Document:

SECURITY
AGREEMENT

    

    THIS SECURITY AGREEMENT (this
“Agreement”), is entered into as of
August __, 2009 and made effective as of July 20, 2009, by and between New Media Lottery Services,
Inc., a Delaware corporation, with headquarters located at 1400
Technology Drive, Harrisonburg, VA 22802 (the “Pledgor” and Trafalgar Capital Specialized
Investment Fund, FIS (the “Secured
Party”).  Capitalized words which are otherwise undefined in
this Agreement shall have the same definition as in the Securities Purchase
Agreement dated as of the date hereof entered into by the parties hereto (the
“Securities Purchase
Agreement”).

     

    RECITALS:

     

    WHEREAS, the Pledgor issued
and sold to the Secured Party, Three Hundred Thousand U.S. Dollars (US$300,000)
of secured convertible redeemable debentures and has agreed to issue and
sell up to an additional Seven Hundred Thousand U.S. Dollars (US$700,000) of
secured convertible debentures (the “Debentures”) pursuant
to the terms of the Securities Purchase Agreement; and

     

    WHEREAS, to induce the Secured
Party to enter into the transactions contemplated by the Securities Purchase
Agreement and the Transaction Documents, the Pledgor agreed to grant to the
Secured Party a first priority security interest in and to the pledged property
identified on Exhibit
A hereto until the satisfaction of the Obligations (as defined herein
below).

     

    AGREEMENT:

     

    NOW, THEREFORE, in
consideration of the premises and the mutual covenants herein contained, and for
other good and valuable consideration, the adequacy and receipt of which are
hereby acknowledged, the parties hereto hereby agree as follows:

     

    ARTICLE 1

     

    DEFINITIONS AND
INTERPRETATIONS

     

    Section
1.1              Recitals.  The
above recitals are true and correct and are incorporated herein, in their
entirety, by this reference.

     

    Section
1.2             Interpretations.  Nothing
herein expressed or implied is intended or shall be construed to confer upon any
person other than the Secured Party any right, remedy or claim under or by
reason hereof.

     

    Section
1.3            Obligations
Secured.  The obligations secured hereby are any and all
obligations of the Pledgor to the Secured Party now existing or hereinafter
incurred to the Secured Party, whether oral or written and whether arising on or
after the date hereof including, without limitation, those obligations of the
Pledgor to the Secured Party under the Securities Purchase Agreement and the
Transaction Documents and any other amounts now or hereafter owed to the Secured
Party by the Pledgor thereunder or hereunder (collectively, the “Obligations”).

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    ARTICLE 2

    PLEDGED PROPERTY,
ADMINISTRATION OF COLLATERAL

    AND TERMINATION OF SECURITY
INTEREST

     

    Section
2.1              Grant of Security
Interest.

     

    (a)           The
Pledgor hereby pledges to the Secured Party and creates in the Secured Party for
its benefit a security interest for such time until the Obligations are paid in
full, in and to all of in the property described in Exhibit A hereto,
whether now existing or hereafter from time to time acquired (collectively,
the  “Pledged
Property”).

     

    (b)           Simultaneously
with the execution and delivery of this Agreement, the Pledgor shall make,
execute, acknowledge, file, record and deliver to the Secured Party any
documents reasonably requested by the Secured Party to perfect its security
interest in the Pledged Property.  Simultaneously with the execution
and delivery of this Agreement, the Pledgor shall make, execute, acknowledge and
deliver to the Secured Party such documents and instruments, including, without
limitation, financing statements, certificates, local lien documents, affidavits
and forms as may, in the Secured Party’s reasonable judgment, be necessary to
effectuate, complete or perfect, or to continue and preserve, the security
interest of the Secured Party in the Pledged Property, and the Secured Party
shall hold such documents and instruments as secured party, subject to the terms
and conditions contained herein.

     

    Section
2.2              Rights; Interests;
Etc.

     

    (a)           So
long as no Event of Default (as hereinafter defined) shall have occurred
and be continuing:

     

    (i)           the
Pledgor shall be entitled to exercise any and all rights pertaining to its
Pledged Property or any part thereof for any purpose not inconsistent with the
terms hereof; and

     

    (ii)          the
Pledgor shall be entitled to receive and retain any and all payments paid or
made in respect of its Pledged Property.

     

    (b)           Upon
the occurrence and during the continuance of an Event of Default:

     

    (i)           All
rights of the Pledgor to exercise the rights which it would otherwise be
entitled to exercise pursuant to Section 2.2(a)(i) hereof and to
receive payments which it would otherwise be authorized to receive and retain
pursuant to Section 2.2(a)(ii) hereof shall be suspended, and all such
rights shall thereupon become vested in the Secured Party who shall thereupon
have the sole right to exercise such rights and to receive and hold as Pledged
Property such payments; provided, however, that if
the Secured Party shall become entitled and shall elect to exercise its right to
realize on the Pledged Property pursuant to Article 5 hereof, then all cash
sums received by the Secured Party, or held by Pledgor for the benefit of the
Secured Party and paid over pursuant to Section 2.2(b)(ii) hereof,
shall be applied against any outstanding Obligations; and

     

    
      
        
        

      

      
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    (ii)           All
interest, dividends, income and other payments and distributions which are
received by the Pledgor contrary to the provisions of
Section 2.2(b)(i) hereof shall be received in trust for the benefit of
the Secured Party, shall be segregated from other property of the Pledgor and
shall be forthwith paid over to the Secured Party; or

     

    (iii)          The
Secured Party in its sole discretion shall be authorized to sell any or all of
the Pledged Property at a public or private sale in order to recoup all of the
outstanding Obligations.

     

    (c)           Each
of the following events, subject to the lapse of applicable cure periods, shall
constitute a default under this Agreement (each an “Event of
Default”):

     

    (i)           any
default, whether in whole or in part, shall occur in the payment to the Secured
Party of principal, interest or other item comprising the Obligations as and
when due or with respect to any other debt or obligation of the Pledgor to a
party other than the Secured Party;

     

    (ii)           any
default, whether in whole or in part, shall occur in the due observance or
performance of any obligations or other covenants, terms or provisions to be
performed under this Agreement or any of the Transaction Documents;

     

    (iii)          Any
representation or warranty made or furnished by or on behalf of the Pledgor in
connection with this Agreement, the Securities Purchase Agreement or any
Transaction Document proves to have been incorrect or misleading in any material
respect when made or furnished; or

     

    (iv)          Secured
Party, reasonably and in good faith, deems itself to be insecure;

     

    (v)           the
Pledgor shall:  (1) make a general assignment for the benefit of
its creditors; (2) apply for or consent to the appointment of a receiver,
trustee, assignee, custodian, sequestrator, liquidator or similar official for
itself or any of its assets and properties; (3) commence a voluntary case
for relief as a debtor under the United States Bankruptcy Code; (4) file
with or otherwise submit to any governmental authority any petition, answer or
other document seeking: (A) reorganization, (B) an arrangement with
creditors or (C) to take advantage of any other present or future
applicable law respecting bankruptcy, reorganization, insolvency, readjustment
of debts, relief of debtors, dissolution or liquidation; (5) file or
otherwise submit any answer or other document admitting or failing to contest
the material allegations of a petition or other document filed or otherwise
submitted against it in any of the proceedings set forth in this Section
2.2(c)(v) under any such applicable law, or (6) be adjudicated a bankrupt
or insolvent by a court of competent jurisdiction; or

     

    (vi)          any
case, proceeding or other action shall be commenced against the Pledgor for the
purpose of effecting, or an order, judgment or decree shall be entered by any
court of competent jurisdiction approving (in whole or in part) anything
specified in Section 2.2(c)(v) hereof, or any receiver, trustee,
assignee, custodian, sequestrator, liquidator or other official shall be
appointed with respect to the Pledgor, or shall be appointed to take or shall
otherwise acquire possession or control of all or a substantial part of the
assets and properties of the Pledgor, and any of the foregoing shall continue
unstayed and in effect for any period of thirty (30) calendar
days.

     

    
      
        
        

      

      
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    ARTICLE 3

     

    ATTORNEY-IN-FACT;
PERFORMANCE; AUTHORIZATION TO FILE FINANCING

    STATEMENTS

     

    Section
3.1              Secured Party Appointed
Attorney-In-Fact.  Upon the occurrence of an Event of Default,
the Pledgor hereby appoints the Secured Party as its attorney-in-fact, with full
authority in the place and stead of the Pledgor and in the name of the Pledgor
or otherwise, from time to time in the Secured Party’s discretion to take any
action and to execute any instrument which the Secured Party may reasonably deem
necessary to accomplish the purposes of this Agreement, including, without
limitation, to receive and collect all instruments made payable to the Pledgor
representing any payments in respect of its Pledged Property or any part thereof
and to give full discharge for the same.  The Secured Party may
demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Pledged Property as and when the Secured Party may
determine.  To facilitate collection, the Secured Party may notify
account debtors and obligors on any Pledged Property to make payments directly
to the Secured Party.

     

    Section
3.2              Secured Party May
Perform.  If the Pledgor fails to perform any covenant,
obligation or agreement contained herein, the Secured Party, at its option, may
itself perform, or cause performance of, such covenant, obligation or agreement,
and the expenses of the Secured Party incurred in connection therewith shall be
included in the Obligations secured hereby and payable by the Pledgor under
Section 8.3.

     

    Section
3.3             Authorization to file
Financing Statements.  The Pledgor hereby irrevocably
authorizes the Secured Party at any time and from time to time to file and amend
financing statements, and do whatever may be necessary under the Uniform
Commercial Code as applicable in the state of incorporation or organization of
the relevant Pledgor or such other state or country where the Pledged Property
is or may be located or in each jurisdiction of the principal place of business
of the Pledgor to perfect and continue the Secured Party’s interest in the
Pledged Property.  The Pledgor agrees to furnish any information
required in connection with the foregoing to the Secured Party promptly upon the
Secured Party’s request. The Pledgor also ratifies its authorization for the
Secured Party to have filed in any Uniform Commercial Code jurisdiction any like
initial financing statements or amendments thereto if filed prior to the date
hereof and filed pursuant to the terms of this Agreement.

     

    Section
3.4              No Duty on the Secured
Party. The powers conferred on the Secured Party hereunder are solely to
protect its interests in the Pledged Property and shall not impose any duty upon
it to exercise any such powers.  The Secured Party shall be
accountable only for the amounts that it actually receives as a result of the
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to any Pledgor for any act or failure
to act, except for the Secured Party’s own gross negligence or willful
misconduct.

     

    
      
        
        

      

      
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    ARTICLE 4

     

    REPRESENTATIONS AND
WARRANTIES

     

    Section
4.1              Authorization;
Enforceability. Each of the parties hereto represents and warrants that
it has taken all action necessary to authorize the execution, delivery and
performance of this Agreement and the transactions contemplated hereby; and upon
execution and delivery, this Agreement shall constitute a valid and binding
obligation of the respective party, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors’
rights or by the principles governing the availability of equitable
remedies.

     

    Section
4.2              Ownership of Pledged
Property.  The Pledgor warrants and represents that it is the
legal and beneficial owner of the Pledged Property free and clear of any lien,
security interest, option or other charge or encumbrance except for the security
interest created by this Agreement and for the Permitted Liens.  For
purposes hereof, “Permitted Liens”
means (i) liens for taxes or other governmental charges which are not yet
delinquent or are being contested in good faith by appropriate proceedings, (ii)
liens for carriers, contractors, warehousemen, mechanics, materialmen, laborers,
employees, suppliers or other similar persons arising by operation of law and
incurred in the ordinary course of business for sums not yet delinquent or being
contested in good faith, (iii) liens relating to deposits made in the ordinary
course of business in connection with workers’ compensation, unemployment
insurance and other types of social security or to secure the performance of
leases, trade contracts or other similar agreements; and (iv) in the case of
real property, any matters, restrictions, covenants, conditions, limitations,
rights, rights of way, encumbrances, encroachments, reservations, easements,
agreements and other matters of record, such state of facts of which an accurate
survey or inspection of the property would reveal and do not materially
interfere with the use or value of the property; and (v) all security interests
granted by the Pledgor and its affiliates in favor of the Secured Party under
any agreement.

     

    ARTICLE 5

     

    DEFAULT; REMEDIES;
SUBSTITUTE COLLATERAL

     

    Section
5.1              Default and
Remedies.

     

    (a)           If
an Event of Default described in Section 2.2(c)(i), (ii), (iii) or (iv)
hereof occurs, then in each such case the Secured Party may declare the
Obligations to be due and payable immediately, by a notice in writing to the
Pledgor, and upon any such declaration, the Obligations shall become immediately
due and payable.  If an Event of Default described in
Sections 2.2(c)(v) or (vi) occurs and is continuing for the
period set forth therein, then the Obligations shall automatically become
immediately due and payable without declaration or other act on the part of the
Secured Party.

     

    (b)           Upon
the occurrence of an Event of Default, the Secured Party shall be entitled to:
(i)  receive all distributions with respect to the Pledged Property,
(ii)  cause the Pledged Property to be transferred into the name of the
Secured Party or its nominee, (iii)  dispose of the Pledged Property, and
(iv)  realize upon any and all rights in the Pledged Property then held by
the Secured Party as provided herein.

     

    
      
        
        

      

      
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    Section
5.2              Method of Realizing Upon the
Pledged Property: Other Remedies.

     

    Upon the
occurrence of an Event of Default, in addition to any rights and remedies
available at law or in equity, the following provisions shall govern the Secured
Party’s right to realize upon the Pledged Property:

     

    (a)           Any
item of the Pledged Property may be sold for cash or other value in any number
of lots at brokers board, public auction or private sale and may be sold without
demand, advertisement or notice (except that the Secured Party shall give the
Pledgor ten (10) calendar days’ prior written notice of the time and place
or of the time after which a private sale may be made (the “Sale Notice”)), which
notice period is hereby agreed to be commercially reasonable.  At any
sale or sales of the Pledged Property, the Pledgor may bid for and purchase the
whole or any part of its Pledged Property and, upon compliance with the terms of
such sale, may hold, exploit and dispose of the same without further
accountability to the Secured Party.  The Pledgor will execute and
deliver, or cause to be executed and delivered, such instruments, documents,
assignments, waivers, certificates, and affidavits and supply or cause to be
supplied such further information and take such further action as the Secured
Party reasonably shall require in connection with any such sale.

     

    (b)           Any
cash being held by the Secured Party as Pledged Property and all cash proceeds
received by the Secured Party in respect of, sale of, collection from, or other
realization upon all or any part of the Pledged Property shall be applied as
follows:

     

    (i)           to
the payment of all amounts due the Secured Party for the expenses reimbursable
to it hereunder or owed to it pursuant to Section 8.3 hereof;

     

    (ii)          to
the payment of the Obligations then due and unpaid; and

     

    (iii)         the
balance, if any, to the person or persons entitled thereto, including, without
limitation, the Pledgor.

     

    (c)           In
addition to all of the rights and remedies which the Secured Party may have
pursuant to this Agreement, the Secured Party shall have all of the rights and
remedies provided by law, including, without limitation, those under the Uniform
Commercial Code.

     

    (d)           If
the Pledgor fails to pay such amounts due upon the occurrence of an Event of
Default which is continuing, then the Secured Party may institute a judicial
proceeding for the collection of the sums so due and unpaid, may prosecute such
proceeding to judgment or final decree and may enforce the same against the
Pledgor and collect the monies adjudged or decreed to be payable in the manner
provided by law out of the property of Pledgor, wherever situated.

     

    (e)           The
Pledgor agrees that it shall be liable for any reasonable fees, expenses and
costs incurred by the Secured Party in connection with enforcement, collection
and preservation of the Transaction Documents, including, without limitation,
reasonable legal fees and expenses, and such amounts shall be deemed included as
Obligations secured hereby and payable as set forth in Section 8.3
hereof.

     

    
      
        
        

      

      
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    Section
5.3              Proofs of
Claim.  In case of the pendency of any receivership,
insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment,
composition or other judicial proceeding relating to the Pledgor or the property
of the Pledgor or of such other obligor or its creditors, the Secured Party
(irrespective of whether the Obligations shall then be due and payable as
therein expressed or by declaration or otherwise and irrespective of whether the
Secured Party shall have made any demand on the Pledgor for the payment of the
Obligations), shall be entitled and empowered, by intervention in such
proceeding or otherwise:

     

    (a)           to
file and prove a claim for the whole amount of the Obligations and to file such
other papers or documents as may be necessary or advisable in order to have the
claims of the Secured Party (including any claim for the reasonable legal fees
and expenses and other expenses paid or incurred by the Secured Party permitted
hereunder and of the Secured Party allowed in such judicial proceeding),
and

     

    (b)           to
collect and receive any monies or other property payable or deliverable on any
such claims and to distribute the same; and any custodian, receiver, assignee,
trustee, liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by the Secured Party to make such payments to
the Secured Party and, in the event that the Secured Party shall consent to the
making of such payments directed to the Secured Party, to pay to the Secured
Party any amounts for expenses due it hereunder.

     

    Section
5.4              Duties Regarding Pledged
Property.  The Secured Party shall have no duty as to the
collection or protection of the Pledged Property or any income thereon or as to
the preservation of any rights pertaining thereto, beyond the safe custody and
reasonable care of any of the Pledged Property actually in the Secured Party’s
possession.

     

    ARTICLE 6

     

    AFFIRMATIVE
COVENANTS

     

    The
Pledgor covenants and agrees that, from the date hereof and until the
Obligations have been fully paid and satisfied, unless the Secured Party shall
consent otherwise in writing (as provided in Section 8.4
hereof):

     

    Section
6.1              Existence, Properties,
Etc.  The Pledgor shall do, or cause to be done, all things, or
proceed with due diligence with any actions or courses of action, that may be
reasonably necessary (i) to maintain the Pledgor’s due organization, valid
existence and good standing under the laws of the State of Delaware and
(ii) to preserve and keep in full force and effect all qualifications,
licenses and registrations in those jurisdictions in which the failure to do so
could have a Material Adverse Effect (as defined below); and (b) the
Pledgor shall not do, or cause to be done, any act impairing the Pledgor’s
corporate power or authority (i) to carry on the Pledgor’s business as now
conducted, and (ii) to execute or deliver this Agreement or any other
document delivered in connection herewith, including, without limitation, any
UCC-1 Financing Statements required by the Secured Party to which it is or
will be a party, or perform any of its obligations hereunder or
thereunder.  For purpose of this Agreement, the term “Material Adverse
Effect” means any material and adverse affect, whether individually or in
the aggregate, upon (a) the Pledgor’s assets, business, operations,
properties or condition, financial or otherwise or results of operations of the
Pledgor, taken as a whole, excluding any change, event, circumstance or effect
that is caused by changes in general economic conditions or changes generally
affecting the industry in which the Pledgor operates (provided that such changes
do not affect the Pledgor in a materially disproportionate manner); or
(b) the Pledgor’s ability to make payment as and when due of all or any
part of the Obligations; or (c) the Pledged Property.

     

    
      
        
        

      

      
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    Section
6.2              Accounts and
Reports.  The Pledgor shall maintain a standard system of
accounting in accordance with generally accepted accounting principles
consistently applied and provide, at its sole expense, to the Secured Party the
following:

     

    (a)           as
soon as available, a copy of any notice or other communication alleging any
nonpayment or other material breach or default, or any foreclosure or other
action respecting any material portion of its assets and properties, received
respecting any of the indebtedness of the Pledgor in excess of US$25,000 (other
than the Obligations), or any demand or other request for payment under any
guaranty, assumption, purchase agreement or similar agreement or arrangement
respecting the indebtedness or obligations of others in excess of US$25,000,
including any received from any person acting on behalf of the Secured Party or
beneficiary thereof, except for supplier requests in the normal course of
business for payment of past due accounts payable invoices so long as such past
due amounts do not exceed in the aggregate US$50,000 at any time;
and

     

    (b)           within
fifteen (15) calendar days after the making of each submission or filing, a
copy of any report, financial statement, notice or other document, whether
periodic or otherwise, submitted to the shareholders of the Pledgor, or
submitted to or filed by the Pledgor with any governmental authority involving
or affecting (i) the Pledgor that could have a Material Adverse Effect;
(ii) the Obligations; or (iii) any part of the Pledged
Property.

     

    Section
6.3              Maintenance of Books and
Records; Inspection.  The Pledgor shall maintain its books,
accounts and records in accordance with United States generally accepted
accounting principles consistently applied, and permit the Secured Party, its
officers and employees and any professionals designated by the Secured Party in
writing, during business hours and upon reasonable notice to visit and inspect
any of its properties (including but not limited to the Pledged Property),
corporate books and financial records, and to discuss its accounts, affairs and
finances with any employee, officer or director thereof.

     

    Section
6.4              Maintenance and
Insurance.

     

    (a)           The
Pledgor shall maintain or cause to be maintained, at its own expense, all of its
assets and properties in good working order and condition, making all necessary
repairs thereto and renewals and replacements thereof.

     

    (b)           The
Pledgor shall maintain or cause to be maintained, at its own expense, insurance
in form, substance and amounts (including deductibles), which the Pledgor deems
reasonably necessary to the Pledgor’s business, (i) adequate to insure all
assets and properties of the Pledgor, which assets and properties are of a
character usually insured by persons engaged in the same or similar business
against loss or damage resulting from fire or other risks included in an
extended coverage policy; (ii) against public liability and other tort
claims that may be incurred by the Pledgor; (iii) as may be required by the
Transaction Documents and/or applicable law and (iv) as may be reasonably
requested by Secured Party, all with adequate, financially sound and reputable
insurers.

     

    
      
        
        

      

      
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    Section
6.5              Contracts and Other
Collateral.  The Pledgor shall perform all of its obligations
under or with respect to each instrument, receivable, contract and other
intangible included in its Pledged Property to which the Pledgor is now or
hereafter will be party on a timely basis and in the manner therein required,
including, without limitation, this Agreement.

     

    Section
6.6             Defense of Collateral,
Etc.  The Pledgor shall defend and enforce its right, title and
interest in and to any part of:  (a) its Pledged Property; and
(b) if not included within its Pledged Property, those assets and
properties whose loss could have a Material Adverse Effect, the Pledgor shall
defend the Secured Party’s right, title and interest in and to each and every
part of its Pledged Property, each against all manner of claims and demands on a
timely basis to the full extent permitted by applicable law.

     

    Section
6.7              Payment of Debts, Taxes,
Etc.  The Pledgor shall pay, or cause to be paid, all of its
indebtedness and other liabilities and perform, or cause to be performed, all of
its obligations in accordance with the respective terms thereof, and pay and
discharge, or cause to be paid or discharged, all taxes, assessments and other
governmental charges and levies imposed upon it (other than those being
contested by the Pledgor in good faith), upon any of its assets and properties
on or before the last day on which the same may be paid without penalty, as well
as pay all other lawful claims (whether for services, labor, materials, supplies
or otherwise) as and when due.

     

    Section
6.8              Taxes and Assessments; Tax
Indemnity.  The Pledgor shall (a) file all tax returns and
appropriate schedules thereto that are required to be filed under applicable
law, prior to the date of delinquency, (b) pay and discharge all taxes,
assessments and governmental charges or levies imposed upon the Pledgor, upon
its income and profits or upon any properties belonging to it, prior to the date
on which penalties attach thereto, and (c) pay all taxes, assessments and
governmental charges or levies that, if unpaid, might become a lien or charge
upon any of its properties; provided, however, that the
Pledgor in good faith may contest any such tax, assessment, governmental charge
or levy described in the foregoing clauses (b) and (c) so long as appropriate
reserves are maintained with respect thereto.

     

    Section
6.9              Compliance with Law and
Other Agreements.  The Pledgor shall maintain its business
operations and property owned or used in connection therewith in compliance with
(a) all applicable federal, state and local laws, regulations and
ordinances governing such business operations and the use and ownership of such
property, and (b) all agreements, licenses, franchises, indentures and
mortgages to which the Pledgor is a party or by which the Pledgor or any of its
properties is bound.  Without limiting the foregoing, the Pledgor
shall pay all of its indebtedness promptly in accordance with the terms
thereof.

     

    Section
6.10            Notice of
Default.  The Pledgor shall give written notice to the Secured
Party of the occurrence of any default or Event of Default under this Agreement
or any of the Transaction Documents, promptly upon the occurrence
thereof.

     

    
      
        
        

      

      
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    Section
6.11           
Notice of
Litigation.  The Pledgor shall give notice, in writing, to the
Secured Party of (a) any actions, suits or proceedings wherein the amount
at issue is in excess of US$50,000, instituted by any persons against the
Pledgor, or affecting any of the assets of the Pledgor, and (b) any
dispute, not resolved within fifteen (15) calendar days of the commencement
thereof, between the Pledgor on the one hand and any governmental or regulatory
body on the other hand, which might reasonably be expected to have a Material
Adverse Effect on the business operations or financial condition of the
Pledgor.

     

    ARTICLE 7

     

    NEGATIVE
COVENANTS

     

    The
Pledgor covenants and agrees that, from the date hereof and until the
Obligations have been fully paid and satisfied, the Pledgor shall not, unless
the Secured Party shall consent otherwise in writing:

     

    Section
7.1              Indebtedness.  Directly
or indirectly permit, create, incur, assume, permit to exist, increase, renew or
extend on or after the date hereof any indebtedness on its part, including
commitments, contingencies and credit availabilities, or apply for or offer or
agree to do any of the foregoing.

     

    Section
7.2              Liens and
Encumbrances.  Except for Permitted Liens and for transfers in
the ordinary course of business, directly or indirectly make, create, incur,
assume or permit to exist any assignment, transfer, pledge, mortgage, security
interest or other lien or encumbrance of any nature in, to or against any part
of its Pledged Property or of the Pledgor’s capital stock, or offer or agree to
do so, or own or acquire or agree to acquire any asset or property of any
character subject to any of the foregoing encumbrances (including any
conditional sale contract or other title retention agreement), or assign, pledge
or in any way transfer or encumber its right to receive any income or other
distribution or proceeds from any part of its Pledged Property; or enter into
any sale-leaseback financing respecting any part of its Pledged Property as
lessee, or cause or assist the inception or continuation of any of the
foregoing.

     

    Section
7.3               Certificate of
Incorporation, Bylaws, Mergers, Consolidations, Acquisitions and Sales, Sales of
Capital Stock, Incurrence of Debt.

     

    (a)           Except
as may be required to comply with the terms of the Transaction Documents and
currently outstanding convertible securities (as described in Schedule 4(c) of the Purchase
Agreement), Pledgor shall not:

     

    (i)           Amend
its Certificate of Incorporation or Bylaws;

     

    (ii)          Issue
or sell its Common Stock, as defined in the Securities Purchase
Agreement;

     

    (iii)         Issue
or sell shares of the Pledgor’s capital stock;

     

    (iv)         Issue
or sell any warrant, option, right, contract, call, or other security instrument
granting the holder thereof, the right to acquire Common Stock;

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (v)          Incur
any additional debt or permit any subsidiary of the Pledgor to incur any
additional debt; 

     

    (vi)         Be
a party to any merger, consolidation or corporate reorganization;
or.

     

    (vii)        Purchase
or otherwise acquire all or substantially all of the assets or stock of, or any
partnership or joint venture interest in, any other person, firm or entity,
(viii) sell, transfer, convey, grant a security interest in (except for
Permitted Liens) or lease all or any substantial part of its assets, or
(ix) create any new subsidiaries nor convey any of its assets to any
subsidiary.

     

    Section
7.4              Management,
Ownership.  Materially change its ownership, executive staff or
management without the prior written consent of the Secured
Party.  The ownership, executive staff and management of the Pledgor
are material factors in the Secured Party's willingness to institute and
maintain a lending relationship with the Pledgor.

     

    Section
7.5              Dividends,
Etc.  Declare or pay any distribution or dividend of any kind,
in cash or in property, on any class of its capital stock or ownership
interests, nor purchase, redeem, retire or otherwise acquire for value any
shares or ownership interests, nor make any distribution of any kind in respect
thereof, nor make any return of capital to shareholders or owners, nor make any
payments in respect of any pension, profit sharing, retirement, stock option,
stock bonus, incentive compensation or similar plan (except as required or
permitted hereunder).

     

    Section
7.6              Guaranties;
Loans.  Guarantee nor be liable in any manner, whether directly
or indirectly, or become contingently liable after the date of this Agreement in
connection with the obligations or indebtedness of any person or persons, except
for (i) guaranties or liabilities as are outstanding on the date of this
Agreement, (ii) the endorsement of negotiable instruments payable to the Pledgor
for deposit or collection in the ordinary course of business, and (iii) accounts
payable of the Pledgor incurred in the ordinary course of the business of the
Pledgor.  The Pledgor shall not make any loan, advance or extension of
credit to any person other than in the normal course of its
business.

     

    Section
7.7              Debt.  Except
for such indebtedness as is outstanding on the date of this Agreement and listed
on the attached Schedule 7.7
(other than trade payables), create, incur, assume or suffer to exist any
additional indebtedness of any description whatsoever (excluding any
indebtedness of the Pledgor to the Secured Party, indebtedness otherwise
permitted by the terms of this Agreement, trade accounts payable and accrued
expenses incurred in the ordinary course of business and the endorsement of
negotiable instruments payable to the Pledgor, respectively for deposit or
collection in the ordinary course of business).

     

    Section
7.8              Conduct of
Business.  The Pledgor will continue to engage in a business of
the general type as conducted by it on the date of this Agreement.

     

    Section
7.9              Places of Business; Location
of Assets.  The location of the Pledgor’s chief place of
business is at the address set forth in Section 8.1 hereof.  The
location(s) of Pledgor’s assets is listed on the attached Schedule 7.9.  The
Pledgor shall not change the location of its respective chief place of business,
chief executive office or any place of business disclosed to the Secured Party
or move any of the Pledged Property from its current location without thirty
(30) calendar days' prior written notice to the Secured Party in each
instance.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    ARTICLE 8

     

    MISCELLANEOUS

     

    Section
8.1              Notices.  All
notices or other communications required or permitted to be given pursuant to
this Agreement shall be in writing and shall be considered as duly given
on:  (a) the date of delivery, if delivered in person, by
nationally recognized overnight delivery service or
(b) five (5) days after mailing if mailed from within the
continental United States by certified mail, return receipt requested to the
party entitled to receive the same:

     

    
      
        	
                If
      to the Pledgor, to:

              	
                New
      Media Lottery Services, Inc.

                1400
      Technology Drive

                Harrisonburg,
      VA 22802

                Attention:  Mr.
      John Carson, President & CEO

                Facsimile:  (540)
      437-1688

              
	 	 
	
                With
      a copy to:

              	
                110
      East 59th
      Street

                New
      York, NY 10022

                Attention:   William
      P. Ruffa, Esq.

                Telephone: (212)
      355-0606

                Facsimile:
       1-877-FAX-RUFF

              
	
                 

              	 
      
	
                If
      to the Secured Party, to:

              	
                Trafalgar
      Capital Specialized Investment Fund

                8
      The Dickens, Kirk Street

                16
      Northington Street

                London
      WC1N 2DG

                Attention:
      Andrew Garai, Chairman of the Board of Trafalgar Capital Sarl, General
      Partner

                Facsimile:       011-44-207-405-0161
      and

                                        001-786-323-1651

              
	 
      	 
      
	
                With
      Copy to:

              	
                K&L
      Gates LLP

                200
      South Biscayne Blvd., Suite 3900

                Miami,
      Florida 33131

                Attention:
      Clayton E. Parker, Esq.

                Telephone:
      (305) 539-3306

                Facsimile:  (305)
      358-7095

              

      

    

    

    Any party
may change its address by giving notice to the other party stating its new
address.  Commencing on the tenth (10th) calendar
day after the giving of such notice, such newly designated address shall be such
party’s address for the purpose of all notices or other communications required
or permitted to be given pursuant to this Agreement.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    Section
8.2              Severability.  If
any provision of this Agreement shall be held invalid or unenforceable, such
invalidity or unenforceability shall attach only to such provision and shall not
in any manner affect or render invalid or unenforceable any other severable
provision of this Agreement, and this Agreement shall be carried out as if any
such invalid or unenforceable provision were not contained herein.

     

    Section
8.3              Expenses.  In
the event of an Event of Default, the Pledgor shall pay to the Secured Party the
amount of any and all reasonable expenses, including the reasonable fees and
expenses of its counsel, which the Secured Party may incur in connection
with:  (i) the custody or preservation of, or the sale,
collection from, or other realization upon, any of the Pledged Property;
(ii) the exercise or enforcement of any of the rights of the Secured Party
hereunder or (iii) the failure by the Pledgor to perform or observe any of
the provisions hereof.

     

    Section
8.4              Waivers, Amendments,
Etc.  The Secured Party’s delay or failure at any time or times
hereafter to require strict performance by the Pledgor of any undertakings,
agreements or covenants shall not waiver, affect, or diminish any right of the
Secured Party under this Agreement to demand strict compliance and performance
herewith.  Any waiver by the Secured Party of any Event of Default
shall not waive or affect any other Event of Default, whether such Event of
Default is prior or subsequent thereto and whether of the same or a different
type.  None of the undertakings, agreements and covenants of the
Pledgor contained in this Agreement, and no Event of Default, shall be deemed to
have been waived by the Secured Party, nor may this Agreement be amended,
changed or modified, unless such waiver, amendment, change or modification is
evidenced by an instrument in writing specifying such waiver, amendment, change
or modification and signed by the Secured Party.

     

    Section
8.5              Continuing Security
Interest.  This Agreement shall create a continuing security
interest in the Pledged Property and shall: (i) remain in full force and
effect until payment in full of the Obligations (whether by payment of cash,
redemption or conversion); and (ii) be binding upon the Pledgor and its
successors and heirs and (iii) inure to the benefit of the Secured Party
and its successors and assigns.  Upon the payment or satisfaction in
full of the Obligations, the Pledgor shall be entitled to the return, at its
expense, of such of the Pledged Property as shall not have been sold in
accordance with Section 5.2 hereof or otherwise applied pursuant to the
terms hereof. Upon payment in full of all Obligations, the Secured Party shall
execute and deliver to the Pledgor, within three business days, all instruments
and other documents as may be necessary or proper to release the lien on and
security interest in the Pledged Property which has been granted
hereunder.

     

    Section
8.6              Independent
Representation.  Each party hereto acknowledges and agrees that
it has received or has had the opportunity to receive independent legal counsel
of its own choice and that it has been sufficiently apprised of its rights and
responsibilities with regard to the substance of this Agreement.

     

    Section
8.7              Applicable
Law:  Jurisdiction.  This Agreement shall be deemed
to be made under and shall be construed in accordance with the laws of the State
of Florida without giving effect to the principals of conflict of laws
thereof.  Each of the parties consents to the jurisdiction of the
U.S. District Court sitting in the Southern District of the State of
Florida or the state courts of the State of Florida sitting in Miami-Dade
County, Florida in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non conveniens to the
bringing of any such proceeding in such jurisdictions.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    Section
8.8             
Waiver of Jury
Trial.  AS A FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER
INTO THIS AGREEMENT AND TO MAKE THE FINANCIAL ACCOMMODATIONS TO THE PLEDGOR, THE
PLEDGOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED
IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS
TRANSACTION.

     

    Section
8.9              Entire
Agreement.  This Agreement constitutes the entire agreement
among the parties and supersedes any prior agreement or understanding among them
with respect to the subject matter hereof.

     

    Section
8.10            Further
Assurances.  The Pledgor 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 Secured Party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement.   Furthermore, the
Pledgor agrees to execute such other documents as are reasonably required by the
Secured Party.  It shall be deemed a default of this Agreement if the
Pledgor fails to sign any such agreement within one business day of the date of
request by Secured Party.

    

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    IN WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.

    

    
      
        
          
            
              
                
                  	 
      	
                          THE
      PLEDGOR:

                        
	 
      	
                          NEW
      MEDIA LOTTERY SERVICES, INC.

                        
	 
      	 
      
	 
      	
                          By:

                        	 
      
	 
      	
                          Name:

                        
	 
      	
                          Title:

                        
	 
      	 
      
	 
      	
                          THE SECURED
      PARTY:

                        
	 
      	
                          TRAFALGAR
      CAPITAL SPECIALIZED

                        
	 
      	
                          INVESTMENT
      FUND, FIS

                        
	 
      	
                          By:

                        	
                          Trafalgar
      Capital Sarl

                        
	 
      	
                          Its:

                        	
                          General
      Partner

                        
	 
      	 
      
	 
      	
                          By:

                        	 
      
	 
      	
                          Name:

                        
	 
      	
                          Title:

                        

                

              

            

          

        

      

    

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
A

    DEFINITION OF PLEDGED
PROPERTY

     

    For the
purpose of securing prompt and complete payment and performance by the Pledgor
of all of the Obligations, the Pledgor unconditionally and irrevocably hereby
grants to the Secured Party a continuing security interest in and to, and lien
upon, all of Pledgor’s and its current or future acquired subsidiaries’ assets,
including specifically the following Pledged Property of the
Pledgor:

     

    a.            All
of the Pledgor’s cash, including cash on deposit and cash on hand;

     

    b.            All
goods of the Pledgor, including, without limitation, machinery, equipment,
furniture, furnishings, fixtures, signs, lights, tools, parts, supplies and
motor vehicles of every kind and description, now or hereafter owned by the
Pledgor wherever located or in which the Pledgor may have or may hereafter
acquire any interest, and all replacements, additions, accessions, substitutions
and proceeds thereof, arising from the sale or disposition thereof, and where
applicable, the proceeds of insurance and of any tort claims involving any of
the foregoing;

     

    c.            All
now owned or hereafter acquired inventory of the Pledgor, including, but not
limited to, all goods, wares, merchandise, parts, supplies, finished products,
other tangible personal property, including such inventory as is temporarily out
of the Pledgor’s custody or possession and including any returns upon any
accounts or other proceeds, including insurance proceeds, resulting from the
sale or disposition of any of the foregoing;

     

    d.            All
contract rights and general intangibles of the Pledgor, including, without
limitation, goodwill, trademarks, trade styles, trade names, leasehold
interests, partnership or joint venture interests, patents and patent
applications, copyrights, deposit accounts whether now owned or hereafter
created;

     

    e.            All
documents, warehouse receipts, instruments and chattel paper of the Pledgor
whether now owned or hereafter created;

     

    f.            All
accounts and other receivables, instruments or other forms of obligations and
rights to payment of the Pledgor, (collectively, the “Accounts”) together
with the proceeds thereof, all goods represented by such Accounts and all such
goods that may be returned by the Pledgor’s customers, and all proceeds of any
insurance thereon, and all guarantees, securities and liens which the Pledgor
may hold for the payment of any such accounts including, without limitation, all
rights of stoppage in transit, replevin and reclamation and as an unpaid vendor
and/or lienor, all of which the Pledgor represents and warrants will be bona
fide and existing obligations of its respective customers, arising out of the
sale of goods by the Pledgor in the ordinary course of business;

     

    g.            To
the extent assignable, all of the Pledgor’s rights under all present and future
authorizations, permits, licenses and franchises issued or granted in connection
with the operations of any of its facilities;

     

    h.            All
equity interests, securities or other instruments in other companies, including,
without limitation, any subsidiaries, investments or other entities (whether or
not controlled);

     

    i.            All
real estate property owned by the Pledgor and the interest of the Pledgor in
fixtures related to such real property;

     

    j.            All
of the Pledgor’s ledger sheets, ledger cards, files, correspondence, records,
books of account, computers, computer software, computer programs, data
processing records, correspondence, tapes, disks and documents (including,
without limitation, electronic documents) relating to the above-described
Pledged Property; and

     

    k.            All
products and proceeds (including, without limitation, insurance proceeds) from
the above-described Pledged Property.

     

    
      
        
        

      

      
        A-1

        
          

        

      

      
        
        

      

    

     

    SCHEDULE
7.7

     

    EXISTING
INDEBTEDNESS

     

    
      Nathan
Miller

    

    
      	
               
      

            	
              As
      of April 30, 2009, New Media Lottery Services, Inc. was indebted to Nathan
      Miller, a former officer and director of the company and current major
      shareholder, in the amount of $183,177, plus $60,698 in accrued interest,
      which is repayable on terms to be
determined.

            

    

     

    
      Legal Fee
Dispute

    

    
      	
               
      

            	
              The
      Company is engaged in a fee dispute with one of its former law
      firms.  The Company has accrued $202,465 in legal fees billed by
      a law firm named Miller & Earle, PLLC (ME) where one of the law firm
      partners is a major shareholder and former director of the
      Company.  In addition to the $202,465, ME has billed an
      additional $43,808 during fiscal year 2005.  The Company
      believes that these additional billings were incorrect.  Due to
      uncertainties in the settlement process with ME, no provision has been
      made in the financial statements to reflect the additional $43,808 in 2005
      fees.

            

    

     

    
      Deferred Salary for John T.
Carson

    

    Ireland:
€49,852

    US:
$109,000 (as of July 31, 2009)

     

    
      
        
        

      

      
        A-2

        
          

        

      

      
        
        

      

    

     

    SCHEDULE
7.9

    LOCATION(S)
OF ASSETS

     

    
      - The
Company leases an office at 1400 Technology Drive, Harrisonburg,
Virginia.

    

    

    
      - The
Company leases office space at Suite 210A, 9705 Horton Road SW, Calgary,
Alberta, Canada.

    

    

    
      - New
Media Lottery Services, PLC, leases an office at 22/23 Upper Pembroke Street,
Suite 402, Dublin 2, Ireland,

    

     

    Additionally,
the Company leases rack space for the hosting of servers at:

     

    TelecityGroup UK Limited 10th
Floor, 6&7 Harbour Exchange Square, London, E14 9GE, United
Kingdom

     

    
      
        
        

      

      
        A-3Unassociated Document

    Exhibit
10.1

    

    FEDERAL
DEPOSIT INSURANCE CORPORATION

    WASHINGTON,
D.C.

    

    
      
        	 
      	 
      	 
      
	 
      	
                )

              	 
      
	
                In
      the Matter of

              	
                )

              	
                ORDER
      TO CEASE AND DESIST

              
	 
      	
                )

              	 
      
	 
      	
                )

              	 
      
	
                FIRST
      MARINER BANK

              	
                )

              	 
      
	
                BALTIMORE,
      MARYLAND

              	
                )

              	
                FDIC-09-302b

              
	 
      	
                )

              	 
      
	 
      	
                )

              	 
      
	
                (Insured
      State Nonmember Bank)

              	
                )

              	 
      
	 
      	
                )

              	 
      

      

    

    

    First
Mariner Bank, Baltimore, Maryland (“Bank”), through its board of directors
(“Board”), having been advised of its right to the issuance and service of a
NOTICE OF CHARGES AND OF HEARING detailing the unsafe or unsound banking
practices alleged to have been committed by the Bank and of its right to a
hearing on the alleged charges under section 8(b) of the Federal Deposit
Insurance Act (“Act”), 12 U.S.C. § 1818(b), and having waived those
rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO
CEASE AND DESIST (“CONSENT AGREEMENT”) with counsel for the Federal Deposit
Insurance Corporation (“FDIC”) dated September 17, 2009, and having also entered
into a Stipulation and Consent to the Issuance of an Order to Cease and Desist,
dated September 17, 2009, with the Commissioner of Financial Regulation for the
State of Maryland (“Commissioner”), whereby, solely for the purpose of this
proceeding and without admitting or denying the alleged charges of unsafe or
unsound banking practices, the Bank consented to the issuance of an ORDER TO
CEASE AND DESIST (“ORDER”) by the FDIC, and consented to the adoption of the
ORDER by the Commissioner.

     

    The FDIC
considered the matter and determined that they had reason to believe that the
Bank had engaged in unsafe or unsound banking practices.  The FDIC,
therefore, accepted the CONSENT AGREEMENT and issued the
following:

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    ORDER
TO CEASE AND DESIST

     

    IT IS ORDERED, that the Bank,
institution-affiliated parties, as that term is defined in section 3(u) of the
Act, 12 U.S.C. § 1813(u), of the Bank and its successors and assigns, cease
and desist from the following unsafe or unsound banking practices:

     

    
      	
               
      

            	
              1.

            	
              Operating
      the Bank with an inadequate level of capital protection for the kind and
      quality of assets held by the Bank;

               

            

    

    
      	
               
      

            	
              2.

            	
              Operating
      the Bank with inadequate earnings to support operations, maintain capital
      levels, and support loan loss reserves appropriate to prospective economic
      conditions;

               

            

    

    
      	
               
      

            	
              3.

            	
              Operating
      the Bank with an excessive level of adversely classified loans or
      assets;

               

            

    

    
      	
               
      

            	
              4.

            	
              Operating
      the Bank with inadequate management policies and practices;
      and

               

            

    

    
      	
               
      

            	
              5.

            	
              Operating
      the Bank with inadequate liquidity in light of the Bank’s reliance on
      non-core funding, its capital position, and prospective funding
      needs.

            

    

    

    IT IS FURTHER ORDERED, that
the Bank, its institution-affiliated parties and its successors and assigns take
affirmative action as follows:

    

    MANAGEMENT

    

    1.           The
Bank shall have and retain qualified management.  Each member of
management shall possess qualifications and experience commensurate with his or
her duties and responsibilities at the Bank.  The qualifications of
management personnel shall be evaluated on their ability to:

     

    
      	
               
      

            	
              (i)

            	
              comply
      with the requirements of this
ORDER;

            

    

    
      
        	 	 	 
	
                 
      

              	
                (ii)

              	
                operate
      the Bank in a safe and sound manner;

              
	 	 	 

      

    

    
      	
               
      

            	
              (iii)

            	
              comply
      with applicable laws and regulations;
and

            

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    (iv)           restore
all aspects of the Bank to a safe and sound condition, including improving the
Bank’s asset quality, capital adequacy, earnings, management effectiveness, and
liquidity.

    

    RESTRICTION ON ADVANCES TO
CLASSIFIED BORROWERS

    

    2.            (a)           While
this ORDER is in effect, the Bank shall not extend, directly or indirectly, any
additional credit to or for the benefit of any borrower whose existing credit
has been classified “Loss” by the FDIC or the Commissioner as the result of its
examination of the Bank, either in whole or in part, and is uncollected, or to
any borrower who is already obligated in any manner to the Bank on any extension
of credit, including any portion thereof, that has been charged off the books of
the Bank and remains uncollected.  The requirements of this paragraph
shall not prohibit the Bank from renewing credit already extended to a borrower
after full collection, in cash, of interest due from the borrower.

     

    (b)           While
this ORDER is in effect, the Bank shall not extend, directly or indirectly, any
additional credit to or for the benefit of any borrower whose extension of
credit is classified “Doubtful” and/or “Substandard” by the FDIC or the
Commissioner as the result of its examination of the Bank, either in whole or in
part, and is uncollected, unless the Board has signed a detailed written
statement giving reasons why failure to extend such credit would be detrimental
to the best interests of the Bank.  The statement shall be placed in
the appropriate loan file and included in the minutes of the applicable meeting
of the Board.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    BUDGET
AND PROFIT PLAN

    

    3.            (a)           Within
30 days of the end of the calendar year 2009, the Bank shall formulate and
submit to the Regional Director of the New York Regional Office of the FDIC
(“Regional Director”) and the Commissioner for review and comment a written
profit plan and a realistic, comprehensive budget for all categories of income
and expense for calendar year 2010.  The plan required by this
paragraph shall contain formal goals and strategies, be consistent with sound
banking practices, reduce discretionary expenses, improve the Bank’s overall
earnings and net interest income, and shall contain a description of the
operating assumptions that form the basis for major projected income and expense
components.

     

    (b)          The
written profit plan shall address, at a minimum:

     

    
      
        	
                 
      

              	
                (i)

              	
                An
      analysis of the Bank’s pricing structure;

              
	 	 	 

      

    

    
      
        	
                 
      

              	
                (ii)

              	
                The
      level and related provision expenses of adversely classified loans or
      assets; and

              
	 	 	 

      

    

    
      	
               
      

            	
              (iii)

            	
              A
      recommendation for reducing the Bank’s cost of
  funds.

            

    

     

    (c)          Within
30 days after the end of each calendar quarter following completion of the
profit plan and budget required by this paragraph, the Board shall evaluate the
Bank’s actual performance in relation to the written profit plan and budget,
record the results of the evaluation, and note any actions taken by the Bank in
the minutes of the Board meeting when such evaluation is
undertaken.

     

    (d)          A
written profit plan and budget shall be prepared for each calendar year for
which this ORDER is in effect and shall be submitted to the Regional Director
and the Commissioner for review and comment within 30 days after the end of each
year.  Within 30 days after receipt of all such comments from the
Regional Director and the Commissioner, and after adoption of any recommended
changes, the Board shall approve the written profit plan and budget, which
approval shall be recorded in the minutes of the applicable Board
meeting.  Thereafter, the Bank shall implement and follow the
plan.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

      CAPITAL
PLAN

      

      

      4.           (a)           Within
30 days after the effective date of this ORDER, the Bank shall submit a written
capital plan to the Regional Director and the Commissioner.  The
capital plan shall require the Bank, after establishing an Allowance for Loan
and Lease Losses, to achieve and maintain, on or before June 30, 2010, its Tier
1 Leverage Capital ratio equal to or greater than 7.50 percent of the Bank’s
Average Total Assets and its Total Risk-Based Capital ratio equal to or greater
than 11 percent of the Bank’s Total Risk Weighted Assets.  In
developing the capital plan, the Bank must take into consideration:

       

      (i)           The
volume of the Bank’s adversely classified assets;

       

      (ii)          The
nature and level of the Bank’s asset concentrations;

       

      
        (iii)         The
adequacy of the Bank’s Allowance for Loan and Lease Losses;

         

      

      (iv)         The
anticipated level of retained earnings;

       

      (v)          Anticipated
and contingent liquidity needs; and

       

      
        (vi)        The
source and timing of additional funds to fulfill future capital
needs.

         

      

      (b)           Beginning
on March 31, 2010, the Bank shall maintain its Tier 1 Leverage Capital ratio at
a level equal to or greater than 6.5 percent and its Total Risk-Based Capital
ratio at a level equal to or greater than 10 percent.

       

      (c)           Within
30 days after receipt of comments to the capital plan from the Regional Director
and the Commissioner, the Board shall adopt the capital plan, including any
modifications or amendments requested by the Regional Director and the
Commissioner.  Thereafter, the Bank shall immediately initiate
measures detailed in the capital plan, to the extent such measures have not
previously been initiated, to effect compliance with the plan.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

      (d)           If
any such capital ratios are less than required by this ORDER, as determined as
of the date of any Report of Condition and Income or at an examination by the
FDIC or the Commissioner, the Bank shall, within 30 days after receipt of a
written notice of the capital deficiency from the Regional Director and the
Commissioner, present to the Regional Director and the Commissioner a new
capital plan to increase the Bank’s Tier 1 Capital or to take other measures to
bring the Tier 1 Leverage and Total Risk Based capital ratios to the percentages
required by this ORDER.  Such other measures shall include, but not be
limited to, the direct contribution of cash by the parent holding company or the
merger with or acquisition by another federally insured institution or holding
company thereof.  Within 30 days after receipt of comments to the new
capital plan from the Regional Director and the Commissioner, the Board shall
adopt the new capital plan, including any modifications or amendments requested
by the Regional Director and the Commissioner.

       

      (e)           Thereafter,
the Bank shall immediately initiate measures detailed in the new capital plan,
to the extent such measures have not previously been initiated, to increase its
capital by an amount sufficient to bring the Tier 1 Leverage and Total Risk
Based capital ratios to the percentages required by this ORDER.

       

      (f)           In
addition, the Bank shall comply with the FDIC’s Statement of Policy on
Risk-Based Capital found in Appendix A to Part 325 of the FDIC Rules and
Regulations, 12 C.F.R. Part 325, App. A.

       

      (g)           For
purposes of this ORDER, all terms relating to capital shall be calculated
according to the methodology set forth in Part 325 of the FDIC’s Rules and
Regulations, 12 C.F.R. Part 325.

      

      REDUCTION OF ADVERSELY
CLASSIFIED ASSETS

      

      5.           (a)           Within
10 days from the effective date of this ORDER, the Bank shall eliminate from its
books, by charge off or collection, all assets classified "Loss" in the Bank’s
Report of Examination as of March 30, 2009 (“2009 Report”) that have not been
previously collected or charged off.  Elimination of these assets
through proceeds of other loans made by the Bank is not considered collection
for the purpose of this paragraph.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

      (b)           Within
60 days from the effective date of this ORDER, the Bank shall revise or adopt a
written plan to reduce the Bank’s risk exposure in each asset classified
“Substandard” in the 2009 Report, and submit such plan to the Regional Director
and the Commissioner for review and comment.  For purposes of this
provision, “reduce” means to collect, charge off, or improve the quality of an
asset so as to warrant its removal from adverse classification by the FDIC
and/or the Commissioner.  In developing the plan mandated by this
paragraph, the Bank shall, at a minimum, and with respect to each adversely
classified loan or lease, review, analyze and document the financial position of
the borrower, including source of repayment, repayment ability and alternative
repayment sources, as well as the value and accessibility of any pledged or
assigned collateral and any possible actions to improve the Bank’s collateral
position.

       

      (c)           In
addition, the plan mandated by this paragraph shall also include, but not be
limited to, the following:

       

      (i)           a
schedule for reducing the outstanding dollar amount of each adversely classified
asset, including timeframes, with the objective of achieving the reduced dollar
amounts (at a minimum, the schedule for each adversely classified asset must
show its expected dollar balance on a quarterly basis);

       

      (ii)           specific
action plans intended to reduce the Bank’s risk exposure in each classified
asset;

       

      (iii)           a
schedule showing, on a quarterly basis, the expected consolidated balance of all
adversely classified assets and the ratio of the consolidated balance to the
Bank’s projected Tier 1 capital plus the Allowance for Loan and Lease
Losses;

       

      (iv)           a
provision for the Bank’s submission of monthly written progress reports to the
Board; and

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

      (v)           a
provision mandating the Board to review the progress reports, with a notation of
the review recorded in the meeting minutes of the Board.

       

      (d)           The
plan mandated by this paragraph shall further require a reduction in the
aggregate balance of assets classified “Substandard” in the 2009 Report in
accordance with the following schedule:

       

      
        	
                 
      

              	
                (i)

              	
                within
      270 days from the effective date of this ORDER, shall be reduced by at
      least 25 percent; and

              

      

      
        
          	 	 	 
	
                   
      

                	
                  (ii)

                	
                  by
      December 31, 2010, shall be reduced by at least 50
  percent.

                

        

      

       

      (e)           The
requirements of this paragraph do not represent standards for future operations
of the Bank.  Following achievement with any expected or anticipated
reduction schedule, the Bank shall continue to reduce the total volume of
adversely classified assets.

       

      (f)           
Within 30 days after the Regional Director and the Commissioner have responded
to the plan mandated by this paragraph, the Board shall adopt the plan, as
amended or modified by the Regional Director and the Commissioner, at which time
the Bank shall immediately implement the plan to the extent that the provisions
of the plan are not already in effect at the Bank.

      

      RESTRICTION ON DIVIDENDS AND
MANAGEMENT FEES

      

      6.           Neither
the Bank nor any of its subsidiaries shall pay cash dividends or management fees
(excluding payments to affiliates to reimburse such affiliates for bona fide
expenses in the normal course of business) without the prior written consent of
the Regional Director and the Commissioner.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      BROKERED
DEPOSITS

      

      7.           (a)           Upon
the effective date of this ORDER, the Bank shall not accept, renew or roll over
any “brokered deposits” (as that term is defined in section 337.6(a)(2) of the
FDIC’s Rules and Regulations, 12 C.F.R. § 337.6(a)(2)), unless the Bank has been
granted a waiver by the Regional Director.

       

      (b)           While
this ORDER is in effect, the Bank shall comply with the restrictions on the
effective yield on deposits described in section 337.6 of the FDIC’s Rules and
Regulations, 12 C.F.R. § 337.6.

      

      LIQUIDITY

      

      8.           (a)           Within
60 days after the effective date of this ORDER, the Bank shall establish a
liquidity plan and submit it to the Regional Director and the Commissioner for
review and comment.  Annually thereafter, while this ORDER is in
effect, the Bank shall review its liquidity plan for adequacy and, based upon
such review, shall make necessary revisions to the liquidity plan to strengthen
funds management procedures and maintain adequate provisions to meet the Bank’s
liquidity needs.  The initial liquidity plan shall include, at a
minimum, provisions:

       

      (i)           establishing
a reasonable range for its net non-core funding ratio as computed in the Uniform
Bank Performance Report and shall address the means by which the Bank will seek
to reduce its reliance on non-core funding, wholesale funding sources, and high
cost rate-sensitive deposits to a level acceptable to the Regional Director and
the Commissioner;

       

      
        (ii)          identifying
the source and use of borrowed and/or volatile funds;

      

       

      (iii)         establishing
sufficient back-up lines of credit, to the extent possible, that would allow the
Bank to borrow funds to meet depositor demands if the Bank’s other provisions
for liquidity proved to be inadequate;

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

      (iv)        establishing
a minimum liquidity ratio and defining how the ratio is to be
calculated;

       

      (v)         establishing
contingency plans by identifying alternative courses of action designed to meet
the Bank’s liquidity needs; and

       

      (vi)        addressing
the use of borrowings (i.e., seasonal credit needs, match funding mortgage
loans, etc.) and providing for reasonable maturities commensurate with the use
of the borrowed funds; addressing concentration of funding sources; and
addressing pricing and collateral requirements with specific allowable funding
channels.

       

      (b)        Within
30 days after the Regional Director and the Commissioner have responded to the
liquidity plan, the Board shall adopt the liquidity plan as amended or modified
by the Regional Director and the Commissioner, at which time the Bank shall
immediately implement the liquidity plan to the extent that the provisions of
the liquidity plan are not already in effect at the Bank.

      

      CORRECTION AND
PREVENTION

      

      

      9.           Beginning
on the effective date of this ORDER, the Bank shall take steps necessary,
consistent with other provisions of this ORDER and sound banking practices, to
correct and implement all recommendations and findings that were identified in
the 2009 Report.

      

      COMPLIANCE
COMMITTEE

      

      10.           Within
30 days after the effective date of this ORDER, the Board shall establish a
committee of the Board charged with the responsibility of ensuring that the Bank
complies with the provisions of this ORDER.  At least 75 percent of
the members of such committee shall be directors not employed in any capacity by
the Bank other than as a director.  The committee shall maintain
minutes for all meetings.  The committee shall report monthly to the
full Board, and a copy of the report and any discussion relating to the report
or the ORDER shall be noted in the minutes of the Board meetings.  The
establishment of this subcommittee shall not diminish the responsibility or
liability of the entire Board to ensure compliance with the provisions of this
ORDER.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

      PROGRESS
REPORTS

      

      11.           Within
30 days after the end of each calendar quarter following the effective date of
this ORDER, the Bank shall furnish to the Regional Director and the Commissioner
written progress reports signed by each member of the Board, detailing the
actions taken to secure compliance with the ORDER and the results
thereof.  Such reports may be discontinued when the corrections
required by this ORDER have been accomplished and the Regional Director and the
Commissioner have released, in writing, the Bank from making further
reports.

      

      This
ORDER shall be binding upon the Bank, its successors and assigns, and all
institution-affiliated parties of the Bank.

       

      The
provisions of this ORDER shall remain effective and enforceable except to the
extent that, and until such time as, any provision of this ORDER shall have been
modified, terminated, superseded, or set aside by the FDIC in
writing.

       

      This
ORDER will become effective upon its issuance by the FDIC.

       

      Pursuant
to delegated authority.

       

      Dated
this 18th day of
September, 2009.

      

      
        
          
            	
                    /s/

                  
	
                    James
      C. Watkins

                  
	
                    Deputy
      Regional Director

                  
	
                    New
      York Region

                  
	
                    Division
      of Supervision and Consumer Protection

                  
	
                    Federal
      Deposit Insurance
Corporation

                  

          

        

      

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