(f), such Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until such Investor’s receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(g) or the first sentence of 3(f) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended shares of Common Stock to a transferee of an Investor in accordance with the terms of the Securities Purchase Agreement in connection with any sale of Registrable Securities with respect to which an Investor has entered into a contract for sale prior to the Investor’s receipt of a notice from the Company of the happening of any event of the kind described in Section 3(g) or the first sentence of 3(f) and for which the Investor has not yet settled.

d. Each Investor covenants and agrees that it will comply with the prospectus delivery requirements of the 1933 Act as applicable to it or an exemption therefrom in connection with sales of Registrable Securities pursuant to the Registration Statement.

5. Expenses of Registration.

All reasonable expenses, other than underwriting discounts and commissions, incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees, and fees and disbursements of counsel for the Company, shall be paid by the Company. The Company shall also reimburse the Investors for the fees and disbursements of Legal Counsel in connection with registration, filing or qualification pursuant to Sections 2 and 3 of this Agreement which amount shall be limited to $15,000.

6. Indemnification.

In the event any Registrable Securities are included in a Registration Statement under this Agreement:

a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend each Investor, the directors, officers, members, partners, employees, agents, representatives of, and each Person, if any, who controls any Investor within the meaning of the 1933 Act or the 1934 Act (each, an “Indemnified Person”), against any losses, claims, damages, liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys’ fees, amounts paid in settlement or expenses, joint or several, (collectively, “Claims”) incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto (“Indemnified Damages”), to which any of them may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other “blue sky” laws of any jurisdiction in which Registrable Securities are offered (“Blue Sky Filing”), or the omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in the light of the circumstances under which the statements therein were made, not misleading, (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation thereunder relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement or (iv) any violation of this Agreement (the matters in the foregoing clauses (i) through (iv) being, collectively, “Violations”). Subject to Section 6(c), the Company shall reimburse the Indemnified Persons, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Company pursuant to Section 3(d) and (ii) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9.

b. In connection with any Registration Statement in which an Investor is participating, each such Investor agrees to severally and not jointly indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (each, an “Indemnified Party”), against any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by such Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(c), such Investor will reimburse any legal or other expenses reasonably incurred by an Indemnified Party in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld or delayed; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9.

c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses of not more than one counsel for such Indemnified Person or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. In the case of an Indemnified Person, legal counsel referred to in the immediately preceding sentence shall be selected by the Investors holding at least a majority in interest of the Registrable Securities included in the Registration Statement to which the Claim relates. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or Claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person reasonably apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent; provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such Claim or litigation, and such settlement shall not include any admission as to fault on the part of the Indemnified Party. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action.

d. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred.

e. No Person involved in the sale of Registrable Securities who is guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) in connection with such sale shall be entitled to indemnification from any Person involved in such sale of Registrable Securities who is not guilty of fraudulent misrepresentation.

f. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

7. Contribution.

To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6 of this Agreement, (ii) no Person involved in the sale of Registrable Securities, which Person is guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) in connection with such sale, shall be entitled to contribution from any Person involved in such sale of Registrable Securities who was not guilty of fraudulent misrepresentation; and (iii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities pursuant to such Registration Statement.

8. Reports Under the 1934 Act.

With a view to making available to the Investors the benefits of Rule 144 promulgated under the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration (“Rule 144”), the Company agrees, for so long as an Investor holds Notes, Warrants, Common Shares (as defined in the Securities Purchase Agreement) or Registrable Securities, to:

a. make and keep public information available, as those terms are understood and defined in Rule 144;

b. file with the SEC in a timely manner (except as noted in Schedule 4(c) of the Securities Purchase Agreement) all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and

c. furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company, if true, that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual report of the Company and such other reports and documents so filed by the Company (but only if such reports are not publicly available on the EDGAR System) and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration.

9. Assignment of Registration Rights.

The rights under this Agreement shall be automatically assignable by the Investors to any transferee of all or any portion of such Investor’s Registrable Securities if: (i) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee and (b) the securities with respect to which such registration rights are being transferred or assigned; (iii) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act or applicable state securities laws; (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein; and (v) such transfer shall have been made in accordance with the applicable requirements of the Securities Purchase Agreement (including the furnishing by the Investor to the Company of an opinion of counsel reasonably acceptable to the Company, prior to such transfer, that such Registrable Securities may be so transferred in a transaction that does not require registration under the 1933 Act).

10. Amendment of Registration Rights.

Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Required Holders. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. No such amendment shall be effective to the extent that it applies to less than all of the holders of the Registrable Securities. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of this Agreement unless the same consideration also is offered to all of the parties to this Agreement.

11. Miscellaneous.

a. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the such record owner of such Registrable Securities.

b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one Business Day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. Each Investor shall provide notice in writing to the Company of any change in address, which notice shall be sent by the Company to all the other Investors. The addresses and facsimile numbers for such communications shall be:

If to the Company:

The Allied Defense Group, Inc.
8000 Towers Crescent Drive Suite 260 Vienna, Virginia 22182 Telephone: Facsimile:	(703) 847-5268 (703) 847-5334

Attention: Chief Financial Officer

With a copy to:

Baxter, Baker, Sidle, Conn & Jones
Sun Trust Building, Suite 2100
120 E. Baltimore Street
Baltimore, Maryland 21202
Telephone: (410) 230-3800
Facsimile: (410) 230-3801
Attention: James E. Baker, Jr.

If to Legal Counsel:

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Telephone: (212) 756-2000
Facsimile: (212) 593-5955
Attention: Eleazer N. Klein, Esq.

If to a Buyer, to its address and facsimile number set forth on the Schedule of Buyers attached hereto, with copies to such Buyer’s representatives as set forth on the Schedule of Buyers, or to such other address and/or facsimile number and/or to the attention of such other Person as the recipient party has specified by written notice given to each other party five (5) days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.

c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

d. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

e. This Agreement, the other Transaction Documents (as defined in the Securities Purchase Agreement) and the instruments referenced herein and therein constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the other Transaction Documents and the instruments referenced herein and therein supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof.

f. Subject to the requirements of Section 9, this Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto.

g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

h. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

j. All consents and other determinations required to be made by the Investors pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by the Required Holders.

k. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party.

l. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

m. The obligations of each Buyer hereunder are several and not joint with the obligations of any other Buyer, and no provision of this Agreement is intended to confer any obligations on any Buyer vis-à-vis any other Buyer. Nothing contained herein, and no action taken by any Buyer pursuant hereto, shall be deemed to constitute the Buyers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Buyers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated herein.

* * * * * *

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.

COMPANY:

THE ALLIED DEFENSE GROUP, INC.

By:      
Name:  
Title:    

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.

BUYERS:

KINGS ROAD INVESTMENTS LTD.

By:      
Name:  
Title:    

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.

PORTSIDE GROWTH & OPPORTUNITY FUND

By:      
Name:  
Title:    

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.

CASTLERIGG MASTER INVESTMENTS LTD.

By:      
Name:  
Title:    

IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to this Registration Rights Agreement to be duly executed as of the date first written above.

LB I GROUP INC.

By:      
Name:  
Title:    

SCHEDULE OF BUYERS

			Buyer's Representative's
	Buyer's Address		Address
Buyer	and Facsimile Number		and Facsimile Number
	c/o Polygon Investment Partners LP
	399 Park Avenue, 22nd Floor
	New York NY 10022		Schulte Roth & Zabel LLP
	Attention: Erik M.W. Caspersen and		919 Third Avenue
	Brandon L. Jones		New York, New York 10022
	Facsimile: (212) 359-7303		Attn: Eleazer Klein, Esq.
Kings Road	Telephone: (212) 359-7300		Facsimile: (212) 593-5955
Investments Ltd.	Residence: Cayman Islands		Telephone: (212) 756-2000
	c/o Ramius Capital Group, L.L.C.
	666 Third Avenue, 26th Floor
	New York, New York 10017
	Attention: Jeffrey Smith
	Owen Littman
	Facsimile: (212) 845-7999
		(212) 845-7995
	Telephone: (212) 845-7955
Portside Growth &		(212) 201-4841
Opportunity Fund	Residence: Cayman Islands			N/A
	c/o Sandell Asset Management
	40 West 57th St
	26th Floor		McDermott Will & Emery LLP
	New York, NY 10019		340 Madison Avenue
	Attention: Cem Hacioglu / Matthew Pliskin		New York, New York 10173-1922
	Telephone: 212-603-5700		Attn: Stephen Older, Esq.
Castlerigg Master	Fax: 212-603-5710		Facsimile: (212) 547-5444
Investments Ltd.	Residence: British Virgin Islands		Telephone: (212) 547-5649
	c/o Lehman Brothers Inc.
	399 Park Ave
	NY, NY 10022
	Attention: Will Yelsits
LB I Group Inc.	Eric Salzman			N/A

SCHEDULE 2(c)(i)

Shares includable in Initial Registration Statement:

LB I Group Inc.		41,739	Common Stock
Halcyon/Sliska Offshore Management LLC*	33,000		Common Stock
Patriot Capital Funding, Inc.		28,000	Warrants
Cowen and Company , LLC		41,793	Warrants

• Including any assignee of such common shareholders rights.

SCHEDULE 2(c)(ii)

Shares and Warrants Includible in Additional Registration Statement

Pirate Capital LLC*	261,261	Common Stock
Wynnefield Capital, Inc.*	64,000	Common Stock

To the extent shares or warrants described in Schedule 2(c)(i) hereof are not included on the Initial Registration Statement, such shares and warrants are incorporated herein by reference.

• Including any assignee of such common shareholders rights.

EXHIBIT A

FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

Mellon Investor Services, LLC
85 Challenger Road
Ridgefield, New Jersey 07660

Re: The Allied Defense Group, Inc.

Ladies and Gentlemen:

[We are][I am] counsel to The Allied Defense Group, Inc., a Delaware corporation (the "Company”), and have represented the Company in connection with that certain Securities Purchase Agreement (the “Securities Purchase Agreement”) entered into by and among the Company and the buyers named therein (collectively, the “Holders”) pursuant to which the Company issued to the Holders senior secured convertible notes (the “Notes”) convertible into the Company’s common stock, $0.10 par value per share (the "Common Stock”) and warrants exercisable for shares of Common Stock (the “Warrants”). Pursuant to the Securities Purchase Agreement, the Company also has entered into a Registration Rights Agreement with the Holders (the “Registration Rights Agreement”) pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement), including the shares of Common Stock issuable upon conversion of the Notes, the shares of Common Stock issuable as Interest Shares pursuant to the Notes, the shares of Common Stock issuable upon exercise of the Warrants and the Common Shares, under the Securities Act of 1933, as amended (the “1933 Act”). In connection with the Company’s obligations under the Registration Rights Agreement, on      , 200_, the Company filed a Registration Statement on Form S-3 (File No. 333-     ) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) relating to the Registrable Securities which names each of the Holders as a selling stockholder thereunder.

In connection with the foregoing, [we][I] advise you that a member of the SEC’s staff has advised [us][me] by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no knowledge, after telephonic inquiry of a member of the SEC’s staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement.

This letter shall serve as our standing confirmation to you of the Company’s instruction that the shares of Common Stock are freely transferable by the Holders pursuant to the Registration Statement. You need not require further letters from us to effect any future legend-free issuance or reissuance of shares of Common Stock to the Holders as contemplated by the Company’s Irrevocable Transfer Agent Instructions dated June      , 2007.

CC: [LIST NAMES OF HOLDERS] Very truly yours,
[ISSUER’S COUNSEL]
By:     

EXHIBIT B

SELLING STOCKHOLDERS

The shares of common stock being offered by the selling stockholders are those issuable to the Selling Stockholders upon conversion and/or redemption of the Notes and upon exercise of the Warrants. For additional information regarding the issuance of those Notes and warrants, see “Private Placement of Notes and Warrants” above. We are registering the shares of common stock in order to permit the selling stockholders to offer the shares for resale from time to time. Except for the ownership of the Notes and Warrants issued pursuant to the securities purchase agreement, the selling stockholders have not had any material relationship with us within the past three years.

The table below lists the selling stockholders and other information regarding the beneficial ownership of the shares of common stock by each of the selling stockholders. The second column lists the number of shares of common stock beneficially owned by each selling stockholder, based on its ownership of the Notes and Warrants, as of      , 200_, assuming conversion and/or redemption of all convertible notes and exercise of the warrants held by the selling stockholders on that date, without regard to any limitations on conversions, redemptions or exercise.

The third column lists the shares of common stock being offered by this prospectus by the selling stockholders.

In accordance with the terms of a registration rights agreement among the Company and the selling stockholders, this prospectus generally covers the resale of at least 120% of the sum of (i) the number of shares of common stock issuable upon conversion of the Notes as of the trading day immediately preceding the date the registration statement is initially filed with the SEC, (ii) the maximum number of Interest Shares issuable pursuant to the terms of the Notes as of the trading day immediately preceding the date the registration statement is initially filed with the SEC, (iii) the number of shares of common stock issuable upon exercise of the related Warrants as of the trading day immediately preceding the date the registration statement is initially filed with the SEC and (iv) ) the number of Common Shares issued as of the trading day immediately preceding the date the registration statement is initially filed with the SEC. Because the conversion price of the Notes and the exercise price of the Warrants may be adjusted, the number of shares that will actually be issued may be more or less than the number of shares being offered by this prospectus. The fourth column assumes the sale of all of the shares offered by the selling stockholders pursuant to this prospectus.

Under the terms of the Notes and the Warrants, a selling stockholder may not convert the convertible notes or exercise the warrants to the extent such conversion, redemption or exercise would cause such selling stockholder, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 9.99% of our then outstanding shares of common stock following such conversion, redemption or exercise, excluding for purposes of such determination shares of common stock issuable upon conversion and/or redemption of the Notes which have not been converted or redeemed and upon exercise of the Warrants that have not been exercised. The number of shares in the second column does not reflect this limitation. The selling stockholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.”

		Maximum Number of
	Number of Shares	Shares to be Sold	Number of Shares
	Owned Prior to	Pursuant to this	Owned After
Name of Selling Stockholder	Offering	Prospectus	Offering
Kings Road Investments Ltd. (1) Portside Growth & Opportunity Fund (2) Castlerigg Master Investments Ltd. (3) LB I Group Inc. (4)			0

(1) Kings Road Investments Ltd. (“Kings Road”) is a wholly-owned subsidiary of Polygon Global Opportunities Master Fund (“Master Fund”). Polygon Investment Partners LLP, Polygon Investment Partners LP and Polygon Investment Partners HK Limited (the “Investment Managers”), Polygon Investments Ltd. (the “Manager”), the Master Fund, Alexander Jackson, Reade Griffith and Paddy Dear share voting and dispositive power of the securities held by Kings Road. The Investment Managers, the Manager, Alexander Jackson, Reade Griffith and Paddy Dear disclaim beneficial ownership of the securities held by Kings Road.

(2) Ramius Capital Group, LLC (“Ramius Capital”) is the investment adviser of Portside Growth and Opportunity Fund (“Portside”) and consequently has voting control and investment discretion over securities held by Portside. Ramius Capital disclaims beneficial ownership of the shares held by Portside. Peter A. Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon are the sole managing members of C4S& Co., LLC, the sole managing member of Ramius Capital. As a result, Messrs. Cohen, Stark, Strauss and Solomon may be considered beneficial owners of any shares deemed to be beneficially owned by Ramius Capital. Messrs. Cohen, Stark, Strauss and Solomon disclaim beneficial ownership of these shares.

(3) Sandell Asset Management Corp. is the investment manager of Castlerigg Master Investment Ltd. (“Castlerigg”) and has shared voting and dispositive power over the securities owned by Castlerigg. Sandell Asset Management Corp. and Thomas E. Sandell, its sole shareholder, disclaim beneficial ownership of the securities owned by Castlerigg.

(4) LB I Group Inc. is an affiliate of a broker-dealer and has represented to us that it is not acting as an underwriter in this offering. It purchased the securities in the ordinary course of business, and at the time of the purchase of the securities to be resold, it had no agreements or understandings, directly or indirectly, with any person to distribute the securities.  Lehman Brothers Inc. is the parent company of LB I Group Inc. Lehman Brothers Holdings Inc., a public reporting company, is the parent company of Lehman Brothers Inc. The address for LB I Group Inc. is c/o Lehman Brothers Inc., 399 Park Avenue, New York, New York 10022, Attn: Eric Salzman and Will Yelsits.

PLAN OF DISTRIBUTION

We are registering the Common Shares previously issued and the shares of common stock issuable upon conversion of the Notes, as Interest Shares pursuant to the terms of the Notes and upon exercise of the Warrants to permit the resale of these shares of common stock by the holders of the Notes and Warrants from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling stockholders of the shares of common stock. We will bear all fees and expenses incident to our obligation to register the shares of common stock.

The selling stockholders may sell all or a portion of the shares of common stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions,

• on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;

• in the over-the-counter market;

• in transactions otherwise than on these exchanges or systems or in the over-the-counter market;

• through the writing of options, whether such options are listed on an options exchange or otherwise;

• ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

• block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

• purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

• an exchange distribution in accordance with the rules of the applicable exchange;

• privately negotiated transactions;

• short sales;

• sales pursuant to Rule 144;

• broker-dealers may agree with the selling securityholders to sell a specified number of such shares at a stipulated price per share;

• a combination of any such methods of sale; and

• any other method permitted pursuant to applicable law.

If the selling stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). In connection with sales of the shares of common stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling stockholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

The selling stockholders may pledge or grant a security interest in some or all of the convertible notes, or warrants or shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

The selling stockholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.

Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the shelf registration statement, of which this prospectus forms a part.

The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.

We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement, estimated to be $[     ] in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or “blue sky” laws; provided, however, that a selling stockholder will pay all underwriting discounts and selling commissions, if any. We will indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreements, or the selling stockholders will be entitled to contribution. We may be indemnified by the selling stockholders against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, in accordance with the related registration rights agreement, or we may be entitled to contribution.

Once sold under the shelf registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.

EXHIBIT C

SELLING STOCKHOLDER QUESTIONNAIRE

The undersigned hereby provides the following information to the Company and represents and warrants that such information is accurate:

1. Name.

(a) Full Legal Name of Selling Securityholder

(b) Full Legal Name of Registered Holder (if not the same as (a) above) through which Registrable Securities Listed in Item 3 below are held:

(c) Full Legal Name of Natural Control Person (which means a natural person who directly or indirectly alone or with others has power to vote or dispose of the securities covered by the questionnaire):

2. Address for Notices to Selling Securityholder:

Telephone:

Fax:

Contact Person:

3. Beneficial Ownership of Registrable Securities:

Type and Principal Amount of Registrable Securities beneficially owned:

4. Broker-Dealer Status:

(a) Are you a broker-dealer?

Yes No

(b) Are you an affiliate of a broker-dealer?

Yes No

(c) If you are an affiliate of a broker-dealer, do you certify that you bought the Registrable Securities in the ordinary course of business, and at the time of the purchase of the Registrable Securities to be resold, you had no agreements or understandings, directly or indirectly, with any person to distribute the Registrable Securities?

Yes No

5. Beneficial Ownership of Other Securities of the Company Owned by the Selling Securityholder.

Except as set forth below in this Item 5, the undersigned is not the beneficial or registered owner of any securities of the Company other than the Registrable Securities listed above in Item 3.

Type and Amount of Other Securities beneficially owned by the Selling Securityholder:

6. Relationships with the Company:

Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (owners of 5% of more of the equity securities of the undersigned) has held any position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years.

State any exceptions here:

The undersigned agrees to promptly notify the Company of any material inaccuracies or changes in the information provided herein that may occur subsequent to the date hereof and prior to the Effective Date for the Registration Statement.

By signing below, the undersigned consents to the disclosure of the information contained herein in its answers to Items 1 through 6 and the inclusion of such information in the Registration Statement and the related prospectus. The undersigned understands that such information will be relied upon by the Company in connection with the preparation or amendment of the Registration Statement and the related prospectus.

IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this Questionnaire to be executed and delivered either in person or by its duly authorized agent.

Dated:	Beneficial Owner:
	By:
		Name:
		Title:

PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:

[ ]

The Allied Defense Group, Inc.

FOR IMMEDIATE RELEASE	For More Information, Contact:
June 20, 2007	Crystal B. Leiderman

Director, Investor Relations
800-847-5322

THE ALLIED DEFENSE GROUP ANNOUNCES AGREEMENT TO REFINANCE $30 MILLION CONVERTIBLE NOTES — RESOLVES
CLAIMS WITH NOTEHOLDERS AND RECEIVES UP TO $15 MILLION IN NEW FUNDING

Conference Call Scheduled for 9:00 am EDT, Thursday, June 21, 2007

VIENNA, Virginia, June 20, 2007 – The Allied Defense Group, Inc. (AMEX: ADG) today announced that it has entered into definitive agreements with all investors of the Company’s $30 million convertible notes to recapitalize the Company and resolve all outstanding disputes of default between the Company and its debt holders. Under the terms of the agreement, the convertible note investors have agreed to amend certain terms of the existing notes, provide up to $15 million in new funding, and release the Company of all alleged defaults and penalties under the convertible note agreement.

The transaction is subject to various closing conditions, including approval of the American Stock Exchange, and is expected to close within five business days.

Under the terms of the agreement, the Company will exchange the existing $30.0 million convertible debt issue for new approximately $27.1 million senior secured notes carrying an 8.95% coupon, payable quarterly and convertible into shares of The Allied Defense Group’s common stock at a price of $9.35 per share (equal to the closing bid price of the common stock on the day of signing) and 1.288 million shares of common stock.

The Company will also receive an incremental $15 million cash of new funding, subject to similar interest and conversion provisions as the approximately $27.1 million notes.

Of the $15 million in new funding, $5 million will be made available immediately upon closing. The remaining $10 million will become available once a large anticipated ammunition contract award is received by the Company’s wholly-owned MECAR S.A subsidiary. Allied’s expectations with respect to the order have not changed and the Company is currently working to establish a performance bond guarantee, which is a final requirement before the client can issue the contract award to MECAR.

Major General (Ret) John J. Marcello, President and Chief Executive Officer of The Allied Defense Group said, “I am very pleased to announce that the Company has reached a consensual resolution with its convertible debt holders. This restructuring will recapitalize the Company and eliminate any uncertainties associated with the alleged defaults under the original notes. The management team and Board of Directors believes that this restructuring is in the best interests of all shareholders and one of several steps needed to refocus the Company on a path of maximizing shareholder value. The Company continues to work closely with its advisors to improve operational performance and evaluate all strategic options in an effort to maximize shareholder value.”

The Company will be hosting a conference call on Thursday, June 21, 2007 at 9:00 a.m. EDT. To access the call, please dial (888) 459-5609 within the United States and (973) 321-1024 outside the United States.

A replay of the call will be available from Thursday, June 21, 2007 at 12:00 p.m., EDT, through Thursday, June 28, 2007. To access the replay, please call (877) 519-4471 in the United States or (973) 341-3080 outside the United States. To access the replay, users will need to enter the following code: 8937352.

The announcement of this refinancing of convertible senior subordinated notes as detailed in this press release shall not constitute an offer to sell or a solicitation of an offer to buy the notes or the shares of common stock issuable upon conversion of the notes.

About The Allied Defense Group, Inc.
The Allied Defense Group, Inc. is a diversified international defense and security firm which: develops and produces conventional ammunition marketed to defense departments worldwide; designs, produces and markets sophisticated electronic and microwave security systems principally for European and North American markets; manufactures battlefield effects simulators and other training devices for the military; and designs and produces state-of-the-art weather and navigation software, data, and systems for commercial and military customers.

For more Information, please visit the Company web site: www.allieddefensegroup.com

Certain statements contained herein are “forward looking” statements as such term is defined in the Private Securities Litigation Reform Act of 1995. Because statements include risks and uncertainties, actual results may differ materially from those expressed or implied and include, but are not limited to, those discussed in filings by the Company with the Securities and Exchange Commission.