Securities Purchase Agreement


    
      

      

    

    


    Exhibit
      10.5

    


    


    SECURITIES
      PURCHASE AGREEMENT

    


    THIS SECURITIES
      PURCHASE AGREEMENT
      (this
“Agreement”),
      dated
      as of December 20, 2006, by and among COBALIS
      CORPORATION,
      a Nevada
      corporation (the “Company”),
      and
      the Buyers listed on Schedule I attached hereto (individually, a
“Buyer”
or
      collectively “Buyers”).

     

    WITNESSETH

    


    WHEREAS,
      the
      Company and the Buyer(s) are executing and delivering this Agreement in reliance
      upon an exemption from securities registration pursuant to Section 4(2) and/or
      Rule 506 of Regulation D (“Regulation
      D”)
      as
      promulgated by the U.S. Securities and Exchange Commission (the “SEC”)
      under
      the Securities Act of 1933, as amended (the “Securities
      Act”);

     

    WHEREAS,
      the
      parties desire that, upon the terms and subject to the conditions contained
      herein, the Company shall issue and sell to the Buyer(s), as provided herein,
      and the Buyer(s) shall purchase up to Three Million Eight Hundred Fifty Dollars
      ($3,850,000) of secured convertible debentures (the “Convertible
      Debentures”),
      which
      shall be convertible into shares of the Company’s common stock, par value $0.001
      (the “Common
      Stock”)
      (as
      converted, the “Conversion
      Shares”)
      of
      which Two Million Five Hundred Thousand Dollars ($2,500,000) shall be funded
      on
      the third (3rd) business day following the date hereof (the “First
      Closing”),
      Six
      Hundred Seventy Five Thousand Dollars ($675,000) shall be funded on the date
      the
      registration statement (the “Registration
      Statement”)
      is
      filed, pursuant to the Registration Rights Agreement dated the date hereof,
      with
      the United States Securities and Exchange Commission (the “SEC”)
      (the
“Second
      Closing”),
      and
      Six Hundred Seventy Five Thousand Dollars ($675,000) shall be funded within
      three (3) business days after the date the Registration Statement is declared
      effective by the SEC (the “Third
      Closing”)
      (individually referred to as a “Closing”
      collectively referred to as the “Closings”),
      for a
      total purchase price of up to Three Million Eight Hundred Fifty Dollars
      ($3,850,000), (the “Purchase
      Price”)
      in the
      respective amounts set forth opposite each Buyer(s) name on Schedule I (the
      “Subscription
      Amount”);
      and

     

    WHEREAS,
      contemporaneously with the execution and delivery of this Agreement, the parties
      hereto are executing and delivering a Registration Rights Agreement (the
“Registration
      Rights Agreement”)
      pursuant to which the Company has agreed to provide certain registration rights
      under the Securities Act and the rules and regulations promulgated there under,
      and applicable state securities laws; and

     

    WHEREAS,
      the
      Convertible Debentures are secured by (i) a security interest in all of the
      assets of the Company and of each of the Company's subsidiaries as evidenced
      by
      the security agreement of even date herewith (the “Security
      Agreement”),
      and
      (ii) certain shares of common stock owned by officers of the Company (the
“Pledged
      Shares”)
      as
      evidenced by the pledge and escrow agreement of even date herewith (the
“Pledge
      Agreement,”
and
      together with the Security Agreement collectively the “Security
      Documents”).

     

    WHEREAS,
      within
      thirty (30) days of the date hereof, the parties hereto are executing and
      delivering Irrevocable Transfer Agent Instructions (the “Irrevocable
      Transfer Agent Instructions”)
      in the
      forth attached hereto as Exhibit A.

     

    
      
        
        

      

      
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    NOW,
      THEREFORE,
      in
      consideration of the mutual covenants and other agreements contained in this
      Agreement the Company and the Buyer(s) hereby agree as follows:

     

    1.  PURCHASE
      AND SALE OF CONVERTIBLE DEBENTURES.

     

    (a)  Purchase
      of Convertible Debentures.
      Subject
      to the satisfaction (or waiver) of the terms and conditions of this Agreement,
      each Buyer agrees, severally and not jointly, to purchase at the Closings and
      the Company agrees to sell and issue to each Buyer, severally and not jointly,
      at each Closing, Convertible Debentures in amounts corresponding with the
      Subscription Amount set forth opposite each Buyer’s name on Schedule I hereto.


     

    (b)  Closing
      Date.
      The
      First Closing of the purchase and sale of the Convertible Debentures shall
      take
      place at 10:00 a.m. Eastern Standard Time on
      the
      third (3rd) business day
      following the date hereof, subject to notification of satisfaction of the
      conditions to the First Closing set forth herein and in Sections 6 and 7 below
      (or such later date as is mutually agreed to by the Company and the Buyer(s))
      (the “First
      Closing Date”),
      the
      Second Closing of the purchase and sale of the Convertible Debentures shall
      take
      place at 4:00 p.m. Eastern Standard Time on the date the Registration Statement
      is filed with the SEC, subject to notification of satisfaction of the conditions
      to the Second Closing set forth herein and in Sections 6 and 7 below (or such
      later date as is mutually agreed to by the Company and the Buyer(s)) (the
“Second
      Closing Date”),
      and
      the Third Closing of the purchase and sale of the Convertible Debentures shall
      take place at 10:00 a.m. Eastern Standard Time on the third (3rd) business
      day
      immediately following the date the Registration Statement is declared effective
      by the SEC, subject to notification of satisfaction of the conditions to the
      Third Closing set forth herein and in Sections 6 and 7 below (or such earlier
      date as is mutually agreed to by the Company and the Buyer(s)) (the
“Third
      Closing Date”)
      (collectively referred to as the “Closing
      Dates”).
      Each
      Closing shall occur on the respective Closing Dates at the offices of Yorkville
      Advisors, LLC, 3700 Hudson Street, Suite 3700, Jersey City, New Jersey 07302
      (or
      such other place as is mutually agreed to by the Company and the Buyer(s)).
      

     

    (c)  Form
      of Payment.
      Subject
      to the satisfaction of the terms and conditions of this Agreement, on the
      respective Closing Dates, (i) the Buyers shall deliver to the Company such
      aggregate proceeds for the Convertible Debentures to be issued and sold to
      such
      Buyer(s), minus the fees to be paid directly from the proceeds of the Closings
      as set forth herein, and (ii) the Company shall deliver to each Buyer,
      Convertible Debentures which such Buyer(s) is purchasing in amounts indicated
      opposite such Buyer’s name on Schedule I, duly executed on behalf of the
      Company.

     

    2.  BUYER’S
      REPRESENTATIONS AND WARRANTIES.

     

    Each
      Buyer represents and warrants, severally and not jointly, that:

     

    (a)  Investment
      Purpose.
      Each
      Buyer is acquiring the Convertible Debentures and, upon conversion of
      Convertible Debentures, the Buyer will acquire the Conversion Shares then
      issuable, for its own account for investment only and not with a view towards,
      or for resale in connection with, the public sale or distribution thereof,
      except pursuant to sales registered or exempted under the Securities Act;
      provided, however, that by making the representations herein, such Buyer
      reserves the right to dispose of the Conversion Shares at any time in accordance
      with or pursuant to an effective registration statement covering such Conversion
      Shares or an available exemption under the Securities Act.

     

    
      
        
        

      

      
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    (b)  Accredited
      Investor Status.
      Each
      Buyer is an “Accredited
      Investor”
as
      that
      term is defined in Rule 501(a)(3) of Regulation D.

     

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

     

    (d)  Information.
      Each
      Buyer and its advisors (and his or, its counsel), if any, have been furnished
      with all materials relating to the business, finances and operations of the
      Company and information he deemed material to making an informed investment
      decision regarding his purchase of the Convertible Debentures and the Conversion
      Shares, which have been requested by such Buyer. Each Buyer and its advisors,
      if
      any, have been afforded the opportunity to ask questions of the Company and
      its
      management. Neither such inquiries nor any other due diligence investigations
      conducted by such Buyer or its advisors, if any, or its representatives shall
      modify, amend or affect such Buyer’s right to rely on the Company’s
      representations and warranties contained in Section 3 below. Each Buyer
      understands that its investment in the Convertible Debentures and the Conversion
      Shares involves a high degree of risk. Each Buyer is in a position regarding
      the
      Company, which, based upon employment, family relationship or economic
      bargaining power, enabled and enables such Buyer to obtain information from
      the
      Company in order to evaluate the merits and risks of this investment. Each Buyer
      has sought such accounting, legal and tax advice, as it has considered necessary
      to make an informed investment decision with respect to its acquisition of
      the
      Convertible Debentures and the Conversion Shares.

     

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

     

    (f)  Transfer
      or Resale.
      Each
      Buyer understands that except as provided in the Registration Rights Agreement:
      (i) the Convertible Debentures have not been and are not being registered under
      the Securities Act or any state securities laws, and may not be offered for
      sale, sold, assigned or transferred unless (A) subsequently registered
      thereunder, or (B) such Buyer shall have delivered to the Company an opinion
      of
      counsel, in a generally acceptable form, to the effect that such securities
      to
      be sold, assigned or transferred may be sold, assigned or transferred pursuant
      to an exemption from such registration requirements; (ii) any sale of such
      securities made in reliance on Rule 144 under the Securities Act (or a successor
      rule thereto) (“Rule 144”)
      may be
      made only in accordance with the terms of Rule 144 and further, if Rule 144
      is
      not applicable, any resale of such securities under circumstances in which
      the
      seller (or the person through whom the sale is made) may be deemed to be an
      underwriter (as that term is defined in the Securities Act) may require
      compliance with some other exemption under the Securities Act or the rules
      and
      regulations of the SEC thereunder; and (iii) neither the Company nor any other
      person is under any obligation to register such securities under the Securities
      Act or any state securities laws or to comply with the terms and conditions
      of
      any exemption thereunder. The Company reserves the right to place stop transfer
      instructions against the shares and certificates for the Conversion
      Shares.

     

    
      
        
        

      

      
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    (g)  Legends.
      Each
      Buyer understands that the certificates or other instruments representing the
      Convertible Debentures and or the Conversion Shares shall bear a restrictive
      legend in substantially the following form (and a stop -transfer order may
      be
      placed against transfer of such stock certificates):

     

    THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
      SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A
      VIEW
      TOWARD RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
      IN
      THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
      THE
      SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR
      AN
      OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
      REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. 

     

    The
      legend set forth above shall be removed and the Company within two (2) business
      days shall issue a certificate without such legend to the holder of the
      Conversion Shares upon which it is stamped, if, unless otherwise required by
      state securities laws, (i) in connection with a sale transaction, provided
      the
      Conversion Shares are registered under the Securities Act or (ii) in connection
      with a sale transaction, after such holder provides the Company with an opinion
      of counsel, which opinion shall be in form, substance and scope customary for
      opinions of counsel in comparable transactions, to the effect that a public
      sale, assignment or transfer of the Conversion Shares may be made without
      registration under the Securities Act. 

     

    (h)  Authorization.
      The
      Buyer has full power and authority to enter into the Transaction Documents.
      All
      action on the part of the Buyer, its officers, directors and stockholders
      necessary for the authorization, execution and delivery of the Transaction
      Documents has been taken or will be taken prior to the Closing. Each such
      agreement constitutes a valid and legally binding obligation of the Buyer,
      enforceable in accordance with its terms except (i) as limited by
      applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
      moratorium and other laws of general application affecting enforcement of
      creditors’ rights generally, and subject to general principles of equity
      (regardless of whether enforcement is sought in a proceeding at law or in
      equity); and (ii) as limited by laws relating to the availability of
      specific performance, injunctive relief or other equitable remedies (regardless
      of whether enforcement is sought in a proceeding at law or in
      equity).

     

    
      
        
        

      

      
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    (i)  Receipt
      of Documents.
      Each
      Buyer and his or its counsel has received and read in their entirety: (i) this
      Agreement and each representation, warranty and covenant set forth herein and
      the Transaction Documents (as defined herein); (ii) all due diligence and other
      information necessary to verify the accuracy and completeness of such
      representations, warranties and covenants; (iii) the Company’s Form 10-KSB for
      the fiscal year ended March 31, 2006; (iv) the Company’s Forms 10-QSB for the
      fiscal quarters ended June 30 and September 30, 2006 (v) the Company’s Form 8-K
      filed on October 26, 2006, and (vi) answers to all questions each Buyer
      submitted to the Company regarding an investment in the Company; and each Buyer
      has relied on the information contained therein and has not been furnished
      any
      other documents, literature, memorandum or prospectus.

     

    (j)  Due
      Formation of Corporate and Other Buyers.
      If the
      Buyer(s) is a corporation, trust, partnership or other entity that is not an
      individual person, it has been formed and validly exists and has not been
      organized for the specific purpose of purchasing the Convertible Debentures
      and
      is not prohibited from doing so.

     

    (k)  No
      Legal Advice From the Company.
      Each
      Buyer acknowledges, that it had the opportunity to review this Agreement and
      the
      transactions contemplated by this Agreement with his or its own legal counsel
      and investment and tax advisors. Each Buyer is relying solely on such counsel
      and advisors and not on any statements or representations of the Company or
      any
      of its representatives or agents for legal, tax or investment advice with
      respect to this investment, the transactions contemplated by this Agreement
      or
      the securities laws of any jurisdiction. 

     

    3.  REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY.

     

    The
      Company represents and warrants as of the date hereof to each of the Buyers
      that, except as set forth in the SEC Documents (as defined herein) or in the
      Disclosure Schedule attached hereto (the “Disclosure
      Schedule”)
      the
      statements contained in this Section 3 are complete and accurate as of the
      date of this Agreement. As used in this Section 3, the term “Knowledge” shall
      mean the actual knowledge of the officers of the Company.

     

    (a)  Organization
      and Qualification.
      The
      Company and its subsidiaries are corporations duly organized and validly
      existing in good standing under the laws of the jurisdiction in which they
      are
      incorporated, and have the requisite corporate power to own their properties
      and
      to carry on their business as now being conducted. Each of the Company and
      its
      subsidiaries is duly qualified as a foreign corporation to do business and
      is in
      good standing in every jurisdiction in which the nature of the business
      conducted by it makes such qualification necessary, except to the extent that
      the failure to be so qualified or be in good standing would not have a material
      adverse effect on the Company and its subsidiaries taken as a
      whole.

     

    
      
        
        

      

      
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    (b)  Authorization,
      Enforcement, Compliance with Other Instruments.
      (i)
      Except as contemplated herein, the Company has the requisite corporate power
      and
      authority to enter into and perform this Agreement, the Security Documents,
      the
      Registration Rights Agreement, the Irrevocable Transfer Agent Agreement, and
      any
      related agreements (collectively the “Transaction
      Documents”)
      and to
      issue the Convertible Debentures and the Conversion Shares in accordance with
      the terms hereof and thereof, (ii) the execution and delivery of the Transaction
      Documents by the Company and the consummation by it of the transactions
      contemplated hereby and thereby, including, without limitation, the issuance
      of
      the Convertible Debentures, the Conversion Shares, and the reservation for
      issuance and the issuance of the Conversion Shares issuable upon conversion
      or
      exercise thereof, have been duly authorized by the Company’s Board of Directors
      and no further consent or authorization is required by the Company, its Board
      of
      Directors or its stockholders, (iii) the Transaction Documents have been duly
      executed and delivered by the Company, (iv) the Transaction Documents constitute
      the valid and binding obligations of the Company enforceable against the Company
      in accordance with their terms, except as such enforceability may be limited
      by
      general principles of equity or applicable bankruptcy, insolvency,
      reorganization, moratorium, liquidation or similar laws relating to, or
      affecting generally, the enforcement of creditors’ rights and
      remedies.

     

    (c)  Capitalization.
      The
      authorized capital stock of the Company consists of 50,000,000 shares of Common
      Stock and 5,000,000 shares of Preferred Stock, par value $0.001 (“Preferred
      Stock”)
      of
      which 35,929,126 shares of Common Stock and 500 shares of Preferred Stock are
      issued and outstanding. All of such outstanding shares have been validly issued
      and are fully paid and nonassessable. No shares of Common Stock are subject
      to
      preemptive rights or any other similar rights or any liens or encumbrances
      suffered or permitted by the Company. As of the date of this Agreement, (i)
      there are no outstanding options, warrants, rights to subscribe to, calls or
      commitments of any character whatsoever relating to, or securities or rights
      convertible into, any shares of capital stock of the Company or any of its
      subsidiaries, or contracts, commitments, understandings or arrangements by
      which
      the Company or any of its subsidiaries is or may become bound to issue
      additional shares of capital stock of the Company or any of its subsidiaries
      or
      options, warrants, scrip, rights to subscribe to, calls or commitments of any
      character whatsoever relating to, or securities or rights convertible into,
      any
      shares of capital stock of the Company or any of its subsidiaries, (ii) there
      are no outstanding debt securities; (iii) there are no agreements or
      arrangements under which the Company or any of its subsidiaries is obligated
      to
      register the sale of any of their securities under the Securities Act (except
      pursuant to the Registration Rights Agreement) and (iv) there are no outstanding
      registration statements and there are no outstanding comment letters from the
      SEC or any other regulatory agency. There are no securities or instruments
      containing anti-dilution or similar provisions that will be triggered by the
      issuance of the Convertible Debentures as described in this Agreement. The
      Company has made available to the Buyer true and correct copies of the Company’s
      Articles of Incorporation, as amended and as in effect on the date hereof (the
      “Articles
      of Incorporation”),
      and
      the Company’s By-laws, as in effect on the date hereof (the “By-laws”),
      and
      the terms of all securities convertible into or exercisable for Common Stock
      and
      the material rights of the holders thereof in respect thereto other than stock
      options issued to employees and consultants. 

     

    (d)  Issuance
      of Securities.
      The
      Convertible Debentures are duly authorized and, upon issuance in accordance
      with
      the terms hereof, shall be duly issued, fully paid and nonassessable, are free
      from all taxes, liens and charges with respect to the issue thereof. The
      Conversion Shares issuable upon conversion of the Convertible Debentures have
      been duly authorized and reserved for issuance. Upon conversion or exercise
      in
      accordance with the Convertible Debentures the Conversion Shares will be duly
      issued, fully paid and nonassessable.

     

    
      
        
        

      

      
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    (e)  No
      Conflicts.
      The
      execution, delivery and performance of the Transaction Documents by the Company
      and the consummation by the Company of the transactions contemplated hereby
      will
      not (i) result in a violation of the Articles of Incorporation, any certificate
      of designations of any outstanding series of preferred stock of the Company
      or
      the By-laws or (ii) conflict with or constitute a default (or an event which
      with notice or lapse of time or both would become a default) under, or give
      to
      others any rights of termination, amendment, acceleration or cancellation of,
      any agreement, indenture or instrument to which the Company or any of its
      subsidiaries is a party, or result in a violation of any law, rule, regulation,
      order, judgment or decree (including federal and state securities laws and
      regulations and the rules and regulations of The National Association of
      Securities Dealers Inc.’s OTC Bulletin Board on which the Common Stock is
      quoted) applicable to the Company or any of its subsidiaries or by which any
      property or asset of the Company or any of its subsidiaries is bound or
      affected. Neither the Company nor its subsidiaries is in violation of any term
      of or in default under its Articles of Incorporation or By-laws or their
      organizational charter or by-laws, respectively, or any material contract,
      agreement, mortgage, indebtedness, indenture, instrument, judgment, decree
      or
      order or any statute, rule or regulation applicable to the Company or its
      subsidiaries. The business of the Company and its subsidiaries is not being
      conducted, and shall not be conducted in violation of any material law,
      ordinance, or regulation of any governmental entity.

     

    (f)  SEC
      Documents: Financial Statements.
      Since
      January 1, 2003, the Company has filed all reports, schedules, forms, statements
      and other documents required to be filed by it with the SEC under the Securities
      Exchange Act of 1934, as amended (the “Exchange
      Act”)
      (all
      of the foregoing filed prior to the date hereof or amended after the date hereof
      and all exhibits included therein and financial statements and schedules thereto
      and documents incorporated by reference therein, being hereinafter referred
      to
      as the “SEC
      Documents”).
      The
      Company has delivered to the Buyers or their representatives, or made available
      through the SEC’s website at http://www.sec.gov., true and complete copies of
      the SEC Documents. As of their respective dates, the financial statements of
      the
      Company disclosed in the SEC Documents (the “Financial
      Statements”)
      complied as to form in all material respects with applicable accounting
      requirements and the published rules and regulations of the SEC with respect
      thereto. Such financial statements have been prepared in accordance with
      generally accepted accounting principles, consistently applied, during the
      periods involved (except (i) as may be otherwise indicated in such Financial
      Statements or the notes thereto, or (ii) in the case of unaudited interim
      statements, to the extent they may exclude footnotes or may be condensed or
      summary statements) and, fairly present in all material respects the financial
      position of the Company as of the dates thereof and the results of its
      operations and cash flows for the periods then ended (subject, in the case
      of
      unaudited statements, to normal year-end audit adjustments).

     

    (g)  10(b)-5.
      To the
      Company’s Knowledge, the SEC Documents do not include any untrue statements of
      material fact, nor do they omit to state any material fact required to be stated
      therein necessary to make the statements made, in light of the circumstances
      under which they were made, not misleading.

     

    
      
        
        

      

      
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    (h)  Absence
      of Litigation.
      There
      is no action, suit, proceeding, pending before or by any court, public board,
      government agency, self-regulatory organization or body pending against the
      Company of any of the Company’s subsidiaries or, to the Knowledge of the
      Company, affecting the Company, the Common Stock or any of the Company’s
      subsidiaries, wherein an unfavorable decision, ruling or finding would (i)
      have
      a material adverse effect on the transactions contemplated hereby (ii) adversely
      affect the validity or enforceability of, or the authority or ability of the
      Company to perform its obligations under, this Agreement or any of the documents
      contemplated herein, or (iii) have a material adverse effect on the business,
      operations, properties, financial condition or results of operations of the
      Company and its subsidiaries taken as a whole.

     

    (i)  Acknowledgment
      Regarding Buyer’s Purchase of the Convertible Debentures.
      The
      Company acknowledges and agrees that the Buyer(s) is acting solely in the
      capacity of an arm’s length purchaser with respect to this Agreement and the
      transactions contemplated hereby. The Company further acknowledges that the
      Buyer(s) is not acting as a financial advisor or fiduciary of the Company (or
      in
      any similar capacity) with respect to this Agreement and the transactions
      contemplated hereby and any advice given by the Buyer(s) or any of their
      respective representatives or agents in connection with this Agreement and
      the
      transactions contemplated hereby is merely incidental to such Buyer’s purchase
      of the Convertible Debentures or the Conversion Shares. The Company further
      represents to the Buyer that the Company’s decision to enter into this Agreement
      has been based solely on the independent evaluation by the Company and its
      representatives.

     

    (j)  No
      General Solicitation.
      Neither
      the Company, nor any of its affiliates, nor any person acting on its or their
      behalf, has engaged in any form of general solicitation or general advertising
      (within the meaning of Regulation D under the Securities Act) in connection
      with
      the offer or sale of the Convertible Debentures or the Conversion
      Shares.

     

    (k)  No
      Integrated Offering.
      To the
      Knowledge of the Company, 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 require registration of the Convertible
      Debentures or the Conversion Shares under the Securities Act or cause this
      offering of the Convertible Debentures or the Conversion Shares to be integrated
      with prior offerings by the Company for purposes of the Securities
      Act.

     

    (l)  Employee
      Relations.
      Neither
      the Company nor any of its subsidiaries is involved in any labor dispute nor,
      to
      the knowledge of the Company or any of its subsidiaries, is any such dispute
      threatened. None of the Company’s or its subsidiaries’ employees is a member of
      a union and the Company and its subsidiaries believe that their relations with
      their employees are good.

     

    (m)  Intellectual
      Property Rights.
      The
      Company and its subsidiaries own or possess adequate rights or licenses to
      use
      all trademarks, trade names, service marks, service mark registrations, service
      names, patents, patent rights, inventions, licenses, approvals, governmental
      authorizations, trade secrets and rights necessary to conduct their respective
      businesses as now conducted except where failure to do so would constitute
      a
      Material Adverse Effect. The Company and its subsidiaries do not have any
      Knowledge of any infringement by the Company or its subsidiaries of trademark,
      trade name rights, patents, patent rights, copyrights, inventions, licenses,
      service names, service marks, service mark registrations, trade secret or other
      similar rights of others, and, to the Knowledge of the Company, there is no
      claim, action or proceeding being made or brought against, or to the Company’s
      knowledge, being threatened against, the Company or its subsidiaries regarding
      trademark, trade name, patents, patent rights, invention, copyright, license,
      service names, service marks, service mark registrations, trade secret or other
      infringement; and the Company and its subsidiaries are unaware of any facts
      or
      circumstances which might give rise to any of the foregoing.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    (n)  Environmental
      Laws.
      The
      Company and its subsidiaries are (i) in compliance with any and all applicable
      foreign, federal, state and local laws and regulations relating to the
      protection of human health and safety, the environment or hazardous or toxic
      substances or wastes, pollutants or contaminants (“Environmental
      Laws”),
      (ii)
      have received all permits, licenses or other approvals required of them under
      applicable Environmental Laws to conduct their respective businesses and (iii)
      are in compliance in all material respects with all terms and conditions of
      any
      such permit, license or approval.

     

    (o)  Title.
      Any
      real property and facilities held under lease by the Company and its
      subsidiaries are held by them under valid, subsisting and enforceable leases
      with such exceptions as are not material and do not interfere with the use
      made
      and proposed to be made of such property and buildings by the Company and its
      subsidiaries except where failure to do so would constitute a Material Adverse
      Effect..

     

    (p)  Insurance.
      The
      Company and each of its subsidiaries are insured by insurers of recognized
      financial responsibility against such losses and risks and in such amounts
      as
      management of the Company believes to be prudent and customary in the businesses
      in which the Company and its subsidiaries are engaged. Neither the Company
      nor
      any such subsidiary has been refused any insurance coverage sought or applied
      for and neither the Company nor any such subsidiary has any reason to believe
      that it will not be able to renew its existing insurance coverage as and when
      such coverage expires or to obtain similar coverage from similar insurers as
      may
      be necessary to continue its business at a cost that would not materially and
      adversely affect the condition, financial or otherwise, or the earnings,
      business or operations of the Company and its subsidiaries, taken as a
      whole.

     

    (q)  Regulatory
      Permits.
      The
      Company and its subsidiaries possess all material certificates, authorizations
      and permits issued by the appropriate federal, state or foreign regulatory
      authorities necessary to conduct their respective businesses, and neither the
      Company nor any such subsidiary has received any notice of proceedings relating
      to the revocation or modification of any such certificate, authorization or
      permit.

     

    (r)  Internal
      Accounting Controls.
      The
      Company and each of its subsidiaries maintain a system of internal accounting
      controls sufficient to provide reasonable assurance that (i) transactions are
      executed in accordance with management’s general or specific authorizations,
      (ii) transactions are recorded as necessary to permit preparation of financial
      statements in conformity with generally accepted accounting principles and
      to
      maintain asset accountability, and (iii) the recorded amounts for assets is
      compared with the existing assets at reasonable intervals and appropriate action
      is taken with respect to any differences.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    (s)  No
      Material Adverse Breaches, etc.
      To the
      Company’s Knowledge, neither the Company nor any of its subsidiaries is subject
      to any charter, corporate or other legal restriction, or any judgment, decree,
      order, rule or regulation which in the judgment of the Company’s officers has or
      is expected in the future to have a material adverse effect on the business,
      properties, operations, financial condition, results of operations or prospects
      of the Company or its subsidiaries. Neither the Company nor any of its
      subsidiaries is in breach of any contract or agreement which breach, in the
      judgment of the Company’s officers, has or is expected to have a material
      adverse effect on the business, properties, operations, financial condition,
      results of operations or prospects of the Company or its
      subsidiaries.

     

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

     

    (u)  Certain
      Transactions.
      Except
      for arm’s length transactions pursuant to which the Company makes payments in
      the ordinary course of business upon terms no less favorable than the Company
      could obtain from third parties and other than the grant of stock options
      disclosed in the SEC Documents, none of the officers, directors, or employees
      of
      the Company is presently a party to any transaction with the Company (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 corporation, partnership, trust or other entity
      in
      which any officer, director, or any such employee has a substantial interest
      or
      is an officer, director, trustee or partner.

     

    (v)  Fees
      and Rights of First Refusal.
      The
      Company is not obligated to offer the securities offered hereunder on a right
      of
      first refusal basis or otherwise to any third parties including, but not limited
      to, current or former shareholders of the Company, underwriters, brokers, agents
      or other third parties.

     

    4.  COVENANTS.

     

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

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

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

     

    (c)  Reporting
      Status.
      Until
      the earlier of (i) the date as of which the Buyer(s) may sell all of the
      Conversion Shares without restriction pursuant to Rule 144 promulgated under
      the
      Securities Act (or successor thereto), or (ii) the date on which (A) the
      Buyer(s) shall have sold all the Conversion Shares and (B) none of the
      Convertible Debentures are outstanding (the “Registration
      Period”),
      the
      Company shall file in a timely manner all reports required to be filed with
      the
      SEC pursuant to the Exchange Act and the regulations of the SEC thereunder,
      and
      the Company shall not terminate its status as an issuer required to file reports
      under the Exchange Act even if the Exchange Act or the rules and regulations
      thereunder would otherwise permit such termination.

     

    (d)  Use
      of
      Proceeds.
      The
      Company will use the proceeds from the sale of the Convertible Debentures for
      general corporate and working capital purposes.

     

    (e)  Reservation
      of Shares.
      On the
      date hereof, the Company shall initially reserve for issuance to the Buyers
      10,583,737
      shares
      in
      total for issuance upon both conversions of the Convertible Dentures and upon
      exercise of the Warrants (collectively, the “Initial
      Share Reserve”).
      The
      Company represents that it has sufficient authorized and unissued shares of
      Common Stock available to create the Initial Share Reserve after considering
      all
      other commitments that may require the issuance of Common Stock. After the
      Company increases its authorized Common Stock in accordance with Section 4(o)
      hereof, the Company shall promptly increase the Initial Share Reserve to a
      total
      share reserve of 15,400,000 shares for issuance upon conversions of the
      Convertible Debentures and upon exercise of the Warrants (collectively, the
      “Share
      Reserve”).
      The
      Company shall take all action reasonably necessary to at all times have
      authorized, and reserved for the purpose of issuance, such number of shares
      of
      Common Stock as shall be necessary to effect the full conversion of the
      Convertible Debentures and the full exercise of the Warrants. If at any time
      the
      Share Reserve is insufficient to effect the full conversion of the Convertible
      Debentures or the full exercise of the Warrants, the Company shall increase
      the
      Share Reserve accordingly. If the Company does not have sufficient authorized
      and unissued shares of Common Stock available to increase the Share Reserve,
      the
      Company shall call and hold a special meeting of the shareholders within seventy
      five (75) days of such occurrence, for the sole purpose of increasing the number
      of shares authorized. The Company’s management shall recommend to the
      shareholders to vote in favor of increasing the number of shares of Common
      Stock
      authorized. Management shall also vote all of its shares in favor of increasing
      the number of authorized shares of Common Stock.

     

    (f)  Listings
      or Quotation.
      The
      Company’s Common Stock shall be listed or quoted for trading on any of (a) the
      American Stock Exchange, (b) New York Stock Exchange, (c) the Nasdaq National
      Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC Bulletin Board
      (“OTC”)
      (each,
      a “Primary
      Market”)
      and
      the Company shall promptly secure the listing or quotation of the Conversion
      Shares and Warrant Shares for trading on the same Primary Market upon which
      the
      shares of Common Stock are then listed or quoted. 

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    (g)  Fees
      and Expenses. 

     

    (i)  Each
      of
      the Company and the Buyer(s) shall pay all costs and expenses incurred by such
      party in connection with the negotiation, investigation, preparation, execution
      and delivery of the Transaction Documents. The Company shall pay Yorkville
      Advisors LLC a fee equal to ten percent (10%) of the Purchase Price which shall
      be paid pro rata directly from the gross proceeds of each Closing. 

     

    (ii)  The
      Company shall pay a structuring fee to Yorkville Advisors LLC of Twenty Two
      Thousand Five Hundred Dollars ($22,500) which shall be paid directly from the
      proceeds of the First Closing. 

     

    (iii)  The
      Company shall pay Yorkville Advisors, LLC a non-refundable due diligence fee
      of
      Seven Thousand Five Hundred Dollars ($7,500) which has been paid.

     

    (iv)  On
      the
      date hereof the Company shall issue to the Buyer the A Warrants, B Warrants,
      C
      Warrants, and D Warrants in the amounts set forth next to the Buyer’s name set
      forth below (the A, B, C, and D Warrants collectively, the “Warrants”).
      Each
      of the Warrants shall be in the form of the Warrant attached hereto as Exhibit
      B. The shares of Common Stock issuable under the Warrants shall collectively
      be
      referred to as the “Warrant
      Shares”.

     

    
      	
              Buyer

            	 	
              Warrant
                Series

            	 	
              Purchase
                Amount

            	 	
              Warrant
                Shares

            	 	
              Warrant

              Exercise
                Price

            	 
	
              Cornell
                Capital Partners, LP.

            	 	 	
              A
                Warrant

            	 	
              $

            	
              1,000,000

            	 	 	
              1,333,333

            	 	
              $

            	
              0.750

            	 
	
              Cornell
                Capital Partners, LP.

            	 	 	
              B
                Warrant

            	 	
              $

            	
              1,000,000

            	 	 	
              1,205,400

            	 	
              $

            	
              0.8296

            	 
	
              Cornell
                Capital Partners, LP.

            	 	 	
              C
                Warrant

            	 	
              $

            	
              1,750,000

            	 	 	
              2,343,959

            	 	
              $

            	
              0.7466

            	 
	
              Cornell
                Capital Partners, LP.

            	 	 	
              D
                Warrant

            	 	
              $

            	
              1,750,000

            	 	 	
              1,757,910

            	 	
              $

            	
              0.9955

            	 
	
               

            	 	 	
              
              

            	 	 	
              
              

            	 	 	
              
              

            	 	 	
              
              

            	 
	
              Total
                Warrant Shares

            	 	 	
              
              

            	 	
              $

            	
              5,500,000

            	 	 	
              6,640,602

            	 	 	
              
              

            	 


    

     

    (h)  Corporate
      Existence.
      So long
      as any of the Convertible Debentures remain outstanding, the Company shall
      not
      directly or indirectly consummate any merger, reorganization, restructuring,
      reverse stock split consolidation, sale of all or substantially all of the
      Company’s assets or any similar transaction or related transactions (each such
      transaction, an “Organizational
      Change”)
      unless, prior to the consummation an Organizational Change, the Company obtains
      the written consent of each Buyer, which shall not be unreasonably withheld,
      conditioned, or delayed. In any such case, the Company will make appropriate
      provision with respect to such holders’ rights and interests to insure that the
      provisions of this Section 4(h) will thereafter be applicable to the Convertible
      Debentures.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    (i)  Transactions
      With Affiliates.
      So long
      as any Convertible Debentures are outstanding, the Company shall not, and shall
      cause each of its subsidiaries not to, enter into, amend, modify or supplement,
      or permit any subsidiary to enter into, amend, modify or supplement any
      agreement, transaction, commitment, or arrangement with any of its or any
      subsidiary’s officers, directors, person who were officers or directors at any
      time during the previous two (2) years, stockholders who beneficially own five
      percent (5%) or more of the Common Stock, or Affiliates (as defined below)
      or
      with any individual related by blood, marriage, or adoption to any such
      individual or with any entity in which any such entity or individual owns a
      five
      percent (5%) or more beneficial interest (each a “Related
      Party”),
      except for (a) customary employment arrangements and benefit programs on
      reasonable terms, (b) any investment in an Affiliate of the Company, (c) any
      agreement, transaction, commitment, or arrangement on an arms-length basis
      on
      terms no less favorable than terms which would have been obtainable from a
      person other than such Related Party, (d) any agreement, transaction,
      commitment, or arrangement which is approved by a majority of the disinterested
      directors of the Company; for purposes hereof, any director who is also an
      officer of the Company or any subsidiary of the Company shall not be a
      disinterested director with respect to any such agreement, transaction,
      commitment, or arrangement. “Affiliate”
for
      purposes hereof means, with respect to any person or entity, another person
      or
      entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
      interest in that person or entity, (ii) has ten percent (10%) or more common
      ownership with that person or entity, (iii) controls that person or entity,
      or
      (iv) shares common control with that person or entity. “Control”
or
      “controls”
for
      purposes hereof means that a person or entity has the power, direct or indirect,
      to conduct or govern the policies of another person or entity.

     

    (j)  Transfer
      Agent.
      The
      Company covenants and agrees that, in the event that the Company’s agency
      relationship with the transfer agent should be terminated for any reason prior
      to a date which is two (2) years after the Closing Date, the Company shall
      immediately appoint a new transfer agent and shall require that the new transfer
      agent execute and agree to be bound by the terms of the Irrevocable Transfer
      Agent Instructions (as defined herein).

     

    (k)  Restriction
      on Issuance of the Capital Stock.
      So long
      as any Convertible Debentures are outstanding, the Company shall not, without
      the prior written consent of the Buyer(s), (i) issue or sell shares of Common
      Stock or Preferred Stock without consideration or for a consideration per share
      less than the bid price of the Common Stock determined immediately prior to
      its
      issuance, (ii) issue any preferred stock, warrant, option, right, contract,
      call, or other security or instrument granting the holder thereof the right
      to
      acquire Common Stock without consideration or for a consideration less than
      such
      Common Stock’s Bid Price determined immediately prior to it’s issuance, (iii)
      enter into any security instrument granting the holder a security interest
      in
      any and all assets of the Company, or (iv) file any registration statement
      on
      Form S-8 registering shares
      of
      Common Stock with a fair market value of $500,000 or greater except to register
      shares of Common Stock issuable in connection with a bona fide employee stock
      incentive plan approved by the Board of Directors.
      However, if the Buyer(s) elects not to participate in an issuance of capital
      stock by the Company through the Buyer(s) Right of First Offer previously or
      currently granted to such Buyer(s), then the provisions of this Section 4(k)
      shall not be available to such Buyer(s).

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    (l)  Neither
      the Buyer(s) nor any of its affiliates have an open short position in the Common
      Stock of the Company, and the Buyer(s) agrees that it shall not, and that it
      will cause its affiliates not to, engage in any short sales of or hedging
      transactions with respect to the Common Stock as long as any Convertible
      Debentures shall remain outstanding. 

     

    (m)  Rights
      of First Negotiation.
      For a
      period of 15 months from the date hereof, if
      the
      Company intends to raise additional capital by the issuance or sale of capital
      stock of the Company, including without limitation shares of any class of common
      stock, any class of preferred stock, options, warrants or any other securities
      convertible or exercisable into shares of common stock (whether the offering
      is
      conducted by the Company, underwriter, placement agent or any third party)
      the
      Company shall offer to the Buyers such issuance or sale of capital stock, by
      providing in writing the principal amount of capital it intends to raise and
      outline of the material terms of such capital raise. The Buyer shall have five
      (5) business days from receipt of such notice of the sale or issuance of capital
      stock to accept or reject all or a portion of such capital raising offer.


     

    (n)  Lock
      Up Agreements.
      On the
      date hereof, the Company shall obtain from each officer and director a lock
      up
      agreement in the form attached hereto as Exhibit
      C.

     

    (o)  Increase
      Authorized.The
      Company shall use its reasonable best efforts, within seventy five (75) days
      of
      the date hereof, to effectuate an increase its authorized capital stock to
      at
      least 75,000,000 shares of Common Stock in full compliance with applicable
      laws.

     

    (p)  The
      Company shall not use any proceeds from the sale of the Convertible Debentures,
      either directly or indirectly, to repay any amounts owed to Gryphon Master
      Fund.


     

    5.  TRANSFER
      AGENT INSTRUCTIONS.

     

    (a)  Within
      thirty (30) days of the date hereof, the Company shall issue the Irrevocable
      Transfer Agent Instructions to its transfer agent irrevocably appointing David
      Gonzalez, Esq. as the Company’s agent for purpose of having certificates issued,
      registered in the name of the Buyer(s) or its respective nominee(s), for the
      Conversion Shares representing such amounts of Convertible Debentures as
      specified from time to time by the Buyer(s) to the Company upon conversion
      of
      the Convertible Debentures, for interest owed pursuant to the Convertible
      Debenture, and for any and all Liquidated Damages (as this term is defined
      in
      the Registration Rights Agreement). The Company shall not change its transfer
      agent without the express written consent of the Buyer(s), which may be withheld
      by the Buyer(s) in its sole discretion. Prior to registration of the Conversion
      Shares under the Securities Act, all such certificates shall bear the
      restrictive legend specified in Section 2(g) of this Agreement. The Company
      warrants that no instruction other than the Irrevocable Transfer Agent
      Instructions referred to in this Section 5, and stop transfer instructions
      to
      give effect to Section 2(g) hereof (in the case of the Conversion Shares prior
      to registration of such shares under the Securities Act) will be given by the
      Company to its transfer agent and that the Conversion Shares shall otherwise
      be
      freely transferable on the books and records of the Company as and to the extent
      provided in this Agreement and the Registration Rights Agreement. Nothing in
      this Section 5 shall affect in any way the Buyer’s obligations and agreement to
      comply with all applicable securities laws upon resale of Conversion Shares.
      If
      the Buyer(s) provides the Company with an opinion of counsel, in form, scope
      and
      substance customary for opinions of counsel in comparable transactions to the
      effect that registration of a resale by the Buyer(s) of any of the Conversion
      Shares is not required under the Securities Act, the Company shall within two
      (2) business days instruct its transfer agent to issue one or more certificates
      in such name and in such denominations as specified by the Buyer. The Company
      acknowledges that a breach by it of its obligations hereunder will cause
      irreparable harm to the Buyer by vitiating the intent and purpose of the
      transaction contemplated hereby. Accordingly, the Company acknowledges that
      the
      remedy at law for a breach of its obligations under this Section 5 will be
      inadequate and agrees, in the event of a breach or threatened breach by the
      Company of the provisions of this Section 5, that the Buyer(s) shall be
      entitled, in addition to all other available remedies, to an injunction
      restraining any breach and requiring immediate issuance and transfer, without
      the necessity of showing economic loss and without any bond or other security
      being required.

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

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

     

    The
      obligation of the Company hereunder to issue and sell the Convertible Debentures
      to the Buyer(s) at the Closings is subject to the satisfaction, at or before
      the
      Closing Dates, of each of the following conditions, provided that these
      conditions are for the Company’s sole benefit and may be waived by the Company
      at any time in its sole discretion:

     

    (a)  Each
      Buyer shall have executed the Transaction Documents and delivered them to the
      Company.

     

    (b)  The
      Buyer(s) shall have delivered to the Company the Purchase Price for Convertible
      Debentures in respective amounts as set forth next to each Buyer as outlined
      on
      Schedule I attached hereto, minus any fees to be paid directly from the proceeds
      the Closings as set forth herein, by wire transfer of immediately available
      U.S.
      funds pursuant to the wire instructions provided by the Company.

     

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

     

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

     

    (a)  The
      obligation of the Buyer(s) hereunder to purchase the Convertible Debentures
      at
      the First Closing is subject to the satisfaction, at or before the First Closing
      Date, of each of the following conditions:

     

    (i)  The
      Company shall have executed the Transaction Documents and delivered the same
      to
      the Buyer(s).

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    (ii)  The
      Common Stock shall be authorized for quotation or trading on the Primary Market,
      trading in the Common Stock shall not have been suspended for any reason, and
      all the Conversion Shares issuable upon the conversion of the Convertible
      Debentures shall be approved for listing or trading on the Primary Market.
      

     

    (iii)  The
      representations and warranties of the Company shall be true and correct in
      all
      material respects (except to the extent that any of such representations and
      warranties is already qualified as to materiality in Section 3 above, in which
      case, such representations and warranties shall be true and correct without
      further qualification) as of the date when made and as of the First Closing
      Date
      as though made at that time (except for representations and warranties that
      speak as of a specific date) and the Company shall have performed, satisfied
      and
      complied in all material respects with the covenants, agreements and conditions
      required by this Agreement to be performed, satisfied or complied with by the
      Company at or prior to the First Closing Date

     

    (iv)  The
      Company shall have executed and delivered to the Buyer(s) the Convertible
      Debentures in the respective amounts pursuant to the First Closing set forth
      opposite each Buyer(s) name on Schedule I attached hereto.

     

    (v)  The
      Buyer(s) shall have received an opinion of counsel from counsel to the Company
      in a form satisfactory to the Buyer(s).

     

    (vi)  The
      Company shall have provided to the Buyer(s) a certificate of good standing
      from
      the secretary of state from the state in which the company is
      incorporated.

     

    (vii)  The
      Company shall have filed a form UCC-1 or such other forms as may be required
      to
      perfect the Buyer’s interest in the Pledged Property as detailed in the Security
      Agreement dated the date hereof and provided proof of such filing to the
      Buyer(s).

     

    (viii)  The
      Pledged Shares as well as executed and medallion guaranteed stock powers as
      required pursuant to the Pledge Agreement shall have been delivered to the
      Escrow Agent.

     

    (ix)  The
      Company shall have provided to the Buyer an acknowledgement, to the satisfaction
      of the Buyer, from the Company’s independent certified public accountants as to
      its ability to provide all consents required in order to file a registration
      statement in connection with this transaction.

     

    (x)  The
      Company shall have created the Initial Share Reserve. 

     

    (xi)  The
      Irrevocable Transfer Agent Instructions, in form and substance satisfactory
      to
      the Buyer, shall have been delivered to and acknowledged in writing by the
      Company’s transfer agent.

     

    (b)  The
      obligation of the Buyer(s) hereunder to accept the Convertible Debentures at
      the
      Second Closing is subject to the satisfaction, at or before the Second Closing
      Date, of each of the following conditions:

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    (i)  The
      Common Stock shall be authorized for quotation or trading on the Primary Market,
      trading in the Common Stock shall not have been suspended for any reason, and
      all the Conversion Shares issuable upon the conversion of the Convertible
      Debentures shall be approved for listing or trading on the Primary Market.
      

     

    (ii)  The
      representations and warranties of the Company shall be true and correct in
      all
      material respects (except to the extent that any of such representations and
      warranties is already qualified as to materiality in Section 3 above, in which
      case, such representations and warranties shall be true and correct without
      further qualification) as of the date when made and as of the Second Closing
      Date as though made at that time (except for representations and warranties
      that
      speak as of a specific date) and the Company shall have performed, satisfied
      and
      complied in all material respects with the covenants, agreements and conditions
      required by this Agreement to be performed, satisfied or complied with by the
      Company at or prior to the Second Closing Date. 

     

    (iii)  The
      Company shall have executed and delivered to the Buyer(s) the Convertible
      Debentures in the respective amounts pursuant to the Second Closing set forth
      opposite each Buyer(s) name on Schedule I attached hereto.

     

    (iv)  The
      Buyer(s) shall have received an opinion of counsel from counsel to the Company
      in a form satisfactory to the Buyer(s).

     

    (v)  The
      parties hereto and the Company’s transfer agent shall have executed the
      Irrevocable Transfer Agent Instructions substantially in the form attached
      hereto as Exhibit A. 

     

    (vi)  The
      Company shall have filed the Registration Statement with the SEC materially
      in
      compliance with the rules and regulations promulgated by the SEC for filing
      thereof. 

     

    (vii)  The
      Company shall have certified, in a certificate executed by two officers of
      the
      Company and dated as of the Second Closing Date, that all conditions to the
      Second Closing have been satisfied.

     

    (c)  The
      obligation of the Buyer(s) hereunder to accept the Convertible Debentures at
      the
      Third Closing is subject to the satisfaction, at or before the Third Closing
      Date, of each of the following conditions:

     

    (i)  The
      Common Stock shall be authorized for quotation on the OTCBB and trading in
      the
      Common Stock shall not have been suspended for any reason. 

     

    (ii)  The
      representations and warranties of the Company shall be true and correct in
      all
      material respects (except to the extent that any of such representations and
      warranties is already qualified as to materiality in Section 3 above, in which
      case, such representations and warranties shall be true and correct without
      further qualification) as of the date when made and as of the Third Closing
      Date
      as though made at that time (except for representations and warranties that
      speak as of a specific date) and the Company shall have performed, satisfied
      and
      complied in all material respects with the covenants, agreements and conditions
      required by this Agreement to be performed, satisfied or complied with by the
      Company at or prior to the Third Closing Date. 

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    (iii)  
      The
      Company shall have executed and delivered to the Buyer(s) the Convertible
      Debentures in the respective amounts pursuant to the Third Closing set forth
      opposite each Buyer(s) name on Schedule I attached hereto.

     

    (iv)  The
      Buyer(s) shall have received an opinion of counsel from counsel to the Company
      in a form satisfactory to the Buyer(s).

     

    (v)  The
      Registration Statement shall have been declared effective by the SEC.


     

    (vi)  The
      Company shall have filed its certificate of amendment to its certificate of
      incorporation increasing its authorized Common Stock in accordance with Section
      4(o) hereof.

     

    (vii)  The
      Company shall have created the Share Reserve.

     

    (viii)  The
      Company shall have certified, in a certificate executed by two officers of
      the
      Company and dated as of the Third Closing Date, that all conditions to the
      Third
      Closing have been satisfied.

     

    8.  INDEMNIFICATION.

     

    (a)  In
      consideration of the Buyer’s execution and delivery of this Agreement and
      acquiring the Convertible Debentures and the Conversion Shares hereunder, and
      in
      addition to all of the Company’s other obligations under this Agreement, the
      Company shall defend, protect, indemnify and hold harmless the Buyer(s) and
      each
      other holder of the Convertible Debentures and the Conversion Shares, and all
      of
      their officers, directors, employees and agents (including, without
      limitation, those retained in connection with the transactions contemplated
      by
      this Agreement) (collectively, the “Buyer
      Indemnitees”)
      from
      and against any and all actions, causes of action, suits, claims, losses, costs,
      penalties, fees, liabilities and damages, and expenses in connection therewith
      (irrespective of whether any such Buyer Indemnitee is a party to the action
      for
      which indemnification hereunder is sought), and including reasonable attorneys’
fees and disbursements (the “Indemnified
      Liabilities”),
      incurred by the Buyer Indemnitees or any of them as a result of, or arising
      out
      of, or relating to (a) any misrepresentation or breach of any representation
      or
      warranty made by the Company in this Agreement, the Convertible Debentures
      or
      the Transaction Documents or any other certificate, instrument or document
      contemplated hereby or thereby, (b) any breach of any covenant, agreement or
      obligation of the Company contained in this Agreement, or the Transaction
      Documents or any other certificate, instrument or document contemplated hereby
      or thereby, or (c) any cause of action, suit or claim brought or made against
      such Indemnitee and arising out of or resulting from the execution, delivery,
      performance or enforcement of this Agreement or any other instrument, document
      or agreement executed pursuant hereto by any of the parties hereto, any
      transaction financed or to be financed in whole or in part, directly or
      indirectly, with the proceeds of the issuance of the Convertible Debentures
      or
      the status of the Buyer or holder of the Convertible Debentures the Conversion
      Shares, as a Buyer of Convertible Debentures in the Company. To the extent
      that
      the foregoing undertaking by the Company may be unenforceable for any reason,
      the Company shall make the maximum contribution to the payment and satisfaction
      of each of the Indemnified Liabilities, which is permissible under applicable
      law.

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    (b)  In
      consideration of the Company’s execution and delivery of this Agreement, and in
      addition to all of the Buyer’s other obligations under this Agreement, the Buyer
      shall defend, protect, indemnify and hold harmless the Company and all of its
      officers, directors, employees and agents (including, without limitation, those
      retained in connection with the transactions contemplated by this Agreement)
      (collectively, the “Company
      Indemnitees”)
      from
      and against any and all Indemnified Liabilities incurred by the Indemnitees
      or
      any of them as a result of, or arising out of, or relating to (a) any
      misrepresentation or breach of any representation or warranty made by the
      Buyer(s) in this Agreement, instrument or document contemplated hereby or
      thereby executed by the Buyer, (b) any breach of any covenant, agreement or
      obligation of the Buyer(s) contained in this Agreement, the Transaction
      Documents or any other certificate, instrument or document contemplated hereby
      or thereby executed by the Buyer, or (c) any cause of action, suit or claim
      brought or made against such Company Indemnitee based on material
      misrepresentations or due to a material breach and arising out of or resulting
      from the execution, delivery, performance or enforcement of this Agreement,
      the
      Transaction Documents or any other instrument, document or agreement executed
      pursuant hereto by any of the parties hereto. To the extent that the foregoing
      undertaking by each Buyer may be unenforceable for any reason, each Buyer shall
      make the maximum contribution to the payment and satisfaction of each of the
      Indemnified Liabilities, which is permissible under applicable law.

     

    9.  GOVERNING
      LAW: MISCELLANEOUS.

     

    (a)  Governing
      Law.
      This
      Agreement shall be governed by and interpreted in accordance with the laws
      of
      the State of New Jersey without regard to the principles of conflict of laws.
      The parties further agree that any action between them shall be heard in Hudson
      County, New Jersey, and expressly consent to the jurisdiction and venue of
      the
      Superior Court of New Jersey, sitting in Hudson County and the United States
      District Court for the District of New Jersey sitting in Newark, New Jersey
      for
      the adjudication of any civil action asserted pursuant to this
      Paragraph.

     

    (b)  Counterparts.
      This
      Agreement may be executed in two or more identical counterparts, all of which
      shall be considered one and the same agreement and shall become effective when
      counterparts have been signed by each party and delivered to the other party.
      In
      the event any signature page is delivered by facsimile transmission, the party
      using such means of delivery shall cause four (4) additional original executed
      signature pages to be physically delivered to the other party within five (5)
      days of the execution and delivery hereof.

     

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

     

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

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    (e)  Entire
      Agreement, Amendments.
      This
      Agreement supersedes all other prior oral or written agreements between the
      Buyer(s), the Company, their affiliates and persons acting on their behalf
      with
      respect to the matters discussed herein, and this Agreement and the instruments
      referenced herein contain the entire understanding of the parties with respect
      to the matters covered herein and therein and, except as specifically set forth
      herein or therein, neither the Company nor any Buyer makes any representation,
      warranty, covenant or undertaking with respect to such matters. No provision
      of
      this Agreement may be waived or amended other than by an instrument in writing
      signed by the party to be charged with enforcement.

     

    (f)  Notices.
      Any
      notices, consents, waivers, or other communications required or permitted to
      be
      given under the terms of this Agreement must be in writing and will be deemed
      to
      have been delivered (i) upon receipt, when delivered personally; (ii) upon
      confirmation of receipt, when sent by facsimile; (iii) three (3) days after
      being sent by U.S. certified mail, return receipt requested, or (iv) one (1)
      day
      after deposit with a nationally recognized overnight delivery service, in each
      case properly addressed to the party to receive the same. The addresses and
      facsimile numbers for such communications shall be:

     

    
      	
              If
                to the Company, to:

            	
              Cobalis
                Corporation

            
	
               

            	
              2445
                McCabe Way, Suite 150

            
	
               

            	
              Irvine,
                CA 92614

            
	
               

            	
              Attention:
                Dr. Gerald J. Yaktan

            
	
               

            	
              Telephone: 

            
	
               

            	
              Facsimile: 

            
	
               

            	
               

            
	
              With
                a copy to:

            	
              Wilson
                Sonsini Goodrich & Rosati

            
	
               

            	
              12235
                El Camino Real, Suite 200

            
	
               

            	
              San
                Diego, CA 92130

            
	
               

            	
              Attention: Martin
                J. Waters, Esq.

            
	
               

            	
              Telephone:
                 858-350-2300

            
	
               

            	
              Facsimile:
                 858-350-2399

            
	
               

            	
               

            


    

     

    If
      to the
      Buyer(s), to its address and facsimile number on Schedule I, with copies to
      the
      Buyer’s counsel as set forth on Schedule I. Each party shall provide five (5)
      days’ prior written notice to the other party of any change in address or
      facsimile number.

     

    (g)  Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their respective successors and assigns. Neither the Company nor any Buyer
      shall
      assign this Agreement or any rights or obligations hereunder without the prior
      written consent of the other party hereto.

     

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

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    (i)  Survival.
      Unless
      this Agreement is terminated under Section 9(l), the representations and
      warranties of the Company and the Buyer(s) contained in Sections 2 and 3, the
      agreements and covenants set forth in Sections 4, 5 and 9, and the
      indemnification provisions set forth in Section 8, shall survive the Closing
      for
      a period of two (2) years following the date on which the Convertible Debentures
      are converted in full. The Buyer(s) shall be responsible only for its own
      representations, warranties, agreements and covenants hereunder.

     

    (j)  Publicity.
      The
      Company and the Buyer(s) shall have the right to approve, before issuance any
      press release or any other public statement with respect to the transactions
      contemplated hereby made by any party; provided, however, that the Company
      shall
      be entitled, without the prior approval of the Buyer(s), to issue any press
      release or other public disclosure with respect to such transactions required
      under applicable securities or other laws or regulations (the Company shall
      use
      its best efforts to consult the Buyer(s) in connection with any such press
      release or other public disclosure prior to its release and Buyer(s) shall
      be
      provided with a copy thereof upon release thereof).

     

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

     

    (l)  Termination.
      In the
      event that the First Closing shall not have occurred with respect to the Buyers
      on or before five (5) business days from the date hereof due to the Company’s or
      the Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7
      above (and the non-breaching party’s failure to waive such unsatisfied
      condition(s)), the non-breaching party shall have the option to terminate this
      Agreement with respect to such breaching party at the close of business on
      such
      date without liability of any party to any other party; provided, however,
      that
      if this Agreement is terminated by the Company pursuant to this Section 9(l),
      the Company shall remain obligated to reimburse the Buyer(s) for the fees and
      expenses of Yorkville Advisors LLC described in Section 4(g) above.

     

    (m)  Brokerage.
      The
      Company represents that no broker, agent, finder or other party has been
      retained by it in connection with the transactions contemplated hereby and
      that
      no other fee or commission has been agreed by the Company to be paid for or
      on
      account of the transactions contemplated hereby. 

     

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

     

    


    [REMAINDER
      PAGE INTENTIONALLY LEFT BLANK]

    


    
      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

      

    

    


     

    
 

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

     

    
      	 	 	 
	 	
              COMPANY:

            
	 	
              COBALIS
                CORPORATION 

            
	 
 	 
 	 
 
	 	By:  	/s/ Gerald
              Yakatan
	 	
              

              Name: Gerald
                Yakatan

            
	 	
              Title: Chief
                Executive Officer

            


    

     

     

    


    
      
        
          
          

        

        
          22

          
            

          

        

        
          
          

        

      

    

     

     

    


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

     

    
      	 	 	 
	 	
              BUYERS:

            
	 	
              CORNELL
                CAPITAL PARTNERS, LP 

            
	 
 	 
 	 
 
	 	By:  	Yorkville
              Advisors, LLC 
	 	
              
Name:
              Yorkville Advisors, LLC 
	 	
              Its: General
                Partner

            


    

    
      	 	 	 
	 	
            
	 	By:  	/s/ Mark
              Angelo
	 	
              

              Name: Mark
                Angelo

            
	 	
              Its: Portfolio
                Manager

            


    

     

     

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

     

    SCHEDULE
      I

     

    SCHEDULE
      OF BUYERS

     

    SCHEDULE
      OF BUYERS

     

    


    
      	
              (1)

            	
              (2)

            	
              (3)

            	
              (4)

            	
              (5)

            	
              (8)

            
	
              Buyer
                

            	
              Subscription
                Amount

            	
               

            	
              Legal
                Representative’s

              Address
                and Facsimile

              Number

            
	
               

            	
              First
                Closing

            	
              Second
                Closing

            	
              Third
                Closing

            	
              TOTAL

            	
               

            
	
               

            	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Cornell
                Capital Partners, LP

               

              101
                Hudson Street, Suite 3700

              Jersey
                City, NJ 07303

              Attention:
                Mark Angelo

              Telephone:
                (201) 985-8300

              Facsimile:
                (201) 985-8266

              Residence:
                Delaware

            	
              $2,500,000

            	
              $675,000

            	
              $675,000

            	
              $3,850,000

            	
              David
                Gonzalez, Esq.

              101
                Hudson Street, Suite 3700

              Jersey
                City, New Jersey 07302 

              Telephone:
                (201) 985-8300 

              Facsimile:
                (201) 985-8266

            


    

    


     

    


    
      
        
          
            


          

          
          

        

        
          24

          
            

          

        

        
          
          

          
          

        

      

    

    



    DISCLOSURE
      SCHEDULE

    
 

    
      	
              Schedule

            	
              Title

            
	
              3(a)

            	
              Organization
                and Qualification

            
	
              3(b)

            	
              Authorization,
                Enforcement, Compliance with Other Instruments

            
	
              3(c)

            	
              Capitalization

            
	
              3(d)

            	
              Issuance
                of Securities

            
	
              3(e)

            	
              No
                Conflicts

            
	
              3(f)

            	
              SEC
                Documents: Financial Statements

            
	
              3(g)

            	
              10(b)-5

            
	
              3(h)

            	
              Absence
                of Litigation

            
	
              3(i)

            	
              Acknowledgment
                Regarding Buyer’s Purchase of the Convertible
                Debentures.

            
	
              3(j)

            	
              No
                General Solicitation

            
	
              3(k)

            	
              No
                Integrated Offering

            
	
              3(l)

            	
              Employee
                Relations

            
	
              3(m)

            	
              Intellectual
                Property Rights

            
	
              3(n)

            	
              Environmental
                Laws

            
	
              3(o)

            	
              Title

            
	
              3(p)

            	
              Insurance

            
	
              3(q)

            	
              Regulatory
                Permits

            
	
              3(r)

            	
              Internal
                Accounting Controls

            
	
              3(s)

            	
              No
                Material Adverse Breaches, etc.

            
	
              3(t)

            	
              Tax
                Status

            
	
              3(u)

            	
              Certain
                Transactions

            
	
              3(v)

            	
              Fees
                and Rights of First Refusal

            
	 	
            


    

    


    


    
      
        
          
          

        

        
          25

          
            

          

        

        
          
          

        

      

    

    


    Schedule
      3(c)

    Capitalization

    


    


    3(c)(i) -
      See
      attached capitalization table

    


    -
      See
      attached agreements

    


    In
      addition to the above attachments, there a two warrant agreements which have
      been approved but not issued. Those warrants relate to Mr. Jim Hammer in the
      amount of 1,600,000 warrants priced at $.01 and MDC Enterprises in the amount
      of
      300,000 warrants priced at $.75. Both of these warrants have been previously
      shown in the Company’s capitalization table as issued and outstanding and are
      accordingly included in the above attached capitalization table.

    


    In
      addition to the above attachments, there is one equity agreement which has
      been
      approved but not issued to MDC Enterprises in the amount of 300,000 shares.
      This
      equity agreement has been previously shown in the Company’s capitalization table
      as issued and outstanding and are accordingly included in the above attached
      capitalization table.

    


    Additionally,
      shares for Mr. Robert Lanthier related to his exercised warrants for 150,000
      have not yet been issued but have been previously disclosed in the Company’s
      capitalization table as issued and outstanding and are included in the above
      attached capitalization table. 

    


    3(c)(iii)

    


    On
      October 17, 2006, the Company entered into subscription agreements with two
      accredited investors for a total of $575,000 (see attached summary of terms).
      These agreements provide registration rights and require the Company to provide
      notice of its intent to put up a registration statement with penalties assessed
      in additional unregistered shares if the underlying shares are not registered
      by
      May 07. 

    

      
        
          
          

        

        
          26

          
            

          

        

        
          
          

        

      

    

     

    Schedule
      3(d)

    Issuance
      of Securities

    


    


    Currently
      the company has 50,000,000 common shares authorized which we believe is not
      sufficient to cover the issuance of the Conversion Shares. The company is in
      the
      process of planning and scheduling a shareholders meeting in order to increase
      the authorized shares to 100,000,000. Therefore, the Conversion Shares issuable
      upon conversion of the Convertible Debentures may not in total be duly
      authorized and reserved for issuance.

    


    
      
        
          
          

        

        
          27

          
            

          

        

        
          
          

        

      

    

    


    Schedule
      3(e)

    No
      Conflicts

    


    


    Currently
      the company has 50,000,000 common shares authorized under its Articles of
      Incorporation which we believe is less than the amount required to cover the
      issuance of the Conversion Shares. The company is in the process of planning
      and
      scheduling a shareholders meeting in order to increase the authorized shares
      to
      100,000,000. Therefore, the execution, delivery and performance of the
      Convertible Debentures may result in a violation of our Articles of
      Incorporation. 

    


    


    


    
      
        
          
          

        

        
          28

          
            

          

        

        
          
          

        

      

    

    


    Schedule
      3(g)

    10(b)-5

    


    


    The
      Company is of the opinion that in its Report on Form 8-K filed on October 27,
      2005, reporting a press release concerning its clinical trials, the Company
      omitted a material fact, namely that the data analysis was performed using
      a
      method outside the scope of FDA requirements. The omission was corrected in
      the
      Company’s Report on Form 8-K filed on June 16, 2006, reporting a press release
      that contained the following statements:

    


    “In
      October 2005, the company reported results of an initial six-week 714 patient
      Phase III trial designed to study various PreHistin dose regimens for reducing
      seasonal allergy symptoms when compared to placebo. As reported, the statistical
      analysis utilized a modified intent to treat and an ANOVA (ANalysis Of
      VAriation) model to determine the treatment effects for the four-arm study
      and
      certain assumptions used were not specified in the statistical analysis plan
      (SAP). Although the data resulting from the prior Phase III Clinical Trial
      demonstrated that patients who were administered PreHistin showed a
      statistically significant reduction of allergy symptoms when the modified
      analysis was applied, the data most likely be viewed by the FDA as supportive
      data and not as pivotal Phase III results required to secure
      approval.”

     

     

    
      
        
          
          

        

        
          29

          
            

          

        

        
          
          

        

      

    

    


    Schedule
      3(h)

    Absence
      of Litigation

    


    


    The
      Company is in default on its payments due pursuant to the Business Center Drive
      Partners litigation. The Company owes approximately $125,000. The attorney
      for
      the Creditor is asserting ownership of shares issued to Chaslav Radovich that
      serve as collateral for the judgment. The Company intends to pay the judgment
      from proceeds. 

     

    


    
      
        
          
          

        

        
          30

          
            

          

        

        
          
          

        

      

    

     

    Schedule
      3(l)

    Employee
      Relations

    


    On
      November 20, 2006, the Company received a letter from Mr. Jim Luce, former
      COO
      of the Company. In this letter Mr. Luce alleges to be paid for back wages and
      business expenses. The Company believes that Mr. Luce has been paid in full.
      As
      far as the financial statements are concerned, the Company made an accrual
      to
      reflect this potential debt. The Company still maintains that any monies
      allegedly owed to Mr. Luce is remote.

    
 

    
      
        
          
          

        

        
          31

          
            

          

        

        
          
          

        

      

    

     

    Schedule
      3(s)

    No
      Material Adverse Breaches, etc.

    
 

    The
      company received a loan from MDC Enterprises Ltd. in August, 2006. This was
      disclosed in the company’s latest 10-QSB filed with the SEC. The loan is to be
      repaid by December 29, 2006 and the Company will make every attempt to repay
      this loan. However, there exists a possibility the Company may have insufficient
      funds to make this repayment. In the event the Company is not able to repay
      this
      loan, the Company will contact MDC ahead of the due date and discuss with MDC
      options for repayment. 

     

    


    
      
        
          
          

        

        
          32

          
            

          

        

        
          
          

        

      

    

    


    Schedule
      3(t)

    Tax
      Status

    


    


    The
      company must still determine whether or not there may be a payroll tax liability
      associated with S-8 shares issued to employees of the company on October 31,
      2006 in lieu of salaries and bonuses which were due to be paid in cash. No
      final
      determination has been made. However if there would be additional payroll taxes
      due and payable the amount could be approximately $350,000.

     

    


    
      
        
          
          

        

        
          33

          
            

          

        

        
          
          

        

      

    

    


    Schedule
      3(u)

    Certain
      Transactions

    


    


    
      	·  	
              On
                January 1, 2001 the Company entered into a consulting agreement with
                R&R Holdings, whose President is Radul Radovich, Chairman of the
                Company. The yearly retainer is
                $125,000.

            


    

    


    
      	·  	
              On
                May 1, 2006 the Company executed one-year Corporate Housing Lease
                Agreement with a third party for the benefit of its President, Chas
                Radovich. The Company prepaid 40,000 restricted shares for the term
                of the
                lease.

            


    

     

    


    
      
        
          
          

        

        
          34

          
            

          

        

        
          
          

        

      

    

    


     

    EXHIBIT
      A

     

     

    FORM
      OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS

     

    


    
      
        
          
          

        

        
          35

          
            

          

        

        
          
          

        

      

    

    


     

    EXHIBIT
      B

     

     

    FORM
      OF WARRANT 

     

    


    
      
        
          
          

        

        
          36

          
            

          

        

        
          
          

        

      

    

    


     

    EXHIBIT
      C

     

     

    LOCK
      UP AGREEMENT

     

    The
      undersigned hereby agrees that for a period commencing on December 20, 2006
      and
      expiring on the date thirty (30) days after the date that all amounts owed
      to
      Cornell Capital Partners, LP (the “Buyer”),
      under
      the Secured Convertible Debentures issued to the Buyer pursuant to the
      Securities Purchase Agreement between Cobalis Corporation (the “Company”)
      and
      the Buyer dated December 20, 2006 have been paid (the “Lock-up
      Period”),
      he,
      she or it will not, directly or indirectly, without the prior written consent
      of
      the Buyer, issue, offer, agree or offer to sell, sell, grant an option for
      the
      purchase or sale of, transfer, pledge, assign, hypothecate, distribute or
      otherwise encumber or dispose of any securities of the Company, including common
      stock or options, rights, warrants or other securities underlying, convertible
      into, exchangeable or exercisable for or evidencing any right to purchase or
      subscribe for any common stock (whether or not beneficially owned by the
      undersigned), or any beneficial interest therein (collectively, the
“Securities”)
      except
      in accordance with the volume limitations set forth in Rule 144(e) of the
      General Rules and Regulations under the Securities Act of 1933, as
      amended.

     

    In
      order
      to enable the aforesaid covenants to be enforced, the undersigned hereby
      consents to the placing of legends and/or stop-transfer orders with the transfer
      agent of the Company’s securities with respect to any of the Securities
      registered in the name of the undersigned or beneficially owned by the
      undersigned, and the undersigned hereby confirms the undersigned’s investment in
      the Company.

     

    Dated:
      _______________, 2006

     

    
      	 	 	 
	 	Signature
	 
 	 
 	 
 
	 	By:  	/s/ 
	 	
              
                

              

               

              Name:

              
                

              

            
	 	
              Address:

              
                

              

            
	 	
              City, State, Zip Code:

              
                

              

            
	 	
            
	 	 
	 	
              
                
Print
                Social Security Number 

            
	 	or Taxpayer I.D.
              Number




    
      
        
        

      

      
        37

        
          

        

      

      
        
        

      

    

    


    

      CLOSING
        STATEMENT

      December
        20, 2006

      


      


      The
        undersigned do hereby:

      


      1.  Acknowledge
        the acceptance of subscriptions from purchasers representing gross proceeds
        of
        $2,500,000 from the issuance of Convertible Debentures of COBALIS
        CORPORATION,
        a
        Nevada corporation (the “Company”).

      


      2.  Represent
        that all conditions precedent to closing of the Company’s offering of the
        Convertible Debentures pursuant to the Securities Purchase Agreement have
        been
        satisfied or waived; and

       

      3.  Agree
        that gross proceeds shall be disbursed via wire transfer in immediately
        available U.S. funds, payable to the following parties:

       

      
        
          	
                  Gross
                    Proceeds:

                	
                  From
                    Cornell Capital Partners, LP

                	
                  $2,500,000
                    

                
	 	 	 
	
                  Less:

                	
                  Commitment
                    Fee (10% of Gross Proceeds) to Yorkville Advisors, LLC

                	
                  ($250,000)

                
	 	 	 
	 	
                  Structuring
                    Fee to Yorkville Advisors, LLC

                	
                  ($22,500)

                
	 	 	 
	
                  Sub-Total:

                	 	
                  $2,227,500
                    

                
	 	 	 
	
                  Disbursements:

                	 	 
	 	 	 
	
                   

                	 	 
	
                  Net
                    Proceeds:

                	
                  Net
                    Proceeds Payable to the Company

                	
                  $2,227,500
                    

                


        

      

       

      


      [SIGNATURE
        PAGE IMMEDIATELY TO FOLLOW] 


      
        
          
          

        

        
          38

          
            

          

        

        
          
          

        

      

       

      


      	Cobalis
              Corporation	 	 	Cornell
              Capital Partners, LP
	 	 	 	 
	 	 	 	By: Yorkville Advisors,
              LLC
	 	 	 	Its: General
              Partner
	 	 	 	 
	By:
              /s/ Gerald Yakatan	 	 	By:
              /s/ Mark Angelo
	
              

              Name: Gerald
                Yakatan

              
                Title: Chief
                  Executive Officer

              

            	 	 	
              
                

              

              Name: Mark
                Angelo

              Its: Portfolio
                Manager

            


       

       

      39