Document:

EXHIBIT
      10.13

     

    THIS
      WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
      BEEN
      REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER
      THE SECURITIES LAWS OF APPLICABLE STATES. THESE SECURITIES ARE SUBJECT TO
      RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD
      EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS,
      PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
      THAT
      THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
      INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION
      OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT
      ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE
      STATE SECURITIES LAWS.

     

    WARRANT
      TO PURCHASE COMMON STOCK

     

    OF

     

    ARIEL
      WAY, INC.

     

    Issued
      on
      May 28, 2005 (“Issue
      Date”)

    Void
      after May 29, 2010 (“Expiration
      Date”)

     

    This
      certifies that in consideration of the execution of that certain initial warrant
      agreement (the “Warrant
      Agreement”),
      dated
      as of May 28, 2005, as amended, by and between Ariel Way, Inc., a Florida
      corporation (the “Company”),
      with
      principal offices at 8000 Towers Crescent Drive, Suite 1220, Vienna, VA 22182,
      and Oberon Securities, LLC, a Delaware company, with principal offices at 79
      Madison Avenue, 6th
      Floor,
      New York, NY 10016 (“Oberon”)
      is
      entitled, subject to the terms and conditions of this Warrant, to purchase
      from
      the Company at any time during the Exercise Period (as defined below), up to
      One
      Million (1,000,000) shares (the “Number
      of Shares”)
      of
      Warrant Stock (as defined below) at a price per share equal to the Warrant
      Price
      (as defined below), upon surrender of this Warrant at the principal offices
      of
      the Company, together with a duly executed subscription form in the form
      attached hereto as Exhibit 1
      and
      simultaneous payment of the full Warrant Price for the shares of Warrant Stock
      so purchased in lawful money of the United States or cancellation of
      indebtedness of the Company to the Warrant Holder of the same equal amount,
      at
      the option of Oberon. The Warrant Price and the number and character of shares
      of Warrant Stock purchasable under this Warrant are subject to adjustment as
      provided herein. The shares underlying the warrants shall entitle the Warrant
      Holder to one-time “piggyback” registration rights.

     

    1. DEFINITIONS.
      The
      following definitions shall apply for purposes of this Warrant:

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    1.1 “Company”
means
      the “Company”
as
      defined above and includes any corporation which shall succeed to or assume
      the
      obligations of the Company under this Warrant.

     

    1.2 “Exercise
      Period”
means
      the period (A) commencing on the Issue Date and (B) ending at 5:00 p.m. Eastern
      Standard Time on the Expiration Date (as defined on the first page of this
      Warrant, and as subject to adjustment as provided herein).

     

    1.3 “SEC”
means
      the U.S. Securities and Exchange Commission.

     

    1.4 “Warrant”
means
      this Warrant and any warrant(s) delivered in substitution or exchange therefor,
      as provided herein.

     

    1.5 “Warrant
      Holder”
means
      any person who shall at the time be the registered holder of this
      Warrant.

     

    1.6 “Warrant
      Price”
means
      $0.06 per share. The Warrant Price is subject to adjustment as provided
      herein.

     

    1.7 “Warrant
      Stock”
means
      the Common Stock of the Company, $0.001 par value per share. The number and
      character of shares of Warrant Stock are subject to adjustment as provided
      herein and the term “Warrant
      Stock”
shall
      include stock and other securities and property at any time receivable or
      issuable upon exercise of this Warrant in accordance with its
      terms.

     

    2. EXERCISE.

     

    2.1 Method
      of Exercise.
      Subject
      to the terms and conditions of this Warrant, the Warrant Holder may exercise
      this Warrant in whole or in part, at any time or from time to time, on any
      business day during the Exercise Period, for up to that number of shares of
      Warrant Stock that has vested pursuant to Section 0
      below by
      surrendering this Warrant at the principal offices of the Company, with the
      subscription form attached hereto duly executed by the Warrant Holder, and
      payment
      of an amount equal to the product
      obtained by multiplying (i) the number of shares of Warrant Stock to be
      purchased by the Warrant Holder by (ii) the Warrant Price or adjusted
      Warrant Price therefor, if applicable, as determined in accordance with the
      terms hereof or cancellation of indebtedness of the Company to the Warrant
      Holder of the same equal amount at the option of the Warrant Holder.
The
      Warrant Holder shall also have a “cash-less” exercise option such that
      exercising certain number of shares of Warrant Stock and the sales proceeds
      from
      the sale of such shares shall provide for the payment to the Company of an
      amount equal to the total warrant purchase price as defined above.

     

    2.2 Vesting
      and Exercisability of Warrant.
      This
      Warrant shall be fully vested and immediately exercisable as to One Million
      (1,000,000) shares of Warrant Stock as of the date hereof. 

     

    2.3 Form
      of Payment.
      Payment
      may be made by (i) a check payable to the Company’s order, (ii) wire
      transfer of funds to the Company, (iii) cancellation of indebtedness of the
      Company to the Warrant Holder, or (iv) any combination of the
      foregoing.

      
        
           

        

        
          -2-

          
            

          

        

        
           

        

      

    2.4 Partial
      Exercise. Upon
      a
      partial exercise of this Warrant, this Warrant shall be surrendered by the
      Warrant Holder and replaced with a new Warrant of like tenor in which the Number
      of Shares shall be reduced by the number of shares of Warrant Stock purchased
      upon such exercise.

     

    2.5 No
      Fractional Shares.
      No
      fractional shares may be issued upon any exercise of this Warrant, and any
      fractions shall be rounded down to the nearest whole number of shares. If upon
      any exercise of this Warrant a fraction of a share results, the Company will
      pay
      the cash value of any such fractional share, calculated on the basis of the
      Warrant Price.

     

    2.6 Restrictions
      on Exercise.
      This
      Warrant may not be exercised if the issuance of the Warrant Stock upon such
      exercise would constitute a violation of any applicable federal or state
      securities laws or other laws or regulations. As a condition to the exercise
      of
      this Warrant, the Warrant Holder shall execute the subscription form attached
      hereto as Exhibit 1,
      confirming and acknowledging that the representations and warranties of the
      Warrant Holder set forth in Section 0
      are true
      and correct as of the date of exercise.

     

    3. ISSUANCE
      OF STOCK.
      This
      Warrant shall be deemed to have been exercised immediately prior to the close
      of
      business on the date of its surrender for exercise as provided above, and the
      person entitled to receive the shares of Warrant Stock issuable upon such
      exercise shall be treated for all purposes as the holder of record of such
      shares as of the close of business on such date. As soon as practicable on
      or
      after such date, the Company shall issue and deliver to the person or persons
      entitled to receive the same a certificate or certificates for the number of
      whole shares of Warrant Stock issuable upon such exercise.

     

    4. ADJUSTMENT
      PROVISIONS.
      The
      number and character of shares of Warrant Stock issuable upon exercise of this
      Warrant (or any shares of stock or other securities or property at the time
      receivable or issuable upon exercise of this Warrant) and the Warrant Price
      therefor, are subject to adjustment upon the occurrence of the following events
      between the date this Warrant is issued and the date it is
      exercised:

     

    4.1 Adjustment
      for Stock Splits and Stock Dividends.
      The
      Warrant Price of this Warrant and the Number of Shares of Warrant Stock issuable
      upon exercise of this Warrant (or any shares of stock or other securities at
      the
      time issuable upon exercise of this Warrant) shall each be proportionally
      adjusted to reflect any stock dividend, stock split or reverse stock split,
      or
      other similar event affecting the number of outstanding shares of Warrant Stock
      (or such other stock or securities). 

     

    4.2 Adjustment
      for Other Dividends and Distributions.
      In case
      the Company shall make or issue, or shall fix a record date for the
      determination of eligible holders entitled to receive, a dividend or other
      distribution payable respect to the Warrant Stock that is payable in
      (a) securities of the Company (other than issuances with respect to which
      adjustment is made under Sections 0
      or
0)
      or
      (b) assets (other than cash dividends paid or payable solely out of
      retained earnings), then, and in each such case, the Warrant Holder, upon
      exercise of this Warrant at any time after the consummation, effective date
      or
      record date of such event, shall receive, in addition to the shares of Warrant
      Stock issuable upon such exercise prior to such date, the securities or such
      other assets of the Company to which the Warrant Holder would have
      been

      
        
           

        

        
          -3-

          
            

          

        

        
           

        

      

    entitled
      upon such date if the Warrant Holder had exercised this Warrant immediately
      prior thereto (all subject to further adjustment as provided in this
      Warrant).

     

    4.3 Adjustment
      for Reorganization, Consolidation, Merger.
      In case
      of any recapitalization or reorganization of the Company after the date of
      this
      Warrant, or in case, after such date, the Company shall consolidate with or
      merge into another corporation, then, and in each such case, the Warrant Holder,
      upon the exercise of this Warrant (as provided in Section 0),
      at any
      time after the consummation of such recapitalization, reorganization,
      consolidation or merger, shall be entitled to receive, in lieu of the stock
      or
      other securities and property receivable upon the exercise of this Warrant
      prior
      to such consummation, the stock or other securities or property to which the
      Warrant Holder would have been entitled upon the consummation of such
      recapitalization, reorganization, consolidation or merger if the Warrant Holder
      had exercised this Warrant immediately prior thereto, all subject to further
      adjustment as provided in this Warrant, and the successor or purchasing
      corporation in such reorganization, consolidation or merger (if other than
      the
      Company) shall duly execute and deliver to the Warrant Holder a supplement
      hereto acknowledging such corporation’s obligations under this Warrant; and in
      each such case, the terms of this Warrant shall be applicable to the shares
      of
      stock or other securities or property receivable upon the exercise of this
      Warrant after the consummation of such reorganization, consolidation or
      merger.

     

    4.4 Conversion
      of Stock.
      In case
      all the authorized Common Stock of the Company is converted, pursuant to the
      Company’s Certificate of Incorporation, into other securities or property, or
      the Common Stock otherwise ceases to exist, then, in such case, the Warrant
      Holder, upon exercise of this Warrant at any time after the date on which the
      Common Stock is so converted or ceases to exist (the “Termination
      Date”),
      shall
      receive, in lieu of the number of shares of Common Stock that would have been
      issuable upon such exercise immediately prior to the Termination Date (the
      “Former
      Number of Shares of Warrant Stock”),
      the
      stock and other securities and property which the Warrant Holder would have
      been
      entitled to receive upon the Termination Date if the Warrant Holder had
      exercised this Warrant with respect to the Former Number of Shares of Warrant
      Stock immediately prior to the Termination Date (all subject to further
      adjustment as provided in this Warrant).

     

    4.5 Notice
      of Adjustments.
      The
      Company shall promptly give written notice of each adjustment or readjustment
      of
      the Warrant Price or the number of shares of Warrant Stock or other securities
      issuable upon exercise of this Warrant. The notice shall describe the adjustment
      or readjustment and show in reasonable detail the facts on which the adjustment
      or readjustment is based.

     

    4.6 No
      Change Necessary.
      The
      form of this Warrant need not be changed because of any adjustment in the
      Warrant Price or in the number of shares of Warrant Stock issuable upon its
      exercise.

     

    4.7 Reservation
      of Stock.
      If at
      any time the number of shares of Warrant Stock or other securities issuable
      upon
      exercise of this Warrant shall not be sufficient to effect the exercise of
      this
      Warrant, the Company will take such corporate action as may, in the opinion
      of
      its counsel, be necessary to increase its authorized but unissued shares of
      Warrant Stock or other securities issuable upon exercise of this Warrant as
      shall be sufficient for such purpose.

      
        
           

        

        
          -4-

          
            

          

        

        
           

        

      

    5. REPRESENTATIONS
      AND WARRANTIES OF WARRANT HOLDER.
      Warrant
      Holder represents and warrants to the Company as follows:

     

    5.1 Purchase
      for Own Account for Investment.
      Warrant
      Holder is purchasing the Warrant Stock for Warrant Holder’s own account for
      investment purposes only and not with a view to, or for sale in connection
      with,
      a distribution of the Warrant Stock within the meaning of the Securities Act
      of
      1933, as amended (the “1933
      Act”).
      Warrant Holder has no present intention of selling or otherwise disposing of
      all
      or any portion of the Warrant Stock and no one other than Warrant Holder has
      any
      beneficial ownership of any of the Warrant Stock.

     

    5.2 Access
      to Information.
      Warrant
      Holder has had access to all information regarding the Company and its present
      and prospective business, assets, liabilities and financial condition that
      Warrant Holder reasonably considers important in making the decision to purchase
      the Warrant Stock, and Warrant Holder has had ample opportunity to ask questions
      of the Company’s representatives concerning such matters and this
      investment.

     

    5.3 Understanding
      of Risks.
      Warrant
      Holder is fully aware of: (a) the highly speculative nature of the
      investment in the Warrant Stock; (b) the financial hazards involved;
      (c) the lack of liquidity of the Warrant Stock and the restrictions on
      transferability of the Warrant Stock (e.g.,
      that
      Warrant Holder may not be able to sell or dispose of the Warrant Stock or use
      them as collateral for loans); (d) the qualifications and backgrounds of the
      management of the Company; and (e) the tax consequences of investment in the
      Warrant Stock.

     

    5.4 Warrant
      Holder’s Qualifications.
      Warrant
      Holder has a preexisting personal or business relationship with the Company
      and/or certain of its officers and/or directors of a nature and duration
      sufficient to make Warrant Holder aware of the character, business acumen and
      general business and financial circumstances of the Company and/or such officers
      and directors. By reason of Warrant Holder’s business or financial experience,
      Warrant Holder is capable of evaluating the merits and risks of this investment,
      has the ability to protect Warrant Holder’s own interests in this transaction
      and is financially capable of bearing a total loss of this
      investment.

     

    5.5 No
      General Solicitation.
      At no
      time was Warrant Holder presented with or solicited by any publicly issued
      or
      circulated newspaper, mail, radio, television or other form of general
      advertising or solicitation in connection with the offer, sale and purchase
      of
      the Warrant Stock.

     

    5.6 Compliance
      with Securities Laws.
      Warrant
      Holder understands and acknowledges that, in reliance upon the representations
      and warranties made by Warrant Holder herein, the Warrant Stock are not
      being registered with the SEC under the 1933 Act, but instead are being issued
      under an exemption or exemptions from the registration and qualification
      requirements of the 1933 Act which impose certain restrictions on Warrant
      Holder’s ability to transfer the Warrant Stock.

     

    5.7 Restrictions
      on Transfer.
      Warrant
      Holder understands that Warrant Holder may not transfer any Warrant Stock unless
      such Warrant Stock is registered under the 1933 Act or other applicable state
      securities laws or unless, in the opinion of counsel to the

      
        
           

        

        
          -5-

          
            

          

        

        
           

        

      

    Company,
      exemptions from such registration and qualification requirements are available.
      Warrant Holder understands that only the Company may file a registration
      statement with the SEC. Warrant Holder has also been advised that exemptions
      from registration and qualification may not be available or may not permit
      Warrant Holder to transfer all or any of the Warrant Stock in the amounts or
      at
      the times proposed by Warrant Holder.

     

    5.8 Legends.
      It is
      understood that the certificates evidencing the Warrant Stock and the Common
      Stock issuable upon exercise thereof, will bear the legend set forth
      below:

     

    THE
      SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
      ACT
      OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY OTHER
      JURISDICTIONS. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
      AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
      ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
      EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
      BEAR
      THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE
      ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND
      SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER
      OR
      RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES
      LAWS.

     

    6. NO
      RIGHTS OR LIABILITIES AS STOCKHOLDER.
      This
      Warrant does not by itself entitle the Warrant Holder to any voting rights
      or
      other rights as a shareholder of the Company. In the absence of affirmative
      action by the Warrant Holder to purchase Warrant Stock by exercise of this
      Warrant, no provisions of this Warrant, and no enumeration herein of the rights
      or privileges of the Warrant Holder, shall cause the Warrant Holder to be a
      shareholder of the Company for any purpose.

     

    7. NO
      IMPAIRMENT.
      The
      Company will not, by amendment of its Certificate of Incorporation or Bylaws,
      or
      through reorganization, consolidation, merger, dissolution, issue or sale of
      securities, sale of assets or any other voluntary action, willfully avoid or
      seek to avoid the observance or performance of any of the terms of this Warrant,
      but will at all times in good faith assist in the carrying out of all such
      terms
      and in the taking of all such action as may be necessary or appropriate in
      order
      to protect the rights of the holder against wrongful impairment. Without
      limiting the generality of the foregoing, the Company will take all such action
      as may be necessary or appropriate in order that the Company may duly and
      validly issue fully paid and nonassessable shares of Warrant Stock upon the
      exercise of this Warrant.

     

    8. ATTORNEYS’
      FEES.
      In
      the
      event any party is required to engage the services of any attorneys for the
      purpose of enforcing this Warrant, or any provision thereof, the prevailing
      party shall be entitled to recover its reasonable expenses and costs in
      enforcing this Warrant, including attorneys’ fees.

      
        
           

        

        
          -6-

          
            

          

        

        
           

        

      

    9. TRANSFER.
      Neither
      this Warrant nor any rights hereunder may be assigned, conveyed or transferred,
      in whole or in part, without the Company’s prior written consent, which the
      Company may withhold in its sole discretion. The rights and obligations of
      the
      Company and the Warrant Holder under this Warrant shall be binding upon and
      benefit their respective permitted successors, assigns, heirs, administrators
      and transferees.

     

    10. GOVERNING
      LAW.
      This
      Warrant shall be governed by and construed under the internal laws of the State
      of Delaware as applied to agreements among Delaware residents entered into
      and
      to be performed entirely within Delaware, without reference to principles of
      conflict of laws or choice of laws.

     

    11. HEADINGS.
      The
      headings and captions used in this Warrant are used only for convenience and
      are
      not to be considered in construing or interpreting this Warrant. All references
      in this Warrant to sections and exhibits shall, unless otherwise provided,
      refer
      to sections hereof and exhibits attached hereto, all of which exhibits are
      incorporated herein by this reference.

     

    12. NOTICES.
      Unless
      otherwise provided, any notice required or permitted under this Agreement shall
      be given in writing and shall be deemed effectively given (i) at the time
      of personal delivery, if delivery is in person; (ii) one (1) business day
      after deposit with an express overnight courier for United States deliveries,
      or
      two (2) business days after such deposit for deliveries outside of the United
      States, with proof of delivery from the courier requested; or (iii) three
      (3) business days after deposit in the United States mail by certified mail
      (return receipt requested) for United States deliveries when addressed to the
      party to be notified at the address indicated for such party in the first
      paragraph of this Warrant or, in the case of the Company, at 8000 Towers
      Crescent Drive, Suite 1220, Vienna, VA 22182, or at such other address as any
      party or the Company may designate by giving ten (10) days’ advance written
      notice to all other parties.

     

    13. AMENDMENT;
      WAIVER. Any
      term
      of this Warrant may be amended, and the observance of any term of this Warrant
      may be waived (either generally or in a particular instance and either
      retroactively or prospectively) only with the written consent of the Company
      and
      the Warrant Holder. Any amendment or waiver effected in accordance with this
      Section shall be binding upon the Warrant Holder, each future holder of such
      securities, and the Company.

     

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

     

    15. TERMS
      BINDING.
      By
      acceptance of this Warrant, the Warrant Holder accepts and agrees to be bound
      by
      all the terms and conditions of this Warrant.

     

    16. COUNTERPARTS.
      This
      Warrant may be executed in any number of counterparts, each of which when so
      executed and delivered will be deemed an original, and all of which together
      shall constitute one and the same agreement.

    
      
         

      

      
        -7-

        
          

        

      

      
         

      

    

     

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

     

    
      	
              THE
                COMPANY:

               

              ARIEL
                WAY, INC.

            
	 	 
	
              By:

            	    

	
              Name:

            	
              Arne
                Dunhem

            
	
              Title:

            	
              President
                and CEO

            
	 
	
              AGREED
                AND ACKNOWLEDGED

            
	 
	
              THE
                HOLDER:

               

              OBERON
                SECURITIES, LLC

            
	 
	  

    

     

    
      
         

      

      
        -8-

        
          

        

      

      
         

      

    

    

    EXHIBIT 1

     

    FORM
      OF SUBSCRIPTION

    (To
      be signed only upon exercise of Warrant)

     

    To:
      Ariel
      Way, Inc.

     

    (1) The
      undersigned Warrant Holder hereby elects to purchase     
        
      shares
      of Common Stock of Ariel Way, Inc. (the “Warrant
      Stock”),
      pursuant to the terms of the attached Warrant, and tenders herewith payment
      of
      the purchase price for such shares in full or accepts cancellation of
      indebtedness of the Company to the Warrant Holder of the same equal
      amount.

     

    (2) In
      exercising the Warrant, the undersigned Warrant Holder hereby confirms and
      acknowledges that the representations and warranties set forth in
      Section __ of the Warrant as they apply to the undersigned Warrant Holder
      continue to be true and correct as of this date. 

     

    (3) Please
      issue a certificate or certificates representing such shares of Warrant Stock
      in
      the name specified below:

     

    
      	     

	
              (Name)

            
	 
	      

	
              (Address)

            
	 
	    

	
              (City,
                State, Zip Code)

            
	 
	    

	
              (Federal
                Tax Identification Number)

            
	 
	    

	
              (Date)NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE, IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS, AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.

Original Issue Date: August 4, 2006
Original Conversion Price (subject to adjustment herein): $1.388

                       8% SENIOR SECURED CONVERTIBLE NOTE
                                DUE MAY 15, 2007

      FOR VALUE RECEIVED, Auriga Laboratories, Inc., a Delaware corporation (the
"Company") promises to pay to Sorrento Financial Partners, LLC or its registered
assigns (the "Holder"), the principal sum of $632,000 on May 15, 2007 (the
"Maturity Date"), and to pay interest to the Holder on the aggregate unconverted
and then outstanding principal amount of this Note in accordance with the
provisions hereof. This Note is subject to the following additional provisions:

Section 1. Definitions. For the purposes hereof, the following terms shall have
the following meanings:

      "Business Day" means any day except Saturday, Sunday and any day which
shall be a federal legal holiday in the United States or a day on which banking
institutions in the State of Georgia are authorized or required by law or other
government action to close.

      "Common Stock" means the common stock, $0.001 par value, of the Company
and stock of any other class into which such shares may hereafter have been
reclassified or changed.

      "Conversion Date" shall have the meaning set forth in Section 4(a) hereof.

      "Conversion Price" shall have the meaning set forth in Section 4(b).

      "Conversion Shares" means the shares of Common Stock issuable upon
conversion of this Note.

<PAGE>

      "Event of Default" shall have the meaning set forth in Section 6.

      "Exchange Act" means the Securities Exchange Act of 1934, as amended.

      "FMV" means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or quoted
on a Trading Market, the closing price of the Common Stock for such date (or the
nearest preceding date) on the primary Trading Market on which the Common Stock
is then listed or quoted; (b) if the Common Stock is not then listed or quoted
on the Trading Market and if prices for the Common Stock are then reported in
the "Pink Sheets", the most recent bid price per share of the Common Stock so
reported; or (c) in all other cases, the fair market value of a share of Common
Stock as determined in good faith by the Company's Board of Directors.

      "Interest Payment Date" shall have the meaning set forth in Section 2(a).

      "Maturity Date" shall have the meaning set forth in the introductory
paragraph of this Note.

      "Notice of Conversion" shall have the meaning set forth in Section 4(a).

      "Original Issue Date" shall mean the date of the first issuance of this
Note regardless of the number of transfers of this Note and regardless of the
number of instruments which may be issued to evidence this Note.

      "Person" means a corporation, an association, a partnership, organization,
a business, an individual, a government or political subdivision thereof or a
governmental agency.

      "Trading Day" means a day on which the Common Stock is traded on a Trading
Market.

      "Trading Market" means the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the Nasdaq
SmallCap Market, the American Stock Exchange, the New York Stock Exchange, the
Nasdaq National Market or the OTC Bulletin Board.

Section 2.  Interest.

      (a)   Payment of Interest. The Company shall pay interest to the Holder on
the aggregate unconverted and then outstanding principal amount of this Note at
the annual rate of 8%, payable monthly in arrears beginning on the first day of
the first month after the Original Issue Date and on each Conversion Date (as to
that principal amount then being converted) and on the Maturity Date (except
that, if any such date is not a Business Day, then such payment shall be due on
the next succeeding Business Day) (each such date, an "Interest Payment Date").

      (b)   Interest Calculations. Interest shall be calculated on the basis of
a 360-day year and shall accrue daily commencing on the Original Issue Date
until payment in full of the principal sum, together with all accrued and unpaid
interest has been made. Interest shall be compounded monthly. Interest shall
cease to accrue with respect to any principal amount converted.

                                  Page 2 of 10
<PAGE>

Section 3. Voluntary Prepayment. The Company may prepay all or any portion of
this Note at any time without penalty or premium.

Section 4.  Conversion.

      (a)   Voluntary Conversion. At any time after the Original Issue Date
until this Note is no longer outstanding, this Note shall be convertible into
shares of Common Stock at the option of the Holder, in whole or in part at any
time and from time to time. The Holder shall effect conversions by delivering to
the Company the form of Notice of Conversion attached hereto as Annex A (a
"Notice of Conversion"), specifying therein the principal amount of this Note to
be converted and the date on which such conversion is to be effected (a
"Conversion Date"). If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
is provided hereunder. To effect conversions hereunder, the Holder shall not be
required to physically surrender this Note to the Company unless the entire
principal amount of this Note has been so converted. Conversions hereunder shall
have the effect of lowering the outstanding principal amount of this Note in an
amount equal to the applicable conversion. The Holder and the Company shall
maintain records showing the principal amount converted and the date of such
conversions. The Company shall deliver any objection to any Notice of Conversion
within 3 Business Days of receipt of such notice. In the event of any dispute or
discrepancy, the records of the Holder shall be controlling and determinative in
the absence of manifest error. The Holder and any assignee, by acceptance of
this Note, acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of a portion of this Note, the unpaid and
unconverted principal amount of this Note may be less than the amount stated on
the face hereof. However, at the Company's request, the Holder shall promptly
surrender this Note to the Company so that a new Note reflecting the correct
principal amount may be issued to the Holder.

      (b)   Conversion Price. Subject to the provisions of Section 5, the
Conversion Price in effect on any Conversion Date shall be $1.388.

      (c)   Mechanics of Conversion

            (i)   Conversion Shares Issuable Upon Conversion of Principal
Amount. The number of shares of Common Stock issuable upon a conversion
hereunder shall be determined by the quotient obtained by dividing (x) the
outstanding principal amount of this Note to be converted by (y) the Conversion
Price then in effect.

            (ii)  Delivery of Certificate Upon Conversion. Promptly following
any Conversion Date, the Company will deliver to the Holder (A) a certificate or
certificates representing the Conversion Shares representing the number of
shares of Common Stock being acquired upon the conversion of this Note and (B) a
bank check in the amount of accrued and unpaid interest.

            (iii) Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of its
authorized and unissued shares of Common Stock, solely for the purpose of
issuance upon conversion of this Note as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holder, not less than such number of shares of Common Stock as shall be issuable
(taking into account the adjustments of Section 5) upon the conversion of the
outstanding principal amount of this Note. The Company covenants that all shares
of Common Stock that shall be so issuable shall, upon issue, be duly and validly
authorized and issued, fully paid and nonassessable.

                                  Page 3 of 10
<PAGE>

            (iv)  Fractional Shares. Upon a conversion hereunder the Company
shall not issue stock certificates representing fractions of shares of Common
Stock, but shall in lieu thereof, make a cash payment in respect of any final
fraction of a share based on the FMV at such time.

            (v)   Transfer Taxes. The issuance of certificates for shares of the
Common Stock on conversion of this Note shall be made without charge to the
Holder for any documentary stamp or similar taxes that may be payable in respect
of the issue or delivery of such certificate, provided that the Company shall
not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion in
a name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the Person or Persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.

Section 5.  Certain Adjustments.

      (a)   Stock Dividends and Stock Splits. If the Company, at any time while
this Note is outstanding: (A) shall pay a stock dividend or otherwise make a
distribution or distributions on shares of its Common Stock or any other equity
or equity equivalent securities payable in shares of Common Stock (which, for
avoidance of doubt, shall not include any shares of Common Stock issued by the
Company pursuant to this Note), (B) subdivide outstanding shares of Common Stock
into a larger number of shares, (C) combine (including by way of reverse stock
split) outstanding shares of Common Stock into a smaller number of shares, or
(D) issue by reclassification of shares of the Common Stock any shares of
capital stock of the Company, then the Conversion Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock outstanding after
such event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.

      (b)   Calculations. All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be. For
purposes of this Section 5, the number of shares of Common Stock deemed to be
issued and outstanding as of a given date shall be the sum of the number of
shares of Common Stock (excluding treasury shares, if any) issued and
outstanding.

                                  Page 4 of 10
<PAGE>

Section 6.  Events of Default.

      (a)   "Event of Default", wherever used herein, means any one of the
following events (whatever the reason and whether it shall be voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court, or any order, rule or regulation of any administrative or
governmental body):

            (i)   any default in the payment of (A) the principal of amount of
this Note, or (B) interest on this Note, as and when the same shall become due
and payable (whether on a Conversion Date or the Maturity Date or by
acceleration or otherwise) which default, solely in the case of an interest
payment, is not cured, within 5 Trading Days;

            (ii)  the Company shall fail to observe or perform any other
covenant or agreement contained in this Note which failure is not cured, if
possible to cure, within 5 Trading Days after notice of such default sent by the
Holder;

            (iii) any representation or warranty made herein shall be untrue or
incorrect in any material respect as of the date when made or deemed made;

            (iv) (i) the Company shall commence, or there shall be
commenced against the Company, a case under any applicable bankruptcy or
insolvency laws as now or hereafter in effect or any successor thereto, or the
Company commences any other proceeding under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect relating to
the Company or (ii) there is commenced against the Company any such bankruptcy,
insolvency or other proceeding which remains undismissed for a period of 60
days; or (iii) the Company is adjudicated by a court of competent jurisdiction
insolvent or bankrupt; or any order of relief or other order approving any such
case or proceeding is entered; or (iv) the Company suffers any appointment of
any custodian or the like for it or any substantial part of its property which
continues undischarged or unstayed for a period of 60 days; or (v) the Company
makes a general assignment for the benefit of creditors; or (vi) the Company
shall fail to pay, or shall state that it is unable to pay, or shall be unable
to pay, its debts generally as they become due; or (vii) the Company shall call
a meeting of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (viii) the Company shall by any act or failure to
act expressly indicate its consent to, approval of or acquiescence in any of the
foregoing; or (ix) any corporate or other action is taken by the Company for the
purpose of effecting any of the foregoing; or

            (v)   the Company shall default in any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there
may be secured or evidenced any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement of the Company in an amount
exceeding $100,000, whether such indebtedness now exists or shall hereafter be
created and such default shall result in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable.

                                  Page 5 of 10
<PAGE>

      (b)   Remedies Upon Event of Default. If any Event of Default occurs, the
full principal amount of this Note, together with interest and other amounts
owing in respect hereof, to the date of acceleration shall become, at the
Holder's election, immediately due and payable in full. The Holder need not
provide and the Company hereby waives any presentment, demand, protest or other
notice of any kind, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and all
other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by the Holder at any time prior to payment hereunder and
the Holder shall have all rights as a Note holder until such time, if any, as
the full payment under this Section shall have been received by it. No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon.

Section 7.   Piggyback Registration Rights. In the event that the Company files
a registration statement with the Securities and Exchange Commission covering
the sale of its shares of Common Stock (other than a registration statement on
Form S-4, S-8 or similar form), then the Holder shall have the right to require
the Company to register the resale of the Conversion Shares on such registration
statement, provided that if such registration is underwritten, the inclusion of
such shares shall be subject to cutback at the discretion of the managing
underwriter and provided further that the inclusion of Conversion Shares on any
registration statement shall be subject and subordinated to the registration
rights of any other holders of the Company's securities. The foregoing
registration rights shall expire on the one-year anniversary of the Original
Issue Date.

Section 8.   Accrued Bonus. As of the date hereof, Phil Pesin ("Pesin") was owed
$232,000 from the Company representing accrued but unpaid bonus payments
pursuant to the terms of his employment agreement (the "Accrued Bonus"). Pesin
has assigned all rights to receive the Accrued Bonus to the Holder. A portion of
the value received by the Company under this Note is the agreement by the Holder
to forgo any amounts owed to it under the Accrued Bonus. Each of the Holder and
Pesin agree and acknowledge that it or he therefore has no further rights in or
to the Accrued Bonus.

Section 9.  Miscellaneous.

      (a)   Notices. Any and all notices or other communications or deliveries
to be provided by the Holder hereunder, including, without limitation, any
Notice of Conversion, shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service, addressed
to the Company, at 5555 Triangle Parkway, Suite 300, Norcross, Georgia 30092,
facsimile number, 678-282-1697, Attn: CEO, or such other address or facsimile
number as the Company may specify for such purposes by notice to the Holder
delivered in accordance with this Section. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service addressed to the Holder at the facsimile telephone
number or address of such Holder appearing on the books of the Company, or if no
such facsimile telephone number or address appears, at the principal place of
business of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 5:30 p.m. (New
York City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:30 p.m. (New York City time) on any date
and earlier than 11:59 p.m. (New York City time) on such date, (iii) the second
Business Day following the date of mailing, if sent by nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.

                                  Page 6 of 10
<PAGE>

      (b)   Absolute Obligation. Except as expressly provided herein, no
provision of this Note shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of, and interest on,
this Note at the time, place, and rate, and in the coin or currency, herein
prescribed. This Note is a direct debt obligation of the Company.

      (c)   Lost or Mutilated Note. If this Note shall be mutilated, lost,
stolen or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Note, or in lieu of or in
substitution for a lost, stolen or destroyed Note, a new Note for the principal
amount of this Note so mutilated, lost, stolen or destroyed but only upon
receipt of evidence of such loss, theft or destruction of such Note, and of the
ownership hereof, and indemnity, if requested, all reasonably satisfactory to
the Company.

      (d)   Security Interest. This Note is a direct debt obligation of the
Company and is secured by a first priority perfected security interest in all of
the assets of the Company for the benefit of the Holder.

      (e)   Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Note shall be governed by and construed
and enforced in accordance with the internal laws of the State of Delaware,
without regard to the principles of conflicts of law thereof.

      (f)   Waiver. Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of
any other breach of such provision or of any breach of any other provision of
this Note. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Note on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Note. Any waiver must be
in writing.

      (g)   Severability. If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any Person or circumstance, it shall nevertheless
remain applicable to all other Persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on this Note as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of this Note, and the Company (to the extent it may lawfully do so)
hereby expressly waives all benefits or advantage of any such law, and covenants
that it will not, by resort to any such law, hinder, delay or impede the
execution of any power herein granted to the Holder.

                                  Page 7 of 10
<PAGE>

      (h)   Next Business Day. Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment shall be
made on the next succeeding Business Day.

      (i)   Headings. The headings contained herein are for convenience only, do
not constitute a part of this Note and shall not be deemed to limit or affect
any of the provisions hereof.

      (j)   Seniority. This Note is senior in right of payment to any and all
other indebtedness of the Company.

                            *********************

                                  Page 8 of 10
<PAGE>

      IN WITNESS WHEREOF, the Company has caused this Note to be duly executed
by a duly authorized officer as of the date first above indicated.

                                         AURIGA LABORATORIES, INC.

                                         By: /s/ Philip S. Pesin
                                                 ------------------------------
                                             Name:  Philip S. Pesin
                                             Title: Chairman and CEO

AGREED AND ACKNOWLEDGED

SORRENTO FINANCIAL PARTNERS, LLC

By: /s/ Philip S. Pesin
        ---------------------------
    Name:  Phil Pesin
    Title: Manager

/s/ Philip S. Pesin
    -------------------------------------------------------------
Phil Pesin, in his individual capacity, with respect to Section 8

                                  Page 9 of 10
<PAGE>

                                   ANNEX A

                             NOTICE OF CONVERSION

      The undersigned hereby elects to convert principal under the Senior
Secured Convertible Note of Auriga Laboratories, Inc., a Delaware corporation
(the "Company"), due on May 15, 2007, into shares of common stock, par value
$0.001 (the "Common Stock"), of the Company according to the conditions hereof,
as of the date written below. If shares are to be issued in the name of a person
other than the undersigned, the undersigned will pay all transfer taxes payable
with respect thereto and is delivering herewith such certificates and opinions
as reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.

Conversion calculations:
                              Date to Effect Conversion:

                              Principal Amount of Note to be Converted:

                              Number of shares of Common Stock to be issued:

                              Signature:

                              Name:

                              Address:

                                 Page 10 of 10

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00108-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00108-of-00352.parquet"}]]