XcelMobility, Inc.: Exhibit 10.1 - Filed by newsfilecorp.com





Execution Version 

SECURITIES PURCHASE AGREEMENT 

            THIS
SECURITIES PURCHASE AGREEMENT (the “Agreement”) is made as of
the 30th day of May, 2014 by and between
XcelMobility, Inc., a Nevada corporation (the “Company”), and
Hanover Holdings I, LLC, a New York limited liability company (the
“Investor”). 

            WHEREAS,
the Company and the Investor are executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by Section
4(a)(2) of the Securities Act of 1933, as amended (the “1933
Act”), and Rule 506 of Regulation D (“Regulation D”) as
promulgated by the United States Securities and Exchange Commission (the
“Commission”) under the 1933 Act (without limiting any other such
exemption which may apply to the transactions contemplated by this Agreement);


           
WHEREAS, the Company has authorized the issuance of (i) a senior
convertible note, in the original principal amount of $350,000, in the form
attached hereto as Exhibit A (the “Note”), which Note shall
be convertible into shares of the Company’s common stock, $0.001 par value per
share (the “Common Stock”), in accordance with the terms of the
Note, and (ii) a warrant to acquire up 3,716,091 additional shares of Common
Stock, in the form attached hereto as Exhibit B (the
“Warrant”); 

           
WHEREAS, Investor wishes to purchase, and the Company wishes to sell at
the Closing (as defined below), upon the terms and conditions stated in this
Agreement, (i) the Note (and the Common Stock issuable upon conversion thereof,
collectively, the “Conversion Shares”) and (ii) the Warrant (and
the Common Stock issuable upon exercise thereof, collectively, the
“Warrant Shares”). 

            WHEREAS,
the Note, the Conversion Shares, the Warrant and the Warrant Shares are
collectively referred to herein as the “Securities” and the
offering contemplated hereby is referred to herein as the
“Offering”; 

           
WHEREAS, the parties have agreed that the obligation to repay the Note
shall be an unsecured obligation of the Company; and 

           
WHEREAS, at the Closing, the parties hereto shall execute and deliver a
Registration Rights Agreement, in the form attached hereto as Exhibit C (the
“Registration Rights Agreement”), pursuant to which the Company
has agreed to provide certain registration rights with respect to the
Registrable Securities (as defined in the Registration Rights Agreement), under
the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws. 

            NOW,
THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, and in consideration of the premises and the
mutual agreements, representations and warranties, provisions and covenants
contained herein, the parties hereto, intending to be legally bound hereby,
agree as follows: 

           
1.        Purchase and Sale of Note
and Warrant.




                          1.1       
Purchase and Sale of Note and Warrant. Subject to the satisfaction (or,
where legally permissible, the waiver) of the conditions set forth in Section
4.1, the Company shall issue and sell to the Investor, and the Investor shall
purchase from the Company on the Closing Date (as defined below), the Note and
the Warrant (the “Closing”). 

                          1.2       
Form of Payment. On the Closing Date, (i) the Investor shall pay the
Purchase Price (as defined below) (less the amounts withheld pursuant to Section
12.12) to the Company for the Note and the Warrant to be issued and sold to the
Investor at the Closing, by wire transfer of immediately available funds in
accordance with the Company’s written wire instructions and (ii) immediately
following the Company’s receipt of such amount, the Company shall deliver to the
Investor (x) the Note and (y) the Warrant, in each case, duly executed on behalf
of the Company and registered in the name of the Investor or its designee.

            2.       
Purchase Price. The purchase price for the Note and the Warrant to be
purchased by the Investor (the “Purchase Price”) shall be
$250,000. The Note will be issued with an original issue discount of
approximately 28.57% . 

            3.       
Closing Date. The date and time of the Closing (the “Closing
Date”) shall be 10:00 a.m. (New York City time), on the first
(1st) Trading Day (as defined below) (and including the date hereof
if a Trading Day) on which the conditions to the Closing set forth in Section
4.1 below are satisfied or waived. The Closing shall occur at the offices of
Greenberg Traurig, LLP, MetLife Building, 200 Park Avenue, New York, NY 10166.


           
4.        Closing Conditions; Certain
Covenants. 

                         
4.1        Conditions to the
Closing.

                          (a)       
Conditions of the Company to the Closing. The obligation of the Company
to sell and issue the Note and the Warrant to the Investor at the Closing is
subject to the fulfillment, to the Company’s reasonable satisfaction, prior to
or at the Closing, of each of the following conditions: 

                         
(i)      Representations and Warranties. The
representations and warranties of the Investor contained in this Agreement (x)
that are not qualified by “materiality” shall have been true and correct in all
material respects when made and shall be true and correct in all material
respects as of the Closing Date with the same force and effect as if made on
such dates, except to the extent such representations and warranties are as of
another date, in which case, such representations and warranties shall be true
and correct in all material respects as of such other date and (y) that are
qualified by “materiality” shall have been true and correct when made and shall
be true and correct as of the Closing Date with the same force and effect as if
made on such dates, except to the extent such representations and warranties are
as of another date, in which case, such representations and warranties shall be
true and correct as of such other date.

                          (ii)   
 Registration Rights Agreement. The Investor shall have duly
executed and delivered the Registration Rights Agreement to the Company. 

2




                          (iii)  
 No Injunction. No statute, regulation, order, decree, writ, ruling
or injunction shall have been enacted, entered, promulgated, threatened or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of or which would materially modify or delay any of
the transactions contemplated by the Transaction Documents. 

                          (b)       
Conditions to the Investor to the Closing. The obligation of the Investor
to purchase the Note and the Warrant to be issued to the Investor at the Closing
is subject to the satisfaction, or (where legally permissible) the waiver by the
Investor, on the Closing Date, of each of the following conditions: 

                         
(i)      Representations and Warranties. The
representations and warranties of the Company contained in this Agreement (x)
that are not qualified by “materiality” or “Material Adverse Effect” shall have
been true and correct in all material respects when made and shall be true and
correct in all material respects as of the Closing Date with the same force and
effect as if made on such dates, except to the extent such representations and
warranties are as of another date, in which case, such representations and
warranties shall be true and correct in all material respects as of such other
date and (y) that are qualified by “materiality” or “Material Adverse Effect”
shall have been true and correct when made and shall be true and correct as of
the Closing Date with the same force and effect as if made on such dates, except
to the extent such representations and warranties are as of another date, in
which case, such representations and warranties shall be true and correct as of
such other date. 

                          (ii)   
 Performance of the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement and the Registration Rights Agreement
to be performed, satisfied or complied with by the Company at or prior to the
Closing Date. The Company shall have delivered to the Investor on the Closing
Date a written certification by an executive officer of the Company to the
foregoing substantially in the form attached hereto as Exhibit D. 

                          (iii)    No
Suspension of Trading in or Notice of Delisting of Common Stock.
Trading in the Common Stock shall not have been suspended by the Commission, the
Trading Market or the FINRA (except for any suspension of trading of less than
fourteen (14) days, which suspension shall be terminated prior to the Closing
Notice Date), the Company shall not have received any final and non-appealable
notice that the listing or quotation of the Common Stock on the Trading Market
shall be terminated on a date certain (unless, prior to such date certain, the
Common Stock is listed or quoted on any other Trading Market), trading in
securities generally as reported on the Trading Market shall not have been
suspended or limited, nor shall a banking moratorium have been declared either
by the U.S. or New York State authorities (except for any suspension, limitation
or moratorium which shall be terminated prior to the Closing Notice Date), there
shall not have been imposed any suspension of electronic trading or settlement
services by the Depository Trust Company (“DTC”) with respect to
the Common Stock that is continuing, the Company shall not have received any
notice from DTC to the effect that a suspension of electronic trading or
settlement services by DTC with respect to the Common Stock is being imposed or
is contemplated (unless, prior to such suspension, DTC shall have
notified the Company in writing that DTC has determined not to impose any such
suspension).

3




                          (iv)   
 Compliance with Laws. The Company shall have complied with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances in connection with the execution, delivery and performance of this
Agreement and the other Transaction Documents (as defined below) to which it is
a party and the consummation of the transactions contemplated hereby and
thereby, including, without limitation, the Company shall have obtained all
permits and qualifications required by any applicable state securities or “Blue
Sky” laws for the offer and sale of the Securities by the Company to the
Investor). 

                          (v)     
No Injunction. No statute, regulation, order, decree, writ, ruling or
injunction shall have been enacted, entered, promulgated, threatened or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of or which would materially modify or delay any of the
transactions contemplated by the Transaction Documents. 

                          (vi)   
 No Proceedings or Litigation. No action, suit or proceeding before
any arbitrator or any court or governmental authority shall have been commenced
or threatened, and no inquiry or investigation by any governmental authority
shall have been commenced or threatened, against the Company or any Subsidiary,
or any of the officers, directors or affiliates of the Company or any
Subsidiary, seeking to restrain, prevent or change the transactions contemplated
by the Transaction Documents, or seeking material damages in connection with
such transactions. 

                          (vii)   
Listing of Securities. All of the Conversion Shares and Warrant Shares
that may be issued pursuant to the Note and Warrant, respectively, shall have
been approved for listing or quotation on the Trading Market as of the Closing
Date, in each case, without regard to any limitations on conversion or exercise
set forth in the Note or Warrant, respectively, subject only to notice of
issuance. 

                          (viii) 
 No Material Adverse Effect. No condition, occurrence, state of
facts or event constituting a Material Adverse Effect shall have occurred and be
continuing. 

                          (ix)   
 Opinion of Counsel. On the Closing Date, the Investor shall have
received an opinion from outside counsel to the Company, dated the Closing Date,
in the form mutually agreed to by the parties hereto prior to the date hereof.


                          (x)    
 Note and Warrant. At the Closing, the Company shall have tendered
to the Investor the Note and Warrant. 

                          (xi)   
 Registration Rights Agreement. The Company shall have duly executed
and delivered the Registration Rights Agreement to the Investor. 

                          (xii)   
Current Public Information. All reports, schedules, registrations, forms,
statements, information and other documents required to have been filed by the
Company with the Commission pursuant to
the reporting requirements of the 1934 Act, including all material required to
have been filed pursuant to Section 13(a) or 15(d) of the 1934 Act, shall have
been filed with the Commission under the 1934 Act.

4




                         
4.2        Reserved.

                          4.3       
Securities Law Disclosure; Publicity. The Company shall (a) by 9:00 a.m.
(New York City time) on the Trading Day immediately following the Closing Date,
issue a press release in form and substance reasonably acceptable to the
Investor disclosing the material terms of the transactions contemplated hereby
(the “Press Release”) and (b) issue a Current Report on Form 8-K
(the “Current Report”) disclosing the material terms of the
transactions contemplated hereby, and including the Transaction Documents as
exhibits thereto, within the time required by the 1934 Act. From and after the
issuance of the Press Release, the Company represents to the Investor that the
Company shall have publicly disclosed all material, non-public information
delivered to the Investor as of such time by the Company or any of its
subsidiaries, or any of their respective officers, directors, employees or
agents in connection with the transactions contemplated by the Transaction
Documents. The Company shall afford the Investor and its counsel with a
reasonable opportunity to review and comment upon, shall consult with the
Investor and its counsel on the form and substance of, and shall give due
consideration to all such comments from the Investor or its counsel on, any
press release, Commission filing or any other public disclosure made by or on
behalf of the Company relating to the Investor, its purchases hereunder or any
aspect of the Transaction Documents or the transactions contemplated thereby,
prior to the issuance, filing or public disclosure thereof, and the Company
shall not issue, file or publicly disclose any such information to which the
Investor shall object. For the avoidance of doubt, the Company shall not be
required to submit for review any such disclosure contained in periodic reports
filed with the Commission under the Exchange Act if it shall have previously
provided the same disclosure for review in connection with a previous filing.


                          4.4       
Legends. The Securities may only be disposed of in compliance with state
and federal securities laws. In connection with any transfer of Securities other
than pursuant to an effective registration statement or Rule 144 (as defined
below), to the Company or to an affiliate of the Investor or in connection with
a pledge, the Company may require the transferor thereof to provide to the
Company an opinion of counsel selected by the transferor and reasonably
acceptable to the Company, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer does
not require registration of such transferred Securities under the 1933 Act. The
Investor understands that the certificate or other instrument representing the
Note and the Warrant and the stock certificates representing the Conversion
Shares and the Warrant Shares, respectively, except as set forth below, shall
bear any legends as required by applicable state securities or “Blue Sky” laws
in addition to a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of such stock certificates):


            [NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE][EXERCISABLE] HAVE BEEN]
[THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO THE HOLDER
(IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE
TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES. 

5




                          The
Company shall use its reasonable best efforts to cause its transfer agent to
remove the legend set forth above and to issue a certificate without such legend
to the holder of the Securities upon which it is stamped, or to issue to such
holder by electronic delivery at the applicable balance account at DTC, unless
otherwise required by state securities or “blue sky” laws, at such time as (i)
such Securities are registered for resale under the 1933 Act, (ii) in connection
with a sale, assignment or other transfer, such holder provides the Company with
an opinion of counsel, in a form generally acceptable to the Company’s legal
counsel and the Transfer Agent, to the effect that such sale, assignment or
transfer of the Securities may be made without registration under the 1933 Act,
(ii) if the holding period (as determined under Rule 144) for such Securities is
at least six months, but less than one year, such holder provides the Company
and its legal counsel with reasonable assurance in writing that the Securities
are being sold, assigned or transferred pursuant to Rule 144 or Rule 144A or
(iii) if the holding period (as determined under Rule 144) for such Securities
is at least one year, such holder provides the Company and its legal counsel
with reasonable assurance in writing that the Securities can be sold, assigned
or transferred pursuant to Rule 144 or Rule 144A. In furtherance of the
foregoing, the Company agrees that, following the Effective Date or at such time
as such legend is not required pursuant to this Section 4.4, the Company shall,
no later than three Trading Days following the delivery by the Investor to the
Company or the Transfer Agent of a certificate representing Conversion Shares or
Warrant Shares issued with a restrictive legend (such third Trading Day, the
“Legend Removal Date”), either: (A) issue and deliver (or cause to
be issued and delivered) to the Investor a certificate representing such
Conversion Shares or Warrant Shares, as applicable, that is free from all
restrictive and other legends or (B) cause the Transfer Agent to credit the
Investor’s or its designee’s account at DTC through its Deposit/Withdrawal at
Custodian (DWAC) system with a number of shares of Common Stock equal to the
number of Conversion Shares or Warrant Shares, as applicable, represented by the
certificate so delivered by the Investor. If the Company fails on or prior to
the Legend Removal Date to either (i) issue and deliver (or cause to be issued
and delivered) to the Investor a certificate representing the Conversion Shares
or Warrant Shares, as applicable, that is free from all restrictive and other
legends or (ii) cause the Transfer Agent to credit the balance account of the
Investor or its designee at DTC through its Deposit/Withdrawal at Custodian
(DWAC) system with a number of shares of Common Stock equal to the number of the
Conversion Shares or Warrant Shares, as applicable, represented by the
certificate delivered by the Investor pursuant hereto (a “Delivery
Failure”), and if on or after the Legend Removal Date the Investor
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by the Investor of shares of Common Stock that the Investor
anticipated receiving from the Company without any restrictive legend, then the
Company shall, within three Trading Days after the Investor’s request, pay cash
to the Investor in an amount equal to the Investor’s total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased, at which point the Company’s obligation to deliver a certificate or
credit the Investor’s or its designee’s account at DTC for such shares of Common
Stock shall terminate and such shares shall be cancelled(the “Buy-In
Remedy”). For the avoidance of doubt, with respect to any given Delivery
Failure, the Investor shall be entitled, at the election of the Investor, to
recovery either pursuant to this Buy-In Remedy or Section 3(c)(ii) of the Note,
but not both. 

6




                          4.5       
No Short Sales. So long as the Note remains outstanding, neither the
Investor nor any of its affiliates nor any entity managed or controlled by the
Investor (collectively, the “Restricted Persons” and each of the
foregoing is referred to herein as a “Restricted Person”) shall,
directly or indirectly, engage in any Short Sales involving the Company’s
securities. Notwithstanding the foregoing, it is expressly understood and agreed
that nothing contained herein shall (without implication that the contrary would
otherwise be true) prohibit any Restricted Person from: (1) selling “long” (as
defined under Rule 200 promulgated under Regulation SHO) the Securities; or (2)
selling a number of shares of Common Stock equal to the number of Conversion
Shares and/or Warrant Shares, as applicable, that such Restricted Person is
entitled to receive under a pending Conversion Notice (as defined in the Note)
and/or Exercise Notice (as defined in the Warrant) but has not yet taken
possession of so long as such Restricted Person delivers the Conversion Shares
purchased pursuant to such Conversion Notice and/or the Warrant Shares purchased
pursuant to such Exercise Notice, as applicable, to the purchaser thereof;
provided, however, such Restricted Person shall not be required to so deliver
any such Conversion Shares subject to such Conversion Notice or the Warrant
Shares purchased pursuant to such Exercise Notice, as applicable, if the Company
fails for any reason to deliver such Conversion Shares to the Investor on the
applicable settlement date upon the terms and subject to the provisions of the
Note and/or such Warrant Shares to the Investor on the applicable settlement
date upon the terms and subject to the provisions of the Warrant, as applicable.


            5.       
Representations and Warranties of the Company. Except as set forth in the
Disclosure Schedules, which Disclosure Schedules shall be deemed a part hereof
and shall qualify any representation or otherwise made herein to the extent of
the disclosure contained in the corresponding section of the Disclosure
Schedules, the Company hereby makes the following representations and warranties
to the Investors as of the Closing Date: 

                         
5.1        Organization, Good Standing and
Qualification. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Nevada. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a Material Adverse Effect. 

                          5.2       
Capitalization and Voting Rights. The authorized capital stock of the
Company and the shares thereof issued and outstanding were as set forth in the
Public Reports as of the dates reflected therein. All of the outstanding shares
of Common Stock have been duly authorized and validly issued, and are fully paid
and nonassessable. Except as set forth in the Public Reports, this Agreement and
the Registration Rights Agreement, there are no agreements or arrangements under
which the Company is obligated to register the sale of any securities under the
Securities Act. Except as set forth in the Public Reports, no shares of Common
Stock are entitled to preemptive rights and there are no outstanding
debt securities and no contracts, commitments, understandings, or arrangements
by which the Company is or may become bound to issue additional shares of the
capital stock of the Company or options, warrants, scrip, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into or exchangeable for, any shares of capital stock of
the Company other than those issued or granted in the ordinary course of
business pursuant to the Company’s equity incentive and/or compensatory plans or
arrangements. Except for customary transfer restrictions contained in agreements
entered into by the Company to sell restricted securities or as set forth in the
Public Reports, the Company is not a party to, and it has no knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of the Company. Except as set forth in the Public Reports, the offer and sale of
all capital stock, convertible or exchangeable securities, rights, warrants or
options of the Company issued prior to the Closing Date complied with all
applicable federal and state securities laws, and no stockholder has any right
of rescission or damages or any “put” or similar right with respect thereto that
would have a Material Adverse Effect. Except as set forth in the Public Reports,
there are no securities or instruments containing anti-dilution or similar
provisions that will be triggered by the Note, the Warrant, this Agreement or
the Registration Rights Agreement or the consummation of the transactions
described herein or therein. 

7




                          5.3       
Authorization; Enforcement. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the Note, the Warrant
and the Registration Rights Agreement (the “Transaction
Documents”) and the performance of all obligations of the Company
hereunder and thereunder, and the authorization (or reservation for issuance),
sale and issuance of the Note and the Warrant, and the Common Stock into which
the Note and the Warrant are convertible or exercisable, as applicable, have
been taken on or prior to the date hereof. Each of the Transaction Documents has
been duly executed by the Company and, when delivered in accordance with the
terms hereof and thereof, will constitute the valid and binding obligation of
the Company enforceable against the Company in accordance with its terms,
except: (i) as limited by general equitable principles and applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors’ rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law. 

                          5.4       
Valid Issuance of the Conversion Shares and Warrant Shares; Reservation
of Shares. Each of the Note and Warrant has been duly authorized and,
when issued and paid for in accordance with this Agreement, will be duly and
validly issued, fully paid and nonassessable, free and clear of all Liens
imposed by the Company other than restrictions on transfer under this Agreement
and under applicable state and federal securities laws. Upon conversion in
accordance with the Note or exercise in accordance with the Warrant (as the case
may be), the Conversion Shares and the Warrant Shares, respectively, when issued
and delivered in accordance with the terms of this Agreement and the Note or the
Warrant, as applicable, for the consideration expressed herein and therein, will
be duly and validly issued, fully paid and non-assessable, free and clear of all
Liens imposed by the Company, other than restrictions on transfer under this
Agreement and under applicable state and federal securities laws. The Company
has reserved from its duly authorized capital stock a sufficient number of
shares of Common Stock for issuance of the Conversion Shares as required
by Section 8 of the Note and Warrant Shares as required by Section 1(g) of the
Warrant. 

8




                          5.5       
Offering. Subject to the truth and accuracy of the Investor’s
representations set forth in Section 6 of this Agreement, the offer and issuance
of the Securities as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act of 1933, as amended (the
“1933 Act”), and the qualification or registration requirements of
state securities laws or other applicable blue sky laws. Neither the Company nor
any authorized agent acting on its behalf will take any action hereafter that
would cause the loss of such exemptions. 

                          5.6       
Public Reports. The Company is current in its filing obligations under
the 1934 Act, including without limitation as to its filings of Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K
(collectively, the “Public Reports”). The Public Reports do not
contain any untrue statement of a material fact or omit to state any fact
necessary to make any statement therein not misleading. The financial statements
included within the Public Reports for the fiscal year ended December 31, 2013
and for each quarterly period thereafter (the “Financial
Statements”) have been prepared in accordance with generally accepted
accounting principles (“GAAP”) applied on a consistent basis
throughout the periods indicated and with each other, except that unaudited
Financial Statements may not contain all footnote required by generally accepted
accounting principles. The Financial Statements fairly present, in all material
respects, the financial condition and operating results of the Company as of the
dates, and for the periods, indicated therein, subject in the case of unaudited
Financial Statements to normal year-end audit adjustments. 

                          5.7       
Compliance With Laws. The Company has not violated any law or any
governmental regulation or requirement which violation has had or would
reasonably be expected to have a Material Adverse Effect on its business and the
Company has not received written notice of any such violation. 

                          5.8       
Violations. The consummation of the transactions contemplated by the
Transaction Documents and all other documents and instruments required to be
delivered in connection therewith will not result in or constitute any of the
following: (a) a violation of any provision of the articles of incorporation,
bylaws or other governing documents of the Company; (b) a violation of any
provisions of any applicable law or of any writ or decree of any court or
governmental instrumentality; (c) a default or an event that, with notice or
lapse of time or both, would be a default, breach, or violation of a lease,
license, promissory note, conditional sales contract, commitment, indenture,
mortgage, deed of trust, or other agreement, instrument, or arrangement to which
the Company is a party or by which the Company or its property is bound; (d) an
event that would permit any party to terminate any agreement or to accelerate
the maturity of any indebtedness or other obligation of the Company; or (e) the
creation or imposition of any lien, pledge, option, security agreement, equity,
claim, charge, encumbrance or other restriction or limitation on the capital
stock or on any of the properties or assets of the Company. 

                          5.9       
Consents; Waivers. No consent, waiver, approval or authority of any
nature, or other formal action, by any Person, firm or corporation, or any
agency, bureau or department of any government or any subdivision thereof, not
already obtained, is required in connection with the execution and delivery of the Transaction
Documents by the Company or the consummation by the Company of the transactions
provided for herein and therein. 

9




                          5.10    
 Sarbanes-Oxley Act. The Company is in compliance with any and all
applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as
of the date hereof, and any and all applicable rules and regulations promulgated
by the Commission thereunder that are effective as of the date hereof.

                          5.11    
Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, the Common Stock or any of
the Company’s officers or directors in their capacities as such.

                          5.12    
 Material Changes; Undisclosed Events, Liabilities or Developments.
Since the date of the latest audited financial statements included within the
Public Reports, except as specifically disclosed in a subsequent Public Report
filed prior to the date hereof: (i) there has been no event, occurrence or
development that has had or that could reasonably be expected to result in a
Material Adverse Effect, (ii) the Company has not incurred any liabilities
(contingent or otherwise) other than (A) trade payables and accrued expenses
incurred in the ordinary course of business consistent with past practice and
(B) liabilities not required to be reflected in the Company’s financial
statements pursuant to GAAP or disclosed in filings made with the Commission,
(iii) the Company has not altered its method of accounting, (iv) the Company has
not declared or made any dividend or distribution of cash or other property to
its stockholders or purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock and (v) the Company has not issued any
equity securities to any officer, director or affiliate, except pursuant to
existing Company stock option plans. The Company does not have pending before
the Commission any request for confidential treatment of information. Except for
the issuance of the Securities contemplated by this Agreement, no event,
liability, fact, circumstance, occurrence or development has occurred or exists
or is reasonably expected to occur or exist with respect to the Company or its
Subsidiaries or their respective businesses, properties, operations, assets or
financial condition, that would be required to be disclosed by the Company under
applicable securities laws at the time this representation is made or deemed
made that has not been publicly disclosed at least one Trading Day prior to the
date that this representation is made. 

                          5.13    
 Intellectual Property. The Company has, or has rights to use, all
patents, patent applications, trademarks, trademark applications, service marks,
trade names, trade secrets, inventions, copyrights, licenses and other
intellectual property rights and similar rights as described in the Public
Reports as necessary or required for use in connection with their respective
businesses and which the failure to so have could have a Material Adverse Effect
(collectively, the “Intellectual Property Rights”). None of, and
the Company has not received a notice (written or otherwise) that any of, the
Intellectual Property Rights has expired, terminated or been abandoned, or is
expected to expire or terminate or be abandoned, within two (2) years from the
date of this Agreement. The Company has not received, since the date of the
latest audited financial statements included within the Public Reports, a
written notice of a claim or otherwise has any knowledge that the Intellectual
Property Rights violate or infringe upon the rights of any Person, except as
could not have or reasonably be expected to not have a Material Adverse Effect. To the knowledge of the Company, all such
Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights. The
Company has taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties, except where
failure to do so could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. 

10




                          5.14    
 Registration Rights. Other than the Investor or as set forth in the
Public Reports, no Person has any right to cause the Company to effect the
registration under the 1933 Act of any securities of the Company. 

                          5.15    
 Disclosure. Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company confirms that neither it nor any other Person acting on its behalf has
provided the Investor or its agents or counsel with any information that it
believes constitutes or might constitute material, non-public information. The
Company understands and confirms that the Investor will rely on the foregoing
representation in effecting transactions in securities of the Company. All of
the disclosure furnished by or on behalf of the Company to the Investor
regarding the Company and its Subsidiaries, their respective businesses and the
transactions contemplated hereby, including the Disclosure Schedules to this
Agreement, is true and correct in all material respects and does not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading. The press releases disseminated by
the Company during the twelve months preceding the date of this Agreement taken
as a whole do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made and when made, not misleading. The Company acknowledges and agrees that the
Investor does not make nor has made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically
set forth in Section 6 hereof. 

                          5.16    
 No Integrated Offering. Assuming the accuracy of the Investor’s
representations and warranties set forth in Section 6, neither the Company, nor
any of its affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of (i) the 1933 Act which would require the registration of any
such securities under the 1933 Act, or (ii) any applicable shareholder approval
provisions of any Trading Market on which any of the securities of the Company
are listed or designated. 

                          5.17     
Seniority. As of the Closing Date, no Indebtedness or other claim against
the Company is senior to the Note in right of payment, whether with respect to
interest or upon liquidation or dissolution, or otherwise, other than
indebtedness secured by purchase money security interests (which is senior only
as to underlying assets covered thereby) and capital lease obligations (which is
senior only as to the property covered thereby). 

                          5.18    
 Bankruptcy Status; Indebtedness. The Company has no current
intention or expectation to file for reorganization or liquidation under the
bankruptcy or reorganization laws of any jurisdiction within one year from the
Closing Date. Schedule 5.18 sets forth as of the date hereof all outstanding
secured and unsecured Indebtedness (as defined below) of the Company or any Subsidiary, or for which the Company or any
Subsidiary has commitments. For the purposes of this Agreement,
“Indebtedness” means (x) any liabilities for borrowed money or
amounts owed in excess of $100,000 (other than trade accounts payable incurred
in the ordinary course of business), (y) all guaranties, endorsements and other
contingent obligations in respect of indebtedness of others, whether or not the
same are or should be reflected in the Company’s consolidated balance sheet (or
the notes thereto), except guaranties by endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business; and (z) the present value of any lease payments in excess of $100,000
due under leases required to be capitalized in accordance with GAAP. The Company
is not in default with respect to any Indebtedness. 

11




                          5.19    
 Regulation M Compliance. The Company has not, and to its knowledge
no one acting on its behalf has, (i) taken, directly or indirectly, any action
designed to cause or to result in the stabilization or manipulation of the price
of any security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any Person any compensation for soliciting another to purchase any other
securities of the Company. 

                          5.20    
 No Disqualification Events. None of the Company, any of its
predecessors, any affiliated issuer, any director, executive officer, other
officer of the Company participating in the offering contemplated hereby, any
beneficial owner of 20% or more of the Company's outstanding voting equity
securities, calculated on the basis of voting power, nor any promoter (as that
term is defined in Rule 405 under the 1933 Act) connected with the Company in
any capacity at the time of sale (each, an “Issuer Covered
Person”) is subject to any of the “Bad Actor” disqualifications
described in Rule 506(d)(1)(i) to (viii) under the 1933 Act (a
“Disqualification Event”), except for a Disqualification Event
covered by Rule 506(d)(2) or (d)(3). The Company has exercised reasonable care
to determine whether any Issuer Covered Person is subject to a Disqualification
Event. 

            6.       
Representations and Warranties of the Investor. The Investor hereby
represents, warrants and covenants that: 

                         
6.1        Authorization. The Investor
has full power and authority to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby and
has taken all action necessary to authorize the execution and delivery of this
Agreement and the Registration Rights Agreement, the performance of its
obligations hereunder and thereunder and the consummation of the transactions
contemplated hereby and thereby.

                          6.2       
No Public Sale or Distribution. The Investor is (i) acquiring the Note
and the Warrant, and (ii) upon conversion of the Note will acquire the
Conversion Shares and (iii) upon exercise of the Warrant will acquire the
Warrant Shares for its own account, not as a nominee or agent, and not with a
view towards, or for resale in connection with, the public sale or distribution
of any part thereof, except pursuant to sales registered or exempted under the
1933 Act. The Investor is acquiring the Securities hereunder in the ordinary
course of its business. The Investor does not presently have any contract,
agreement, undertaking, arrangement or understanding, directly or indirectly,
with any Person to sell, transfer, pledge, assign or otherwise distribute any of
the Securities.

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                          6.3       
Accredited Investor Status; Investment Experience. The Investor is an
“accredited investor” as that term is defined in Rule 501(a) of Regulation D.
The Investor can bear the economic risk of its investment in the Securities, and
has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of an investment in the Securities.


                          6.4       
Reliance on Exemptions. The Investor understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and the
Investor’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Investor set forth herein in order to
determine the availability of such exemptions and the eligibility of the
Investor to acquire the Securities.

                          6.5       
Information. The Investor and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities which
have been requested by the Investor. The Investor and its advisors, if any, have
been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by the Investor
or its advisors, if any, or its representatives shall modify, amend or affect
the Investor’s right to rely on the Company’s representations and warranties
contained herein. The Investor understands that its investment in the Securities
involves a high degree of risk. The Investor has sought such accounting, legal
and tax advice as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities. The Investor is
relying solely on its own accounting, legal and tax advisors, and not on any
statements of the Company or any of its agents or representatives, for such
accounting, legal and tax advice with respect to its acquisition of the
Securities and the transactions contemplated by this Agreement. 

                          6.6       
No Governmental Review. The Investor understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

                          6.7       
Validity; Enforcement; No Conflicts. This Agreement and each Transaction
Document to which the Investor is a party have been duly and validly authorized,
executed and delivered on behalf of the Investor and shall constitute the legal,
valid and binding obligations of the Investor enforceable against the Investor
in accordance with their respective terms, except as such enforceability may be
limited by general principles of equity or to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies. The execution, delivery and performance by the Investor of this
Agreement and each Transaction Document to which the Investor is a party and the
consummation by the Investor of the transactions contemplated hereby and thereby
will not (i) result in a violation of the organizational documents of the
Investor 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 Investor is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree (including federal and
state securities or “Blue Sky” laws) applicable to the Investor, except in the
case of clause (ii) above, for such conflicts, defaults or rights which would
not, individually or in the aggregate, reasonably be expected to have a material
adverse effect on the ability of the Investor to perform its obligations
hereunder.

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                          6.8       
Organization and Standing. The Investor is a limited liability company
duly organized, validly existing and in good standing under the laws of the
State of New York. 

                          6.9       
Brokers or Finders. The Investor represents and warrants, to the best of
its knowledge, that no finder, broker, agent, financial advisor or other
intermediary, nor any purchaser representative or any broker-dealer acting as a
broker, is entitled to any compensation in connection with the transactions
contemplated by this Agreement or the transactions contemplated hereby. 

                          6.10     
Ability to Perform. There are no actions, suits, proceedings or
investigations pending against Investor or Investor’s assets before any court or
governmental agency (nor is there any threat thereof) which would impair in any
way Investor’s ability to enter into and fully perform its commitments and
obligations under this Agreement or the transactions contemplated hereby. 

            7.       
Use of Proceeds. The Investor acknowledges that the Company will use the
proceeds received from the purchase of the Note and Warrant for, among other
things, (i) costs and expenses relating to the sale of the Note and Warrant to
the Investor and (ii) general working capital purposes. 

            8.       
Rule 144 Availability; Public Information. At all times during the period
commencing on the six (6) month anniversary of the Closing Date and ending at
such time that all of the Securities can be sold without the requirement to be
in compliance with Rule 144(c)(1) under the 1933 Act and otherwise without
restriction or limitation pursuant to Rule 144 under the 1933 Act, the Company
shall use its reasonable best efforts to ensure the availability of Rule 144
under the 1933 Act to the Investor with regard to the Conversion Shares and the
Warrant Shares (assuming a cashless exercise of the Warrant), including
compliance with Rule 144(c)(1) under the 1933 Act. If, (i) at any time during
the period commencing from the six (6) month anniversary of the Closing Date and
ending on the first anniversary of the Closing Date, the Company shall fail for
any reason to satisfy the current public information requirement under Rule
144(c) under the 1933 Act (a “Public Information Failure”), or
(ii) the Company shall fail to take such action as is reasonably requested by
the Investor to enable the Investor to sell the Conversion Shares and the
Warrant Shares (assuming a cashless exercise of the Warrant) pursuant to Rule
144 under the 1933 Act (including, without limitation, delivering all such legal
opinions, consents, certificates, resolutions and instructions to the Company’s
transfer agent as may be reasonably requested from time to time by the Investor
and otherwise fully cooperate with Investor and Investor’s broker to effect such
sale of securities pursuant to Rule 144 under the 1933 Act) (a “Process
Failure”), then, in either case, in addition to the Investor’s other
available remedies, the Company shall pay to a Investor, in cash, as liquidated
damages and not as a penalty, by reason of any such delay in or reduction of its
ability to sell the Securities, an amount in cash equal to two percent (2.0%) of
the aggregate Purchase Price of the Investor’s Securities on the day of a Public
Information Failure or Process Failure, as applicable, and on every thirtieth
(30th) day (pro rated for periods totaling less than thirty days) thereafter
until (a) in the case of a Process Failure, the date such Process Failure
is cured, or (b) in the case of a Public Information Failure, the earlier of (1)
the date such Public Information Failure is cured and (b) such time that such
public information is no longer required for the Investor to transfer the
Conversion Shares or the Warrant Shares (assuming a cashless exercise of the
Warrant) pursuant to Rule 144 under the 1933 Act. The payments to which the
Investor shall be entitled pursuant to this Section 8 are referred to herein as
“Rule 144 Failure Payments.” Rule 144 Failure
Payments shall be paid on the earlier of (i) the last day of the calendar month
during which such Rule 144 Failure Payments are incurred and (ii) the third
(3rd) Trading Day after the event or failure giving rise to the Rule 144 Failure
Payments is cured.

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            9.       
Indemnification. In consideration of the Investor’s execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless the
Investor and each holder of any Securities and all of their stockholders,
partners, members, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons’ agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the
“Indemnitees”) from and against any and all actions, causes of
action, suits, claims, losses, costs, penalties, fees, liabilities and damages,
and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the
“Indemnified Liabilities”), incurred by any Indemnitee as a result
of, or arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company or any Subsidiary in any of the
Transaction Documents, (b) any breach of any covenant, agreement or obligation
of the Company or any Subsidiary contained in any of the Transaction Documents
or (c) any cause of action, suit or claim brought or made against such
Indemnitee by a third party (including for these purposes a derivative action
brought on behalf of the Company or any Subsidiary) and arising out of or
resulting from (i) the execution, delivery, performance or enforcement of any of
the Transaction Documents, (ii) any transaction financed or to be financed in
whole or in part, directly or indirectly, with the proceeds of the issuance of
the Securities, or (iii) the status of the Investor or holder of the Securities
as an investor in the Company pursuant to the transactions contemplated by the
Transaction Documents. To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. Except as otherwise set
forth herein, the mechanics and procedures with respect to the rights and
obligations under this Section 9 shall be the same as those set forth in Section
6 of the Registration Rights Agreement. Notwithstanding anything to the contrary
in this Section 9, the Company shall not be obligated to pay an Indemnitee any
sums otherwise due under this Section 9 if the Company has already paid the
Indemnitee such sums for the same Indemnified Liabilities under Section 6 of the
Registration Rights Agreement. 

            10.    
 Participation Rights. During the period commencing on the date
hereof and ending 180 calendar days after the date hereof, neither the Company
nor any of its Subsidiaries shall, directly or indirectly, effect any Subsequent
Placement (as defined below) unless the Company shall have first complied with
this Section 10.

15




                          10.1    
 At least three (3) Trading Days prior to any proposed or intended
Subsequent Financing, the Company shall deliver to the Investor a written notice
of its proposal or intention to effect a Subsequent Financing (each such notice,
a “Pre-Notice”), which Pre-Notice shall not contain any
information (including, without limitation, material, non-public information)
other than: either (A) (i) a statement that the Company proposes or intends to
effect a Subsequent Financing, (ii) a statement that the statement in clause (i)
above does not constitute material, non-public information and (iii) a statement
informing the Investor that it is entitled to receive an Offer Notice (as
defined below) with respect to such Subsequent Financing upon its written
request or (B) if the existence of such Subsequent Financing is, as of the date
of such Pre-Notice, material, non-public information, a statement that the
Investor is entitled to receive material, non-public information. Upon the
written request of the Investor within two (2) Trading Days after the Company’s
delivery to the Investor of such Pre-Notice, and only upon a written request by
the Investor, the Company shall promptly, but no later than one (1) Trading Day
after such request, deliver to the Investor an irrevocable written notice (the
“Offer Notice”) of any proposed or intended issuance or sale or
exchange (the “Offer”) of the securities being offered (the
“Offered Securities”) in a Subsequent Financing, which Offer
Notice shall (w) identify and describe the Offered Securities, (x) describe the
price and other terms upon which they are to be issued, sold or exchanged, and
the aggregate number or amount of the Offered Securities to be issued, sold or
exchanged, (y) identify the Persons (if known) to which or with which the
Offered Securities are to be offered, issued, sold or exchanged and (z) offer to
issue and sell to or exchange with the Investor in accordance with the terms of
the Offer all of the Offered Securities.

                          10.2    
 To accept an Offer, in whole or in part, the Investor must deliver a
written notice to the Company prior to the end of the third (3rd) Business Day
after the Investor’s receipt of the Offer Notice (the “Offer
Period”), setting forth the portion of the Offered Securities that the
Investor elects to purchase (in either case, the “Notice of
Acceptance”). Notwithstanding the foregoing, if the Company desires to
modify or amend the terms and conditions of the Offer prior to the expiration of
the Offer Period, the Company may deliver to the Investor a new Offer Notice and
the Offer Period shall expire on the third (3rd) Business Day after the
Investor’s receipt of such new Offer Notice. 

                          10.3     
The Company shall have five (5) Business Days from the expiration of the Offer
Period above (i) to offer, issue, sell or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by the
Investor (the “Refused Securities”) pursuant to a definitive
agreement(s) (the “Subsequent Financing Agreement”), but only to
the offerees described in the Offer Notice (if so described therein) and only
upon terms and conditions (including, without limitation, unit prices and
interest rates) that are not more favorable to the acquiring Person or Persons
or less favorable to the Company than those set forth in the Offer Notice and
(ii) to publicly announce (a) the execution of such Subsequent Financing
Agreement, and (b) either (x) the consummation of the transactions contemplated
by such Subsequent Financing Agreement or (y) the termination of such Subsequent
Financing Agreement, which shall be filed with the SEC on a Current Report on
Form 8-K with such Subsequent Financing Agreement and any documents contemplated
therein filed as exhibits thereto. 

16




                          10.4    
 In the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in
Section 10.3 above), then the Investor may, at its sole option and in its sole
discretion, reduce the number or amount of the Offered Securities specified in
its Notice of Acceptance to an amount that shall be not less than the number or
amount of the Offered Securities that the Investor elected to purchase pursuant
to Section 10.2 above multiplied by a fraction, (i) the numerator of which shall
be the number or amount of Offered Securities the Company actually proposes to
issue, sell or exchange (including Offered Securities to be issued or sold to
the Investor pursuant to this Section 10 prior to such reduction) and (ii) the
denominator of which shall be the original amount of the Offered Securities. In
the event that the Investor so elects to reduce the number or amount of Offered
Securities specified in its Notice of Acceptance, the Company may not issue,
sell or exchange more than the reduced number or amount of the Offered
Securities unless and until such securities have again been offered to the
Investor in accordance with Section 10.1 above. 

                          10.5    
 Upon the closing of the issuance, sale or exchange of all or less than all
of the Refused Securities, the Investor shall acquire from the Company, and the
Company shall issue to the Investor, the number or amount of Offered Securities
specified in its Notice of Acceptance. The purchase by the Investor of any
Offered Securities is subject in all cases to the preparation, execution and
delivery by the Company and the Investor of a separate purchase agreement
relating to such Offered Securities reasonably satisfactory in form and
substance to the Investor and its counsel. 

                          10.6     
Any Offered Securities not acquired by the Investor or other Persons in
accordance with this Section 10 may not be issued, sold or exchanged until they
are again offered to the Investor under the procedures specified in this
Agreement. 

                          10.7    
 The Company and the Investor agree that if the Investor elects to
participate in the Offer, neither the Subsequent Financing Agreement with
respect to such Offer nor any other transaction documents related thereto
(collectively, the “Subsequent Financing Documents”) shall include
any term or provision whereby the Investor shall be required to agree to any
restrictions on trading as to any securities of the Company or be required to
consent to any amendment to or termination of, or grant any waiver, release or
the like under or in connection with, any agreement previously entered into with
the Company or any instrument received from the Company. 

                          10.8     
Notwithstanding anything to the contrary in this Section 10 and unless otherwise
agreed to by the Investor, the Company shall either confirm in writing to the
Investor that the transaction with respect to the Subsequent Financing has been
abandoned or shall publicly disclose its intention to issue the Offered
Securities, in either case, in such a manner such that the Investor will not be
in possession of any material, non-public information, by the fifth
(5th) Business Day following delivery of the Offer Notice. If by such
fifth (5th) Business Day, no public disclosure regarding a
transaction with respect to the Offered Securities has been made, and no notice
regarding the abandonment of such transaction has been received by the Investor,
such transaction shall be deemed to have been abandoned and the Investor shall
not be in possession of any material, non-public information with respect to the
Company or any of its Subsidiaries. Should the Company decide to pursue such
transaction with respect to the Offered Securities, the Company shall provide
the Investor with another Offer Notice and the Investor will again have the right of participation set forth in this
Section 10. The Company shall not be permitted to deliver more than one Offer
Notice to the Investor in any sixty (60) day period, except as expressly
contemplated by the last sentence of Section 10.2. 

17




                          10.9     
The restrictions contained in this Section 10 shall not apply in connection with
the issuance of any Excluded Securities (as defined below). 

                          10.10   
For purposes of this Section 10, the following definitions shall apply: 

                         
(a)        “Approved Stock
Plan” means any employee benefit plan which has been approved by the
board of directors of the Company prior to or subsequent to the date hereof
pursuant to which shares of Common Stock and standard options to purchase Common
Stock may be issued to any employee, officer, consultant or director for
services provided to the Company in their capacity as such. 

                          (b)       
“Convertible Securities” means any capital stock or other security
of the Company or any of its Subsidiaries that is at any time and under any
circumstances directly or indirectly convertible into, exercisable or
exchangeable for, or which otherwise entitles the holder thereof to acquire, any
capital stock or other security of the Company (including, without limitation,
Common Stock) or any of its Subsidiaries.

                          (c)       
“Excluded Securities” means (A) shares of Common Stock or standard
options to purchase Common Stock to directors, officers or employees of the
Company in their capacity as such pursuant to an Approved Stock Plan (as defined
below), provided that (1) all such issuances (taking into account the shares of
Common Stock issuable upon exercise of such options) after the date hereof
pursuant to this clause (A) do not, in the aggregate, exceed more than 5% of the
Common Stock issued and outstanding immediately prior to the date hereof and (2)
the exercise price of any such options is not lowered, none of such options are
amended to increase the number of shares issuable thereunder and none of the
terms or conditions of any such options are otherwise materially changed in any
manner that adversely affects the Investor; (B) shares of Common Stock issued
upon the conversion or exercise of Convertible Securities (other than standard
options to purchase Common Stock issued pursuant to an Approved Stock Plan that
are covered by clause (A) above) issued prior to the date hereof, provided that
the conversion price of any such Convertible Securities (other than standard
options to purchase Common Stock issued pursuant to an Approved Stock Plan that
are covered by clause (A) above) is not lowered, none of such Convertible
Securities (other than standard options to purchase Common Stock issued pursuant
to an Approved Stock Plan that are covered by clause (A) above) are amended to
increase the number of shares issuable thereunder and none of the terms or
conditions of any such Convertible Securities (other than standard options to
purchase Common Stock issued pursuant to an Approved Stock Plan that are covered
by clause (A) above) are otherwise materially changed in any manner that
adversely affects the Investor; (C) the Securities and (D) shares of Common
Stock or Convertible Securities issued or issuable in connection with strategic
alliances, acquisitions, mergers, and strategic partnerships, provided, that (1)
the primary purpose of such issuance is not to raise capital, (2) the purchasers
or acquirers of the securities in such issuance does not include any affiliate
of the Company or any of its Subsidiaries and solely consists of either (x) the
actual participants in such strategic alliance or strategic partnership, (y) the
actual owners of such assets or securities acquired in such acquisition or
merger or (z) the stockholders, partners or members of the foregoing Persons,
(3) the number or amount of securities issued to such Person by
the Company shall not be disproportionate to such Person’s actual participation
in such strategic alliance or strategic partnership or ownership of such assets
or securities to be acquired by the Company, as applicable. 

18




                          (d)       
“Subsequent Financing” means any, direct or indirect, issuance,
offer, sale, grant of any option or right to purchase, or otherwise disposition
of (or announcement of any issuance, offer, sale, grant of any option or right
to purchase or other disposition of) any equity or debt security or any
equity-linked or related security (including, without limitation, any “equity
security” (as that term is defined under Rule 405 promulgated under the 1933
Act), any Convertible Securities, any debt, any preferred stock or any purchase
rights) of the Company or any of its Subsidiaries, including, without
limitation, pursuant to Section 3(a)(9) or Section 3(a)(10) of the 1933 Act, or
the direct or indirect issuance by the Company or any of its Subsidiaries of any
Indebtedness. 

            11.    
 Exclusivity. During the period commencing on the date hereof and
ending on the first (1st) anniversary of the date hereof, and except
with respect to those securities of the Company set forth on Schedule 11,
neither the Company nor any of its affiliates or Subsidiaries, nor any of its or
their respective officers, employees, directors, agents or other
representatives, will, without the prior written consent of the Investor (which
consent may be withheld, delayed or conditioned in the Investor’s sole
discretion), directly or indirectly: (a) solicit, initiate, encourage or accept
any other inquiries, proposals or offers from any Person (other than the
Investor) relating to any exchange (i) of any security of the Company or any of
its Subsidiaries for any other security of the Company or any of its
Subsidiaries, except to the extent (x) consummated pursuant to an exchange
registered under a registration statement of the Company filed pursuant to the
1933 Act and declared effective by the Commission or (y) such exchange is exempt
from registration pursuant to an exemption provided under the 1933 Act (other
than Section 3(a)(10) of the 1933 Act) or (ii) of any indebtedness or other
securities of, or claim against, the Company or any of its Subsidiaries relying
on the exemption provided by Section 3(a)(10) of the 1933 Act (any such
transaction described in clauses (i) or (ii), an “Exchange
Transaction”); (b) enter into, effect, alter, amend, announce or
recommend to its stockholders any Exchange Transaction with any Person (other
than the Investor); or (c) participate in any discussions, conversations,
negotiations or other communications with any Person (other than the Investor)
regarding any Exchange Transaction, or furnish to any Person (other than the
Investor) any information with respect to any Exchange Transaction, or otherwise
cooperate in any way, assist or participate in, facilitate or encourage any
effort or attempt by any Person (other than the Investor) to seek an Exchange
Transaction involving the Company or any of its Subsidiaries. Notwithstanding
the foregoing or anything contained herein to the contrary, neither the Company
nor any of its affiliates or Subsidiaries, nor any of its or their respective
officers, employees, directors, agents or other representatives, will, without
the prior written consent of the Investor (which consent may be withheld,
delayed or conditioned in the Investor’s sole discretion), directly or
indirectly, cooperate in any way, assist or participate in, facilitate or
encourage any effort or attempt by any Person (other than the Investor) to
effect any acquisition of securities or indebtedness of, or claim against, the
Company by such Person from an existing holder of such securities, indebtedness
or claim in connection with a proposed exchange of such securities or
indebtedness of, or claim against, the Company (whether pursuant to Section
3(a)(9) or 3(a)(10) of the 1933 Act or otherwise) (a “Third Party Exchange
Transfer”). The Company, its affiliates and Subsidiaries, and each of its and their respective
officers, employees, directors, agents or other representatives shall
immediately cease and cause to be terminated all existing discussions,
conversations, negotiations and other communications with any Persons (other
than the Investor) with respect to any of the foregoing. The Company shall
promptly (and in no event later than 24 hours after receipt) notify (which
notice shall be provided orally and in writing and shall identify the Person
making the inquiry, request, proposal or offer and set forth the material terms
thereof) the Investor after receipt of any inquiry, request, proposal or offer
relating to any Exchange Transaction or Third Party Exchange Transfer, and shall
promptly (and in no event later than 24 hours after receipt) provide copies to
the Investor of any written inquiries, requests, proposals or offers relating
thereto. The Company agrees that it and its affiliates and Subsidiaries, and
each of its and their respective officers, employees, directors, agents or other
representatives Subsidiaries will not enter into any agreement with any Person
subsequent to the date hereof which prohibits the Company from providing any
information to the Investor in accordance with this provision. As used in this
Agreement, “Person” means any individual, partnership, firm,
corporation, limited liability company, association, trust, unincorporated
organization or other entity, as well as any syndicate or group that would be
deemed to be a person under Section 13(d)(3) of the Exchange Act. For all
purposes of this Agreement, violations of the restrictions set forth in this
Section 11 by any Subsidiary or affiliate of the Company, or any officer,
employee, director, agent or other representative of the Company or any of its
Subsidiaries or affiliates shall be deemed a direct breach of this Section 11 by
the Company. 

19




           
12.        Miscellaneous 

                          12.1    
 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of the Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party, other than the parties hereto or their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. 

                          12.2    
 Governing Law; Jurisdiction; Jury Trial. All questions concerning
the construction, validity, enforcement and interpretation of this Agreement
shall be governed by the internal laws of the State of Illinois, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of Illinois or any other jurisdictions) that would cause the application
of the laws of any jurisdictions other than the State of Illinois. The Company
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in Chicago, Illinois, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT
MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY. 

20




                          12.3    
 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. 

                          12.4    
 Notices. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on the next Trading
Day, (c) five (5) Trading Days after having been sent by registered or certified
mail, return receipt requested, postage prepaid, or (d) one (1) day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to (a) in the case of the Company, to XcelMobility, Inc., 303 Twin Dolphins
Drive, Suite 600, Redwood City, CA 94065, Telephone Number: (650) 632-4210,
Attention: Ronald Strauss, or (b) in the case of the Investor, to Hanover
Holdings I, LLC, c/o Magna Group, 5 Hanover Square, New York, NY 10004,
Telephone Number: (347) 491-4240, Fax: (646) 737-9948, Attention: Marc Manuel,
with a copy (which shall not constitute notice) to Greenberg Traurig, LLP, The
MetLife Building, 200 Park Avenue, New York, New York 10166, Telephone Number
(212) 801-9200, Fax: (212) 801-6400, Attention: Anthony J. Marsico, Esq. 

                          12.5    
 Finder’s Fees. Each party represents that it neither is nor will be
obligated for any finders’ fee or commission in connection with this
transaction. The Company shall indemnify and hold harmless each Investor from
any liability for any commission or compensation in the nature of a finders’ fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible. 

                          12.6    
 Amendments and Waivers. No provision of this Agreement may be
amended other than by a written instrument signed by both parties hereto. No
provision of this Agreement may be waived other than in a written instrument
signed by the party against whom enforcement of such waiver is sought. No
failure or delay in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercises thereof
or of any other right, power or privilege. 

                          12.7    
 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms. 

                          12.8    
 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.


21




                          12.9    
 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. 

                          12.10  
 Interpretation. Unless the context of this Agreement clearly
requires otherwise, (a) references to the plural include the singular, the
singular the plural, the part the whole, (b) references to any gender include
all genders, (c) “including” has the inclusive meaning frequently identified
with the phrase “but not limited to” and (d) references to “hereunder” or
“herein” relate to this Agreement. 

                          12.11  
 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, the Investor
and the Company will be entitled to specific performance under the Transaction
Documents. The parties agree that monetary damages may not be adequate
compensation for any loss incurred by reason of any breach of obligations
contained in the Transaction Documents and hereby agree to waive and not to
assert in any action for specific performance of any such obligation the defense
that a remedy at law would be adequate. 

                          12.12  
 Fees and Expenses. Each party shall bear its own fees and expenses
related to the transactions contemplated by the Transaction Documents;
provided, however, that (i) $40,000 (less $15,000 heretofore paid
by the Company to the Investor) shall be withheld by the Investor from the
Purchase Price at the Closing as a non-accountable and non-refundable document
preparation fee (the “Document Preparation Fee”) in connection
with the preparation, negotiation, execution and delivery of the Transaction
Documents and legal due diligence of the Company, and shall be paid directly to
the Investor’s counsel on the Closing Date by wire transfer of immediately
available funds. For the avoidance of doubt, the Document Preparation Fee (and
any portion thereof) shall be non-refundable when paid. The Company shall pay
all transfer agent fees (including, without limitation, any fees required for
same-day processing of any instruction letter delivered by the Company and any
conversion or exercise notice delivered by a Investor), stamp taxes and other
taxes and duties levied in connection with the delivery of any Securities to the
Investor. 

                          12.13  
 No Variable Rate Transactions; No Frustration. Unless and until the
Company complies with Section 10 hereof, neither the Company nor any of its
affiliates or Subsidiaries, nor any of its or their respective officers,
employees, directors, agents or other representatives, will, without the prior
written consent of the Investor (which consent may be withheld, delayed or
conditioned in the Investor’s sole discretion), effect, enter into, announce or
recommend to its stockholders any agreement, plan, arrangement or transaction
that would or would reasonably be expected to constitute or involve a Variable
Rate Transaction. So long as the Investor or its affiliates hold any Securities,
neither the Company nor any of its affiliates or Subsidiaries, nor any of its or
their respective officers, employees, directors, agents or other
representatives, will, without the prior written consent of the Investor (which
consent may be withheld, delayed or conditioned in the Investor’s sole
discretion), effect, enter into, announce or recommend to its stockholders any
agreement, plan, arrangement or transaction that would or would reasonably be
expected to restrict, delay, conflict with or impair the ability or right of the
Company to timely perform its obligations under this Agreement, the Note or the
Warrant, including, without limitation, the obligation of the Company to timely
deliver shares of Common Stock to the Investor or its affiliates in accordance with this
Agreement, the Note or the Warrant. 

22




                          12.14  
 No Integration. None of the Company, any of its affiliates (as
defined in Rule 501(b) under the 1933 Act), or any person acting on behalf of
the Company or such affiliate will sell, offer for sale, or solicit offers to
buy or otherwise negotiate in respect of any security (as defined in the 1933
Act) which will be integrated with the sale of the Securities in a manner which
would require the registration of the Securities under the 1933 Act or require
stockholder approval under the rules and regulations of the Trading Market and
the Company will take all action that is appropriate or necessary to assure that
its offerings of other securities will not be integrated for purposes of the
1933 Act or the rules and regulations of the Trading Market, with the issuance
of Securities contemplated hereby. 

            13.       
Additional Defined Terms. In addition to the terms defined elsewhere in
this Agreement, the Note or the Warrant the following terms have the meanings
set forth in this Section 11: 

                         
13.1      “1934 Act” means the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder. 

                          13.2     
“Commission” means the United States Securities and Exchange
Commission. 

                          13.3    
 “Common Stock Equivalents” means any securities of the
Company or the Subsidiaries which would entitle the holder thereof to acquire at
any time Common Stock, including, without limitation, any Convertible Security,
Option or other instrument that is at any time convertible into or exercisable
or exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock. 

                          13.4    
 “Effective Date” means the date that the Initial
Registration Statement (as defined in the Registration Rights Agreement) filed
pursuant to the Registration Rights Agreement has been declared effective by the
Commission. 

                          13.5    
 “Liens” means a lien, charge pledge, security interest,
encumbrance, right of first refusal, preemptive right or other restriction. 

                          13.6    
 “Material Adverse Effect” means (i) a material adverse
effect on the legality, validity or enforceability of any Transaction Document,
(ii) a material adverse effect on the results of operations, assets, business,
prospects or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) a material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its
obligations under any Transaction Document. 

                          13.7     
“Registrable Securities” shall have the meaning set forth in the
Registration Rights Agreement. 

                          13.8     
“Short Sales” shall mean “short sales” as defined in Rule 200
promulgated under Regulation SHO under the 1934 Act. 

23




                          13.9     
“Subsidiary” shall mean any corporation or other entity of which
at least a majority of the securities or other ownership interest having
ordinary voting power for the election of directors or other persons performing
similar functions are at the time owned directly or indirectly by the Company
and/or any of its other Subsidiaries. 

                          13.10  
 “Trading Day” means any day on which the Common Stock is
traded on the Trading Market, provided that “Trading Day” shall
not include any day on which the Common Stock is scheduled to trade on the
Trading Market for less than 4.5 hours or any day that the Common Stock is
suspended from trading during the final hour of trading on the Trading Market
(or if the Trading Market does not designate in advance the closing time of
trading on the Trading Market, then during the hour ending at 4:00:00 p.m., New
York City time) unless such day is otherwise designated as a Trading Day in
writing by the Investor. 

                          13.11  
 “Trading Market” means any of the following markets or
exchanges on which the Common Stock is listed or quoted for trading on the date
in question: the OTC Bulletin Board, The NASDAQ Global Market, The NASDAQ Global
Select Market, The NASDAQ Capital Market, the New York Stock Exchange, NYSE
Arca, the NYSE MKT, or the OTCQX Marketplace or the OTCQB Marketplace operated
by OTC Markets Group Inc. (or any successor to any of the foregoing). 

                          13.12  
 “Variable Rate Transaction” means a transaction in which the
Company or any Subsidiary (i) issues or sells any convertible securities either
(A) at a conversion, exercise or exchange rate or other price that is based upon
and/or varies with the trading prices of or quotations for the shares of Common
Stock at any time after the initial issuance of such convertible securities, or
(B) with a conversion, exercise or exchange price that is subject to being reset
at some future date after the initial issuance of such Convertible Securities or
upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock,
including, without limitation, pursuant to any “weighted average” or
“full-ratchet” anti-dilution provision, or (ii) enters into any agreement
(including, without limitation, an equity line of credit or an “at-the-market”
offering) whereby the Company or any Subsidiary may sell securities at a future
determined price. 

[SIGNATURES ON THE FOLLOWING PAGE] 

24




        
   IN WITNESS WHEREOF, the parties have caused this
Agreement to be duly executed and delivered as of the date provided above. 

 

THE COMPANY 

XCELMOBILITY, INC. 

 

By: 
_________________________________
       
Name:
        Title: 





       
    IN WITNESS WHEREOF, the parties have caused this
Agreement to be duly executed and delivered as of the date provided above. 

 

THE INVESTOR:


 

HANOVER HOLDINGS I, LLC, a New York
limited liability company

 

By: 
_________________________________
       
Name:
        Title: