SECURITIES PURCHASE AGREEMENT
 
This Securities Purchase Agreement (this “Agreement”) is dated as of July __,
2007, between Zagg Incorporated, a Nevada corporation (the “Company”), and each
purchaser identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and collectively the “Purchasers”).
 
WHEREAS, subject to the terms and conditions set forth in this Agreement and
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”), and Rule 506 promulgated thereunder, the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not jointly,
desires to purchase from the Company, securities of the Company as more fully
described in this Agreement.
 
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agree
as follows:
 
ARTICLE I.
DEFINITIONS
 
1.1 Definitions
 
. In addition to the terms defined elsewhere in this Agreement, for all purposes
of this Agreement, the following terms have the meanings set forth in this
Section 1.1:
 
“Action” shall have the meaning ascribed to such term in Section 3.1(j).
 
“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person as such terms are used in and construed under Rule 405 under the
Securities Act. With respect to a Purchaser, any investment fund or managed
account that is managed on a discretionary basis by the same investment manager
as such Purchaser will be deemed to be an Affiliate of such Purchaser.
 
“Board of Directors” means the board of directors of the Company.
 
“Business Day” means any day except any Saturday, any Sunday, any day which is a
federal legal holiday in the United States or any day on which banking
institutions in the State of New York are authorized or required by law or other
governmental action to close.
 
“Closing” means the closing of the purchase and sale of the Securities pursuant
to Section 2.1.
 
“Closing Date” means the Trading Day when all of the Transaction Documents have
been executed and delivered by the applicable parties thereto, and all
conditions precedent to (i) the Purchasers’ obligations to pay the Subscription
Amount and (ii) the Company’s obligations to deliver the Securities have been
satisfied or waived.
 
“Commission” means the Securities and Exchange Commission.
 
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“Common Stock” means the common stock of the Company, par value $0.001 per
share, and any other class of securities into which such securities may
hereafter be reclassified or changed into.
 
“Common Stock Equivalents” means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including, without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.
 
“Company Counsel” means ____________, with offices located at _____________.
 
“Disclosure Schedules” means the Disclosure Schedules of the Company delivered
concurrently herewith.
 
“Effective Date” means the date that the initial Registration Statement filed by
the Company pursuant to the Registration Rights Agreement is first declared
effective by the Commission.
 
“Escrow Agent” shall mean Signature Bank, a New York State chartered bank and
having an office at 261 Madison Avenue, New York, New York 10016.
 
“Escrow Agreement” shall mean the escrow agreement entered into prior to the
date hereof, by and among the Company, Empire Financial Group and the Escrow
Agent pursuant to which the Purchasers shall deposit Subscription Amounts with
the Escrow Agent to be applied to the transactions contemplated hereunder.
 
“Evaluation Date” shall have the meaning ascribed to such term in Section
3.1(r).
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to
employees, officers or directors of the Company pursuant to any stock or option
plan duly adopted for such purpose, by a majority of the non-employee members of
the Board of Directors or a majority of the members of a committee of
non-employee directors established for such purpose, (b) securities upon the
exercise or exchange of or conversion of any Securities issued hereunder and/or
other securities exercisable or exchangeable for or convertible into shares of
Common Stock issued and outstanding on the date of this Agreement, provided that
such securities have not been amended since the date of this Agreement to
increase the number of such securities or to decrease the exercise, exchange or
conversion price of such securities, and (c) securities issued pursuant to
acquisitions or strategic transactions approved by a majority of the
disinterested directors of the Company, provided that any such issuance shall
only be to a Person which is, itself or through its subsidiaries, an operating
company in a business synergistic with the business of the Company and in which
the Company receives benefits in addition to the investment of funds, but shall
not include a transaction in which the Company is issuing securities primarily
for the purpose of raising capital or to an entity whose primary business is
investing in securities and (d) with the prior written consent of Empire
Financial Group, up to an amount of Common Stock and warrants equal to $2
million in the aggregate, on substantially the same or more favorable terms and
conditions and prices to the Company as hereunder, with investors executing
definitive agreements for the purchase of such securities and such transactions
having closed on or before the earlier of (i) the Filing Date (as defined in the
Registration Rights Agreement) or (ii) the date that the Initial Registration
Statement (as defined in the Registration Rights Agreement) is actually filed
with the Commission.
 
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“FWS” means Feldman Weinstein & Smith LLP with offices located at 420 Lexington
Avenue, Suite 2620, New York, New York 10170-0002.
 
“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).
 
“Indebtedness” shall have the meaning ascribed to such term in Section 3.1(aa).
 
“Intellectual Property Rights” shall have the meaning ascribed to such term in
Section 3.1(o).
 
“Legend Removal Date” shall have the meaning ascribed to such term in Section
4.1(c).
 
“Liens” means a lien, charge, security interest, encumbrance, right of first
refusal, preemptive right or other restriction.
 
“Material Adverse Effect” shall have the meaning assigned to such term in
Section 3.1(b).
 
“Material Permits” shall have the meaning ascribed to such term in Section
3.1(m).
 
“Participation Maximum” shall have the meaning ascribed to such term in Section
4.12.
 
“Per Share Purchase Price” equals $1.00, subject to adjustment for reverse and
forward stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the date of this Agreement.
 
“Person” means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.
 
“Pre-Notice” shall have the meaning ascribed to such term in Section 4.12.
 
“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an informal investigation or partial proceeding,
such as a deposition), whether commenced or threatened.
 
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“Purchaser Party” shall have the meaning ascribed to such term in Section 4.8.
 
“Registration Rights Agreement” means the Registration Rights Agreement, dated
the date hereof, among the Company and the Purchasers, in the form of Exhibit A
attached hereto.
 
“Registration Statement” means a registration statement meeting the requirements
set forth in the Registration Rights Agreement and covering the resale by the
Purchasers of the Shares and the Warrant Shares.
 
“Required Approvals” shall have the meaning ascribed to such term in Section
3.1(e).
 
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
 
“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).
 
“Securities” means the Shares, the Warrants and the Warrant Shares.
 
“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
 
“Shares” means the shares of Common Stock issued or issuable to each Purchaser
pursuant to this Agreement.
 
“Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO
under the Exchange Act (but shall not be deemed to include the location and/or
reservation of borrowable shares of Common Stock). 
 
“Subscription Amount” means, as to each Purchaser, the aggregate amount to be
paid for Shares and Warrants purchased hereunder as specified below such
Purchaser’s name on the signature page of this Agreement and next to the heading
“Subscription Amount,” in United States dollars and in immediately available
funds.
 
“Subsequent Financing” shall have the meaning ascribed to such term in Section
4.12.
 
“Subsequent Financing Notice” shall have the meaning ascribed to such term in
Section 4.12.
 
“Subsidiary” means any subsidiary of the Company as set forth on Schedule
3.1(a), and shall, where applicable, include any subsidiary of the Company
formed or acquired after the date hereof.
 
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“Trading Day” means a day on which the New York Stock Exchange is open for
trading.
 
“Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the American
Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq
Global Select Market, the New York Stock Exchange, the OTC Bulletin Board or the
Pink Sheets, LLC.
 
“Transaction Documents” means this Agreement, the Warrants, the Registration
Rights Agreement, the Escrow Agreement and any other documents or agreements
executed in connection with the transactions contemplated hereunder.
 
“Transfer Agent” means Empire Stock Transfer, Inc., the current transfer agent
of the Company, with a mailing address of 2470 St. Rose Pkwy., Suite 304,
Henderson, NV 89074 and a facsimile number of (702) 974-1444, and any successor
transfer agent of the Company.
 
“VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market other than the Pink Sheets, LLC, the daily volume weighted
average price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or quoted for
trading as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m.
(New York City time) to 4:02 p.m. (New York City time); (b)  if prices for the
Common Stock are then reported in the “Pink Sheets” published by Pink Sheets,
LLC (or a similar organization or agency succeeding to its functions of
reporting prices), the most recent bid price per share of the Common Stock so
reported; or (c) in all other cases, the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Purchasers of a majority in interest of the Shares then outstanding and
reasonably acceptable to the Company, the fees and expenses of which shall be
paid by the Company.
 
“Warrants” means, collectively, the Common Stock purchase warrants delivered to
the Purchasers at the Closing in accordance with Section 2.2(a) hereof, which
Warrants shall be exercisable immediately and have a term of exercise equal to 5
years, in the form of Exhibit C attached hereto.
 
“Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants.
 
ARTICLE II.
PURCHASE AND SALE
 
2.1 Closing. On the Closing Date, upon the terms and subject to the conditions
set forth herein, substantially concurrent with the execution and delivery of
this Agreement by the parties hereto, the Company agrees to sell, and the
Purchasers, severally and not jointly, agree to purchase, up to an aggregate of
$3,000,000 of Shares and Warrants. Each Purchaser shall deliver to the Escrow
Agent, via wire transfer or a certified check, immediately available funds equal
to its Subscription Amount and the Company shall deliver to each Purchaser its
respective Shares and a Warrant as determined pursuant to Section 2.2(a), and
the Company and each Purchaser shall deliver the other items set forth in
Section 2.2 deliverable at the Closing. Upon satisfaction of the covenants and
conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the
offices of FWS or such other location as the parties shall mutually agree.
 
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2.2 Deliveries.
 
(a) On or prior to the Closing Date, the Company shall deliver or cause to be
delivered to each Purchaser the following:
 
(i) this Agreement duly executed by the Company;
 
(ii) a legal opinion of Company Counsel, substantially in the form of Exhibit B
attached hereto;
 
(iii) a certificate evidencing a number of Shares equal to such Purchaser’s
Subscription Amount divided by the Per Share Purchase Price, registered in the
name of such Purchaser;
 
(iv) a Warrant registered in the name of such Purchaser to purchase up to a
number of shares of Common Stock equal to 50% of such Purchaser’s Shares with an
exercise price equal to $1.30, subject to adjustment therein; and
 
(v) the Registration Rights Agreement duly executed by the Company.
 
(b) On or prior to the Closing Date, each Purchaser shall deliver or cause to be
delivered to the Company the following:
 
(i) this Agreement duly executed by such Purchaser;
 
(ii) such Purchaser’s Subscription Amount by wire transfer to the Escrow
Account; and
 
(iii) the Registration Rights Agreement duly executed by such Purchaser.
 
2.3 Closing Conditions. 
 
(a) The obligations of the Company hereunder in connection with the Closing are
subject to the following conditions being met:
 
(i) the accuracy in all material respects on the Closing Date of the
representations and warranties of the Purchasers contained herein;
 
(ii) all obligations, covenants and agreements of each Purchaser required to be
performed at or prior to the Closing Date shall have been performed; and
 
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(iii) the delivery by each Purchaser of the items set forth in Section 2.2(b) of
this Agreement.
 
(b) The respective obligations of the Purchasers hereunder in connection with
the Closing are subject to the following conditions being met:
 
(i) the accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained herein;
 
(ii) all obligations, covenants and agreements of the Company required to be
performed at or prior to the Closing Date shall have been performed;
 
(iii) the delivery by the Company of the items set forth in Section 2.2(a) of
this Agreement;
 
(iv) there shall have been no Material Adverse Effect with respect to the
Company since the date hereof; and
 
(v) from the date hereof to the Closing Date, trading in the Common Stock shall
not have been suspended by the Commission or the Company’s principal Trading
Market (except for any suspension of trading of limited duration agreed to by
the Company, which suspension shall be terminated prior to the Closing), and, at
any time prior to the Closing Date, trading in securities generally as reported
by Bloomberg L.P. shall not have been suspended or limited, or minimum prices
shall not have been established on securities whose trades are reported by such
service, or on any Trading Market, nor shall a banking moratorium have been
declared either by the United States or New York State authorities nor shall
there have occurred any material outbreak or escalation of hostilities or other
national or international calamity of such magnitude in its effect on, or any
material adverse change in, any financial market which, in each case, in the
reasonable judgment of each Purchaser, makes it impracticable or inadvisable to
purchase the Securities at the Closing.
 
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
 
3.1 Representations and Warranties of the Company. Except as set forth in the
Disclosure Schedules, which Disclosure Schedules shall be deemed a part hereof
and shall qualify any representation or otherwise made herein to the extent of
the disclosure contained in the corresponding section of the Disclosure
Schedules, the Company hereby makes the following representations and warranties
to each Purchaser:
 
(a) Subsidiaries. All of the direct and indirect subsidiaries of the Company are
set forth on Schedule 3.1(a). The Company owns, directly or indirectly, all of
the capital stock or other equity interests of each Subsidiary free and clear of
any Liens, and all of the issued and outstanding shares of capital stock of each
Subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights to subscribe for or purchase securities. If the
Company has no subsidiaries, then all other references to the Subsidiaries or
any of them in the Transaction Documents shall be disregarded.
 
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(b) Organization and Qualification. The Company and each of the Subsidiaries is
an entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently conducted.
Neither the Company nor any Subsidiary is in violation or default of any of the
provisions of its respective certificate or articles of incorporation, bylaws or
other organizational or charter documents. Each of the Company and the
Subsidiaries is duly qualified to conduct business and is in good standing as a
foreign corporation or other entity in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, except where the failure to be so qualified or in good standing, as
the case may be, could not have or reasonably be expected to result in (i) a
material adverse effect on the legality, validity or enforceability of any
Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business, prospects or condition (financial or otherwise) of
the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse
effect on the Company’s ability to perform in any material respect on a timely
basis its obligations under any Transaction Document (any of (i), (ii) or (iii),
a “Material Adverse Effect”) and no Proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or
curtail such power and authority or qualification.
 
(c) Authorization; Enforcement. The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by
each of the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company, the Board of Directors or the Company’s stockholders in connection
therewith other than in connection with the Required Approvals. Each Transaction
Document has been (or upon delivery will have been) duly executed by the Company
and, when delivered in accordance with the terms hereof and thereof, will
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except (i) as limited by general
equitable principles and applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors’ rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may be
limited by applicable law.
 
(d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company, the issuance and sale of the Securities and the
consummation by the Company of the other transactions contemplated hereby and
thereby do not and will not (i) conflict with or violate any provision of the
Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws
or other organizational or charter documents, or (ii) conflict with, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, result in the creation of any Lien upon any of
the properties or assets of the Company or any Subsidiary, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by which any
property or asset of the Company or any Subsidiary is bound or affected, or
(iii) subject to the Required Approvals, conflict with or result in a violation
of any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a Subsidiary
is bound or affected; except in the case of each of clauses (ii) and (iii), such
as could not have or reasonably be expected to result in a Material Adverse
Effect.
 
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(e) Filings, Consents and Approvals. The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) filings required pursuant to Section 4.4 of this Agreement, (ii) the filing
with the Commission of the Registration Statement, (iii) application(s) to each
applicable Trading Market for the listing of the Securities for trading thereon
in the time and manner required thereby and (iv) the filing of Form D with the
Commission and such filings as are required to be made under applicable state
securities laws (collectively, the “Required Approvals”).
 
(f) Issuance of the Securities. The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear of
all Liens imposed by the Company other than restrictions on transfer provided
for in the Transaction Documents. The Warrant Shares, when issued in accordance
with the terms of the Transaction Documents, will be validly issued, fully paid
and nonassessable, free and clear of all Liens imposed by the Company other than
restrictions on transfer provided for in the Transaction Documents. The Company
has reserved from its duly authorized capital stock the maximum number of shares
of Common Stock issuable pursuant to this Agreement and the Warrants.
 
(g) Capitalization. The capitalization of the Company is as set forth on
Schedule 3.1(g), which Schedule 3.1(g) shall also include the number of shares
of Common Stock owned beneficially, and of record, by Affiliates of the Company
as of the date hereof. The Company has not issued any capital stock since its
most recently filed periodic report under the Exchange Act, other than pursuant
to the exercise of employee stock options under the Company’s stock option
plans, the issuance of shares of Common Stock to employees pursuant to the
Company’s employee stock purchase plans and pursuant to the conversion or
exercise of Common Stock Equivalents outstanding as of the date of the most
recently filed periodic report under the Exchange Act. Except as set forth in
Schedule 3.1(g) attached hereto, no Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the transactions contemplated by the Transaction Documents. Except as a result
of the purchase and sale of the Securities and except as set forth in Schedule
3.1(g) attached hereto, there are no outstanding options, warrants, scrip rights
to subscribe to, calls or commitments of any character whatsoever relating to,
or securities, rights or obligations convertible into or exercisable or
exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock or Common Stock Equivalents. The
issuance and sale of the Securities will not obligate the Company to issue
shares of Common Stock or other securities to any Person (other than the
Purchasers) and will not result in a right of any holder of Company securities
to adjust the exercise, conversion, exchange or reset price under any of such
securities. All of the outstanding shares of capital stock of the Company are
validly issued, fully paid and nonassessable, have been issued in compliance
with all federal and state securities laws, and none of such outstanding shares
was issued in violation of any preemptive rights or similar rights to subscribe
for or purchase securities. No further approval or authorization of any
stockholder, the Board of Directors or others is required for the issuance and
sale of the Securities. There are no stockholders agreements, voting agreements
or other similar agreements with respect to the Company’s capital stock to which
the Company is a party or, to the knowledge of the Company, between or among any
of the Company’s stockholders.
 
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(h) SEC Reports; Financial Statements. The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by the
Company under the Securities Act and the Exchange Act, including pursuant to
Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or
such shorter period as the Company was required by law or regulation to file
such material) (the foregoing materials, including the exhibits thereto and
documents incorporated by reference therein, being collectively referred to
herein as the “SEC Reports”) on a timely basis or has received a valid extension
of such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act, as applicable, and none of the SEC Reports, when filed,
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. The financial statements of the Company included in the SEC Reports
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing. Such financial statements have been prepared in accordance with
United States generally accepted accounting principles applied on a consistent
basis during the periods involved (“GAAP”), except as may be otherwise specified
in such financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by GAAP, and fairly
present in all material respects the financial position of the Company and its
consolidated subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial, year-end audit adjustments.
 
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(i) Material Changes; Undisclosed Events, Liabilities or Developments. Since the
date of the latest audited financial statements included within the SEC Reports,
except as specifically disclosed in a subsequent SEC Report filed prior to the
date hereof, (i) there has been no event, occurrence or development that has had
or that could reasonably be expected to result in a Material Adverse Effect,
(ii) the Company has not incurred any liabilities (contingent or otherwise)
other than (A) trade payables and accrued expenses incurred in the ordinary
course of business consistent with past practice and (B) liabilities not
required to be reflected in the Company’s financial statements pursuant to GAAP
or disclosed in filings made with the Commission, (iii) the Company has not
altered its method of accounting, (iv) the Company has not declared or made any
dividend or distribution of cash or other property to its stockholders or
purchased, redeemed or made any agreements to purchase or redeem any shares of
its capital stock and (v) the Company has not issued any equity securities to
any officer, director or Affiliate, except pursuant to existing Company stock
option plans. The Company does not have pending before the Commission any
request for confidential treatment of information. Except for the issuance of
the Securities contemplated by this Agreement or as set forth on Schedule
3.1(i), no event, liability or development 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 at the time this representation is made
or deemed made that has not been publicly disclosed at least 1 Trading Day prior
to the date that this representation is made.
 
(j) Litigation. There is no action, suit, inquiry, notice of violation,
proceeding or investigation pending or, to the knowledge of the Company,
threatened against or affecting the Company, any Subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) could, if there were an unfavorable decision, have or
reasonably be expected to result in a Material Adverse Effect. Neither the
Company nor any Subsidiary, nor any director or officer thereof, is or has been
the subject of any Action involving a claim of violation of or liability under
federal or state securities laws or a claim of breach of fiduciary duty. There
has not been, and to the knowledge of the Company, there is not pending or
contemplated, any investigation by the Commission involving the Company or any
current or former director or officer of the Company. The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the Exchange
Act or the Securities Act.
 
(k) Labor Relations. No material labor dispute exists or, to the knowledge of
the Company, is imminent with respect to any of the employees of the Company
which could reasonably be expected to result in a Material Adverse Effect. None
of the Company’s or its Subsidiaries’ employees is a member of a union that
relates to such employee’s relationship with the Company or such Subsidiary, and
neither the Company nor any of its Subsidiaries is a party to a collective
bargaining agreement, and the Company and its Subsidiaries believe that their
relationships with their employees are good. No executive officer, to the
knowledge of the Company, is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant in favor of any third party,
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. The Company and its Subsidiaries are in compliance with all
U.S. federal, state, local and foreign laws and regulations relating to
employment and employment practices, terms and conditions of employment and
wages and hours, except where the failure to be in compliance could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
 
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(l) Compliance. Neither the Company nor any Subsidiary (i) is in default under
or in violation of (and no event has occurred that has not been waived that,
with notice or lapse of time or both, would result in a default by the Company
or any Subsidiary under), nor has the Company or any Subsidiary received notice
of a claim that it is in default under or that it is in violation of, any
indenture, loan or credit agreement or any other agreement or instrument to
which it is a party or by which it or any of its properties is bound (whether or
not such default or violation has been waived), (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is or has been in
violation of any statute, rule or regulation of any governmental authority,
including without limitation all foreign, federal, state and local laws
applicable to its business and all such laws that affect the environment, except
in each case as could not have or reasonably be expected to result in a Material
Adverse Effect.
 
(m) Regulatory Permits. The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not reasonably be expected to result in a Material
Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary
has received any notice of proceedings relating to the revocation or
modification of any Material Permit.
 
(n) Title to Assets. The Company and the Subsidiaries have good and marketable
title in fee simple to all real property owned by them and good and marketable
title in all personal property owned by them that is material to the business of
the Company and the Subsidiaries, in each case free and clear of all Liens,
except for Liens as do not materially affect the value of such property and do
not materially interfere with the use made and proposed to be made of such
property by the Company and the Subsidiaries and Liens for the payment of
federal, state or other taxes, the payment of which is neither delinquent nor
subject to penalties. Any real property and facilities held under lease by the
Company and the Subsidiaries are held by them under valid, subsisting and
enforceable leases with which the Company and the Subsidiaries are in
compliance.
 
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(o) Patents and Trademarks. The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions, copyrights,
licenses and other intellectual property rights and similar rights necessary or
material for use in connection with their respective businesses as described in
the SEC Reports and which the failure to so have could have a Material Adverse
Effect (collectively, the “Intellectual Property Rights”). Neither the Company
nor any Subsidiary has received a notice (written or otherwise) that any of the
Intellectual Property Rights used by the Company or any Subsidiary violates or
infringes upon the rights of any Person. To the knowledge of the Company, all
such Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights. The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their intellectual properties,
except where failure to do so could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
 
(p) Insurance. The Company and the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the Company and
the Subsidiaries are engaged. Neither the Company nor any 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 without a
significant increase in cost.
 
(q) Transactions With Affiliates and Employees. Except as set forth in the SEC
Reports, none of the officers or directors of the Company and, to the knowledge
of the Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as
employees, officers and 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 officer, director or such employee or, to the knowledge of the
Company, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner, in each
case in excess of $60,000 other than for (i) payment of salary or consulting
fees for services rendered, (ii) reimbursement for expenses incurred on behalf
of the Company and (iii) other employee benefits, including stock option
agreements under any stock option plan of the Company.
 
(r) Sarbanes-Oxley; Internal Accounting Controls. The Company is in material
compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are
applicable to it as of the Closing Date. The Company and the 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
GAAP and to maintain asset accountability, (iii) access to assets is permitted
only in accordance with management’s general or specific authorization, and (iv)
the recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commission’s rules and forms. The Company’s
certifying officers have evaluated the effectiveness of the Company’s disclosure
controls and procedures as of the end of the period covered by the Company’s
most recently filed periodic report under the Exchange Act (such date, the
“Evaluation Date”). The Company presented in its most recently filed periodic
report under the Exchange Act the conclusions of the certifying officers about
the effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date. Since the Evaluation Date, there have
been no changes in the Company’s internal control over financial reporting (as
such term is defined in the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
 
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(s) Certain Fees. Except for the fees paid to Empire Financial Group, Inc., no
brokerage or finder’s fees or commissions are or will be payable by the Company
to any broker, financial advisor or consultant, finder, placement agent,
investment banker, bank or other Person with respect to the transactions
contemplated by the Transaction Documents. The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section that may
be due in connection with the transactions contemplated by the Transaction
Documents.
 
(t) Private Placement. Assuming the accuracy of the Purchasers representations
and warranties set forth in Section 3.2, no registration under the Securities
Act is required for the offer and sale of the Securities by the Company to the
Purchasers as contemplated hereby. The issuance and sale of the Securities
hereunder does not contravene the rules and regulations of the Trading Market.
 
(u) Investment Company. The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, will not be or be an
Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended. The Company shall conduct its business in a
manner so that it will not become subject to the Investment Company Act of 1940,
as amended.
 
(v) Registration Rights. Except as set forth in Schedule 3.1(v) attached hereto,
other than each of the Purchasers, no Person has any right to cause the Company
to effect the registration under the Securities Act of any securities of the
Company.
 
(w) Listing and Maintenance Requirements. The Company’s Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the
Company has taken no action designed to, or which to its knowledge is likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act nor has the Company received any notification that the Commission
is contemplating terminating such registration. The Company has not, in the 12
months preceding the date hereof, received notice from any Trading Market on
which the Common Stock is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such Trading Market. The Company is, and has no reason to believe that it will
not in the foreseeable future continue to be, in compliance with all such
listing and maintenance requirements.
 
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(x) Application of Takeover Protections. The Company and the 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 Company’s certificate of incorporation (or similar charter documents)
or the laws of its state of incorporation that is or could become applicable to
the Purchasers as a result of the Purchasers and the Company fulfilling their
obligations or exercising their rights under the Transaction Documents,
including without limitation as a result of the Company’s issuance of the
Securities and the Purchasers’ ownership of the Securities.
 
(y) Disclosure. Except with respect to the material terms and conditions of the
transactions contemplated by the Transaction Documents, the Company confirms
that neither it nor any other Person acting on its behalf has provided any of
the Purchasers or their agents or counsel with any information that it believes
constitutes or might constitute material, non-public information. The Company
understands and confirms that the Purchasers will rely on the foregoing
representation in effecting transactions in securities of the Company. All
disclosure furnished by or on behalf of the Company to the Purchasers regarding
the Company, its business and the transactions contemplated hereby, including
the Disclosure Schedules to this Agreement, is true and correct and does 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 light of the
circumstances under which they were made, not misleading. The press releases
disseminated by the Company during the twelve months preceding the date of this
Agreement taken as a whole do not 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 light of the circumstances under
which they were made and when made, not misleading. The Company acknowledges and
agrees that no Purchaser makes or has made any representations or warranties
with respect to the transactions contemplated hereby other than those
specifically set forth in Section 3.2 hereof.
 
(z) No Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its Affiliates, nor any Person acting on its or 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 cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of (i) the Securities Act which would require the registration of
any such securities under the Securities Act, or (ii) any applicable shareholder
approval provisions of any Trading Market on which any of the securities of the
Company are listed or designated.
 
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(aa) Solvency. Based on the consolidated financial condition of the Company as
of the Closing Date, after giving effect to the receipt by the Company of the
proceeds from the sale of the Securities hereunder, (i) the fair saleable value
of the Company’s assets exceeds the amount that will be required to be paid on
or in respect of the Company’s existing debts and other liabilities (including
known contingent liabilities) as they mature, (ii) the Company’s assets do not
constitute unreasonably small capital to carry on its business as now conducted
and as proposed to be conducted including its capital needs taking into account
the particular capital requirements of the business conducted by the Company,
and projected capital requirements and capital availability thereof, and (iii)
the current cash flow of the Company, together with the proceeds the Company
would receive, were it to liquidate all of its assets, after taking into account
all anticipated uses of the cash, would be sufficient to pay all amounts on or
in respect of its liabilities when such amounts are required to be paid. The
Company does not intend to incur debts beyond its ability to pay such debts as
they mature (taking into account the timing and amounts of cash to be payable on
or in respect of its debt). The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or
liquidation under the bankruptcy or reorganization laws of any jurisdiction
within one year from the Closing Date. Schedule 3.1(aa) sets forth as of the
date thereof all outstanding secured and unsecured Indebtedness of the Company
or any Subsidiary, or for which the Company or any Subsidiary has commitments.
For the purposes of this Agreement, “Indebtedness” means (a) any liabilities for
borrowed money or amounts owed in excess of $50,000 (other than trade accounts
payable incurred in the ordinary course of business), (b) all guaranties,
endorsements and other contingent obligations in respect of indebtedness of
others, whether or not the same are or should be reflected in the Company’s
balance sheet (or the notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business; and (c) the present value of any lease payments in
excess of $50,000 due under leases required to be capitalized in accordance with
GAAP. Neither the Company nor any Subsidiary is in default with respect to any
Indebtedness.
 
(bb) Tax Status. Except for matters that would not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns and has paid or accrued all taxes
shown as due thereon, and the Company has no knowledge of a tax deficiency which
has been asserted or threatened against the Company or any Subsidiary.
 
(cc) No General Solicitation. Neither the Company nor any person acting on
behalf of the Company has offered or sold any of the Securities by any form of
general solicitation or general advertising. The Company has offered the
Securities for sale only to the Purchasers and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.
 
(dd) Foreign Corrupt Practices. Neither the Company, nor to the knowledge of the
Company, any agent or other person acting on behalf of the Company, has (i)
directly or indirectly, used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is in violation of law, or (iv) violated in
any material respect any provision of the Foreign Corrupt Practices Act of 1977,
as amended.
 
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(ee)  Accountants. The Company’s accounting firm is set forth on Schedule
3.1(ee) of the Disclosure Schedule. To the knowledge and belief of the Company,
such accounting firm (i) is a registered public accounting firm as required by
the Exchange Act and (ii) shall express its opinion with respect to the
financial statements to be included in the Company’s Annual Report on Form
10-KSB for the year ending December 31, 2007.
 
(ee) No Disagreements with Accountants and Lawyers. There are no disagreements
of any kind presently existing, or reasonably anticipated by the Company to
arise, between the Company and the accountants and lawyers formerly or presently
employed by the Company which could affect the Company’s ability to perform any
of its obligations under any of the Transaction Documents, and the Company is
current with respect to any fees owed to its accountants and lawyers.  
 
(ff)  Acknowledgment Regarding Purchasers’ Purchase of Securities. The Company
acknowledges and agrees that each of the Purchasers is acting solely in the
capacity of an arm’s length purchaser with respect to the Transaction Documents
and the transactions contemplated thereby. The Company further acknowledges that
no Purchaser is acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by any Purchaser or any
of their respective representatives or agents in connection with the Transaction
Documents and the transactions contemplated thereby is merely incidental to the
Purchasers’ purchase of the Securities. The Company further represents to each
Purchaser that the Company’s decision to enter into this Agreement and the other
Transaction Documents has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its representatives.
 
(gg) Acknowledgement Regarding Purchaser’s Trading Activity. Anything in this
Agreement or elsewhere herein to the contrary notwithstanding (except for
Sections 3.2(f) and 4.14 hereof), it is understood and acknowledged by the
Company (i) that none of the Purchasers have been asked by the Company to agree,
nor has any Purchaser 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 past or future open market or other transactions by any Purchaser,
specifically including, without limitation, Short Sales or “derivative”
transactions, before or after the closing of this or future private placement
transactions, may negatively impact the market price of the Company’s
publicly-traded securities; (iii) that any Purchaser, and counter-parties in
“derivative” transactions to which any such Purchaser is a party, directly or
indirectly, presently may have a “short” position in the Common Stock, and (iv)
that each Purchaser 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 (a) one or more Purchasers may engage
in hedging activities at various times during the period that the Securities are
outstanding, including, without limitation, during the periods that the value of
the Warrant Shares deliverable with respect to Securities are being determined
and (b) such hedging activities (if any) could reduce the value of the existing
stockholders' equity interests in the Company at and after the time that the
hedging activities are being conducted.  The Company acknowledges that such
aforementioned hedging activities do not constitute a breach of any of the
Transaction Documents.
 
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(hh) Regulation M Compliance.  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, other than, in the case of clauses (ii) and (iii),
compensation paid to the Company’s placement agent in connection with the
placement of the Securities.

3.2 Representations and Warranties of the Purchasers. Each Purchaser, for itself
and for no other Purchaser, hereby represents and warrants as of the date hereof
and as of the Closing Date to the Company as follows:
 
(a) Organization; Authority. Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with full right, corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations hereunder and thereunder.
The execution and delivery of the Transaction Documents and performance by such
Purchaser of the transactions contemplated by the Transaction Documents have
been duly authorized by all necessary corporate or similar action on the part of
such Purchaser. Each Transaction Document to which it is a party has been duly
executed by such Purchaser, and when delivered by such Purchaser in accordance
with the terms hereof, will constitute the valid and legally binding obligation
of such Purchaser, enforceable against it in accordance with its terms, except
(i) as limited by general equitable principles and applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors’ rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies and (iii) insofar as indemnification and contribution
provisions may be limited by applicable law.
 
(b) Own Account. Such Purchaser understands that the Securities are “restricted
securities” and have not been registered under the Securities Act or any
applicable state securities law and is acquiring the Securities as principal for
its own account and not with a view to or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of
such Securities in violation of the Securities Act or any applicable state
securities law and has no direct or indirect arrangement or understandings with
any other persons to distribute or regarding the distribution of such Securities
(this representation and warranty not limiting such Purchaser’s right to sell
the Securities pursuant to the Registration Statement or otherwise in compliance
with applicable federal and state securities laws) in violation of the
Securities Act or any applicable state securities law. Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its business.
 
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(c) Purchaser Status. At the time such Purchaser was offered the Securities, it
was, and at the date hereof it is, and on each date on which it exercises any
Warrants, it will be either: (i) an “accredited investor” as defined in Rule
501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a
“qualified institutional buyer” as defined in Rule 144A(a) under the Securities
Act. Such Purchaser is not required to be registered as a broker-dealer under
Section 15 of the Exchange Act.
 
(d) Experience of Such Purchaser. Such Purchaser, either alone or together with
its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment. Such Purchaser is able to bear the economic
risk of an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.
 
(e) General Solicitation. Such Purchaser 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 or any other
general solicitation or general advertisement.
 
(f) Short Sales and Confidentiality Prior To The Date Hereof. Other than
consummating the transactions contemplated hereunder, such Purchaser has not,
nor has any Person acting on behalf of or pursuant to any understanding with
such Purchaser, directly or indirectly executed any purchases or sales,
including Short Sales, of the securities of the Company during the period
commencing from the time that such Purchaser first received a term sheet
(written or oral) from the Company or any other Person representing the Company
setting forth the material terms of the transactions contemplated hereunder
until the date hereof (“Discussion Time”). Notwithstanding the foregoing, in the
case of a Purchaser that is a multi-managed investment vehicle whereby separate
portfolio managers manage separate portions of such Purchaser's assets and the
portfolio managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Purchaser's assets, the
representation set forth above shall only apply with respect to the portion of
assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement. Other than to other Persons
party to this Agreement, such Purchaser has maintained the confidentiality of
all disclosures made to it in connection with this transaction (including the
existence and terms of this transaction).
 
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ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
 
4.1 Transfer Restrictions.
 
(a) The Securities may only be disposed of in compliance with state and federal
securities laws. In connection with any transfer of Securities other than
pursuant to an effective registration statement or Rule 144, to the Company or
to an Affiliate of a Purchaser or in connection with a pledge as contemplated in
Section 4.1(b), the Company may require the transferor thereof to provide to the
Company an opinion of counsel selected by the transferor and reasonably
acceptable to the Company, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer does
not require registration of such transferred Securities under the Securities
Act. As a condition of transfer, any such transferee shall agree in writing to
be bound by the terms of this Agreement and shall have the rights of a Purchaser
under this Agreement and the Registration Rights Agreement.
 
(b) The Purchasers agree to the imprinting, so long as is required by this
Section 4.1, of a legend on any of the Securities in the following form:
 
THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES 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. THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A
FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a)
UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.
 
The Company acknowledges and agrees that a Purchaser may from time to time
pledge pursuant to a bona fide margin agreement with a registered broker-dealer
or grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and the Registration Rights Agreement and, if required under the terms of such
arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties. Such a pledge or transfer would not be subject to
approval of the Company and no legal opinion of legal counsel of the pledgee,
secured party or pledgor shall be required in connection therewith. Further, no
notice shall be required of such pledge. At the appropriate Purchaser’s expense,
the Company will execute and deliver such reasonable documentation as a pledgee
or secured party of Securities may reasonably request in connection with a
pledge or transfer of the Securities, including, if the Securities are subject
to registration pursuant to the Registration Rights Agreement, the preparation
and filing of any required prospectus supplement under Rule 424(b)(3) under the
Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of Selling Stockholders thereunder.
 
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(c) Certificates evidencing the Shares and Warrant Shares shall not contain any
legend (including the legend set forth in Section 4.1(b)), (i) while a
registration statement (including the Registration Statement) covering the
resale of such security is effective under the Securities Act, or (ii) following
any sale of such Shares or Warrant Shares pursuant to Rule 144, or (iii) if such
Shares or Warrant Shares are eligible for sale under Rule 144(k), or (iv) if
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the Commission). The Company shall cause its counsel to issue a legal opinion to
the Transfer Agent promptly after the Effective Date if required by the Transfer
Agent to effect the removal of the legend hereunder. If all or any portion of a
Warrant is exercised at a time when there is an effective registration statement
to cover the resale of the Warrant Shares, such Warrant Shares shall be issued
free of all legends. The Company agrees that following the Effective Date or at
such time as such legend is no longer required under this Section 4.1(c), it
will, no later than three Trading Days following the delivery by a Purchaser to
the Company or the Transfer Agent of a certificate representing Shares or
Warrant Shares, as the case may be, issued with a restrictive legend (such third
Trading Day, the “Legend Removal Date”), deliver or cause to be delivered to
such Purchaser a certificate representing such shares that is free from all
restrictive and other legends. The Company may not make any notation on its
records or give instructions to the Transfer Agent that enlarge the restrictions
on transfer set forth in this Section. Certificates for Securities subject to
legend removal hereunder shall be transmitted by the Transfer Agent to the
Purchaser by crediting the account of the Purchaser’s prime broker with the
Depository Trust Company System as directed by such Purchaser.

(d) In addition to such Purchaser’s other available remedies, the Company shall
pay to a Purchaser, in cash, as partial liquidated damages and not as a penalty,
for each $2,000 of Shares or Warrant Shares (based on the VWAP of the Common
Stock on the date such Securities are submitted to the Transfer Agent) delivered
for removal of the restrictive legend and subject to Section 4.1(c), $10 per
Trading Day (increasing to $20 per Trading Day five (5) Trading Days after such
damages have begun to accrue) for each Trading Day after the second Trading Day
following the Legend Removal Date until such certificate is delivered without a
legend. Nothing herein shall limit such Purchaser’s right to pursue actual
damages for the Company’s failure to deliver certificates representing any
Securities as required by the Transaction Documents, and such Purchaser shall
have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.
 
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(e) Each Purchaser, severally and not jointly with the other Purchasers, agrees
that such Purchaser will sell any Securities pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom, and that if Securities are sold
pursuant to a Registration Statement, they will be sold in compliance with the
plan of distribution set forth therein, and acknowledges that the removal of the
restrictive legend from certificates representing Securities as set forth in
this Section 4.1 is predicated upon the Company’s reliance upon this
understanding.
 
4.2 Furnishing of Information. Until the earliest of the time that (i) no
Purchaser owns Securities or (ii) the Warrants have expired, the Company
covenants to timely file (or obtain extensions in respect thereof and file
within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to the Exchange Act even if the Company
is not then subject to the reporting requirements of the Exchange Act. As long
as any Purchaser owns Securities, if the Company is not required to file reports
pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and
make publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Securities under Rule 144. The Company
further covenants that it will take such further action as any holder of
Securities may reasonably request, to the extent required from time to time to
enable such Person to sell such Securities without registration under the
Securities Act within the requirements of the exemption provided by Rule 144.
 
4.3 Integration. The Company shall not sell, offer for sale or solicit offers to
buy or otherwise negotiate in respect of any security (as defined in Section 2
of the Securities Act) that would be integrated with the offer or sale of the
Securities in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchasers or that would be integrated
with the offer or sale of the Securities to the Purchasers for purposes of the
rules and regulations of any Trading Market such that it would require
shareholder approval prior to the closing of such other transaction unless
shareholder approval is obtained before the closing of such subsequent
transaction.
 
4.4 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m. (New
York City time) on the 3rd Trading Day immediately following the date hereof,
issue a Current Report on Form 8-K, disclosing the material terms of the
transactions contemplated hereby, and filing the Transaction Documents as
exhibits thereto. The Company and each Purchaser shall consult with each other
in issuing any other press releases with respect to the transactions
contemplated hereby, and neither the Company nor any Purchaser shall issue any
such press release or otherwise make any such public statement without the prior
consent of the Company, with respect to any press release of any Purchaser, or
without the prior consent of each Purchaser, with respect to any press release
of the Company, which consent shall not unreasonably be withheld or delayed,
except if such disclosure is required by law, in which case the disclosing party
shall promptly provide the other party with prior notice of such public
statement or communication. Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the Commission or any regulatory agency or Trading
Market, without the prior written consent of such Purchaser, except (i) as
required by federal securities law in connection with (A) any registration
statement contemplated by the Registration Rights Agreement and (B) the filing
of final Transaction Documents (including signature pages thereto) with the
Commission and (ii) to the extent such disclosure is required by law or Trading
Market regulations, in which case the Company shall provide the Purchasers with
prior notice of such disclosure permitted under this clause (ii).
 
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4.5 Shareholder Rights Plan. No claim will be made or enforced by the Company
or, with the consent of the Company, any other Person, that any Purchaser is an
“Acquiring Person” under any control share acquisition, business combination,
poison pill (including any distribution under a rights agreement) or similar
anti-takeover plan or arrangement in effect or hereafter adopted by the Company,
or that any Purchaser could be deemed to trigger the provisions of any such plan
or arrangement, by virtue of receiving Securities under the Transaction
Documents or under any other agreement between the Company and the Purchasers.
 
4.6 Non-Public Information. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and agrees that neither it nor any other Person acting on its
behalf will provide any Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information. The Company understands and
confirms that each Purchaser shall be relying on the foregoing covenant in
effecting transactions in securities of the Company.
 
4.7 Use of Proceeds. Except as set forth on Schedule 4.7 attached hereto, the
Company shall use the net proceeds from the sale of the Securities hereunder for
working capital purposes and shall not use such proceeds for (a) the
satisfaction of any portion of the Company’s debt (other than payment of trade
payables in the ordinary course of the Company’s business and prior practices),
(b) the redemption of any Common Stock or Common Stock Equivalents or (c) the
settlement of any outstanding litigation.
 
4.8 Indemnification of Purchasers. Subject to the provisions of this Section
4.8, the Company will indemnify and hold each Purchaser and its directors,
officers, shareholders, members, partners, employees and agents (and any other
Persons with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling persons (each, a
“Purchaser Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a Purchaser
in any capacity, or any of them or their respective Affiliates, by any
stockholder of the Company who is not an Affiliate of such Purchaser, with
respect to any of the transactions contemplated by the Transaction Documents
(unless such action is based upon a breach of such Purchaser’s representations,
warranties or covenants under the Transaction Documents or any agreements or
understandings such Purchaser may have with any such stockholder or any
violations by the Purchaser of state or federal securities laws or any conduct
by such Purchaser which constitutes fraud, gross negligence, willful misconduct
or malfeasance). If any action shall be brought against any Purchaser Party in
respect of which indemnity may be sought pursuant to this Agreement, such
Purchaser Party shall promptly notify the Company in writing, and the Company
shall have the right to assume the defense thereof with counsel of its own
choosing reasonably acceptable to the Purchaser Party. Any Purchaser Party shall
have the right to employ separate counsel in any such action and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Purchaser Party except to the extent that (i) the employment
thereof has been specifically authorized by the Company in writing, (ii) the
Company has failed after a reasonable period of time to assume such defense and
to employ counsel or (iii) in such action there is, in the reasonable opinion of
such separate counsel, a material conflict on any material issue between the
position of the Company and the position of such Purchaser Party, in which case
the Company shall be responsible for the reasonable fees and expenses of no more
than one such separate counsel. The Company will not be liable to any Purchaser
Party under this Agreement (i) for any settlement by a Purchaser Party effected
without the Company’s prior written consent, which shall not be unreasonably
withheld or delayed; or (ii) to the extent, but only to the extent that a loss,
claim, damage or liability is attributable to any Purchaser Party’s breach of
any of the representations, warranties, covenants or agreements made by such
Purchaser Party in this Agreement or in the other Transaction Documents.
 
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4.9 Reservation of Common Stock. As of the date hereof, the Company has reserved
and the Company shall continue to reserve and keep available at all times, free
of preemptive rights, a sufficient number of shares of Common Stock for the
purpose of enabling the Company to issue Shares pursuant to this Agreement and
Warrant Shares pursuant to any exercise of the Warrants.
 
4.10 Listing of Common Stock. The Company hereby agrees to use best efforts to
maintain the listing of the Common Stock on a Trading Market, and as soon as
reasonably practicable following the Closing (but not later than the earlier of
the Effective Date and the first anniversary of the Closing Date) to list all of
the Shares and Warrant Shares on such Trading Market. The Company further
agrees, if the Company applies to have the Common Stock traded on any other
Trading Market, it will include in such application all of the Shares and
Warrant Shares, and will take such other action as is necessary to cause all of
the Shares and Warrant Shares to be listed on such other Trading Market as
promptly as possible. The Company will take all action reasonably necessary to
continue the listing and trading of its Common Stock on a Trading Market and
will comply in all respects with the Company’s reporting, filing and other
obligations under the bylaws or rules of the Trading Market.
 
4.11 Equal Treatment of Purchasers. 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 is also offered
to all of the parties to the Transaction Documents. For clarification purposes,
this provision constitutes a separate right granted to each Purchaser by the
Company and negotiated separately by each Purchaser, and is intended for the
Company to treat the Purchasers as a class and shall not in any way be construed
as the Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.
 
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4.12 Participation in Future Financing.
 
(a) From the date hereof until the date that is the 12 month anniversary of the
Effective Date, upon any issuance by the Company or any of its Subsidiaries of
Common Stock or Common Stock Equivalents for cash consideration (a “Subsequent
Financing”), each Purchaser shall have the right to participate in the
Subsequent Financing up to an amount equal to 100% of the Subsequent Financing
(the “Participation Maximum”) on the same terms, conditions and price provided
for in the Subsequent Financing. 
 
(b) At least 5 Trading Days prior to the closing of the Subsequent Financing,
the Company shall deliver to each Purchaser a written notice of its intention to
effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask such
Purchaser if it wants to review the details of such financing (such additional
notice, a “Subsequent Financing Notice”).  Upon the request of a Purchaser, and
only upon a request by such Purchaser, for a Subsequent Financing Notice, the
Company shall promptly, but no later than 1 Trading Day after such request,
deliver a Subsequent Financing Notice to such Purchaser.  The Subsequent
Financing Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder
and the Person or Persons through or with whom such Subsequent Financing is
proposed to be effected and shall include a term sheet or similar document
relating thereto as an attachment.   
 
(c) Any Purchaser desiring to participate in such Subsequent Financing must
provide written notice to the Company by not later than 5:30 p.m. (New York City
time) on the 5th Trading Day after all of the Purchasers have received the
Pre-Notice that the Purchaser is willing to participate in the Subsequent
Financing, the amount of the Purchaser’s participation, and that the Purchaser
has such funds ready, willing, and available for investment on the terms set
forth in the Subsequent Financing Notice. If the Company receives no notice from
a Purchaser as of such 5th Trading Day, such Purchaser shall be deemed to have
notified the Company that it does not elect to participate. 
 
(d) If by 5:30 p.m. (New York City time) on the 5th Trading Day after all of the
Purchasers have received the Pre-Notice, notifications by the Purchasers of
their willingness to participate in the Subsequent Financing (or to cause their
designees to participate) is, in the aggregate, less than the total amount of
the Subsequent Financing, then the Company may effect the remaining portion of
such Subsequent Financing on the terms and with the Persons set forth in the
Subsequent Financing Notice. 
 
(e) If by 5:30 p.m. (New York City time) on the 5th Trading Day after all of the
Purchasers have received the Pre-Notice, the Company receives responses to a
Subsequent Financing Notice from Purchasers seeking to purchase more than the
aggregate amount of the Participation Maximum, each such Purchaser shall have
the right to purchase its Pro Rata Portion (as defined below) of the
Participation Maximum.  “Pro Rata Portion” means the ratio of (x) the
Subscription Amount of Securities purchased on the Closing Date by a Purchaser
participating under this Section 4.12 and (y) the sum of the aggregate
Subscription Amounts of Securities purchased on the Closing Date by all
Purchasers participating under this Section 4.12 plus the aggregate subscription
amounts of investors party to securities purchase agreement(s) contemplated by
clause (d) in the definition of Exempt Issuance that are participating in such
Subsequent Financing pursuant to participation rights granted to such investors
under such agreements that are substantially similar to this Section 4.12.
 
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(f) The Company must provide the Purchasers with a second Subsequent Financing
Notice, and the Purchasers will again have the right of participation set forth
above in this Section 4.12, if the Subsequent Financing subject to the initial
Subsequent Financing Notice is not consummated for any reason on the terms set
forth in such Subsequent Financing Notice within 60 Trading Days after the date
of the initial Subsequent Financing Notice.
 
(g) Notwithstanding the foregoing, this Section 4.12 shall not apply in respect
of (i) an Exempt Issuance or (ii) an underwritten public offering of Common
Stock.
 
4.13 Subsequent Equity Sales.
 
(a) From the date hereof until 90 days after the Effective Date, neither the
Company nor any Subsidiary shall issue shares of Common Stock or Common Stock
Equivalents; provided, however, the 90 day period set forth in this Section 4.13
shall be extended for the number of Trading Days during such period in which (i)
trading in the Common Stock is suspended by any Trading Market, or (ii)
following the Effective Date, the Registration Statement is not effective or the
prospectus included in the Registration Statement may not be used by the
Purchasers for the resale of the Shares and Warrant Shares.
 
(b) From the date hereof until such time as no Purchaser holds any of the
Securities, the Company shall be prohibited from effecting or entering into an
agreement to effect any Subsequent Financing involving a Variable Rate
Transaction. “Variable Rate Transaction” means a transaction in which the
Company issues or sells (i) any debt or equity securities that are convertible
into, exchangeable or exercisable for, or include the right to receive
additional shares of Common Stock either (A) at a conversion, exercise or
exchange rate or other price that is based upon and/or varies with the trading
prices of or quotations for the shares of Common Stock at any time after the
initial issuance of such debt or equity securities, or (B) with a conversion,
exercise or exchange price that is subject to being reset at some future date
after the initial issuance of such debt or equity security or upon the
occurrence of specified or contingent events directly or indirectly related to
the business of the Company or the market for the Common Stock or (ii) enters
into any agreement, including, but not limited to, an equity line of credit,
whereby the Company may sell securities at a future determined price. Any
Purchaser shall be entitled to obtain injunctive relief against the Company to
preclude any such issuance, which remedy shall be in addition to any right to
collect damages.
 
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(c) Notwithstanding the foregoing, this Section 4.13 shall not apply in respect
of an Exempt Issuance, except that no Variable Rate Transaction shall be an
Exempt Issuance.
 
4.14 Short Sales and Confidentiality After The Date Hereof. Each Purchaser,
severally and not jointly with the other Purchasers, covenants that neither it
nor any Affiliate acting on its behalf or pursuant to any understanding with it
will execute any Short Sales during the period commencing at the Discussion Time
and ending at the time that the transactions contemplated by this Agreement are
first publicly announced as described in Section 4.4.  Each Purchaser, severally
and not jointly with the other Purchasers, covenants that until such time as the
transactions contemplated by this Agreement are publicly disclosed by the
Company as described in Section 4.4, such Purchaser will maintain the
confidentiality of the existence and terms of this transaction and the
information included in the Disclosure Schedules.  Each Purchaser severally and
not jointly with any other Purchaser, understands and acknowledges, and agrees,
to act in a manner that will not violate the positions of the Commission as set
forth in Item 65, Section A, of the Manual of Publicly Available Telephone
Interpretations, dated July 1997, compiled by the Office of Chief Counsel,
Division of Corporation Finance. Notwithstanding the foregoing, no Purchaser
makes any representation, warranty or covenant hereby that it will not engage in
Short Sales in the securities of the Company after the time that the
transactions contemplated by this Agreement are first publicly announced as
described in Section 4.4.  Notwithstanding the foregoing, in the case of a
Purchaser that is a multi-managed investment vehicle whereby separate portfolio
managers manage separate portions of such Purchaser’s assets and the portfolio
managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Purchaser’s assets, the
covenant set forth above shall only apply with respect to the portion of assets
managed by the portfolio manager that made the investment decision to purchase
the Securities covered by this Agreement.
 
4.15 Delivery of Securities After Closing. The Company shall deliver, or cause
to be delivered, the respective Securities purchased by each Purchaser to such
Purchaser within 3 Trading Days of the Closing Date.
 
4.16 Form D; Blue Sky Filings. The Company agrees to timely file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof, promptly upon request of any Purchaser. The Company shall 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 Purchasers at
the Closing under applicable securities or “Blue Sky” laws of the states of the
United States, and shall provide evidence of such actions promptly upon request
of any Purchaser.
 
4.17 Capital Changes. Until the one year anniversary of the Effective Date, the
Company shall not undertake a reverse or forward stock split or reclassification
of the Common Stock without the prior written consent of the Purchasers holding
a majority in interest of the Shares.
 
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4.18 Directors and Officers Insurance. The Company shall have obtained directors
and officers insurance coverage at least equal to $2 million from a reputable
insurance company on or before July 15, 2007.
 
4.19 Per Share Purchase Price Protection.
 
(a) As to each Purchaser that then holds at least 20% of the Shares initially
purchased hereunder by such Purchaser on the Closing Date, after the date hereof
and until the 2 year anniversary of the Effective Date, if the Company or any
Subsidiary thereof shall issue any Common Stock or Common Stock Equivalents
entitling any person or entity to acquire shares of Common Stock at an effective
price per share less than the Per Share Purchase Price (the “Discounted Purchase
Price”, as further defined below), within 3 Trading Days of the date thereof the
Company shall issue to such Purchaser that number of additional shares of Common
Stock equal to the difference between (a) the quotient obtained by dividing (i)
the product of (A) the Shares then held by such Purchaser immediately prior to
such issuance multiplied by (B) the Per Share Purchase Price (or if Shares were
previously issued pursuant to this Section 4.18, the lowest Discounted Purchase
Price used hereunder prior to such issuance) divided by (ii) the Discounted
Purchase Price, less (b) the Shares then held by such Purchaser immediately
prior to such issuance. The term “Discounted Purchase Price” shall mean the
amount actually paid by third parties for a share of Common Stock. The sale of
Common Stock Equivalents shall be deemed to have occurred at the time of the
issuance of the Common Stock Equivalents and the Discounted Purchase Price
covered thereby shall also include the actual exercise or conversion price
thereof at the time of the conversion or exercise (in addition to the
consideration per share of Common Stock underlying the Common Stock Equivalents
received by the Company upon such sale or issuance of the Common Stock
Equivalents). If shares are issued for a consideration other than cash, the per
share selling price shall be the fair value of such consideration as determined
in good faith by the Board of Directors of the Company. The Company may not
refuse to issue a Purchaser additional Shares hereunder based on any claim that
such Purchaser or any one associated or affiliated with such Purchaser has been
engaged in any violation of law, agreement or for any other reason, unless, an
injunction from a court, on notice, restraining and or enjoining an issuance
hereunder shall have been sought and obtained. Nothing herein shall limit a
Purchaser’s right to pursue actual damages for the Company's failure to deliver
Shares hereunder and such Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief. On the date of closing of any
transaction pursuant to which securities are issued for a Discounted Purchase
Price, the Company shall give the Purchasers written notice thereof.
 
(b) Notwithstanding anything to the contrary herein, this Section 4.18 shall not
apply to an Exempt Issuance.
 
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ARTICLE V.
MISCELLANEOUS
 
5.1 Termination.  This Agreement may be terminated by any Purchaser, as to such
Purchaser’s obligations hereunder only and without any effect whatsoever on the
obligations between the Company and the other Purchasers, by written notice to
the other parties, if the Closing has not been consummated on or before June __,
2007; provided, however, that no such termination will affect the right of any
party to sue for any breach by the other party (or parties).
 
5.2 Fees and Expenses. Except as expressly set forth in the Transaction
Documents to the contrary, each party shall pay the fees and expenses of its
advisers, counsel, accountants and other experts, if any, and all other expenses
incurred by such party incident to the negotiation, preparation, execution,
delivery and performance of this Agreement. The Company shall pay all Transfer
Agent fees, stamp taxes and other taxes and duties levied in connection with the
delivery of any Securities to the Purchasers.
 
5.3 Entire Agreement. The Transaction Documents, together with the exhibits and
schedules thereto, contain the entire understanding of the parties with respect
to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
 
5.4 Notices. Any and all notices or other communications or deliveries required
or permitted to be provided hereunder shall be in writing and shall be deemed
given and effective on the earliest of (a) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number set
forth on the signature pages attached hereto prior to 5:30 p.m. (New York City
time) on a Trading Day, (b) the next Trading Day after the date of transmission,
if such notice or communication is delivered via facsimile at the facsimile
number set forth on the signature pages attached hereto on a day that is not a
Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c)
the 2nd Trading Day following the date of mailing, if sent by U.S. nationally
recognized overnight courier service, or (d) upon actual receipt by the party to
whom such notice is required to be given. The address for such notices and
communications shall be as set forth on the signature pages attached hereto.
 
5.5 Amendments; Waivers. No provision of this Agreement may be waived or amended
except in a written instrument signed, in the case of an amendment, by the
Company and the Purchasers of at least 67% of the Shares still held by the
Purchasers or, in the case of a waiver, by the party against whom enforcement of
any such waived provision is sought. No waiver of any default with respect to
any provision, condition or requirement of this Agreement shall be deemed to be
a continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of any party to exercise any right hereunder in any manner
impair the exercise of any such right.
 
5.6 Headings. The headings herein are for convenience only, do not constitute a
part of this Agreement and shall not be deemed to limit or affect any of the
provisions hereof.
 
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5.7 Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser (other than by merger). Any
Purchaser may assign any or all of its rights under this Agreement to any Person
to whom such Purchaser assigns or transfers any Securities, provided such
transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions of the Transaction Documents that apply to the
“Purchasers.”
 
5.8 No Third-Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except as otherwise set forth in Section 4.8.
 
5.9 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City 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 (including with respect to the enforcement of any of the Transaction
Documents), 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 improper
or is an inconvenient venue for such proceeding. 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 via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for 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 other manner permitted by law. If either party shall
commence an action or proceeding to enforce any provisions of the Transaction
Documents, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its reasonable attorneys’ fees and other costs
and expenses incurred with the investigation, preparation and prosecution of
such action or proceeding.
 
5.10 Survival. The representations and warranties contained herein shall survive
the Closing and the delivery of the Shares and Warrant Shares.
 
5.11 Execution. This Agreement may be executed in two or more counterparts, all
of which when taken together 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, it being understood that both parties need not
sign the same counterpart. In the event that any signature is delivered by
facsimile transmission or by e-mail delivery of a “.pdf” format data file, such
signature shall create a valid and binding obligation of the party executing (or
on whose behalf such signature is executed) with the same force and effect as if
such facsimile or “.pdf” signature page were an original thereof.
 
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5.12 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
 
5.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) any of the other
Transaction Documents, whenever any Purchaser 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
Purchaser 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; provided,
however, in the case of a rescission of an exercise of a Warrant, the Purchaser
shall be required to return any shares of Common Stock delivered in connection
with any such rescinded exercise notice.
 
5.14 Replacement of Securities. If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
thereof (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction. The applicant
for a new certificate or instrument under such circumstances shall also pay any
reasonable third-party costs (including customary indemnity) associated with the
issuance of such replacement Securities.
 
5.15 Remedies. In addition to being entitled to exercise all rights provided
herein or granted by law, including recovery of damages, each of the Purchasers
and the Company will be entitled to specific performance under the Transaction
Documents. The parties agree that monetary damages may not be adequate
compensation for any loss incurred by reason of any breach of obligations
contained in the Transaction Documents and hereby agrees to waive and not to
assert in any action for specific performance of any such obligation the defense
that a remedy at law would be adequate.
 
5.16 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights 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, state or federal 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.
 
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5.17 Independent Nature of Purchasers’ Obligations and Rights. The obligations
of each Purchaser under any Transaction Document are several and not joint with
the obligations of any other Purchaser, and no Purchaser shall be responsible in
any way for the performance or non-performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
other Transaction Document, and no action taken by any Purchaser pursuant
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents. Each Purchaser shall be entitled to independently protect
and enforce its rights, including without limitation, the rights arising out of
this Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose. Each Purchaser has been represented by its own
separate legal counsel in their review and negotiation of the Transaction
Documents. For reasons of administrative convenience only, Purchasers and their
respective counsel have chosen to communicate with the Company through FWS. The
Company has elected to provide all Purchasers with the same terms and
Transaction Documents for the convenience of the Company and not because it was
required or requested to do so by the Purchasers.
 
5.18 Liquidated Damages. The Company’s obligations to pay any partial liquidated
damages or other amounts owing under the Transaction Documents is a continuing
obligation of the Company and shall not terminate until all unpaid partial
liquidated damages and other amounts have been paid notwithstanding the fact
that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.
 
5.19 Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall not be a Business Day, then such action may be taken or such right may be
exercised on the next succeeding Business Day.
 
5.20 Construction. The parties agree that each of them and/or their respective
counsel has reviewed and had an opportunity to revise the Transaction Documents
and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.
 
5.21 Waiver of Jury Trial. In any action, suit or proceeding in any jurisdiction
brought by any party against any other party, the parties each knowingly and
intentionally, to the greatest extent permitted by applicable law, hereby
absolutely, unconditionally, irrevocably and expressly waives forever trial by
jury.
 
32

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(Signature Pages Follow)
 
33

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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
 

ZAGG INCORPORATED
 
Address for Notice:
     
By: 

--------------------------------------------------------------------------------

Name:
Title:
 
Fax:
     
With a copy to (which shall not constitute notice):
   

 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
 
34

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[PURCHASER SIGNATURE PAGES TO ZAGG SECURITIES PURCHASE AGREEMENT]

IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
 
Name of Purchaser: ________________________________________________________
 
Signature of Authorized Signatory of Purchaser:
__________________________________
 
Name of Authorized Signatory:
____________________________________________________
 
Title of Authorized Signatory:
_____________________________________________________
 
Email Address of Purchaser:________________________________________________
 
Fax Number of Purchaser: ________________________________________________
 
Address for Notice of Purchaser:
 
Address for Delivery of Securities for Purchaser (if not same as address for
notice):
 
Subscription Amount: $_________________

Shares: _________________

Warrant Shares: __________________

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]
 
[SIGNATURE PAGES CONTINUE]
 
35

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Schedule 3.1(a)

None
 
36

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Schedule 3.1(g)
 
Capitalization Table
 
ZAGG Incorporated
         
Capitalization Table
                     
CURRENT CAPITALIZATION
                     
Robert G. Pedersen II / SunCreek
   
6,500,000
   
42.85
%
Shell company shareholders
   
3,346,000
   
22.06
%
Shares sold by Phillip Chipping in secondary transaction to non-affiliates
   
2,761,765
   
18.21
%
Interim capital shares
   
1,500,142
   
9.89
%
Phillip Chipping
   
738,235
   
4.87
%
Brandon T. O'Brien
   
147,853
   
0.97
%
Alan Farr
   
100,000
   
0.66
%
Dexis Development
   
75,000
   
0.49
%
Fully diluted shares
   
15,168,995
   
100.00
%
                               
CAPITALIZATION ASSUMING $5.0M IN UNITS IS COMPLETED
                             
Robert G. Pedersen II / SunCreek
   
6,500,000
   
31.00
%
UNITS investors ($5.0M at $1.00 per share)
   
5,000,000
   
23.84
%
Shell company shareholders
   
3,346,000
   
15.96
%
Shares sold by Phillip Chipping in secondary transaction to non-affiliates
   
2,761,765
   
13.17
%
Interim capital shares
   
1,500,142
   
7.15
%
Employees & Affiliates- stock and options
   
800,000
   
3.82
%
Phillip Chipping
   
738,235
   
3.52
%
Brandon T. O'Brien
   
147,853
   
0.71
%
Alan Farr
   
100,000
   
0.48
%
Dexis Development
   
75,000
   
0.36
%
Fully diluted shares
   
20,968,995
   
100.00
%

 
37

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Schedule 3.1(g) cont.

Table of Beneficial Ownership
The following table sets forth information, as of June 7, 2007, the beneficial
ownership of the outstanding shares of Company’s capital stock by (i) each
person known by Company who beneficially owns five percent (5%) or more of the
outstanding shares; (ii) each officer of the Company; (iii) each director of the
Company, and (iv) all the aforementioned officers and directors as a group. 
 
Title of
Class
 
Name and Address
Of
Beneficial Owners (1)
 
Amount and Nature
Of Beneficial Ownership
Percent
Of
Class (2)
Common Stock
 
Robert G. Pedersen II, President and Chief Executive Officer (3)
 
6,500,000
 
42.85%
Common Stock
 
Brandon T. O’Brien
Chief Financial Officer
 
147,853
 
0.97%
Common Stock
 
Andrew C. Park
201 Post Street, 11th Floor
San Francisco, CA 94108
 
1,058,235
 
6.98%
Common Stock
 
SunCreek, LLC
2873 Tolcate Lane
Holladay, Utah 84121
 
5,000,000
 
32.96%
Common Stock
 
Joseph W. and Patricia G. Abrams Family Trust (4)
 
820,042
 
5.41%
 
 
All officers and directors a group (2)
 
6,647,853
 
43.83%

 
(1)
Unless otherwise noted, the address for each of the named beneficial owners is:
3855 South 500 West, Suite J, Salt Lake City, Utah, 84115. Unless otherwise
indicated, beneficial ownership is determined in accordance with Rule 13d-3
promulgated under the Exchange Act and generally includes voting and/or
investment power with respect to securities. Shares of common stock subject to
options or warrants that are currently exercisable or exercisable within sixty
days of June 7, 2007, are deemed to be beneficially owned by the person holding
such options or warrants for the purpose of computing the percentage of
ownership set forth in the above table, unless otherwise indicated.

(2)
The calculations of percentage of beneficial ownership are based on 15,168,995
shares of common stock outstanding as of June 7, 2007.

(3)
Includes 1,500,000 shares of Common Stock held directly by Mr. Pedersen and
5,000,000 shares of Common Stock held by SunCreek, LLC, an entity wholly owned
by Mr. Pedersen. Mr. Pedersen exercises sole voting and investment control over
the shares held by SunCreek, LLC.

(4)
The 820,042 shares are held by the Joseph W. & Patricia G. Abrams Family Trust,
a revocable living trust. Joseph W. Abrams and, his wife, Patricia G. Abrams are
the sole trustees, trustors and beneficiaries of the Joseph W. & Patricia G.
Abrams Family Trust, each with unilateral power to revoke the trust. As
trustees, each of Joseph and Patricia Abrams is deemed to have shared voting
power with respect to the shares held by the Joseph W. & Patricia G. Abrams
Family Trust.

 
38

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Schedule 3.1(g) cont.

PiggyBack Registration Rights
 
On September 27, 2006, the Company entered into an Exclusive Finder’s Agreement
with Empire Financial Group, Inc. (“Empire Financial”) in connection with a
private offering transaction of up to $6 million. The Company agreed to pay
Empire Financial cash compensation equal to 9% in of the gross proceeds of the
offering, and to issue warrants to purchase 100,000 shares of Company common
stock for every $1 million raised in the offering. The warrant shares have
piggyback registration rights.

On February 8, 2007, the Company issued and sold 785,856 shares of Common Stock
to accredited investors. The shares were sold at a price per share of $0.35.
These shares have piggy back registration rights. The shares were issued
pursuant to an exemption form registration provided by Rule 506 of Regulation D,
as they were issued without any form of general solicitation or general
advertising and the purchases qualified as accredited investors and accepted the
shares for their personal accounts and not with a view towards distribution.

During the quarter ended March 31, 2007, the Company repaid $50,000 of the
principal balance of a $100,000 note issued in November 2006 to an affiliate of
the Company’s Chief Executive Officer, and the remaining $50,000 of principal
plus accrued interest of $1,749 was converted into 147,853 shares of Common
Stock. These shares have piggy back registration rights. The shares were issued
pursuant to an exemption form registration provided by Rule 506 of Regulation D,
as they were issued without any form of general solicitation or general
advertising and the purchases qualified as accredited investors and accepted the
shares for their personal accounts and not with a view towards distribution.

Warrant Schedule
 
Warrant Holder
 
Number of Warrants
 
Exercise Price
 
Expiration Date
                 
Empire Financial Group
   
12,601
 
$
0.35
   
3/18/2012
 
Michael R. Jacks
   
9,450
 
$
0.35
   
3/18/2012
 
William Corbett
   
9,450
 
$
0.35
   
3/18/2012
 
Lee Osman
   
7,875
 
$
0.35
   
3/18/2012
 
Paul Marr
   
6,562
 
$
0.35
   
3/18/2012
 
Jake Jordaan
   
6,562
 
$
0.35
   
3/18/2012
 
Remington Partners
   
100,000
 
$
0.50
   
5/30/2012
 

39

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Schedule 3.1(i)

Organization in the Last Five Years
 
The Company was incorporated on March 24, 2005. The Company was formed under the
original name “Protective Solutions, Inc.” and subsequently changed its name to
“ShieldZone Corporation.” The Company maintains its corporate offices and
operational facility at 3855 South 500 West, Suites B and J, Salt Lake City,
Utah, 84115. The telephone number of the Company is 801-263-0699. The Company’s
website addresses are www.ShieldZone.com, www.InvisibleShield.com and
www.zagg.com. The Company changed its name to Zagg Incorporated in connection
with the Merger (described below).

On February 8, 2007, Amerasia Khan Enterprises Ltd. a Nevada corporation (“AKE”)
(nka Zagg Incorporated), a publicly held entity, executed an Agreement and Plan
of Merger (the “Merger Agreement”) by and between AKE and its wholly owned
subsidiary, SZC Acquisition Corp., a Nevada corporation (“Subsidiary”) on the
one hand and ShieldZone Corporation (now Zagg Incorporated), a Utah corporation
on the other hand. Pursuant to the Merger Agreement ShieldZone merged with the
Subsidiary, with ShieldZone Corporation surviving the merger (the “Merger”). In
consideration, the shareholders of ShieldZone received 10,175,000 shares of the
common stock of AKE.

Following the Merger, ShieldZone was reincorporated in Nevada as a subsidiary of
AKE. On March 7, 2007, ShieldZone was merged up and into AKE. At that time AKE
changed its name to Zagg Incorporated. The operations of the surviving entity
(Zagg Incorporated) are solely that of ShieldZone. As a result of these
transactions, the historical financial statements of Zagg Incorporated are the
historical financial statements of ShieldZone. The fiscal year end of Company is
December 31.

Directors and Executive Officers
 
The following tables summarize the Company's current executive officers and
directors and the proposed executive officers and directors of the Company:
 
Name
 
Age
 
Position
Robert G. Pedersen II
 
40
 
Chief Executive Officer, Director
Brandon T. O’Brien
 
36
 
Chief Financial Officer

Robert G. Pedersen II. Mr. Pedersen provides the overall vision and leadership
of Zagg Incorporated. Mr. Pedersen has more than 20 years' experience in
executive management, sales and marketing, communications, as well as owning and
managing several start-up businesses and enterprises. Since 1998, Mr. Pedersen
was a co-owner and executive manager for Del Sol, LC, a Utah-based international
specialty retailer of apparel and accessories, where he implemented the in-line
retail store model.  Del Sol now has more than 80 stores world-wide.
Additionally, Mr. Pedersen created and was the director of DelSol.com, Del Sol
LC’s Internet presence. In 2002 Mr. Pedersen founded PayTeck, Inc., a Utah
provider of Internet-based payment processing services, which was later sold to
Zion's Bank, a public company, in 2005. Mr. Pedersen joined Zagg in October 2005
as a consultant and then in January 2006 joined the company as a full partner in
a full time capacity and has served as its Chief Executive Officer and Chairman
since that time.  Mr. Pedersen is also the Company’s largest shareholder.  Mr.
Pedersen earned a degree in business administration (BSBA) from the University
of Phoenix and a Masters Degree (MBA) from Brigham Young University in Business
Administration with an emphasis in marketing, finance and organizational
communications. Mr. Pedersen and his wife and six children reside in Holladay,
Utah.
 
40

--------------------------------------------------------------------------------

 

Brandon T. O’Brien. Mr. O’Brien became our Chief Financial Officer on February
12, 2007. Prior to assuming his position as the Chief Financial Officer for the
Company, Mr. O’Brien, served as the Vice President of Finance at Fonix
Corporation, a speech recognition software company, from January 2003 to January
2007, and as an independent financial consultant from September 2001 to January
2003. Mr. O’Brien has extensive experience in mergers and acquisitions,
accounting for financial transactions with foreign subsidiaries and the
application of financial accounting standards and principles. Mr. O’Brien has
broad experience with both small micro-cap public companies and with large
multinational public companies. Mr. O’Brien is a licensed Certified Public
Accountant and has attained the Certified Management Accountant and Certified
Financial Manager designations. Mr. O’Brien earned a Bachelor of Science degree
in Accounting from Utah State University in 1995 and a Masters of Business
Administration from the University of Utah in 1996. Mr. O’Brien resides with his
wife and five children in Farmington, Utah.

Executive Compensation
 
The table below summarizes all compensation awarded to, earned by, or paid to
our former or current executive officers for the fiscal years ended 2006, 2005
and 2004.

Summary Compensation Table
 
 
Name and principal
Position
 
Year
 
Salary
($)
 
Bonus
($)
 
 
Stock
Awards
($)
 
Option
Awards
($)
 
Non-Equity
Incentive Plan
Compensation
($)
 
Nonqualified
Deferred
Compensation
Earnings ($)
 
All Other
Compensation
($)
 
Total
($)
 
Robert G. Pedersen II
CEO & President
   
2004
2005
2006
   
-
-
40,000
   
-
-
10,000
   
-
-
-
   
-
-
-
   
-
-
-
   
-
-
-
   
-
85,000
-
(3)  
-
85,000
50,000
 
 
   

   

   

   

   

   

   

   

   

 
Phillip Chipping (1)
   
2004
2005
2006
   
-
54,614
98,500
   
-
-
-
   
-
-
-
   
-
-
-
   
-
-
-
   
-
-
-
   
-
-
-
   
-
54,614
98,500
 
 
   

   

   

   

   

   

   

   

   

 
David Ho
Former CFO (4)
   
2004
2005
2006
   
-
-
-
   
-
-
-
   
-
9,600
-
(2)  
-
-
-
   
-
-
-
   
-
-
-
   
-
-
-
   
-
9,600
-
 

(1)
  Effective December 15, 2006, Mr. Chipping resigned his position as an officer
and director of the Company.

(2)
We issued 400,000 shares of common stock to Mr. David Ho at $0.001 per share on
June 10, 2005 in settlement of $400 of debt. The conversion rate of $0.001 for
these issuances was the price determined by considering both the stock price at
the time and the great deal of time and effort our officers and directors
expended in developing our business plan and establishing the contacts necessary
to progress the company thus far. We recorded a non cash charge of $9,600 to Mr.
Ho for management compensation to reflect the fair value of the common stock
issued to Mr. Ho. These issuances were made by Amerasia Khan Enterprises Ltd.
prior to the merger transaction with the Company.

 
41

--------------------------------------------------------------------------------

 
(3)
Represents a consulting fee paid to a company owned by Mr. Pedersen for services
rendered through July 2006, but paid in fiscal 2005. In January 2006, Mr.
Pedersen purchased a 50% interest in the equity of the Company through an
affiliated entity and was appointed Chief Executive Officer and Director of the
Company.

(4) 
Mr. Ho resigned has an officer and director of the Company prior to the date of
this Report. Mr. Ho, a former officer and director, did not receive compensation
for his position as an officer of the Company.

 Long-Term Incentive Plans
 
We do not currently have any long term incentive plans.

Compensation to Directors

Directors do not generally receive cash compensation for their services as
directors, but may be reimbursed for expenses incurred in attending board
meetings. During the year ended December 31, 2006, and for the quarter ended
March 31, 2007, the directors of the Company did not receive any compensation
for services as directors.

We intend to adopt a director compensation policy for directors which will
include compensation on a per meeting basis or upon appointment which will
likely be a combination of cash compensation and stock options.

Stock Option Grants

No stock options were granted to any of the Company’s directors and officers
during the Company’s most recent fiscal year ended December 31, 2006. No stock
options were granted to any of the Company’s directors and officers during the
quarter ended March 31, 2007.

Exercise of Stock Options and Year-End Option Values
 
No share purchase options were exercised by the Company’s officers, directors
and employees during the fiscal year ended December 31, 2006. No share purchase
options were exercised by the Company’s officers, directors and employees during
the quarter ended March 31, 2007.

Outstanding Stock Options

The Company currently does not have any outstanding stock options, a stock
option plan or an incentive plan; however, the Board of Directors has reserved
800,000 shares of common stock for use in such a plan to be established at a
later date.
 
Certain Relationships and Related Transactions
 
Except as disclosed below, none of our directors or executive officers, nor any
person who beneficially owns, directly or indirectly, shares carrying more than
5% of the voting rights attached to all of our outstanding shares, nor any
members of the immediate family (including spouse, parents, children, siblings,
and in-laws) of any of the foregoing persons has any material interest, direct
or indirect, in any transaction since our incorporation or in any presently
proposed transaction which, in either case, has or will materially affect us.
 
42

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In October 2005, the Company executed a nine month consulting agreement with
SunCreek, LLC, an entity wholly owned by Robert G. Pedersen II who subsequently
became the Company’s Chief Executive Officer. Compensation in the amount of
$85,000 was paid under the Agreement as of December 2005. No further
compensation is due under the Agreement. The Agreement also provided for the
sale by Phillip J. Chipping, the then sole owner of the Company, of 50% of the
equity securities of the Company to SunCreek, LLC for the amount of $25,000.

In November 2006, the Company issued a Convertible Note (the “Note”), with an
affiliate of the Company’s Chief Executive Officer in the original principal
amount of $100,000. The Note was convertible at the holder's option any time up
to maturity at a conversion price equal to $0.35 per common share. The Note was
due on May 15, 2007, bore interest at 20% per year and was unsecured. The common
shares underlying the Note have piggy back registration rights. During the three
months ended March 31, 2007, the Company repaid $50,000 of the principal balance
of the note. In addition, the remaining $50,000 of principal plus accrued
interest of $1,749 was converted into 147,853 shares of the Company’s common
stock

Risk Factors
 
RISKS RELATED TO THE COMPANY AND ITS BUSINESS

If we are unable to raise capital, our business will fail. 

For the foreseeable future, we intend to fund our operations and capital
expenditures from operations and our cash on hand largely from the proceeds of
this Offering. If our capital resources are insufficient, we may need additional
funds to continue our operations, pursue business opportunities (such as
expansion, acquisitions of complementary businesses or the development of new
products or services), to react to unforeseen difficulties or to respond to
competitive pressures. We cannot assure you that at such time as we need funds
that alternative financing arrangements will be available in amounts or on terms
acceptable to us, if at all. If additional financing is not available when
required or is not available on acceptable terms, we may be unable to fund our
expansion, successfully promote our current products, license new products or
enhance our products and services, take advantage of business opportunities, or
respond to competitive pressures, any of which could have a material adverse
effect on our business and the value of our common stock. If we choose to raise
additional funds through the issuance of equity securities, this may cause
significant dilution of our common stock, and holders of the additional equity
securities may have rights senior to those of the holders of our common stock.
If we obtain additional financing by issuing debt securities, the terms of these
securities could restrict or prevent us from paying dividends and could limit
our flexibility in making business decisions.
 
43

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Without sufficient financing, we would be forced to limit our operations and
otherwise fail to pursue the full measure of our business plan. We are seeking a
maximum of $5,000,000 in this Offering because that amount will be sufficient to
allow us to proceed with our business plan for the next twelve months. If we
receive than that amount, we would be forced to modify our business plan to
curtail our expansion. We do not know how much money we will raise in this
Offering. If it turns out that we have not raised enough money to complete our
business plan for the next twelve months, we will try to raise additional funds
from another private placement or from loans, if available. In the event that we
are unable to raise more financing to pursue our business plan, we will lose
opportunities for growth necessary for our survival and investors may lose their
entire investment.

Because we may be forced to incur debt in the future on less than favorable
terms, the resulting strain on our cash flow may impair our business
operations. 

In order to fund operations, we may issue debt instruments which will have a
senior claim on our assets in the event of a sale of assets. Future debt service
may cause strain on cash flow and impair business operations.

Because the markets for our products are subject to continuing change, they may
impair our ability to successfully sell our products. 

The markets for our products are volatile and subject to continuing change.
Consumer tastes and demands can be unpredictable. We must continuously adjust
our marketing strategy to address the changing state of the markets for our
products, we may not be able to anticipate changes in the market and, as a
result, our product strategies may be unsuccessful.

Because we are dependent on a third party source to acquire sufficient
quantities of raw materials to produce our products, any interruption in that
relationship could harm our results of operations and our revenues.

We acquire substantially all of our raw materials that we use in our products
from one distributor. While we believe our relationship with that distributor is
excellent, and we foresee no interruption in our ability to obtain raw materials
from such distributor, we might in the future need to find other sources or
attempt to manufacture the raw materials, or a material substantially similar to
them, ourselves. We believe we could obtain the raw materials from other
sources, or obtain substantially similar raw materials, or even produce similar
materials ourselves. We also keep an inventory of raw materials on hand which
could support our operations even if our sources were interrupted. However any
unexpected interruption in our acquisition of the raw materials and the
production of our products could harm our results of operations and our
revenues.

Because we are dependent for our success on one key executive officer, our
inability to retain this officer would impede our business plan and growth
strategies, which would have a negative impact on our business and the value of
your investment. 

Our success depends on the skills, experience and performance of key members of
our management team including Mr. Robert G. Pedersen II, our CEO, and Brandon
O’Brien, our CFO. We do not have an employment agreement with Mr. Pedersen or
Mr. O’Brien. We do not have employment agreements with any other members of our
senior management team. Each of those individuals without long-term employment
agreements may voluntarily terminate his employment with the Company at any time
upon short notice. Were we to lose one or more of these key executive officers,
we would be forced to expend significant time and money in the pursuit of a
replacement, which would result in both a delay in the implementation of our
business plan and the diversion of limited working capital. We can give you no
assurance that we can find satisfactory replacements for these key executive
officers at all, or on terms that are not unduly expensive or burdensome to our
company. Although we intend to issue stock options or other equity-based
compensation to attract and retain employees, such incentives may not be
sufficient to attract and retain key personnel.
 
44

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If we fail to attract, train and retain sufficient numbers of our qualified
personnel, our prospects, business, financial condition and results of
operations will be materially and adversely affected.

Our success depends to a significant degree upon our ability to attract, retain
and motivate skilled and qualified personnel. Failure to attract and retain
necessary technical personnel, sales and marketing personnel and skilled
management could adversely affect our business. If we fail to attract, train and
retain sufficient numbers of these highly qualified people, our prospects,
business, financial condition and results of operations will be materially and
adversely affected.

Because we experience seasonal and quarterly fluctuations in demand for our
products, no one quarter is indicative of our results of operations for the
entire fiscal year. 

Our quarterly results may fluctuate quarter to quarter as a result of market
acceptance of our products, the mix, pricing and presentation of the products
offered and sold, the hiring and training of additional personnel, the timing of
inventory write downs, the cost of materials, the incurrence of other operating
costs and factors beyond our control, such as general economic conditions and
actions of competitors. We are also affected by seasonal buying cycles of
consumers, such as the holiday season, and the introduction of popular consumer
electronics, such as a new generation of the iPod. Accordingly, the results of
operations in any quarter will not necessarily be indicative of the results that
may be achieved for a full fiscal year or any future quarter.

Because we have limited protection on the intellectual property underlying our
products, we may not be able to protect our products from the infringement of
others and may be prevented from marketing our products.

We do not own proprietary rights with respect to the film we use in our
products. We have a patent pending with respect to the covering of electronic
devices with thin films. In addition, we own and keep confidential the design
configurations of the film and the process to cut the film which are our
copyrights. We seek to protect our intellectual property rights through
confidentiality agreements with our employees, consultants and partners.
However, no assurance can be given that such measures will be sufficient to
protect our intellectual property rights or that the intellectual property
rights that we have are sufficient to protect other persons from creating and
marketing substantially similar products. If we cannot protect our rights, we
may lose our competitive advantage. Moreover, if it is determined that our
products infringe on the intellectual property rights of third parties, we may
be prevented from marketing our products.
 
45

--------------------------------------------------------------------------------

 
Because the Company may, at some time in the future, issue additional
securities, shareholders are subject to dilution of their ownership.

Although the Company has no plans to raise additional capital aside from the
present Offering, it may at some time in the future do so. Any such issuance
would likely dilute shareholders’ ownership interest in the Company and may have
an adverse impact on the price of the Company’s common stock. In addition, from
time to time we may issue shares of common stock in connection with equity
financing activities or as incentives to our officers and business partners. We
may expand the number of shares available under stock incentive and option
plans, or create new plans. All issuances of common stock would be dilutive to
your holdings in the Company. If your holdings are diluted, the overall value of
your shares may be diminished and your ability to influence shareholder voting
will also be harmed.

If we fail to maintain proper inventory levels, our business could be harmed. 

We produce our products prior to the time we receive customers’ orders. We do
this to minimize purchasing costs, the time necessary to fill customer orders
and the risk of non-delivery. However, we may be unable to sell the products we
have produced in advance. Inventory levels in excess of customer demand may
result in inventory write-downs, and the sale of excess inventory at discounted
prices could significantly impair our brand image and have a material adverse
effect on our operating results and financial condition. Conversely, if we
underestimate demand for our products or if we fail to produce the quality
products that we require at the time we need them, we may experience inventory
shortages. Inventory shortages might delay shipments to customers, negatively
impact distributor relationships, and diminish brand loyalty.

Because we face intense competition, including competition from companies with
significantly greater resources than ours, if we are unable to compete
effectively with these companies, our market share may decline and our business
could be harmed. 

Our market is highly competitive with numerous competitors. Some of our
competitors have greater financial, technological, manufacturing, marketing and
distribution resources than we do. Their greater capabilities in these areas may
enable them to compete more effectively on the basis of price and production and
more quickly develop new products and technologies. They may also have more
fully developed sales channels for consumer sales including large retail seller
arrangements and international distribution capabilities. In addition, new
companies may enter the markets in which we compete, further increasing
competition in the laser industry. We may not be able to compete successfully in
the future, and increased competition may result in price reductions, reduced
profit margins, loss of market share and an inability to generate cash flows
that are sufficient to maintain or expand our development and marketing of new
products, which would adversely impact the trading price of our common shares.
 
46

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If we are unable to effectively manage our growth, our operating results and
financial condition will be adversely affected.

We intend to grow our business by expanding our sales, administrative and
marketing organizations. Any growth in or expansion of our business is likely to
continue to place a strain on our management and administrative resources,
infrastructure and systems. As with other growing businesses, we expect that we
will need to refine and expand our business development capabilities, our
systems and processes and our access to financing sources. We also will need to
hire, train, supervise and manage new employees. These processes are time
consuming and expensive, will increase management responsibilities and will
divert management attention. We cannot assure you that we will be able to:
 
 · 
expand our systems effectively or efficiently or in a timely manner;
   
 · 
allocate our human resources optimally;
   
 · 
meet our capital needs;
   
 · 
identify and hire qualified employees or retain valued employees; or
   
 · 
incorporate effectively the components of any business or product line that we
may acquire in our effort to achieve growth.

Our inability or failure to manage our growth and expansion effectively could
harm our business and materially and adversely affect our operating results and
financial condition.

If our competitors misappropriate our proprietary know-how and trade secrets, it
could have a material adverse affect on our business. 

We depend heavily on the expertise of our production team. If any of our
competitors copies or otherwise gains access to similar products independently,
we might not be able to compete as effectively. The measures we take to protect
our designs may not be adequate to prevent their unauthorized use. Further, the
laws of foreign countries may provide inadequate protection of such intellectual
property rights. We may need to bring legal claims to enforce or protect such
intellectual property rights. Any litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources. In
addition, notwithstanding the rights we have secured in our intellectual
property, other persons may bring claims against us that we have infringed on
their intellectual property rights or claims that our intellectual property
right interests are not valid. Any claims against us, with or without merit,
could be time consuming and costly to defend or litigate and therefore could
have an adverse affect on our business.

If our facilities were to experience catastrophic loss, our operations would be
seriously harmed. 

Our facilities could be subject to a catastrophic loss from fire, flood,
earthquake or terrorist activity. All of our activities, including
manufacturing, our corporate headquarters and other critical business operations
are in one location. Any catastrophic loss at this facility could disrupt our
operations, delay production, and revenue and result in large expenses to repair
or replace the facility. While we have obtained insurance to cover most
potential losses, we cannot assure you that our existing insurance coverage will
be adequate against all other possible losses.
 
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New rules, including those contained in and issued under the Sarbanes-Oxley Act
of 2002, may make it difficult for us to retain or attract qualified officers
and directors, which could adversely affect the management of our business and
our ability to obtain or retain listing of our common stock. 

We may be unable to attract and retain qualified officers, directors and members
of board committees required to provide for our effective management as a result
of the recent and currently proposed changes in the rules and regulations which
govern publicly-held companies, including, but not limited to, certifications
from executive officers and requirements for financial experts on the board of
directors. The perceived increased personal risk associated with these recent
changes may deter qualified individuals from accepting these roles. The
enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of a
series of new rules and regulations and the strengthening of existing rules and
regulations by the SEC. Further, certain of these recent and proposed changes
heighten the requirements for board or committee membership, particularly with
respect to an individual’s independence from the corporation and level of
experience in finance and accounting matters. We may have difficulty attracting
and retaining directors with the requisite qualifications. If we are unable to
attract and retain qualified officers and directors, the management of our
business could be adversely affected.

Our internal controls over financial reporting may not be effective, and our
independent registered public accounting firm may not be able to certify as to
their effectiveness, which could have a significant and adverse effect on our
business. 

We are subject to various regulatory requirements, including the Sarbanes-Oxley
Act of 2002. We, like all other public companies, must incur additional expenses
and, to a lesser extent, diversion of our management’s time in our efforts to
comply with Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal
controls over financial reporting. We have not evaluated our internal controls
over financial reporting in order to allow management to report on, and our
registered independent public accounting firm to attest to, our internal
controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, which we
collectively refer to as Section 404. We have never performed the system and
process evaluation and testing required in an effort to comply with the
management assessment and auditor certification requirements of Section 404,
which may initially apply to us as of December 31, 2007 and December 31, 2008,
respectively. Our lack of familiarity with Section 404 may unduly divert
management’s time and resources in executing the business plan. If, in the
future, management identifies one or more material weaknesses, or our external
auditors are unable to attest that our management’s report is fairly stated or
to express an opinion on the effectiveness of our internal controls, this could
result in a loss of investor confidence in our financial reports, have an
adverse effect on our stock price and/or subject us to sanctions or
investigation by regulatory authorities.

Economic, political, military or other events in the United States could
interfere with our success or operations and harm our business. 

We market and sell our products and services in the United States and abroad.
The September 11, 2001 terrorist attacks disrupted commerce throughout the
United States and other parts of the world. The continued threat of similar
attacks throughout the world and the military action, or possible military
action, taken by the United States and other nations, in Iraq or other countries
may cause significant disruption to commerce throughout the world. To the extent
that such disruptions further slow the global economy or, more particularly,
result in delays or cancellations of purchase orders for our products or extends
the sales cycles with potential customers, our business and results of
operations could be materially adversely affected. We are unable to predict
whether the threat of new attacks or the responses thereto will result in any
long-term commercial disruptions or if such activities or responses will have a
long-term material adverse effect on our business, results of operations or
financial condition.
 
48

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RISKS RELATED TO THE COMPANY’S COMMON STOCK AND THE OFFERING
 
Because our projections of future revenues and earnings are highly subjective
and may not reflect future results, investors may experience volatility in the
price of our common stock.
 
Customers of our products are varied and it is difficult to predict with any
degree of certainty what the Company’s revenues will be for any given period.
Our experience indicates that customers can change their purchasing patterns
quickly in response to market demands and therefore our forecasts may not be
relied upon to accurately forecast sales. We may have provided projections of
our future sales and earnings. Since we do not have long-term purchase
commitments from major customers and instead rely on a broader public to
purchase our products, it is difficult for us to accurately predict the amount
of our sales and related earnings in any given period. Our projections are based
on management’s best estimate of sales using historical sales data, information
from customers and other information deemed relevant. These projections are
highly subjective since sales to our customers can fluctuate substantially. Our
period to period revenues have varied in the past and may continue to vary in
the future. Any significant change in purchases by our customers can
significantly affect our sales and profitability.
 
If demand for our products fluctuates, our revenues, profitability and financial
condition could be adversely affected. Important factors that could cause demand
for our products to fluctuate include:

 
 · 
changes in customer product needs;

     

 
 · 
changes in the level of inventory;

     

 
 · 
changes in business and economic conditions, including a downturn in our
industry; and

     

 
 · 
market acceptance of our products.

If our actual sales or earnings are less than the projected amounts, the price
of our common stock may be adversely affected and accordingly our shareholders
should not place undue reliance on these projections.
 
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In addition, the price of our common stock may be adversely affected due to
other factors, such as changes in analysts’ estimates regarding earnings, or may
be due to factors relating to the markets in general. Shareholders should be
willing to incur the risk of such fluctuations.

If a market for our common stock does not develop, shareholders may be unable to
sell their shares.

A market for our common stock may never develop. Although we applied for
quotation of our common stock on the NASD over-the-counter bulletin board
through a market maker, our shares may never be traded on the bulletin board,
or, if traded, a public market may not materialize. If our common stock is not
traded on the bulletin board or if a public market for our common stock does not
develop, investors may not be able to re-sell the shares of our common stock
that they have purchased and may lose all of their investment.

Because we will be subject to the “Penny Stock” rules if our shares are quoted
on the over-the-counter bulletin board, the level of trading activity in our
stock may be reduced.

Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks generally are equity securities with a price of less
than $5.00 (other than securities registered on some national securities
exchanges or quoted on Nasdaq). The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
broker-dealers who sell these securities to persons other than established
customers and "accredited investors" must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. Consequently, these
requirements may have the effect of reducing the level of trading activity, if
any, in the secondary market for a security subject to the penny stock rules,
and investors in our common stock may find it difficult to sell their shares.

If our shares are quoted on the over-the-counter bulletin board, we will be
required to remain current in our filings with the SEC and our securities will
not be eligible for quotation if we are not current in our filings with the SEC.

In the event that our shares are quoted on the over-the-counter bulletin board,
we will be required order to remain current in our filings with the SEC in order
for shares of our common stock to be eligible for quotation on the
over-the-counter bulletin board. In the event that we become delinquent in our
required filings with the SEC, quotation of our common stock will be terminated
following a 30 or 60 day grace period if we do not make our required filing
during that time. If our shares are not eligible for quotation on the
over-the-counter bulletin board, investors in our common stock may find it
difficult to sell their shares.
 
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Because of our status as a relatively unknown company with a small and thinly
traded public float and lack of history as a public company which could lead to
wide fluctuations in our share price, the market price for our common stock may
be particularly volatile. 

The market for our common stock may be characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
could continue to be more volatile than a seasoned issuer for the indefinite
future. The potential volatility in our share price is attributable to a number
of factors. First, as noted above, our shares of common stock may be
sporadically and thinly traded. As a consequence of this lack of liquidity, the
trading of relatively small quantities of shares by our stockholders may
disproportionately influence the price of those shares in either direction. The
price for our shares could, for example, decline precipitously in the event that
a large number of our shares of common stock are sold on the market without
commensurate demand, as compared to a seasoned issuer which could better absorb
those sales without adverse impact on its share price. Many of these factors
will be beyond our control and may decrease the market price of our common
shares, regardless of our operating performance. We cannot make any predictions
or projections as to what the prevailing market price for our common stock will
be at any time.
 
In addition, the market price of our common stock could be subject to wide
fluctuations in response to:
 
-
 
quarterly variations in our revenues and operating expenses;
     
-
 
announcements of new products or services by us;
     
-
 
fluctuations in interest rates;
     
-
 
significant sales of our common stock, including “short” sales;
     
-
 
the operating and stock price performance of other companies that investors may
deem comparable to us; and
     
- 
 
news reports relating to trends in our markets or general economic conditions.

 
The stock market, in general, and the market prices for penny stock companies in
particular, have experienced volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the price of our stock, regardless of our
operating performance.
 
Stockholders should be aware that, according to SEC Release No. 34-29093, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include (1) control of the market for the security by one
or a few broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
 
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Limitations on director and officer liability and indemnification of our
officers and directors by us may discourage stockholders from bringing suit
against a director. 

Our articles of incorporation and bylaws provide, with certain exceptions as
permitted by governing state law, that a director or officer shall not be
personally liable to us or our stockholders for breach of fiduciary duty as a
director, except for acts or omissions which involve intentional misconduct,
fraud or knowing violation of law, or unlawful payments of dividends. These
provisions may discourage stockholders from bringing suit against a director for
breach of fiduciary duty and may reduce the likelihood of derivative litigation
brought by stockholders on our behalf against a director. In addition, our
articles of incorporation and bylaws may provide for mandatory indemnification
of directors and officers to the fullest extent permitted by governing state
law.
 
Because we do not expect to pay dividends for the foreseeable future, investors
seeking cash dividends should not purchase our common stock.

We currently intend to retain any future earnings to support the development and
expansion of our business and do not anticipate paying cash dividends in the
foreseeable future. Our payment of any future dividends will be at the
discretion of our board of directors after taking into account various factors,
including but not limited to our financial condition, operating results, cash
needs, growth plans and the terms of any credit agreements that we may be a
party to at the time. In addition, our ability to pay dividends on our common
stock may be limited by state law. Accordingly, investors must rely on sales of
their Common Stock after price appreciation, which may never occur, as the only
way to realize their investment.
 
Our Chief Executive Officer and Chief Financial Officer own or control at least
43% of our outstanding common stock, which may limit your ability and the
ability of our other stockholders, whether acting alone or together, to propose
or direct the management or overall direction of our Company. Additionally, this
concentration of ownership could discourage or prevent a potential takeover of
our Company that might otherwise result in shareholders receiving a premium over
the market price for our shares. 

We estimate that approximately 43% of our outstanding shares of common stock is
owned and controlled by our Chief Executive Officer and our Chief Financial
Officer. Such concentrated control of the Company may adversely affect the price
of our common stock. Our principal stockholders may be able to control matters
requiring approval by our stockholders, including the election of directors,
mergers or other business combinations. Such concentrated control may also make
it difficult for our stockholders to receive a premium for their shares of our
common stock in the event we merge with a third party or enter into different
transactions which require stockholder approval. These provisions could also
limit the price that investors might be willing to pay in the future for shares
of our common stock. Accordingly, the existing principal stockholders together
with our directors and executive officers will have the power to control the
election of our directors and the approval of actions for which the approval of
our stockholders is required. If you acquire shares, you may have no effective
voice in the management of the Company.
 
52

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Because future sales of substantial amounts of our equity securities in the
public market, or the perception that such sales could occur, could put downward
selling pressure on our securities, the market for our common stock may be
adversely affected.

Our common stock is presently not traded on any market or securities exchange,
but should a market develop, shares sold at a price below the current market
price at which the common stock is trading will cause that market price to
decline. Moreover, the offer or sale of a large number of shares at any price
may cause the market price to fall. There is a risk that this downward pressure
may make it impossible for an investor to sell his securities at any reasonable
price, if at all.

Because the securities to be issued in the Offering will be illiquid restricted
securities, investors may not be able to sell their securities when they want
to.
 
The Units, shares of Common Stock and Warrants issued in the Offering have not
been registered under the Securities Act, or registered or qualified under any
state securities laws. The Units, Common Stock and Warrants are being sold
pursuant to exemptions contained in and under those laws. Accordingly, these
securities will be considered "restricted securities" as defined in Rule 144
under the Securities Act and therefore may not be resold, and must be held
indefinitely unless registered under applicable federal and state securities
laws, or an exemption from the registration requirements of those laws is
available. Both the certificates representing the shares of Common Stock and the
Warrants sold in the Offering will contain a legend reflecting their restricted
status. Therefore, a purchaser may not be able to sell their securities when
they want to.

Because we may be unable to register all of the common stock included within the
Units for resale, investors may need to rely on an exemption from the
registration requirements in order to sell such common stock.

Under the Registration Rights Agreement, we are obligated to file a "resale"
registration statement with the SEC that covers all of the Common Stock included
within the Units sold in the Offering (along with the Empire Financial warrants
and 862,139 shares of common stock that have piggyback registration rights) and
to use our best efforts to have such "resale" registration statement declared
effective by the SEC at such time and in the manner set forth therein. It is
possible that the SEC (or NASD) may impose conditions that do not permit us or
interfere with our ability to register all of such shares of Common Stock for
resale. In certain circumstances, the SEC may take the view that the private
placement requires us to register the issuance of the securities as a primary
offering. Without sufficient disclosure of this risk, rescission of the private
placement could be sought by investors or an offer of rescission may be mandated
by the SEC, which would result in a material adverse affect to us. To date, the
SEC has not made any formal statements or proposed or adopted any new rules or
regulations regarding interpretations of Rule 415 promulgated under the
Securities Act, as such rule applies to resale registration statements. However,
investors should be aware of the risks that interpretive positions taken with
respect to Rule 415, or similar rules or regulations adopted subsequent to the
date hereof, could have on the manner in which the Common Stock may be
registered or our ability to register the Common Stock for resale at all. If we
are unable to register some or all of the Common Stock, such shares would only
be able to be sold pursuant to an exemption from registration under the
Securities Act, such as Rule 144, that permits the resale of securities
following twelve months after the issuance of such securities, subject to
certain volume limitations.
 
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Because investors in this Offering may be considered underwriters, they may be
subject to unfavorable laws that may apply to their detriment.

Investors purchasing Units in the Offering with a view to selling or otherwise
distributing those securities may be considered to be underwriters, subjecting
such investors to potential liability tinder Section 11 of the Securities Act.
Further, if deemed an underwriter, an investor could not rely on Rule 144 of the
Securities Act to sell or otherwise distribute the securities purchased in the
Offering.

If the SEC does not declare a registration statement effective, investors may
not be able to sell shares in the amounts or at the times they might otherwise
wish to do so.

The Company and the investors will enter into a Registration Rights Agreement at
the commencement of the Offering. The Company has already agreed to register
certain warrants in favor of Empire Financial. Under the applicable agreements,
we will be obligated to file a registration statement providing for the resale
of all of the shares of Common Stock (i) included in the Units, (ii) underlying
the Warrants that are included in the Units and (iii) underlying the warrants
issued to Empire Financial, within 30 days after commencement of this Offering.
If the registration statement is not timely filed or fails to be declared
effective by the SEC, then we must pay liquidated damages in the amount of 2% of
the aggregate purchase price with respect to investors, and no liquidated
damages associated with warrants in favor of Empire Financial. Although we
believe that we will be able to take all steps necessary to permit the SEC to
declare our registration statement effective, it is possible that the SEC may,
by application of policies or procedures, which may change over time, delay the
effectiveness of the registration statement or make it impractical for us to
respond to the SEC in a manner which permits the SEC to declare the registration
statement effective. If we are not able to cause the registration statement to
be declared effective, then investors will need to rely on exemptions from the
registration requirements of the Securities Act, such as Rule 144. Such
exemptions typically limit the amount of shares that an investor can sell,
require that the shares be sold in certain types of transactions, require that
the investor have held the shares to be sold for a minimum period of time and
limit the number of times that an investor may sell its shares.

Because management will have substantial discretion over the use of the proceeds
of the Offering, investors will have no control over where the money will go.

Our management will have significant flexibility in applying the net proceeds of
the Offering and may apply the proceeds in ways with which you do not agree. The
failure of our management to apply these fends effectively could materially harm
our business. The proposed allocation of the net proceeds of the Offering
represents our management's best estimate of the expected use of funds to
finance our activities in accordance with our management's current views and
objectives.
 
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Because we have not retained independent professionals for investors, they
should not rely on our professionals in connection with this Offering.

We have not retained any independent professionals to review or comment on the
Offering or otherwise protect your interests. Although we and Empire Financial
have each retained our own counsel, none of such firms nor any other firm has
made any independent examination of any factual matters represented by
management herein, and investors may not rely on such firms or their
participation in preparation of these disclosures or other matters related to
the Offering, including with respect to any matters herein described.
 
55

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Schedule 3.1(v)

PiggyBack Registration Rights
 
On September 27, 2006, the Company entered into an Exclusive Finder’s Agreement
with Empire Financial Group, Inc. (“Empire Financial”) in connection with a
private offering transaction of up to $6 million. The Company agreed to pay
Empire Financial cash compensation equal to 9% in of the gross proceeds of the
offering, and to issue warrants to purchase 100,000 shares of Company common
stock for every $1 million raised in the offering. The warrant shares have
piggyback registration rights.

On February 8, 2007, the Company issued and sold 785,856 shares of Common Stock
to accredited investors. The shares were sold at a price per share of $0.35.
These shares have piggy back registration rights. The shares were issued
pursuant to an exemption form registration provided by Rule 506 of Regulation D,
as they were issued without any form of general solicitation or general
advertising and the purchases qualified as accredited investors and accepted the
shares for their personal accounts and not with a view towards distribution.

During the quarter ended March 31, 2007, the Company repaid $50,000 of the
principal balance of a $100,000 note issued in November 2006 to an affiliate of
the Company’s Chief Executive Officer, and the remaining $50,000 of principal
plus accrued interest of $1,749 was converted into 147,853 shares of Common
Stock. These shares have piggy back registration rights. The shares were issued
pursuant to an exemption from registration provided by Rule 506 of Regulation D,
as they were issued without any form of general solicitation or general
advertising and the purchases qualified as accredited investors and accepted the
shares for their personal accounts and not with a view towards distribution.
 
56

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Schedule 3.1(aa)

The Company has an unsecured note in the amount of $200,000, bearing interest at
18% per annum, due and payable on August 15, 2007.
 
57

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Schedule 3.1(ee)

Hansen, Barnett & Maxwell, PC.
Salt Lake City, Utah
 
58

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Schedule 4.7

The following table summarizes the anticipated application of the proceeds the
Company will receive from this Offering if the maximum number of Units is sold:

 
 
Amount Assuming Maximum Offering
 
Percent
 
GROSS OFFERING
 
$
5,000,000
   
100.0
%
Commission 1
 
$
450,000
   
9.0
%
Net Proceeds
 
$
4,550,000
   
91.0
%
USE OF NET PROCEEDS
             
Acquisitions2
 
$
1,300,000
   
29
%
TV Infomercial3
 
$
1,080,000
   
24
%
Retail Distribution4
 
$
210,000
   
5
%
Mall Kiosk Program5
 
$
720,000
   
16
%
International Expansion6
 
$
210,000
   
5
%
Inventory Buildup7
 
$
370,000
   
8
%
Working Capital 8
 
$
660,000
   
15
%
TOTAL APPLICATION OF PROCEEDS
 
$
4,550,000
   
100.0
%

1 Commissions: The Company has engaged Empire Financial Group, Inc. (“Empire
Financial”), a licensed broker-dealer, to serve as the Company’s placement agent
in the Offering. The Units will be offered and sold by the Company and/or Empire
Financial on a “best-efforts minimum/maximum” basis. Pursuant to the terms of
the Company’s engagement with Empire Financial, the Company shall pay to Empire
Financial (i) a cash fee equal to 9% of the aggregate purchase price paid by
each purchaser of Units in the Offering, (ii) warrants to purchase 100,000
shares of common stock for every $1,000,000 raised in the Offering, exercisable
upon the same terms as Warrants sold to investors in the Offering, and (iii)
reimbursements for costs incurred not to exceed $10,000. The Company’s officers
and directors may also be involved in the sale of the Units, but will not
receive any sales commission or other remuneration for such efforts.

2 Acquisitions: acquire 2-3 complimentary companies and product lines by the end
of 2008. This will include the cash component of acquisition capital for the
purchase of revenue producing, complimentary companies. The Company will use a
combination of cash and equity to facilitate future acquisitions.

3 TV Infomercial: roll-out a full national television direct response ad
campaign during 2007.  These expenses include commercial production and
management costs and costs associated with the purchase of television media
time.

4 Retail Distribution: establish the Company’s products in approximately 150
national big box retail stores by the end of 2008. This cost will include retail
support with additional personnel, point-of-purchase materials, displays, etc.

5 Mall Kiosk Program: open 18 new corporate owned carts/kiosks in key malls by
the end of 2008. This cost includes displays, product, equipment, leases,
personnel on an average of $40k per location.

6 International Expansion: set up Zagg Europe by August 2007. These costs are to
set up the Company’s European operations for distribution and marketing in
Europe.
 
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7 Inventory Buildup: Buildup up inventory to support growth initiatives for
2007. These costs include new growth initiatives including infomercial, big box
distribution, new products, and corporate retail locations.

8 Working Capital: Develop organization to support the Company’s continued rapid
growth. Systems implementation and growth, additional staff required to support
growth, research and development for new products and expansion of online sales
programs, trade show participation, expansion of the Company’s campus program
and other miscellaneous general and administrative expenses.

Provided the Maximum Offering is sold, we anticipate that the net proceeds from
the Offering will be sufficient to meet our financial requirements for
approximately one year. In the event that less than the Maximum Offering is
sold, we may then require substantial additional capital to fund our current
business. The foregoing represents our current estimate of its allocation of the
net proceeds of the Offering. This estimate is based on certain assumptions and
the amounts actually expended for each purpose may vary significantly if any of
our assumptions prove inaccurate. We reserve the right to change the use of
proceeds as events may cause us to redirect our priorities and reallocate the
proceeds accordingly.

Growth by Acquisition

In February 2007, the Company changed its name from ShieldZone Corporation to
ZAGG Incorporated to better position itself to become a large and encompassing
company in the electronics’ accessories industry through organic growth and
through making targeted acquisitions. The ShieldZone name was very specific to
the invisibleSHIELD product line and although the invisibleSHIELD is and will
continue to be the Company’s core product, the name change will enable us the
opportunity to easily add new products to the Company’s product offering. ZAGG
is a lifestyle company with the slogan, “When others’ Zig, we ZAGG!” ZAGG will
continue to search out other complimentary proven products and companies that
fit the ZAGG lifestyle and strategy for fast growth.

The Company has identified a potential acquisition target in a marketing and
distribution company that will enable the Company to continue to develop its
strategy of new product development and marketing. The Company may use a portion
of the funds raised in this Offering as a portion of the acquisition funds for
this target. In addition, the Company has identified several other potential
acquisition targets that the Company anticipates would add additional revenues
and profits through complementary product offerings.

Organic Growth through Continued Aggressive Marketing

The Company’s invisibleSHIELD product line is still a relatively new product
offering, but it has proven to be well accepted by the consumer market. In two
years, over 200,000 invisibleSHIELDs have been sold to customers worldwide. The
majority of these sells have been over the internet, primarily to “early
adopters.” The Company feels that mass market provides significant growth
opportunity that has not yet been realized. The Company plans to reach the end
consumer through a targeted, brand-focused, approach with the invisibleSHIELD.
With adequate funding, the Company intents to implement its new aggressive
marketing initiatives that will focus on three key areas for growth: television
infomercial, retail sales and international sales.
 
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Television Infomercial

The invisibleSHIELD is a product that demonstrates well. Once a consumer sees
the invisibleSHIELD product and how it functions, there is a strong correlation
to purchases. Since the Company’s inception, the sales growth of the
invisibleSHIELD has primarily been through word-of-mouth advertising. The
Company believes that an effective short-form television infomercial, with a
direct response component, will both increase the invisibleSHIELD brand
awareness and enable an effective demonstration of the product. The Company has
contracted with an industry leader in the direct response industry to produce an
effective ad campaign that will be utilized on national television beginning in
the summer of 2007. As of the date hereof, the production of the infomercial is
in the final stages of production and anticipated to begin airing on national
television stations shortly, pending the successful outcome of a testing period.
The Company anticipates that the direct response campaign coupled with the
infomercial should successfully reach the general public, spread brand awareness
and create a gateway for an in-line big box store retail program.

Retail Distribution into Big Box stores

With the successful implementation of the infomercial, the Company anticipates
that the invisibleSHIELD brand will create a customer driven establishment of
the invisibleSHIELD product line in Big Box retail stores. The Company has
completed extensive research and determined that the invisibleSHIELD product
line may enjoy a successful direct response campaign and retail implementation.
The Company has already received positive feedback from major product
distributors to begin distribution of the invisibleSHIELD product line once new
retail packaging is completed and our television campaign is initiated. The
Company anticipates that this wholesale distribution will create wide-spread
awareness and market penetration.

Carts/Kiosks Retail Locations

An additional retail approach that has already been tested and proven to be
successful for the invisibleSHIELD product is that of carts and kiosks in malls.
Malls have heavy foot traffic and create an opportunity for potential customers
to see a live demonstration of the invisibleSHIELD. As of the date hereof, the
Company has 11 licensed retail mall carts established averaging approximately
$15,000 per month in retail sales. These carts and kiosks also offer our
customers the added benefit of performing the installation of the
invisibleSHIELD for an added fee. Although relatively easy to install,
approximately 80% of kiosk customers utilize the kiosk installation option. To
take advantage of the full margins offered by the invisibleSHIELD, the Company
plans to open approximately 18 corporate carts through the end of 2008. The
Company anticipates that these corporate carts will contribute approximately
$15,000 each in revenue. Corporate owned kiosk locations will also allow the
Company to easily add additional product offerings at each location allowing the
Company to realize full retail margins on these products.
 
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International Expansion

The Company’s internet presence www.ShieldZone.com and www.invisibleSHIELD.com
have consistently produced an average of over $170,000 a month in revenue for
the past several months. Approximately 10% of the Company’s online revenue is
already derived from European customers. With no current marketing or retail
presence in Europe, the Company sees great opportunity for growth in the
European marketplace. The Company anticipates that by duplicating current and
implementing future marketing initiatives and operations used in our current
operations should also be effective in the European markets, if executed
correctly. The Company is preparing to begin operations and fulfillment from a
centralized location in Europe during the third quarter of 2007. Pending the
successful European expansion of the Company’s operations, future offices are
planned for Canada, Asia, Australia, the Middle East and Central and South
America.
 
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