Document:

EXECUTION
      COPY

    REGISTRATION
      RIGHTS AGREEMENT

     

    This
      Registration Rights Agreement (this “Agreement”)
      is
      made and entered into as of December 29, 2006, by and among Inncardio, Inc.,
      a
      Delaware corporation (the “Company”),
      and
      the purchasers listed on Schedule I hereto (the “Purchasers”).

     

    This
      Agreement is being entered into pursuant to the Securities Purchase Agreement
      dated as of the date hereof among the Company and the Purchasers (the
“Purchase
      Agreement”).

     

    The
      Company and the Purchasers hereby agree as follows:

     

    1. Definitions.

     

    Capitalized
      terms used and not otherwise defined herein shall have the meanings given such
      terms in the Purchase Agreement. As used in this Agreement, the following terms
      shall have the following meanings:

     

    “Advice”
shall
      have the meaning set forth in Section 3(m).

     

    “Affiliate”
means,
      with respect to any Person, any other Person that directly or indirectly
      controls or is controlled by or under common control with such Person. For
      the
      purposes of this definition, “control,”
when
      used with respect to any Person, means the possession, direct or indirect,
      of
      the power to direct or cause the direction of the management and policies of
      such Person, whether through the ownership of voting securities, by contract
      or
      otherwise; and the terms of “affiliated,”
      “controlling”
and
      “controlled”
have
      meanings correlative to the foregoing.

     

    “Board”
shall
      have the meaning set forth in Section 3(n).

     

    “Business
      Day”
means
      any day except Saturday, Sunday and any day which shall be a legal holiday
      or a
      day on which banking institutions in the state of New York generally are
      authorized or required by law or other government actions to close.

     

    “Closing
      Date”
means
      the date of the closing of the purchase and sale of the Common Stock and the
      Warrants pursuant to the Purchase Agreement.

     

    “Commission”
means
      the Securities and Exchange Commission.

     

    “Common
      Stock”
means
      the Company’s Common Stock, par value $0.001 per share.

     

    “Effectiveness
      Date”
means
      with respect to each Registration Statement the earlier of (A) the one hundred
      twentieth (120th) day following the initial filing date of such Registration
      Statement (or in the event the Registration Statement receives a “full review”
by the Commission, the one hundred fiftieth (150th) day following the initial
      filing date), or (B) the date which is within three (3) Business Days after
      the
      date on which the Commission informs the Company (i) that the Commission will
      not review the Registration Statement or (ii) that the Company may request
      the
      acceleration of the effectiveness of the Registration Statement and the Company
      makes such request; provided that,
      if the
      Effectiveness Date falls on a Saturday, Sunday or any other day which shall
      be a
      legal holiday or a day on which the Commission is authorized or required by
      law
      or other government actions to close, the Effectiveness Date shall be the
      following Business Day.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

       

    

    “Effectiveness
      Period”
shall
      have the meaning set forth in Section 2.

     

    “Event”
shall
      have the meaning set forth in Section 7(e).

     

    “Event
      Date”
shall
      have the meaning set forth in Section 7(e).

     

    “Exchange
      Act”
means
      the Securities Exchange Act of 1934, as amended.

     

    “Filing
      Date”
means
      the thirtieth (30th) day following the Closing Date or the Subsequent
      Registration Notice Date; provided that, if the Filing Date falls on a Saturday,
      Sunday or any other day which shall be a legal holiday or a day on which the
      Commission is authorized or required by law or other government actions to
      close, the Filing Date shall be the following Business Day.

     

    “Holder”
or
      “Holders”
means
      (i) the holder or holders, as the case may be, from time to time of Registrable
      Securities who agrees in writing to be bound by the terms of this Agreement
      pursuant to Section 7(i) hereof, (ii) solely with respect to the Registration
      Statement in respect of the Initially Registrable Shares, the holders of 41,859
      shares of Common Stock as set forth on Schedule II hereto and (iii) solely
      with
      respect to the Subsequent Registration Statement, the Placement Agent to the
      extent of the shares of Common Stock underlying the warrants issued to it by
      the
      Company on the Closing Date (the Persons referenced in subsections (ii) and
      (iii) hereof are intended to be third party beneficiaries of the Agreement
      to
      the limited extent as described herein).

     

    “Indemnified
      Party”
shall
      have the meaning set forth in Section 5(c).

     

    “Indemnifying
      Party”
shall
      have the meaning set forth in Section 5(c).

     

    “Initially
      Registrable Shares”
shall
      have the meaning set forth in Section 2.

     

    “Losses”
shall
      have the meaning set forth in Section 5(a).

     

    “Person”
means
      an individual or a corporation, partnership, trust, incorporated or
      unincorporated association, joint venture, limited liability company, joint
      stock company, government (or an agency or political subdivision thereof) or
      other entity of any kind.

     

    “Proceeding”
means
      an action, claim, suit, investigation or proceeding (including, without
      limitation, an investigation or partial proceeding, such as a deposition),
      whether commenced or threatened.

     

    “Prospectus”
means
      the prospectus included in the Registration Statement (including, without
      limitation, a prospectus that includes any information previously omitted from
      a
      prospectus filed as part of an effective registration statement in reliance
      upon
      Rule 430A promulgated under the Securities Act), as amended or supplemented
      by
      any prospectus supplement, with respect to the terms of the offering of any
      portion of the Registrable Securities covered by the Registration Statement,
      and
      all other amendments and supplements to the Prospectus, including post-effective
      amendments, and all material incorporated by reference in such
      Prospectus.

     

    
      
        
        

      

      
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    “Registrable
      Securities”
means
      (i) the shares of Common Stock, (ii) the shares of Common Stock issuable upon
      exercise of the Warrants and (iii) to the limited extent described herein,
      the
      shares of Common Stock underlying the warrants (A) issued by the Company to
      the
      Placement Agent on the Closing Date and (B) assumed by the Company that were
      issued by Long-E to the Bridge Investor in connection with Long-E’s issuance of
      the Convertible Bridge Note.

     

    “Registration
      Statement”
means
      the registration statements and any additional registration statements
      contemplated by Section 2, including (in each case) the Prospectus, amendments
      and supplements to such registration statement or Prospectus, including pre-
      and
      post-effective amendments, all exhibits thereto, and all material incorporated
      by reference in such registration statement.

     

    “Rule
      144”
means
      Rule 144 promulgated by the Commission pursuant to the Securities Act, as such
      Rule may be amended from time to time, or any similar rule or regulation
      hereafter adopted by the Commission having substantially the same effect as
      such
      Rule.

     

    “Rule
      158”
means
      Rule 158 promulgated by the Commission pursuant to the Securities Act, as such
      Rule may be amended from time to time, or any similar rule or regulation
      hereafter adopted by the Commission having substantially the same effect as
      such
      Rule.

     

    “Rule
      415”
means
      Rule 415 promulgated by the Commission pursuant to the Securities Act, as such
      Rule may be amended from time to time, or any similar rule or regulation
      hereafter adopted by the Commission having substantially the same effect as
      such
      Rule.

     

    “Rule
      424”
means
      Rule 424 promulgated by the Commission pursuant to the Securities Act, as such
      Rule may be amended from time to time, or any similar rule or regulation
      hereafter adopted by the Commission having substantially the same effect as
      such
      Rule.

     

    “Securities
      Act”
means
      the Securities Act of 1933, as amended.

     

    “Special
      Counsel”
means
      Olshan Grundman Frome Rosenzweig & Wolosky LLP, for which the Holders will
      be reimbursed by the Company pursuant to Section 4.

     

    “Subsequent
      Registration Notice”
shall
      have the meaning set forth in Section 2.

     

    “Subsequent
      Registration Notice Date”
means
      the date on which the Company receives a Subsequent Registration
      Notice.

     

    “Subsequent
      Registration Statement”
shall
      have the meaning set forth in Section 2.

     

    
      
        
        

      

      
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    “Warrants”
means
      the warrants to purchase shares of Common Stock issued to the Purchasers
      pursuant to the Purchase Agreement.

     

    2. Resale
      Registrations.
      On or
      prior to the Filing Date, the Company shall prepare and file with the Commission
      a “resale” Registration Statement providing for the resale of the portion of
      Registrable Securities corresponding thirty percent (30%) of the Company’s
      Common Stock outstanding following the Closing for an offering to be made on
      a
      continuous basis pursuant to Rule 415; provided,
      however,
      that
      such Registration Statement shall not include the shares of Common Stock
      underlying the warrants issued to the Bridge Investor issued in connection
      with
      the issuance of the Convertible Bridge Note (such shares called “Initially
      Registrable Shares”).

     

    The
      holders of the balance of the Registrable Securities will have registration
      rights entitling them to request that a registration statement (the
“Subsequent
      Registration Statement”)
      covering said shares be filed with the Commission no earlier than three (3)
      months after the effective date of the Initial Registration Statement and no
      later than eight (8) months from said effective date. Such request (the
“Subsequent
      Registration Notice”)
      shall
      be made by Holders in interest of at least a majority of such Registrable
      Securities.

     

    Each
      Registration Statement shall be on Form SB-2 (except if the Company is not
      then
      eligible to register for resale the Registrable Securities on Form SB-2, in
      which case such registration shall be on another appropriate form in accordance
      herewith and with the Securities Act and the rules promulgated thereunder).
      Such
      Registration Statements shall cover to the extent allowable under the Securities
      Act and the rules promulgated thereunder (including Rules 415 and 416), such
      indeterminate number of additional shares of Common Stock resulting from stock
      splits, stock dividends or similar transactions with respect to the Registrable
      Securities. The Company shall (i) not permit any securities other than the
      Registrable Securities to be included in each Registration Statement and (ii)
      use its best efforts to cause each Registration Statement to be declared
      effective under the Securities Act as promptly as possible after the filing
      thereof, but in any event prior to the Effectiveness Date, and to keep such
      Registration Statement continuously effective under the Securities Act until
      such date as is the earlier of (y) the date when all Registrable Securities
      covered by such Registration Statement have been sold by the Purchasers or
      (z)
      the date on which the Registrable Securities may be sold without any restriction
      pursuant to Rule 144(k) as determined by the counsel to the Company pursuant
      to
      a written opinion letter to such effect, addressed to the Company’s transfer
      agent (the “Effectiveness
      Period”).
      The
      Company shall request that the effective time of the Registration Statement
      be
      4:00 p.m. Eastern Time on the effective date.

     

    If
      at any
      time following the effective date of the Registration Statements referenced
      elsewhere in this Section 2, and for any reason, an additional Registration
      Statement is required to be filed because at such time the actual number of
      shares of Common Stock and shares of Common Stock for which the Warrants are
      exercisable exceeds the number of shares of Registrable Securities remaining
      under the Registration Statement, the Company shall file such additional
      Registration Statement on the first Business Day following the three-month
      anniversary of the Subsequent Registration Statement, and the Company shall
      use
      its best efforts to cause such additional Registration Statement to be declared
      effective by the Commission as soon as reasonably possible, but in no event
      later than sixty (60) days after filing.

     

    
      
        
        

      

      
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    Notwithstanding
      anything to the contrary set forth in this Section 2, in the event the
      Commission does not permit the Company to register the “resale” of all of the
      Registrable Securities anticipated to be so registered on such Registration
      Statement pursuant to Rule 415, the Company shall register in the Registration
      Statement such number of Registrable Securities as is permitted by the
      Commission, provided,
      however,
      that
      the number of Registrable Securities to be included in such Registration
      Statement or any subsequent registration statement shall be determined in the
      following order: (i) first, the shares of Common Stock shall be registered
      on a
      pro rata basis among the Holders, and (ii) second, the shares of Common Stock
      issuable upon exercise of the Warrants shall be registered on a pro rata basis
      among the Holders. In the event the Commission does not permit the Company
      to
      register all of the Registrable Securities in the Registration Statement, the
      Company shall use its best efforts to register the Registrable Securities,
      subject to the foregoing sentence, that were not registered in the Registration
      Statement as promptly as possible and in a manner permitted by the Commission,
      in accordance with the provisions of this Section 2 or otherwise.

     

    3. Registration
      Procedures.

     

    In
      connection with the Company’s registration obligations hereunder, the Company
      shall:

     

    (a) Prepare
      and file with the Commission, on or prior to the Filing Date, a Registration
      Statement on Form SB-2 (or if the Company is not then eligible to register
      for
      resale the Registrable Securities on Form SB-2 such registration shall be on
      another appropriate form in accordance herewith and the Securities Act and
      the
      rules promulgated thereunder) in accordance with the plan of distribution as
      set
      forth on Exhibit
      A
      hereto
      and in accordance with applicable law, regulations and Commission policies,
      and
      cause the Registration Statement to become effective and remain effective as
      provided herein; provided,
      however,
      that
      not less than ten (10) Business Days prior to the filing of the Registration
      Statement or any related Prospectus or any amendment or supplement thereto,
      the
      Company shall (i) furnish to the Holders and any Special Counsel, copies of
      all
      such documents proposed to be filed, which documents will be subject to the
      reasonable review of such Holders and such Special Counsel, and (ii) cause
      its
      officers and directors, counsel and independent certified public accountants
      to
      respond to such inquiries as shall be necessary, in the reasonable opinion
      of
      Special Counsel, to conduct a reasonable review of such documents. The Company
      shall not file the Registration Statement or any such Prospectus or any
      amendments or supplements thereto to which the Holders of a majority of the
      Registrable Securities or any Special Counsel shall reasonably object in writing
      within five (5) Business Days of their receipt thereof.

     

    (b) (i)
      Prepare and file with the Commission such amendments, including post-effective
      amendments, to the Registration Statement as may be necessary to keep the
      Registration Statement continuously effective as to the applicable Registrable
      Securities for the Effectiveness Period and prepare and file with the Commission
      such additional Registration Statements as necessary in order to register for
      resale under the Securities Act all of the Registrable Securities; (ii) cause
      the related Prospectus to be amended or supplemented by any required Prospectus
      supplement, and as so supplemented or amended to be filed pursuant to Rule
      424
      (or any similar provisions then in force) promulgated under the Securities
      Act;
      (iii) respond as promptly as reasonably possible to any comments received from
      the Commission with respect to the Registration Statement or any amendment
      thereto and as promptly as possible provide the Holders true and complete copies
      of all correspondence from and to the Commission relating to the Registration
      Statement; (iv) file the final prospectus pursuant to Rule 424 of the Securities
      Act on the Business Day following the date the Registration Statement is
      declared effective by the Commission; and (v) comply in all material respects
      with the provisions of the Securities Act and the Exchange Act with respect
      to
      the disposition of all Registrable Securities covered by the Registration
      Statement during the Effectiveness Period in accordance with the intended
      methods of disposition by the Holders thereof set forth in the Registration
      Statement as so amended or in such Prospectus as so supplemented.

     

    
      
        
        

      

      
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    (c) Notify
      the Holders of Registrable Securities and any Special Counsel as promptly as
      possible (and, in the case of (i)(A) below, not less than five (5) Business
      Days
      prior to such filing, and in the case of (iii) below, on the same day of receipt
      by the Company of such notice from the Commission) and (if requested by any
      such
      Person) confirm such notice in writing no later than three (3) Business Days
      following the day (i)(A) when a Prospectus or any Prospectus supplement or
      post-effective amendment to the Registration Statement is filed; (B) when the
      Commission notifies the Company whether there will be a “review” of such
      Registration Statement and whenever the Commission comments in writing on such
      Registration Statement and (C) with respect to the Registration Statement or
      any
      post-effective amendment, when the same has become effective; (ii) of any
      request by the Commission or any other Federal or state governmental authority
      for amendments or supplements to the Registration Statement or Prospectus or
      for
      additional information; (iii) of the issuance by the Commission of any stop
      order suspending the effectiveness of the Registration Statement covering any
      or
      all of the Registrable Securities or the initiation or threatening of any
      Proceedings for that purpose; (iv) of the receipt by the Company of any
      notification with respect to the suspension of the qualification or exemption
      from qualification of any of the Registrable Securities for sale in any
      jurisdiction, or the initiation or threatening of any Proceeding for such
      purpose; and (v) of the occurrence of any event that makes any statement made
      in
      the Registration Statement or Prospectus or any document incorporated or deemed
      to be incorporated therein by reference untrue in any material respect or that
      requires any revisions to the Registration Statement, Prospectus or other
      documents so that, in the case of the Registration Statement or the Prospectus,
      as the case may be, it will not contain any untrue statement of a material
      fact
      or omit to state any material fact required to be stated therein or necessary
      to
      make the statements therein, in the light of the circumstances under which
      they
      were made, not misleading.

     

    (d) Use
      its
      best efforts to avoid the issuance of, or, if issued, obtain the withdrawal
      of,
      as promptly as possible, (i) any order suspending the effectiveness of the
      Registration Statement or (ii) any suspension of the qualification (or exemption
      from qualification) of any of the Registrable Securities for sale in any
      jurisdiction.

     

    (e) If
      requested by any Holder in writing, furnish to such Holder and any Special
      Counsel, without charge, at least one conformed copy of each Registration
      Statement and each amendment thereto, including financial statements and
      schedules, all documents incorporated or deemed to be incorporated therein
      by
      reference, and all exhibits to the extent requested by such Person (including
      those previously furnished or incorporated by reference) within three (3)
      Business Days of the Company’s receipt of such request.

     

    
      
        
        

      

      
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    (f) Deliver
      to each Holder and any Special Counsel, without charge, as many copies of the
      Prospectus or Prospectuses (including each form of prospectus) and each
      amendment or supplement thereto as such Persons may reasonably request; and
      subject to the provisions of Sections 3(m) and 3(n), the Company hereby consents
      to the use of such Prospectus and each amendment or supplement thereto by each
      of the selling Holders in connection with the offering and sale of the
      Registrable Securities covered by such Prospectus and any amendment or
      supplement thereto.

     

    (g) Prior
      to
      any public offering of Registrable Securities, use commercially reasonable
      best
      efforts to register or qualify or reasonably cooperate with the selling Holders
      and any Special Counsel in connection with the registration or qualification
      (or
      exemption from such registration or qualification) of such Registrable
      Securities for offer and sale under the securities or Blue Sky laws of such
      jurisdictions within the United States as any Holder requests in writing, to
      keep each such registration or qualification (or exemption therefrom) effective
      during the Effectiveness Period and to do any and all other acts or things
      necessary or advisable to enable the disposition in such jurisdictions of the
      Registrable Securities covered by a Registration Statement; provided, however,
      that the Company shall not be required to qualify generally to do business
      in
      any jurisdiction where it is not then so qualified or to take any action that
      would subject it to general service of process in any such jurisdiction where
      it
      is not then so subject or subject the Company to any material tax in any such
      jurisdiction where it is not then so subject.

     

    (h) Cooperate
      with the Holders to facilitate the timely preparation and delivery of
      certificates representing Registrable Securities to be sold pursuant to a
      Registration Statement, which certificates, to the extent permitted by the
      Purchase Agreement, Warrants and applicable federal and state securities laws,
      shall be free of all restrictive legends, and to enable such Registrable
      Securities to be in such denominations and registered in such names as any
      Holder may request in connection with any sale of Registrable
      Securities.

     

    (i) Upon
      the
      occurrence of any event contemplated by Section 3(c)(vi) hereof, as promptly
      as
      reasonably possible, prepare a supplement or amendment, including a
      post-effective amendment, to the Registration Statement or a supplement to
      the
      related Prospectus or any document incorporated or deemed to be incorporated
      therein by reference, and file any other required document so that, as
      thereafter delivered, neither the Registration Statement nor such Prospectus
      will contain an untrue statement of a material fact or omit to state a material
      fact required to be stated therein or necessary to make the statements therein,
      in the light of the circumstances under which they were made, not
      misleading.

     

    (j) Use
      its
      best efforts to cause all Registrable Securities relating to the Registration
      Statement to be listed or quoted on the OTC Bulletin Board or any other
      securities exchange, quotation system or market, if any, on which similar
      securities issued by the Company are then listed or traded as and when required
      pursuant to the Purchase Agreement.

     

    (k) Comply
      in
      all material respects with all applicable rules and regulations of the
      Commission and make generally available to its security holders all documents
      filed or required to be filed with the Commission, including, but not limited,
      to, earning statements satisfying the provisions of Section 11(a) of the
      Securities Act and Rule 158 not later than 90 days after the end of any 12-month
      period if such period is a fiscal year commencing on the first day of the first
      fiscal quarter of the Company after the effective date of the Registration
      Statement, which statement shall conform to the requirements of Rule
      158.

     

    
      
        
        

      

      
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    (l) The
      Company may, at its option, require each selling Holder to furnish to the
      Company information regarding such Holder and the distribution of such
      Registrable Securities as is required by law to be disclosed in the Registration
      Statement, Prospectus, or any amendment or supplement thereto, and the Company
      may, at its option, exclude from such registration the Registrable Securities
      of
      any such Holder who unreasonably fails to furnish such information within a
      reasonable time after receiving such request.

     

    If
      the
      Registration Statement refers to any Holder by name or otherwise as the holder
      of any securities of the Company, then such Holder shall have the right to
      require (if such reference to such Holder by name or otherwise is not required
      by the Securities Act or any similar federal or applicable state law then in
      force) the deletion of the reference to such Holder in any amendment or
      supplement to the Registration Statement filed or prepared subsequent to the
      time that such reference ceases to be required.

     

    Each
      Holder covenants and agrees that it will not sell any Registrable Securities
      under the Registration Statement until the Company has electronically filed
      the
      Prospectus as then amended or supplemented as contemplated in Section 3(g)
      and
      notice from the Company that the Registration Statement and any post-effective
      amendments thereto have become effective as contemplated by Section
      3(c).

     

    Each
      Holder agrees by its acquisition of such Registrable Securities that, upon
      receipt of a notice from the Company of the occurrence of any event of the
      kind
      described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(n), such Holder
      will forthwith discontinue disposition of such Registrable Securities under
      the
      Registration Statement until such Holder’s receipt of the copies of the
      supplemented Prospectus and/or amended Registration Statement contemplated
      by
      Section 3(j), or until it is advised in writing (the “Advice”)
      by the
      Company that the use of the applicable Prospectus may be resumed, and, in either
      case, has received copies of any additional or supplemental filings that are
      incorporated or deemed to be incorporated by reference in such Prospectus or
      Registration Statement.

     

    (m) If
      (i)
      there is material non-public information regarding the Company which the
      Company’s Board of Directors (the “Board”)
      determines not to be in the Company’s best interest to disclose and which the
      Company is not otherwise required to disclose, (ii) there is a significant
      business opportunity (including, but not limited to, the acquisition or
      disposition of assets (other than in the ordinary course of business) or any
      merger, consolidation, tender offer or other similar transaction) available
      to
      the Company which the Board determines not to be in the Company’s best interest
      to disclose, or (iii) the Company is required to file a post-effective amendment
      to the Registration Statement to incorporate the Company’s quarterly and annual
      reports and audited financial statements on Forms 10-QSB and 10-KSB, then the
      Company may (y) postpone or suspend filing of a registration statement for
      a
      period not to exceed thirty (30) consecutive days or (z) postpone or suspend
      effectiveness of a registration statement for a period not to exceed thirty
      (30)
      consecutive days; provided, that the Company may not postpone or suspend
      effectiveness of a registration statement under this Section 3(n) for more
      than
      sixty (60) days in the aggregate during any three hundred sixty (360) day
      period; provided, however, that no such postponement or suspension shall be
      permitted for consecutive thirty (30) day periods arising out of the same set
      of
      facts, circumstances or transactions.

     

    
      
        
        

      

      
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    4. Registration
      Expenses.

     

    All
      fees
      and expenses incident to the performance of or compliance with this Agreement
      by
      the Company, except as and to the extent specified in this Section 4, shall
      be
      borne by the Company whether or not the Registration Statement is filed or
      becomes effective and whether or not any Registrable Securities are sold
      pursuant to the Registration Statement. The fees and expenses referred to in
      the
      foregoing sentence shall include, without limitation, (i) all registration
      and
      filing fees (including, without limitation, fees and expenses (A) with respect
      to filings required to be made with the OTC Bulletin Board and each other
      securities exchange or market on which Registrable Securities are required
      hereunder to be listed, if any (B) with respect to filing fees required to
      be
      paid to the National Association of Securities Dealers, Inc. and the NASD
      Regulation, Inc. and (C) in compliance with state securities or Blue Sky laws
      (including, without limitation, fees and disbursements of counsel for the
      Holders in connection with Blue Sky qualifications of the Registrable Securities
      and determination of the eligibility of the Registrable Securities for
      investment under the laws of such jurisdictions as the Holders of a majority
      of
      Registrable Securities may designate)), (ii) printing expenses (including,
      without limitation, expenses of printing certificates for Registrable Securities
      and of printing prospectuses if the printing of prospectuses is requested by
      the
      holders of a majority of the Registrable Securities included in the Registration
      Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and
      disbursements of counsel for the Company and Special Counsel for the Holders,
      in
      the case of the Special Counsel, up to a maximum amount of $12,500, (v)
      Securities Act liability insurance, if the Company, at its option, elects to
      obtain such insurance, and (vi) fees and expenses of all other Persons retained
      by the Company in connection with the consummation of the transactions
      contemplated by this Agreement, including, without limitation, the Company’s
      independent public accountants (including the expenses of any comfort letters
      or
      costs associated with the delivery by independent public accountants of a
      comfort letter or comfort letters). In addition, the Company shall be
      responsible for all of its internal expenses incurred in connection with the
      consummation of the transactions contemplated by this Agreement (including,
      without limitation, all salaries and expenses of its officers and employees
      performing legal or accounting duties), the expense of any annual audit, the
      fees and expenses incurred in connection with the listing of the Registrable
      Securities on any securities exchange as required hereunder. The Company shall
      not be responsible for any discounts, commissions, transfer taxes or other
      similar fees incurred by the Holders in connection with the sale of the
      Registrable Securities.

     

    5. Indemnification.

     

    (a) Indemnification
      by the Company.
      The
      Company shall, notwithstanding any termination of this Agreement, indemnify
      and
      hold harmless each Holder, the officers, directors, managers, partners, members,
      shareholders, agents, brokers, investment advisors and employees of each of
      them, each Person who controls any such Holder (within the meaning of Section
      15
      of the Securities Act or Section 20 of the Exchange Act) and the officers,
      directors, agents and employees of each such controlling Person, to the fullest
      extent permitted by applicable law, from and against any and all losses, claims,
      damages, liabilities, costs (including, without limitation, costs of preparation
      and reasonable attorneys’ fees) and expenses (collectively, “Losses”)
      , as
      incurred, arising out of or relating to any violation of securities laws by
      the
      Company or untrue or alleged untrue statement of a material fact contained
      in
      the Registration Statement, any Prospectus or any form of prospectus or in
      any
      amendment or supplement thereto or in any preliminary prospectus, or arising
      out
      of or relating to any omission or alleged omission of a material fact required
      to be stated therein or necessary to make the statements therein (in the case
      of
      any Prospectus or form of prospectus or supplement thereto, in the light of
      the
      circumstances under which they were made) not misleading, except to the extent,
      but only to the extent, that such untrue statements or omissions are based
      solely upon information regarding such Holder or such other Indemnified Party
      furnished in writing to the Company by such Holder expressly for use therein.
      The Company shall notify the Holders promptly of the institution, threat or
      assertion of any Proceeding of which the Company is aware in connection with
      the
      transactions contemplated by this Agreement.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

       

    

    (b) Indemnification
      by Holders.
      Each
      Holder shall, severally and not jointly, indemnify and hold harmless the
      Company, its directors, officers, agents and employees, each Person who controls
      the Company (within the meaning of Section 15 of the Securities Act and Section
      20 of the Exchange Act), and the directors, officers, agents and employees
      of
      such controlling Persons, to the fullest extent permitted by applicable law,
      from and against all Losses (as determined by a court of competent jurisdiction
      in a final judgment not subject to appeal or review), as incurred, arising
      solely out of or based solely upon any untrue statement of a material fact
      contained in the Registration Statement, any Prospectus, or any form of
      prospectus, or in any amendment or supplement thereto, or arising solely out
      of
      or based solely upon any omission of a material fact required to be stated
      therein or necessary to make the statements therein (in the case of any
      Prospectus or form of prospectus or supplement thereto, in the light of the
      circumstances under which they were made) not misleading, to the extent, but
      only to the extent, that such untrue statement or omission is contained in
      any
      information so furnished in writing by such Holder to the Company specifically
      for inclusion in the Registration Statement or such Prospectus. Notwithstanding
      anything to the contrary contained herein, in no event shall any indemnity
      under
      this Section 5(b) exceed the net proceeds actually received by such Holder
      as a
      result of the sale of Registrable Securities pursuant to a Registration
      Statement.

     

    (c) Conduct
      of Indemnification Proceedings.
      If any
      Proceeding shall be brought or asserted against any Person entitled to indemnity
      hereunder (an “Indemnified
      Party”),
      such
      Indemnified Party promptly shall notify the Person from whom indemnity is sought
      (the “Indemnifying
      Party”)
      in
      writing, and the Indemnifying Party shall be entitled to assume the defense
      thereof, including the employment of counsel reasonably satisfactory to the
      Indemnified Party and the payment of all fees and expenses incurred in
      connection with defense thereof; provided, that the failure of any Indemnified
      Party to give such notice shall not relieve the Indemnifying Party of its
      obligations or liabilities pursuant to this Agreement, except (and only) to
      the
      extent that it shall be finally determined by a court of competent jurisdiction
      (which determination is not subject to appeal or further review) that such
      failure shall have proximately and materially adversely prejudiced the
      Indemnifying Party.

     

    An
      Indemnified Party shall have the right to employ separate counsel in any such
      Proceeding and to participate in the defense thereof, but the fees and expenses
      of such counsel shall be at the expense of such Indemnified Party unless: (1)
      the Indemnifying Party has agreed in writing to pay such fees and expenses;
      or
      (2) the Indemnifying Party shall have failed promptly to assume the defense
      of
      such Proceeding and to employ counsel reasonably satisfactory to such
      Indemnified Party in any such Proceeding; or (3) the named parties to any such
      Proceeding (including any impleaded parties) include both such Indemnified
      Party
      and the Indemnifying Party, and such parties shall have been advised by counsel
      that a conflict of interest is likely to exist if the same counsel were to
      represent such Indemnified Party and the Indemnifying Party (in which case,
      if
      such Indemnified Party notifies the Indemnifying Party in writing that it elects
      to employ separate counsel at the expense of the Indemnifying Party, the
      Indemnifying Party shall not have the right to assume the defense thereof and
      such counsel shall be at the expense of the Indemnifying Party). The
      Indemnifying Party shall not be liable for any settlement of any such Proceeding
      effected without its written consent, which consent shall not be unreasonably
      withheld or delayed. No Indemnifying Party shall, without the prior written
      consent of the Indemnified Party, effect any settlement of any pending or
      threatened Proceeding in respect of which any Indemnified Party is a party
      and
      indemnity has been sought hereunder, unless such settlement includes an
      unconditional release of such Indemnified Party from all liability on claims
      that are the subject matter of such Proceeding.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

       

    

    All
      fees
      and expenses of the Indemnified Party (including reasonable fees and expenses
      to
      the extent incurred in connection with investigating or preparing to defend
      such
      Proceeding in a manner not inconsistent with this Section) shall be paid to
      the
      Indemnified Party, as incurred, within ten (10) Business Days of written notice
      thereof to the Indemnifying Party (regardless of whether it is ultimately
      determined that an Indemnified Party is not entitled to indemnification
      hereunder; provided, that the Indemnified Party shall reimburse all such fees
      and expenses to the extent it is finally judicially determined that such
      Indemnified Party is not entitled to indemnification hereunder).

     

    (d) Contribution.
      If a
      claim for indemnification under Section 5(a) or 5(b) is due but unavailable
      to
      an Indemnified Party because of a failure or refusal of a governmental authority
      to enforce Section 5(a) or 5(b) in accordance with its terms (by reason of
      public policy or otherwise), then each Indemnifying Party, in lieu of
      indemnifying such Indemnified Party, shall contribute to the amount paid or
      payable by such Indemnified Party as a result of such Losses, in such proportion
      as is appropriate to reflect the relative benefits received by the Indemnifying
      Party on the one hand and the Indemnified Party on the other from the offering
      of the Common Stock and the Warrants. If, but only if, the allocation provided
      by the foregoing sentence is not permitted by applicable law, the allocation
      of
      contribution shall be made in such proportion as is appropriate to reflect
      not
      only the relative benefits referred to in the foregoing sentence but also the
      relative fault, as applicable, of the Indemnifying Party and Indemnified Party
      in connection with the actions, statements or omissions that resulted in such
      Losses as well as any other relevant equitable considerations. The relative
      fault of such Indemnifying Party and Indemnified Party shall be determined
      by
      reference to, among other things, whether any action in question, including
      any
      untrue or alleged untrue statement of a material fact or omission or alleged
      omission of a material fact, has been taken or made by, or relates to
      information supplied by, such Indemnifying Party or Indemnified Party, and
      the
      parties’ relative intent, knowledge, access to information and opportunity to
      correct or prevent such action, statement or omission. The amount paid or
      payable by a party as a result of any Losses shall be deemed to include, subject
      to the limitations set forth in Section 5(c), any reasonable attorneys’ or other
      reasonable fees or expenses incurred by such party in connection with any
      Proceeding to the extent such party would have been indemnified for such fees
      or
      expenses if the indemnification provided for in this Section was available
      to
      such party in accordance with its terms. In no event shall any selling Holder
      be
      required to contribute an amount under this Section 5(d) in excess of the net
      proceeds actually received by such Holder upon sale of such Holder’s Registrable
      Securities pursuant to the Registration Statement giving rise to such
      contribution obligation.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

       

    

    The
      parties hereto agree that it would not be just and equitable if contribution
      pursuant to this Section 5(d) were determined by pro rata allocation or by
      any
      other method of allocation that does not take into account the equitable
      considerations referred to in the immediately preceding paragraph. No Person
      guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
      of
      the Securities Act) shall be entitled to contribution from any Person who was
      not guilty of such fraudulent misrepresentation.

     

    (e) Non-exclusive
      Remedy.
      The
      indemnity and contribution agreements contained in this Section are in addition
      to any liability that the Indemnifying Parties may have to the Indemnified
      Parties pursuant to the law.

     

    (f) Underwritten
      Offering; Conflict.
      Notwithstanding the foregoing, to the extent that the provisions on
      indemnification and contribution contained in the underwriting agreement entered
      into in connection with an underwritten public offering are in conflict with
      the
      foregoing provisions, the provisions of the underwriting agreement shall
      control.

     

    (g) Survival
      of Obligations.
      The
      obligations of the Company and the Holders under this Section 5 shall survive
      the completion of any offering of Registrable Securities in a registration
      statement under Section 2 of this Agreement or otherwise.

     

    6. Rule
      144.

     

    As
      long
      as any Holder owns Common Stock, Warrants or Registrable Securities, the Company
      covenants to timely file (or obtain extensions in respect thereof and file
      within the applicable grace period) all reports required to be filed by the
      Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange
      Act. As long as any Holder owns Common Stock, Warrants or Registrable
      Securities, if the Company is not required to file reports pursuant to Section
      13(a) or 15(d) of the Exchange Act, it will prepare and furnish to the Holders
      and make publicly available in accordance with Rule 144(c) promulgated under
      the
      Securities Act annual and quarterly financial statements, together with a
      discussion and analysis of such financial statements in form and substance
      substantially similar to those that would otherwise be required to be included
      in reports required by Section 13(a) or 15(d) of the Exchange Act, as well
      as
      any other information required thereby, in the time period that such filings
      would have been required to have been made under the Exchange Act. The Company
      further covenants that it will take such further action as any Holder may
      reasonably request, all to the extent required from time to time to enable
      such
      Person to sell Conversion Shares and Warrant Shares without registration under
      the Securities Act within the limitation of the exemptions provided by Rule
      144
      promulgated under the Securities Act, including providing any legal opinions
      relating to such sale pursuant to Rule 144. Upon the request of any Holder,
      the
      Company shall deliver to such Holder a written certification of a duly
      authorized officer as to whether it has complied with such
      requirements.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

       

    

    7. Miscellaneous.

     

    (a) Remedies.
      In the
      event of a breach by the Company or by a Holder, of any of their obligations
      under this Agreement, such Holder or the Company, as the case may be, in
      addition to being entitled to exercise all rights granted by law and under
      this
      Agreement, including recovery of damages, will be entitled to specific
      performance of its rights under this Agreement. The Company and each Holder
      agree that monetary damages would not provide adequate compensation for any
      losses incurred by reason of a breach by it of any of the provisions of this
      Agreement and hereby further agrees that, in the event of any action for
      specific performance in respect of such breach, it shall waive the defense
      that
      a remedy at law would be adequate.

     

    (b) No
      Inconsistent Agreements.
      Neither
      the Company nor any of its subsidiaries has, as of the date hereof entered
      into
      and currently in effect, nor shall the Company or any of its subsidiaries,
      on or
      after the date of this Agreement, enter into any agreement with respect to
      its
      securities that is inconsistent with the rights granted to the Holders in this
      Agreement or otherwise conflicts with the provisions hereof. Neither the Company
      nor any of its subsidiaries has previously entered into any agreement currently
      in effect granting any registration rights with respect to any of its securities
      to any Person. Without limiting the generality of the foregoing, without the
      written consent of the Holders of a majority of the then outstanding Registrable
      Securities, the Company shall not grant to any Person the right to request
      the
      Company to register any securities of the Company under the Securities Act
      unless the rights so granted are subject in all respects to the prior rights
      in
      full of the Holders set forth herein, and are not otherwise in conflict with
      the
      provisions of this Agreement.

     

    (c) No
      Piggyback on Registrations.
      Neither
      the Company nor any of its security holders (other than the Holders in such
      capacity pursuant hereto may include securities of the Company in the
      Registration Statement, and the Company shall not after the date hereof enter
      into any agreement providing such right to any of its securityholders, unless
      the right so granted is subject in all respects to the prior rights in full
      of
      the Holders set forth herein, and is not otherwise in conflict with the
      provisions of this Agreement.

     

    (d) Piggy
      Back Registrations.
      For a
      period of thirty-six (36) months following the Closing Date, if there is not
      an
      effective Registration Statement covering (i) Conversion Shares or (ii) Warrant
      Shares, and the Company shall determine to prepare and file with the Commission
      a registration statement relating to an offering for its own account or the
      account of others under the Securities Act of any of its equity securities,
      other than on Form S-4 or Form S-8 (each as promulgated under the Securities
      Act) or their then equivalents relating to equity securities to be issued solely
      in connection with any acquisition of any entity or business or equity
      securities issuable in connection with stock option or other employee benefit
      plans, the Company shall send to each Holder of Registrable Securities written
      notice of such determination and, if within thirty (30) days after receipt
      of
      such notice, or within such shorter period of time as may be specified by the
      Company in such written notice as may be necessary for the Company to comply
      with its obligations with respect to the timing of the filing of such
      registration statement, any such Holder shall so request in writing, (which
      request shall specify the Registrable Securities intended to be disposed of
      by
      the Purchasers), the Company will cause the registration under the Securities
      Act of all Registrable Securities which the Company has been so requested to
      register by the Holder, to the extent requisite to permit the disposition of
      the
      Registrable Securities so to be registered, provided that if at any time after
      giving written notice of its intention to register any securities and prior
      to
      the effective date of the registration statement filed in connection with such
      registration, the Company shall determine for any reason not to register or
      to
      delay registration of such securities, the Company may, at its election, give
      written notice of such determination to such Holder and, thereupon, (i) in
      the
      case of a determination not to register, shall be relieved of its obligation
      to
      register any Registrable Securities in connection with such registration (but
      not from its obligation to pay expenses in accordance with Section 4 hereof),
      and (ii) in the case of a determination to delay registering, shall be permitted
      to delay registering any Registrable Securities being registered pursuant to
      this Section 7(d) for the same period as the delay in registering such other
      securities. The Company shall include in such registration statement all or
      any
      part of such Registrable Securities such holder requests to be registered;
      provided,
      however,
      that
      the Company shall not be required to register any Registrable Securities
      pursuant to this Section 7(d) that are eligible for sale pursuant to Rule 144(k)
      of the Securities Act. In the case of an underwritten public offering, if the
      managing underwriter(s) or underwriter(s) should reasonably object to the
      inclusion of the Registrable Securities in such registration statement, then
      if
      the Company after consultation with the managing underwriter should reasonably
      determine that the inclusion of such Registrable Securities would materially
      adversely affect the offering contemplated in such registration statement,
      and
      based on such determination recommends inclusion in such registration statement
      of fewer or none of the Registrable Securities of the Holders, then (x) the
      number of Registrable Securities of the Holders included in such registration
      statement shall be reduced pro rata among such Holders (based upon the number
      of
      Registrable Securities requested to be included in the registration), if the
      Company after consultation with the underwriter(s) recommends the inclusion
      of
      fewer Registrable Securities, or (y) none of the Registrable Securities of
      the
      Holders shall be included in such registration statement, if the Company after
      consultation with the underwriter(s) recommends the inclusion of none of such
      Registrable Securities; provided, however, that if securities are being offered
      for the account of other persons or entities as well as the Company, such
      reduction shall not represent a greater fraction of the number of Registrable
      securities intended to be offered by the Holders than the fraction of similar
      reductions imposed on such other persons or entities (other than the
      Company).

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

       

    

    (e) Failure
      to File Registration Statement and Other Events.
      The
      Company and the Purchasers agree that the Holders will suffer damages if any
      Registration Statement is not filed on or prior to the applicable Filing Date
      and not declared effective by the Commission on or prior to the applicable
      Effectiveness Date and maintained in the manner contemplated herein during
      the
      Effectiveness Period or if certain other events occur. The Company and the
      Holders further agree that it would not be feasible to ascertain the extent
      of
      such damages with precision. Accordingly, if (A) the Registration Statement
      is
      not filed on or prior to the Filing Date, or (B) the Registration Statement
      is
      not declared effective by the Commission on or prior to the Effectiveness Date,
      or (C) the Company fails to file with the Commission a request for acceleration
      in accordance with Rule 461 promulgated under the Securities Act within three
      (3) Business Days of the date that the Company is notified (orally or in
      writing, whichever is earlier) by the Commission that a Registration Statement
      will not be “reviewed,” or not subject to further review, or (D) the
      Registration Statement is filed with and declared effective by the Commission
      but thereafter ceases to be effective as to all Registrable Securities at any
      time prior to the expiration of the Effectiveness Period, without being
      succeeded immediately by a subsequent Registration Statement filed with and
      declared effective by the Commission, or (E) the Company has breached Section
      3(n) hereof, or (F) trading in the Common Stock shall be suspended or if the
      Common Stock is no longer quoted on or delisted from the OTC Bulletin Board
      (or
      other principal exchange on which the Common Stock is traded) for any reason
      for
      more than three (3) Business Days in the aggregate (any such failure or breach
      being referred to as an “Event,”
and
      for purposes of clauses (A) and (B) the date on which such Event occurs, or
      for
      purposes of clause (C) the date on which such three (3) Business Day period
      is
      exceeded, or for purposes of clause (D) after more than fifteen (15) Business
      Days, or for purposes of clause (F) the date on which such three (3) Business
      Day period is exceeded, being referred to as “Event
      Date”),
      the
      Company shall pay an amount in cash as liquidated damages to each Holder equal
      to two percent (2%) of the amount of the Holder’s initial investment in the
      Common Stock and Warrants pursuant to the Purchase Agreement for each thirty
      (30)-day period or portion thereof thereafter from the Event Date until the
      applicable Event is cured; provided,
      however,
      that in
      no event shall the amount of liquidated damages payable at any time and from
      time to time to any Holder pursuant to this Section 7(e) exceed an aggregate
      of
      twenty percent (20%) of the amount of the Holder’s initial investment in the
      Common Stock. Notwithstanding anything to the contrary in this paragraph (e),
      if
      (a) any of the Events described in clauses (A), (B), (C), (D) or (F) shall
      have
      occurred, (b) on or prior to the applicable Event Date, the Company shall have
      exercised its rights under Section 3(n) hereof and (c) the postponement or
      suspension permitted pursuant to such Section 3(n) shall remain effective as
      of
      such applicable Event Date, then the applicable Event Date shall be deemed
      instead to occur on the second Business Day following the termination of such
      postponement or suspension. Liquidated damages payable by the Company pursuant
      to this Section 7(d) shall be payable on the first (1st) Business Day of each
      thirty (30)-day period following the Event Date in cash.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

       

    

    Notwithstanding
      anything to the contrary contained herein, in no event shall any liquidated
      damages be payable with respect to the delay caused solely due to a Rule 415
      comment by the Commission.

     

    (f) Amendments
      and Waivers.
      The
      provisions of this Agreement, including the provisions of this sentence, may
      not
      be amended, modified or supplemented, and waivers or consents to departures
      from
      the provisions hereof may not be given, unless the same shall be in writing
      and
      signed by the Company and the Holders of at least a majority of the Registrable
      Securities outstanding.

     

    (g) Notices.
      Any
      notice, demand, request, waiver or other communication required or permitted
      to
      be given hereunder shall be in writing and shall be effective (a) upon hand
      delivery, telecopy or facsimile at the address or number designated below (if
      delivered on a business day during normal business hours where such notice
      is to
      be received), or the first business day following such delivery (if delivered
      other than on a business day during normal business hours where such notice
      is
      to be received) or (b) on the second business day following the date of mailing
      by express courier service, fully prepaid, addressed to such address, or upon
      actual receipt of such mailing, whichever shall first occur. The addresses
      for
      such communications shall be:

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    

     

    
      	
              If
                to the Company:

            	
              c/o
                Long-E International Group Co., Ltd.

              C-6F,
                Huhan Chuangxin Block, Keyuan Road, 

              Hi-Tech
                Industry Zone,

              Shenzhen,
                518000, Guangdong, China

              Telephone:
                (86) 755 3396 5188

              Attention:
                Chairman of the Board

            
	 	 
	
              with
                copies (which shall not constitute notice) to:

            	
              Kirkpatrick
                & Lockhart Nicholson Graham LLP

              10100
                Santa Monica Boulevard, Seventh Floor

              Los
                Angeles, California 90067

              Attention:
                Thomas Poletti, Esq.

            
	 	 
	
              If
                to any Purchaser:

            	
              At
                the address of such Purchaser set forth on Schedule I to this Agreement,
                with copies to Purchaser’s counsel as set forth on Schedule I or as
                specified in writing by such:

            
	 	 
	
              with
                copies (which shall not constitute notice) to:

            	
              Olshan
                Grundman Frome Rosenzweig

              &
                Wolosky LLP

              Park
                Avenue Tower,

              65
                East 55th
                Street

              New
                York, New York 10022

              Attention:
                Kenneth M. Silverman, Esq.

            

    

    

    Any
      party
      hereto may from time to time change its address for notices by giving at least
      ten (10) days written notice of such changed address to the other party
      hereto.

     

    (h) Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their successors and permitted assigns and shall inure to the benefit of each
      Holder and its successors and assigns. The Company may not assign this Agreement
      or any of its rights or obligations hereunder without the prior written consent
      of each Holder. Each Purchaser may assign its rights hereunder in the manner
      and
      to the Persons as permitted under the Purchase Agreement.

     

    (i) Assignment
      of Registration Rights.
      The
      rights of each Holder hereunder, including the right to have the Company
      register for resale Registrable Securities in accordance with the terms of
      this
      Agreement, shall be automatically assignable by each Holder to any Person of
      all
      or a portion of the Common Stock or the Registrable Securities if: (i) the
      Holder agrees in writing with the transferee or assignee to assign such rights,
      and a copy of such agreement is furnished to the Company within a reasonable
      time after such assignment, (ii) the Company is, within a reasonable time after
      such transfer or assignment, furnished with written notice of (a) the name
      and
      address of such transferee or assignee, and (b) the securities with respect
      to
      which such registration rights are being transferred or assigned, (iii)
      following such transfer or assignment the further disposition of such securities
      by the transferee or assignees is restricted under the Securities Act and
      applicable state securities laws, (iv) at or before the time the Company
      receives the written notice contemplated by clause (ii) of this Section, the
      transferee or assignee agrees in writing with the Company to be bound by all
      of
      the provisions of this Agreement, and (v) such transfer shall have been made
      in
      accordance with the applicable requirements of the Purchase Agreement. The
      rights to assignment shall apply to the Holders (and to subsequent) successors
      and assigns.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

       

    

    (j) Counterparts.
      This
      Agreement may be executed in any number of counterparts, each of which when so
      executed shall be deemed to be an original and, all of which taken together
      shall constitute one and the same Agreement and shall become effective when
      counterparts have been signed by each party and delivered to the other parties
      hereto, it being understood that all parties need not sign the same counterpart.
      In the event that any signature is delivered by facsimile transmission, such
      signature shall create a valid binding obligation of the party executing (or
      on
      whose behalf such signature is executed) the same with the same force and effect
      as if such facsimile signature were the original thereof.

     

    (k) Governing
      Law; Jurisdiction.
      This
      Agreement shall be governed by and construed in accordance with the internal
      laws of the State of New York, without giving effect to any of the conflicts
      of
      law principles that would result in the general application of the substantive
      law of another jurisdiction. This Agreement shall not be interpreted or
      construed with any presumption against the party causing this Agreement to
      be
      drafted. The Company and the Holders agree that venue for any dispute arising
      under this Agreement will lie exclusively in the state or federal courts located
      in New York County, New York, and the parties irrevocably waive any right to
      raise forum
      non conveniens
      or any
      other argument that New York is not the proper venue. The Company and the
      Holders irrevocably consent to personal jurisdiction in the state and federal
      courts of the state of New York. The Company and the Holders consent to process
      being served in any such suit, action or proceeding by delivering a copy thereof
      to such party at the address in effect for notices to it under this Agreement
      and agrees that such service shall constitute good and sufficient service of
      process and notice thereof. Nothing in this Section 7(k) shall affect or limit
      any right to serve process in any other manner permitted by law. The Company
      and
      the Holders hereby agree that the prevailing party in any suit, action or
      proceeding arising out of or relating to this Agreement or the Purchase
      Agreement, shall be entitled to reimbursement for reasonable legal fees from
      the
      non-prevailing party. The parties hereby waive all rights to a trial by
      jury.

     

    (l) Cumulative
      Remedies.
      The
      remedies provided herein are cumulative and not exclusive of any remedies
      provided by law.

     

    (m) Severability.
      If any
      term, provision, covenant or restriction of this Agreement is held to be
      invalid, illegal, void or unenforceable in any respect, the remainder of the
      terms, provisions, covenants and restrictions set forth herein shall remain
      in
      full force and effect and shall in no way be affected, impaired or invalidated,
      and the parties hereto shall use their reasonable efforts to find and employ
      an
      alternative means to achieve the same or substantially the same result as that
      contemplated by such term, provision, covenant or restriction. It is hereby
      stipulated and declared to be the intention of the parties that they would
      have
      executed the remaining terms, provisions, covenants and restrictions without
      including any of such that may be hereafter declared invalid, illegal, void
      or
      unenforceable.

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

       

    

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

     

    (o) Shares
      Held by the Company and its Affiliates.
      Whenever the consent or approval of Holders of a specified percentage of
      Registrable Securities is required hereunder, Registrable Securities held by
      the
      Company or its Affiliates (other than any Holder or transferees or successors
      or
      assigns thereof if such Holder is deemed to be an Affiliate solely by reason
      of
      its holdings of such Registrable Securities) shall not be counted in determining
      whether such consent or approval was given by the Holders of such required
      percentage.

     

    (p) Independent
      Nature of Purchasers.
      The
      Company acknowledges that the obligations of each Purchaser under the
      Transaction Documents are several and not joint with the obligations of any
      other Purchaser, and no Purchaser shall be responsible in any way for the
      performance of the obligations of any other Purchaser under the Transaction
      Documents. The Company acknowledges that the decision of each Purchaser to
      purchase Securities pursuant to the Purchase Agreement has been made by such
      Purchaser independently of any other Purchaser and independently of any
      information, materials, statements or opinions as to the business, affairs,
      operations, assets, properties, liabilities, results of operations, condition
      (financial or otherwise) or prospects of the Company or of its Subsidiaries
      which may have been made or given by any other Purchaser or by any agent or
      employee of any other Purchaser, and no Purchaser or any of its agents or
      employees shall have any liability to any Purchaser (or any other person)
      relating to or arising from any such information, materials, statements or
      opinions. The Company acknowledges that nothing contained herein, or in any
      Transaction Document, and no action taken by any Purchaser pursuant hereto
      or
      thereto (including, but not limited to, the (i) inclusion of a Purchaser in
      the
      Registration Statement and (ii) review by, and consent to, such Registration
      Statement by a Purchaser) shall be deemed to constitute the Purchasers as a
      partnership, an association, a joint venture or any other kind of entity, or
      create a presumption that the Purchasers are in any way acting in concert or
      as
      a group with respect to such obligations or the transactions contemplated by
      the
      Transaction Documents. The Company acknowledges that each Purchaser shall be
      entitled to independently protect and enforce its rights, including without
      limitation, the rights arising out of this Agreement or out of the other
      Transaction Documents, and it shall not be necessary for any other Purchaser
      to
      be joined as an additional party in any proceeding for such purpose. The Company
      acknowledges that for reasons of administrative convenience only, the
      Transaction Documents have been prepared by counsel for one of the Purchasers
      and such counsel does not represent all of the Purchasers. The Company
      acknowledges that it has elected to provide all Purchasers with the same terms
      and Transaction Documents for the convenience of the Company and not because
      it
      was required or requested to do so by the Purchasers. The Company acknowledges
      that such procedure with respect to the Transaction Documents in no way creates
      a presumption that the Purchasers are in any way acting in concert or as a
      group
      with respect to the Transaction Documents or the transactions contemplated
      hereby or thereby.

     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

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

    
      	 	 	 
	 	
              INNCARDIO,
                INC.

            
	 
 	 
 	 
 
	 	By:  	
              /s/
                Eric Thatcher

            
	 	
              

              Name:
                Eric
                Thatcher

            
	 	
              Title:
                President

            

    

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

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

    
      	 	 	 
	 	
              PURCHASER:
                THE
                NUTMEG GROUP, LLC

            
	 
 	 
 	 
 
	 	By:  	
              /s/
                Randall S. Goulding

            
	 	
              

              Name:
                Randall
                S. Goulding

            
	 	
              Title:
                Manager

            

    

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

    
       

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

      
        	 	 	 
	 	 	PURCHASER: MIDSOUTH
                INVESTOR FUND LP
	 
 	 
 	 
 
	 	By:  	
                /s/
                  Lyman
                  O. Heidtke, G.P.

              
	 	
                

                Name:
                  Lyman
                  O. Heidtke

              
	 	
                Title:
                  General
                  Partner

              

      

       

      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

      

    

    
       

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

      
        	 	 	 
	 	 	PURCHASER: KAGEL
                FAMILY TRUST
	 
 	 
 	 
 
	 	By:  	
                /s/
                  David
                  L. Kagel

              
	 	
                

                Name:
                  David
                  L. Kagel

              
	 	
                Title:
                  Trustee

              

      

       

      
        
          
          

        

        
          22

          
            

          

        

        
          
          

        

      

    

    
      
         

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

        
          	 	 	 
	 	 	PURCHASER: WESTPARK
                  CAPITAL FINANCIAL SERVICES, LLC
	 
 	 
 	 
 
	 	By:  	
                  /s/
                    R
                    Rappaport

                
	 	
                  

                  Name:
                    Richard
                    Rappaport

                
	 	
                  Title:
                    CEO

                

        

         

        
          
            
            

          

          
            23

            
              

            

          

          
            
            

          

        

      

    

    
      
         

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

        
          	 	 	 
	 	 	PURCHASER: PROFESSIONAL
                  OFFSHORE OPPORTUNITY FUND, LTD.
	 
 	 
 	 
 
	 	By:  	
                  /s/
                    Marc
                    K. Swickie

                
	 	
                  

                  Name:
                    Marc
                    K. Swickie

                
	 	
                  Title:
                    Manager

                

        

         

        
          
            
            

          

          
            24

            
              

            

          

          
            
            

          

        

      

    

    
      
         

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

        
          	 	 	 
	 	 	PURCHASER: VISION
                  OPPORTUNITY MASTER FUND, LTD.
	 
 	 
 	 
 
	 	By:  	
                  /s/
                    Adam
                    Benowitz

                
	 	
                  

                  Name:
                    Adam
                    Benowitz

                
	 	
                  Title:
                    Portfolio Manager

                

        

         

      

    

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

     

    Schedule
      I

     

    Purchasers

    

      
        	
                Purchaser

              	 	
                Number
                  of Shares

              	 
	 	 	 	 
	
                Professional
                  Offshore Opportunity Fund

              	 	 	 
	
                1400
                  Old Country Road, Suite 206

              	 	 	
                375,000

              	 
	
                Westbury,
                  NY 11590

              	 	 	 	 
	
                516-228-0070

              	 	 	 	 
	 	 	 	 	 
	
                The
                  Nutmeg Group LLC

              	 	 	 	 
	
                3346
                  Commercial Ave

              	 	 	
                375,000

              	 
	
                Northbrook,
                  IL 60062

              	 	 	 	 
	
                847-291-7711

              	 	 	 	 
	 	 	 	 	 
	
                Kagel
                  Family Trust

              	 	 	 	 
	
                1801
                  Century Park East, Suite 2500

              	 	 	
                125,000

              	 
	
                Los
                  Angeles, CA 90067

              	 	 	 	 
	
                310-553-9009

              	 	 	 	 
	 	 	 	 	 
	
                WestPark
                  Capital Financial Services, LLC

              	 	 	 	 
	
                1900
                  Avenue of the Stars, Suite 310

              	 	 	
                625,000

              	 
	
                Los
                  Angeles, CA 90067

              	 	 	 	 
	
                310
                  843-9304

              	 	 	 	 
	 	 	 	 	 
	
                Vision
                  Opportunity Master Fund, Ltd.

              	 	 	 	 
	
                20
                  W. 55th St ., 5th Floor

              	 	 	
                2,250,000

              	 
	
                New
                  York, NY 10019

              	 	 	 	 
	
                27-0120759

              	 	 	 	 
	 	 	 	 	 
	
                MidSouth
                  Investor Fund LP

              	 	 	 	 
	
                201
                  4th
                  Ave. North

              	 	 	
                1,785,714

              	 
	
                Suite
                  1950

              	 	 	 	 
	
                Nashville,
                  TN 37219

              	 	 	 	 

      

    

     

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

    Schedule
      II

     

    Holders
      of Limited Registration Rights

    

      
        	
                Eric
                  Thatcher:   

              	
                10,000
                  shares

              
	
                Biar
                  Capital Limited:  

              	
                30,000
                  shares

              
	
                Capital
                  Resource Alliance LLC: 

              	
                750
                  shares

              
	
                Lionel
                  Drage:     

              	
                100
                  shares

              
	
                Global
                  Funding Group, Inc.:  

              	
                1,009
                  shares

              

      

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

    Exhibit
      A

     

    Plan
      of Distribution

     

    The
      selling security holders and any of their pledgees, donees, assignees and
      successors-in-interest may, from time to time, sell any or all of their shares
      of common stock being offered under this prospectus on any stock exchange,
      market or trading facility on which shares of our common stock are traded or
      in
      private transactions. These sales may be at fixed or negotiated prices. The
      selling security holders may use any one or more of the following methods when
      disposing of shares:

     

    
      	 	
              ·

            	
              ordinary
                brokerage transactions and transactions in which the broker-dealer
                solicits purchasers;

            

    

     

    
      	 	
              ·

            	
              block
                trades in which the broker-dealer will attempt to sell the shares
                as agent
                but may position and resell a portion of the block as principal to
                facilitate the transaction;

            

    

     

    
      	 	
              ·

            	
              purchases
                by a broker-dealer as principal and resales by the broker-dealer
                for its
                account;

            

    

     

    
      	 	
              ·

            	
              an
                exchange distribution in accordance with the rules of the applicable
                exchange;

            

    

     

    
      	 	
              ·

            	
              privately
                negotiated transactions;

            

    

     

    
      	 	
              ·

            	
              to
                cover short sales made after the date that the registration statement
                of
                which this prospectus is a part is declared effective by the
                Commission;

            

    

     

    
      	 	
              ·

            	
              broker-dealers
                may agree with the selling security holders to sell a specified number
                of
                such shares at a stipulated price per
                share;

            

    

     

    
      	 	
              ·

            	
              a
                combination of any of these methods of sale;
                and

            

    

     

    
      	 	
              ·

            	
              any
                other method permitted pursuant to applicable
                law.

            

    

     

    The
      shares may also be sold under Rule 144 under the Securities Act of 1933, as
      amended (“Securities Act”), if available, rather than under this prospectus. The
      selling security holders have the sole and absolute discretion not to accept
      any
      purchase offer or make any sale of shares if they deem the purchase price to
      be
      unsatisfactory at any particular time.

     

    The
      selling security holders may pledge their shares to their brokers under the
      margin provisions of customer agreements. If a selling security holder defaults
      on a margin loan, the broker may, from time to time, offer and sell the pledged
      shares.

     

    Broker-dealers
      engaged by the selling security holders may arrange for other broker-dealers
      to
      participate in sales. Broker-dealers may receive commissions or discounts from
      the selling security holders (or, if any broker-dealer acts as agent for the
      purchaser of shares, from the purchaser) in amounts to be negotiated, which
      commissions as to a particular broker or dealer may be in excess of customary
      commissions to the extent permitted by applicable law.

     

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

       

    

    If
      sales
      of shares offered under this prospectus are made to broker-dealers as
      principals, we would be required to file a post-effective amendment to the
      registration statement of which this prospectus is a part. In the post-effective
      amendment, we would be required to disclose the names of any participating
      broker-dealers and the compensation arrangements relating to such
      sales.

     

    The
      selling security holders and any broker-dealers or agents that are involved
      in
      selling the shares offered under this prospectus may be deemed to be
“underwriters” within the meaning of the Securities Act in connection with these
      sales. Commissions received by these broker-dealers or agents and any profit
      on
      the resale of the shares purchased by them may be deemed to be underwriting
      commissions or discounts under the Securities Act. Any broker-dealers or agents
      that are deemed to be underwriters may not sell shares offered under this
      prospectus unless and until we set forth the names of the underwriters and
      the
      material details of their underwriting arrangements in a supplement to this
      prospectus or, if required, in a replacement prospectus included in a
      post-effective amendment to the registration statement of which this prospectus
      is a part.

     

    The
      selling security holders and any other persons participating in the sale or
      distribution of the shares offered under this prospectus will be subject to
      applicable provisions of the Exchange Act, and the rules and regulations under
      that act, including Regulation M. These provisions may restrict activities
      of,
      and limit the timing of purchases and sales of any of the shares by, the selling
      security holders or any other person. Furthermore, under Regulation M, persons
      engaged in a distribution of securities are prohibited from simultaneously
      engaging in market making and other activities with respect to those securities
      for a specified period of time prior to the commencement of such distributions,
      subject to specified exceptions or exemptions. All of these limitations may
      affect the marketability of the shares.

     

    If
      any of
      the shares of common stock offered for sale pursuant to this prospectus are
      transferred other than pursuant to a sale under this prospectus, then subsequent
      holders could not use this prospectus until a post-effective amendment or
      prospectus supplement is filed, naming such holders. We offer no assurance
      as to
      whether any of the selling security holders will sell all or any portion of
      the
      shares offered under this prospectus.

     

    We
      have
      agreed to pay all fees and expenses we incur incident to the registration of
      the
      shares being offered under this prospectus. However, each selling security
      holder and purchaser is responsible for paying any discounts, commissions and
      similar selling expenses they incur.

     

    We
      and
      the selling security holders have agreed to indemnify one another against
      certain losses, damages and liabilities arising in connection with this
      prospectus, including liabilities under the Securities Act.

     

    
      
        
        

      

      
        29Execution Copy
                         COMMON STOCK PURCHASE AGREEMENT

      COMMON STOCK PURCHASE AGREEMENT (the "Agreement"),  dated as of January 2,
2007  by  and  between  e.Digital  Corporation,   a  Delaware  corporation  (the
"Company"),  and Fusion  Capital  Fund II, LLC, an  Illinois  limited  liability
company (the "Buyer").  Capitalized  terms used herein and not otherwise defined
herein are defined in Section 10 hereof.

                                    WHEREAS:

      Subject  to the terms and  conditions  set  forth in this  Agreement,  the
Company  wishes  to sell to the  Buyer,  and the  Buyer  wishes  to buy from the
Company,  up to Eight Million Five Hundred Thousand Dollars  ($8,500,000.00)  of
the Company's common stock, par value $0.001 per share (the "Common Stock"). The
shares of Common Stock to be purchased hereunder are referred to herein
as the "Purchase Shares."

      NOW THEREFORE, the Company and the Buyer hereby agree as follows:

      1.    PURCHASE OF COMMON STOCK.

      Subject  to the terms and  conditions  set  forth in this  Agreement,  the
Company has the right to sell to the Buyer,  and the Buyer has the obligation to
purchase from the Company, Purchase Shares as follows:

      (a) Initial Purchases;  Commencement of Base and Block Purchases of Common
Stock.  Within one Business Day after the  execution of this  Agreement and also
again on the Filing Date (as defined in Section  4(a)  hereof),  the Buyer shall
buy from the  Company on each such date  2,083,333  Purchase  Shares  (each such
purchase an "Initial  Purchase" and such Purchase  Shares are referred to herein
as "Initial  Purchase  Shares")  for a total  purchase  price Two Hundred  Fifty
Thousand Dollars  ($250,000.00)  or $0.12 per share.  The two Initial  Purchases
hereunder shall be Five Hundred Thousand Dollars  ($500,000.00) in aggregate and
the Buyer shall receive  4,166,666  shares in the aggregate  relating to the two
Initial  Purchases.  The Initial Purchase Shares shall be issued in certificated
form and  (subject to Section 5 hereof)  shall bear the  restrictive  legend set
forth in Section  4(e)  hereof.  Thereafter,  the  purchase and sale of Purchase
Shares  hereunder  shall  occur  from time to time upon  written  notices by the
Company to the Buyer on the terms and  conditions as set forth herein  following
the satisfaction of the conditions (the "Commencement") as set forth in Sections
6 and 7 below (the date of satisfaction of such  conditions,  the  "Commencement
Date").

      (b) The  Company's  Right to Require  Purchases.  Any time on or after the
Commencement  Date,  the Company shall have the right but not the  obligation to
direct the Buyer by its delivery to the Buyer of Base Purchase Notices from time
to time to buy Purchase  Shares (each such  purchase a "Base  Purchase")  in any
amount up to Eighty Thousand Dollars  ($80,000.00) per Base Purchase Notice (the
"Base Purchase  Amount") at the Purchase Price on the Purchase Date. The Company
may deliver multiple Base Purchase Notices to the Buyer so long as at least Four
(4) Business Days have passed since the most recent Base Purchase was completed.
Notwithstanding  the forgoing,  any time on or after the Commencement  Date, the
Company shall also have the right but not the  obligation by its delivery to the
Buyer of Block  Purchase  Notices  from time to time to direct  the Buyer to buy
Purchase Shares (each such purchase a "Block  Purchase") in any amount up to One
Million Dollars  ($1,000,000.00) per Block Purchase Notice at the Block Purchase
Price on the Purchase Date as provided herein. For a Block Purchase Notice to be

<PAGE>

valid the following  conditions must be met: (1) the Block Purchase Amount shall
not exceed One Hundred Thousand Dollars ($100,000.00) per Block Purchase Notice,
(2) the Company must deliver the Purchase Shares before 11:00 a.m.  eastern time
on the  Purchase  Date and (3) the Sale  Price of the  Common  Stock must not be
below  $0.10   (subject  to  equitable   adjustment   for  any   reorganization,
recapitalization,  non-cash dividend,  stock split or other similar transaction)
during the Purchase Date, the date of the delivery of the Block Purchase  Notice
and during the Business Day prior to the delivery of the Block Purchase  Notice.
The Block  Purchase  Amount may be increased to up to Two Hundred Fifty Thousand
Dollars  ($250,000.00) per Block Purchase Notice if the Sale Price of the Common
Stock  is  not  below  $0.20   (subject   to   equitable   adjustment   for  any
reorganization,  recapitalization,  non-cash  dividend,  stock  split  or  other
similar  transaction)  during the Purchase Date, the date of the delivery of the
Block  Purchase  Notice and during the Business Day prior to the delivery of the
Block Purchase Notice.  The Block Purchase Amount may be increased to up to Five
Hundred  Thousand  Dollars  ($500,000.00)  per Block Purchase Notice if the Sale
Price of the Common Stock is not below $0.40  (subject to  equitable  adjustment
for any  reorganization,  recapitalization,  non-cash  dividend,  stock split or
other similar transaction) during the Purchase Date, the date of the delivery of
the Block  Purchase  Notice and during the Business Day prior to the delivery of
the Block Purchase  Notice.  The Block Purchase Amount may be increased to up to
One Million Dollars  ($1,000,000.00) per Block Purchase Notice if the Sale Price
of the Common Stock is not below $0.80 (subject to equitable  adjustment for any
reorganization,  recapitalization,  non-cash  dividend,  stock  split  or  other
similar  transaction)  during the Purchase Date, the date of the delivery of the
Block  Purchase  Notice and during the Business Day prior to the delivery of the
Block Purchase  Notice.  As used herein,  the term "Block  Purchase Price" shall
mean the lesser of (i) the lowest Sale Price of the Common Stock on the Purchase
Date or (ii) the lowest  Purchase  Price during the  previous ten (10)  Business
Days prior to the date that the valid Block Purchase  Notice was received by the
Buyer.  However,  if at any  time  during  the  Purchase  Date,  the date of the
delivery of the Block  Purchase  Notice or during the  Business Day prior to the
delivery of the Block  Purchase  Notice,  the Sale Price of the Common  Stock is
below the applicable Block Purchase  threshold price,  such Block Purchase shall
be void and the Buyer's  obligations  to buy Purchase  Shares in respect of that
Block Purchase Notice shall be terminated.  Thereafter,  the Company shall again
have the right to submit a Block Purchase Notice as set forth herein by delivery
of a new Block  Purchase  Notice  only if the Sale Price of the Common  Stock is
above the  applicable  Block  Purchase  threshold  price  during the date of the
delivery of the Block  Purchase  Notice and during the Business Day prior to the
delivery of the Block Purchase  Notice.  The Company may deliver  multiple Block
Purchase  Notices to the Buyer so long as at least three (3) Business  Days have
passed since the most recent Block Purchase was completed.

      (c) Payment  for  Purchase  Shares.  The Buyer shall pay to the Company an
amount equal to the Purchase Amount with respect to such Purchase Shares as full
payment for such  Purchase  Shares via wire  transfer of  immediately  available
funds on the same Business Day that the Buyer  receives such Purchase  Shares if
they are received by the Buyer before 11:00 a.m.  eastern time or if received by
the Buyer after 11:00 a.m.  eastern  time,  the next  Business  Day. The Company
shall not issue any  fraction of a share of Common Stock upon any  purchase.  If
the  issuance  would  result in the  issuance of a fraction of a share of Common
Stock,  the Company  shall round such  fraction of a share of Common Stock up or
down to the nearest whole share. All payments made under this Agreement shall be
made in  lawful  money of the  United  States of  America  or wire  transfer  of
immediately available funds to such account as the Company may from time to time
designate by written notice in accordance with the provisions of this Agreement.
Whenever any amount expressed to be due by the terms of this Agreement is due on
any day that is not a Business  Day,  the same shall  instead be due on the next
succeeding day that is a Business Day.

                                      -2-
<PAGE>

      (d) Purchase  Price Floor.  The Company and the Buyer shall not effect any
sales under this Agreement on any Purchase Date where the Purchase Price for any
purchases of Purchase  Shares would be less than the Floor Price.  "Floor Price"
means  $0.08,  which shall be  appropriately  adjusted  for any  reorganization,
recapitalization, non-cash dividend, stock split or other similar transaction.

      (e) Records of  Purchases.  The Buyer and the Company  shall each maintain
records  showing the remaining  Available  Amount at any give time and the dates
and  Purchase  Amounts  for each  purchase  or  shall  use  such  other  method,
reasonably satisfactory to the Buyer and the Company.

(f) Taxes.  The Company shall pay any and all  transfer,  stamp or similar taxes
that may be payable  with  respect to the issuance and delivery of any shares of
Common Stock to the Buyer made under this Agreement.

      2.    BUYER'S REPRESENTATIONS AND WARRANTIES.

      The Buyer  represents  and  warrants  to the  Company  that as of the date
hereof and as of the Commencement Date:

      (a)  Investment  Purpose.  The Buyer is entering  into this  Agreement and
acquiring  the  Commitment  Shares,  (as defined in Section 4(e)  hereof)  (this
Agreement,  the  Purchase  Shares and the  Commitment  Shares  are  collectively
referred to herein as the "Securities"), for its own account for investment only
and not with a view towards,  or for resale in connection  with, the public sale
or distribution thereof; provided however, by making the representations herein,
the Buyer does not agree to hold any of the  Securities for any minimum or other
specific term.

      (b) Accredited  Investor Status. The Buyer is an "accredited  investor" as
that term is defined in Rule 501(a)(3) of Regulation D.

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

      (d) Information.  The Buyer has been furnished with all materials relating
to the business,  finances and operations of the Company and materials  relating
to the offer and sale of the Securities that have been  reasonably  requested by
the Buyer,  including,  without  limitation,  the SEC  Documents  (as defined in
Section  3(f)  hereof).  The  Buyer  understands  that  its  investment  in  the
Securities  involves  a high  degree of risk.  The Buyer (i) is able to bear the
economic risk of an investment in the  Securities  including a total loss,  (ii)
has such knowledge and  experience in financial and business  matters that it is
capable of  evaluating  the merits and risks of the proposed  investment  in the
Securities  and (iii) has had an  opportunity  to ask  questions  of and receive
answers from the officers of the Company concerning the financial  condition and
business of the  Company  and others  matters  related to an  investment  in the
Securities.  Neither such  inquiries nor any other due diligence  investigations
conducted by the Buyer or its representatives  shall modify, amend or affect the
Buyer's right to rely on the Company's  representations and warranties contained
in Section 3 below. The Buyer has sought such  accounting,  legal and tax advice
as it has  considered  necessary to make an informed  investment  decision  with
respect to its acquisition of the Securities.

                                      -3-
<PAGE>

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

      (f) Transfer or Sale. The Buyer understands that except as provided in the
Registration  Rights  Agreement  (as defined in Section  4(a)  hereof):  (i) the
Securities have not been and are not being  registered under the 1933 Act or any
state  securities  laws,  and may not be offered  for sale,  sold,  assigned  or
transferred  unless (A) subsequently  registered  thereunder or (B) an exemption
exists  permitting such Securities to be sold,  assigned or transferred  without
such registration;  (ii) any sale of the Securities made in reliance on Rule 144
may be made only in accordance  with the terms of Rule 144 and further,  if Rule
144 is not applicable, any resale of the Securities under circumstances in which
the seller (or the person  through whom the sale is made) may be deemed to be an
underwriter  (as that term is  defined in the 1933 Act) may  require  compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder;  and (iii) neither the Company nor any other person is under any
obligation to register the Securities under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption thereunder.

      (g)  Validity;  Enforcement.  This  Agreement  has been  duly and  validly
authorized,  executed  and  delivered  on behalf of the Buyer and is a valid and
binding agreement of the Buyer enforceable  against the Buyer in accordance with
its terms,  subject as to enforceability to general  principles of equity and to
applicable bankruptcy, insolvency,  reorganization,  moratorium, liquidation and
other  similar laws  relating to, or affecting  generally,  the  enforcement  of
applicable creditors' rights and remedies.

      (h) Residency. The Buyer is a resident of the State of Illinois.

      (i) No Prior  Short  Selling.  The Buyer  represents  and  warrants to the
Company  that at no time  prior  to the  date of this  Agreement  has any of the
Buyer, its agents,  representatives or affiliates engaged in or effected, in any
manner whatsoever, directly or indirectly, any (i) "short sale" (as such term is
defined in Section  242.200 of Regulation SHO of the Securities  Exchange Act of
1934,  as  amended  (the  "1934  Act"))  of the  Common  Stock  or (ii)  hedging
transaction,  which  establishes a net short position with respect to the Common
Stock.

      3.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      The  Company  represents  and  warrants  to the Buyer  that as of the date
hereof and as of the Commencement Date:

      (a) Organization  and  Qualification.  The Company and its  "Subsidiaries"
(which for  purposes of this  Agreement  means any entity in which the  Company,
directly or indirectly, owns 50% or more of the voting stock or capital stock or
other similar  equity  interests)  are  corporations  duly organized and validly
existing in good standing under the laws of the  jurisdiction  in which they are
incorporated,  and have the requisite corporate power and authority to own their
properties  and to carry on their business as now being  conducted.  Each of the
Company and its  Subsidiaries  is duly qualified as a foreign  corporation to do
business and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business  conducted by it makes such qualification
necessary,  except to the extent  that the failure to be so  qualified  or be in
good  standing  could not  reasonably  be  expected  to have a Material  Adverse
Effect. As used in this Agreement,  "Material Adverse Effect" means any material
adverse  effect on any of: (i) the  business,  properties,  assets,  operations,
results  of   operations   or  financial   condition  of  the  Company  and  its
Subsidiaries,  if any, taken as a whole, or (ii) the authority or ability of the
Company to perform its obligations  under the Transaction  Documents (as defined
in Section 3(b) hereof).  The Company has no Subsidiaries except as set forth on
Schedule 3(a).

                                      -4-
<PAGE>

      (b)  Authorization;   Enforcement;  Validity.  (i)  The  Company  has  the
requisite   corporate  power  and  authority  to  enter  into  and  perform  its
obligations under this Agreement,  the Registration Rights Agreement and each of
the other agreements  entered into by the parties on the  Commencement  Date and
attached hereto as exhibits to this Agreement  (collectively,  the  "Transaction
Documents"), and to issue the Securities in accordance with the terms hereof and
thereof,  (ii) the  execution and delivery of the  Transaction  Documents by the
Company and the consummation by it of the transactions  contemplated  hereby and
thereby, including without limitation, the issuance of the Commitment Shares and
the  reservation  for issuance and the issuance of the Purchase  Shares issuable
under  this  Agreement,  have been duly  authorized  by the  Company's  Board of
Directors and no further  consent or  authorization  is required by the Company,
its Board of Directors or its  shareholders,  (iii) this Agreement has been, and
each other Transaction Document shall be on the Commencement Date, duly executed
and delivered by the Company and (iv) this Agreement constitutes, and each other
Transaction  Document  upon  its  execution  on  behalf  of the  Company,  shall
constitute, the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may be
limited by general  principles of equity or applicable  bankruptcy,  insolvency,
reorganization,   moratorium,  liquidation  or  similar  laws  relating  to,  or
affecting  generally,  the  enforcement of creditors'  rights and remedies.  The
Board of Directors of the Company has approved  the  resolutions  (the  "Signing
Resolutions")  substantially  in the form as set forth as Exhibit  C-1  attached
hereto to authorize this Agreement and the transactions contemplated hereby. The
Signing  Resolutions  are  valid,  in full  force and  effect  and have not been
modified or  supplemented in any respect other than by the resolutions set forth
in Exhibit C-2 attached hereto regarding the registration  statement referred to
in Section 4 hereof.  The Company has  delivered to the Buyer a true and correct
copy of a unanimous written consent adopting the Signing Resolutions executed by
all of the members of the Board of Directors of the Company.  No other approvals
or consents of the Company's Board of Directors and/or shareholders is necessary
under  applicable  laws and the Company's  Certificate of  Incorporation  and/or
Bylaws to authorize the  execution and delivery of this  Agreement or any of the
transactions contemplated hereby, including, but not limited to, the issuance of
the Commitment Shares and the issuance of the Purchase Shares.

      (c) Capitalization. As of the date hereof, the authorized capital stock of
the Company  consists of (i) 300,000,000  shares of Common Stock, of which as of
the date hereof, 235,275,662 shares are issued and outstanding, none are held as
treasury  shares,  13,636,666  shares are reserved for issuance  pursuant to the
Company's stock option plans of which only approximately 1,910,000 shares remain
available for future  grants and 8,570,109  shares are issuable and reserved for
issuance pursuant to securities (other than stock options issued pursuant to the
Company's stock option plans and  convertible  preferred  stock)  exercisable or
exchangeable  for, or convertible  into, shares of Common Stock and (ii) 250,000
shares of Series D  Preferred  Stock,  $0.001  par value with a $14.80 per share
liquidation preference,  of which as of the date hereof 91,000 shares are issued
and  outstanding  and no  other  Preferred  Stock  is  outstanding.  All of such
outstanding  shares have been, or upon issuance will be,  validly issued and are
fully paid and  nonassessable.  Except as  disclosed  in Schedule  3(c),  (i) no
shares of the Company's  capital  stock are subject to preemptive  rights or any
other similar rights or any liens or  encumbrances  suffered or permitted by the
Company,  (ii) there are no  outstanding  debt  securities,  (iii)  there are no
outstanding  options,   warrants,  scrip,  rights  to  subscribe  to,  calls  or
commitments  of any  character  whatsoever  relating to, or securities or rights
convertible  into,  any  shares of  capital  stock of the  Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the  Company  or  any of  its  Subsidiaries  is or may  become  bound  to  issue
additional  shares of capital stock of the Company or any of its Subsidiaries or
options,  warrants,  scrip,  rights to subscribe to, calls or commitments of any

                                      -5-
<PAGE>

character  whatsoever relating to, or securities or rights convertible into, any
shares of capital  stock of the Company or any of its  Subsidiaries,  (iv) there
are  no  agreements  or  arrangements  under  which  the  Company  or any of its
Subsidiaries is obligated to register the sale of any of their  securities under
the 1933 Act  (except  the  Registration  Rights  Agreement),  (v)  there are no
outstanding  securities or instruments of the Company or any of its Subsidiaries
which contain any redemption or similar provisions,  and there are no contracts,
commitments,  understandings  or arrangements by which the Company or any of its
Subsidiaries  is or may become  bound to redeem a security of the Company or any
of its  Subsidiaries,  (vi) there are no  securities or  instruments  containing
anti-dilution  or similar  provisions  that will be triggered by the issuance of
the  Securities  as described in this  Agreement  and (vii) the Company does not
have any stock appreciation rights or "phantom stock" plans or agreements or any
similar  plan or  agreement.  The  Company has  furnished  to the Buyer true and
correct copies of the Company's Certificate of Incorporation,  as amended and as
in effect on the date  hereof  (the  "Certificate  of  Incorporation"),  and the
Company's  By-laws,  as  amended  and as in  effect  on  the  date  hereof  (the
"By-laws"),  and summaries of the terms of all  securities  convertible  into or
exercisable for Common Stock, if any, and copies of any documents containing the
material rights of the holders thereof in respect thereto.

      (d)  Issuance  of  Securities.   The  Commitment  Shares  have  been  duly
authorized  and,  upon  issuance  in  accordance  with  the  terms  hereof,  the
Commitment Shares shall be (i) validly issued, fully paid and non-assessable and
(ii) free from all taxes,  liens and charges with respect to the issue  thereof.
19,166,666  shares of Common  Stock have been duly  authorized  and reserved for
issuance upon purchase under this Agreement.  Upon issuance and payment therefor
in  accordance  with the terms and  conditions of this  Agreement,  the Purchase
Shares shall be validly issued,  fully paid and  nonassessable and free from all
taxes,  liens and charges  with respect to the issue  thereof,  with the holders
being entitled to all rights accorded to a holder of Common Stock.

      (e) No Conflicts.  Except as disclosed in Schedule  3(e),  the  execution,
delivery and  performance  of the  Transaction  Documents by the Company and the
consummation by the Company of the transactions  contemplated hereby and thereby
(including, without limitation, the reservation for issuance and issuance of the
Purchase  Shares)  will not (i)  result in a  violation  of the  Certificate  of
Incorporation,  any Certificate of  Designations,  Preferences and Rights of any
outstanding  series of  preferred  stock of the  Company or the  By-laws or (ii)
conflict  with,  or constitute a default (or an event which with notice or lapse
of time or both would become a default)  under,  or give to others any rights of
termination,   amendment,   acceleration  or  cancellation  of,  any  agreement,
indenture or  instrument  to which the Company or any of its  Subsidiaries  is a
party, or result in a violation of any law, rule, regulation, order, judgment or
decree  (including  federal and state  securities  laws and  regulations and the
rules and regulations of the Principal  Market  applicable to the Company or any
of its  Subsidiaries) or by which any property or asset of the Company or any of
its  Subsidiaries  is  bound  or  affected,  except  in the  case of  conflicts,
defaults, terminations, amendments, accelerations,  cancellations and violations
under  clause  (ii),  which  could not  reasonably  be  expected  to result in a
Material  Adverse  Effect.  Except as  disclosed in Schedule  3(e),  neither the
Company nor its  Subsidiaries is in violation of any term of or in default under

                                      -6-
<PAGE>

its Certificate of  Incorporation,  any Certificate of Designation,  Preferences
and  Rights of any  outstanding  series of  preferred  stock of the  Company  or
By-laws or their  organizational  charter or  by-laws,  respectively.  Except as
disclosed in Schedule 3(e),  neither the Company nor any of its  Subsidiaries is
in  violation  of any term of or is in  default  under  any  material  contract,
agreement, mortgage,  indebtedness,  indenture,  instrument, judgment, decree or
order or any  statute,  rule or  regulation  applicable  to the  Company  or its
Subsidiaries,   except  for  possible  conflicts,   defaults,   terminations  or
amendments  which could not  reasonably  be expected to have a Material  Adverse
Effect. The business of the Company and its Subsidiaries is not being conducted,
and shall not be conducted,  in violation of any law,  ordinance,  regulation of
any governmental entity, except for possible violations, the sanctions for which
either individually or in the aggregate could not reasonably be expected to have
a Material Adverse Effect. Except as specifically contemplated by this Agreement
and as required  under the 1933 Act or applicable  state  securities  laws,  the
Company is not  required to obtain any  consent,  authorization  or order of, or
make any filing or registration  with, any court or  governmental  agency or any
regulatory  or  self-regulatory  agency in order for it to  execute,  deliver or
perform  any  of its  obligations  under  or  contemplated  by  the  Transaction
Documents in accordance with the terms hereof or thereof. Except as disclosed in
Schedule 3(e), all consents,  authorizations,  orders, filings and registrations
which the Company is required to obtain pursuant to the preceding sentence shall
be obtained or effected on or prior to the Commencement  Date.  Except as listed
in Schedule  3(e),  since  January 1, 2006,  the Company  has not  received  nor
delivered any notices or  correspondence  from or to the Principal  Market.  The
Principal  Market  has not  commenced  any  delisting  proceedings  against  the
Company.

      (f) SEC Documents;  Financial Statements.  Except as disclosed in Schedule
3(f),  since  January  1,  2006,  the  Company  has  timely  filed all  reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC  pursuant  to the  reporting  requirements  of the  1934 Act (all of the
foregoing filed prior to the date hereof and all exhibits  included  therein and
financial  statements  and  schedules  thereto  and  documents  incorporated  by
reference therein being hereinafter  referred to as the "SEC Documents").  As of
their  respective  dates (except as they have been correctly  amended),  the SEC
Documents  complied in all material  respects with the  requirements of the 1934
Act and the rules and regulations of the SEC promulgated  thereunder  applicable
to the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC  (except as they may have been  properly  amended),  contained  any
untrue statement of a material fact or omitted to state a material fact required
to be stated  therein or necessary in order to make the statements  therein,  in
light of the  circumstances  under which they were made, not  misleading.  As of
their  respective  dates  (except  as they  have  been  properly  amended),  the
financial statements of the Company included in the SEC Documents complied as to
form in all material  respects with applicable  accounting  requirements and the
published rules and regulations of the SEC with respect thereto.  Such financial
statements have been prepared in accordance with generally  accepted  accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto or (ii)
in the case of  unaudited  interim  statements,  to the extent  they may exclude
footnotes or may be condensed or summary  statements)  and fairly present in all
material respects the financial  position of the Company as of the dates thereof
and the  results of its  operations  and cash flows for the  periods  then ended
(subject,  in the  case  of  unaudited  statements,  to  normal  year-end  audit
adjustments).  Except as listed in Schedule  3(f),  the Company has  received no
notices or  correspondence  from the SEC since January 1, 2006.  The SEC has not
commenced  any  enforcement  proceedings  against  the  Company  or  any  of its
subsidiaries.

      (g) Absence of Certain  Changes.  Except as  disclosed  in Schedule  3(g),
since  September  30,  2006,  there has been no material  adverse  change in the
business, properties,  operations,  financial condition or results of operations
of the Company or its  Subsidiaries.  The  Company has not taken any steps,  and
does not currently expect to take any steps, to seek protection  pursuant to any
Bankruptcy  Law  nor  does  the  Company  or any of its  Subsidiaries  have  any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy or insolvency proceedings.  The Company is financially solvent and is
generally able to pay its debts as they become due.

                                      -7-
<PAGE>

      (h) Absence of Litigation.  There is no action, suit, proceeding,  inquiry
or  investigation  before or by any  court,  public  board,  government  agency,
self-regulatory organization or body pending or, to the knowledge of the Company
or any of its  Subsidiaries,  threatened  against or affecting the Company,  the
Common Stock or any of the Company's Subsidiaries or any of the Company's or the
Company's Subsidiaries' officers or directors in their capacities as such, which
could reasonably be expected to have a Material Adverse Effect. A description of
each action, suit, proceeding,  inquiry or investigation before or by any court,
public board, government agency,  self-regulatory organization or body which, as
of the date of this  Agreement,  is pending or threatened in writing  against or
affecting the Company, the Common Stock or any of the Company's  Subsidiaries or
any of the  Company's or the  Company's  Subsidiaries'  officers or directors in
their capacities as such, is set forth in Schedule 3(h).

      (i) Acknowledgment  Regarding Buyer's Status. The Company acknowledges and
agrees that the Buyer is acting solely in the capacity of arm's length purchaser
with respect to the  Transaction  Documents  and the  transactions  contemplated
hereby and  thereby.  The  Company  further  acknowledges  that the Buyer is not
acting as a  financial  advisor or  fiduciary  of the Company (or in any similar
capacity)  with  respect  to the  Transaction  Documents  and  the  transactions
contemplated  hereby and thereby and any advice given by the Buyer or any of its
representatives  or agents in connection with the Transaction  Documents and the
transactions contemplated hereby and thereby is merely incidental to the Buyer's
purchase of the Securities. The Company further represents to the Buyer that the
Company's decision to enter into the Transaction Documents has been based solely
on the  independent  evaluation  by the  Company  and  its  representatives  and
advisors.

      (j)  No  General  Solicitation.  Neither  the  Company,  nor  any  of  its
affiliates,  nor any person  acting on its or their  behalf,  has engaged in any
form of general  solicitation  or general  advertising  (within  the  meaning of
Regulation  D under  the 1933 Act) in  connection  with the offer or sale of the
Securities.

       (k) Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all material trademarks, trade names,
service  marks,  service mark  registrations,  service  names,  patents,  patent
rights,    copyrights,    inventions,    licenses,    approvals,    governmental
authorizations,  trade secrets and rights  necessary to conduct their respective
businesses as now conducted.  Except as set forth on Schedule 3(k),  none of the
Company's  material  trademarks,   trade  names,  service  marks,  service  mark
registrations,  service names, patents, patent rights,  copyrights,  inventions,
licenses,   approvals,   government  authorizations,   trade  secrets  or  other
intellectual  property  rights have expired or terminated,  or, by the terms and
conditions thereof,  could expire or terminate within two years from the date of
this  Agreement.  The Company and its  Subsidiaries do not have any knowledge of
any infringement by the Company or its  Subsidiaries of any material  trademark,
trade name rights, patents,  patent rights,  copyrights,  inventions,  licenses,
service names, service marks, service mark registrations,  trade secret or other
similar  rights of others,  or of any such  development  of similar or identical
trade  secrets or technical  information  by others and,  except as set forth on
Schedule  3(k),  there is no claim,  action or proceeding  being made or brought
against, or to the Company's knowledge, being threatened against, the Company or
its  Subsidiaries  regarding  trademark,  trade name,  patents,  patent  rights,
invention,  copyright,  license,  service  names,  service  marks,  service mark
registrations,  trade secret or other  infringement,  which could  reasonably be
expected to have a Material Adverse Effect.

      (l)  Environmental  Laws.  The  Company  and its  Subsidiaries  (i) are in
compliance with any and all applicable  foreign,  federal,  state and local laws
and  regulations  relating to the  protection  of human  health and safety,  the
environment  or  hazardous  or  toxic   substances  or  wastes,   pollutants  or
contaminants ("Environmental Laws"), (ii) have received all permits, licenses or
other approvals required of them under applicable  Environmental Laws to conduct
their  respective  businesses  and  (iii) are in  compliance  with all terms and
conditions of any such permit, license or approval, except where, in each of the
three  foregoing  clauses,  the  failure to so comply  could not  reasonably  be
expected to have, individually or in the aggregate, a Material Adverse Effect.

                                      -8-
<PAGE>

      (m) Title. The Company and its Subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all personal
property  owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and defects
except  such as are  described  in  Schedule  3(m) or such as do not  materially
affect the value of such  property  and do not  interfere  with the use made and
proposed to be made of such property by the Company and any of its Subsidiaries.
Any real property and facilities  held under lease by the Company and any of its
Subsidiaries  are held by them under valid,  subsisting and  enforceable  leases
with such  exceptions as are not material and do not interfere with the use made
and proposed to be made of such  property  and  buildings by the Company and its
Subsidiaries.

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

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

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

      (q) Transactions With Affiliates. Except as set forth on Schedule 3(q) and
other than the grant or exercise of stock  options  disclosed on Schedule  3(c),
none of the  officers,  directors,  or  employees  of the Company is presently a
party to any transaction with the Company or any of its Subsidiaries (other than
for services as  employees,  officers and  directors),  including  any contract,
agreement or other  arrangement  providing for the  furnishing of services to or
by,  providing for rental of real or personal  property to or from, or otherwise
requiring payments to or from any officer,  director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any  officer,  director,  or any such  employee  has an  interest or is an
officer, director, trustee or partner.

                                      -9-
<PAGE>

      (r)  Application  of  Takeover  Protections.  The Company and its board of
directors have taken or will take prior to the  Commencement  Date all necessary
action, if any, in order to render  inapplicable any control share  acquisition,
business  combination,  poison pill (including any  distribution  under a rights
agreement) or other similar  anti-takeover  provision  under the  Certificate of
Incorporation  or the laws of the state of its  incorporation  which is or could
become  applicable to the Buyer as a result of the transactions  contemplated by
this Agreement,  including,  without  limitation,  the Company's issuance of the
Securities and the Buyer's ownership of the Securities.

      (s)  Foreign  Corrupt  Practices.  Neither  the  Company,  nor  any of its
Subsidiaries,  nor any director, officer, agent, employee or other person acting
on behalf of the  Company or any of its  Subsidiaries  has, in the course of its
actions  for, or on behalf of, the  Company,  used any  corporate  funds for any
unlawful contribution,  gift,  entertainment or other unlawful expenses relating
to  political  activity;  made any direct or  indirect  unlawful  payment to any
foreign or  domestic  government  official  or employee  from  corporate  funds;
violated  or is in  violation  of any  provision  of the  U.S.  Foreign  Corrupt
Practices Act of 1977, as amended; or made any unlawful bribe,  rebate,  payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.

      4.    COVENANTS.

      (a) Filing of Form 8-K and Registration Statement. The Company agrees that
it shall,  within the time required under the 1934 Act file a Report on Form 8-K
disclosing this Agreement and the transaction  contemplated  hereby. The Company
shall also file within ten (10) Business Days (the "Filing  Date") from the date
hereof a new  registration  statement  covering only the sale of the  Commitment
Shares,  the Signing Shares and 19,166,666  Purchase  Shares (which includes the
4,166,666  Initial  Purchase  Shares)  in  accordance  with  the  terms  of  the
Registration Rights Agreement between the Company and the Buyer, dated as of the
date hereof ("Registration Rights Agreement"). After such registration statement
is declared  effective by the SEC, the Company agrees and acknowledges  that any
sales by the Company to the Buyer  pursuant to this  Agreement  are sales of the
Company's  equity  securities in a transaction that is registered under the 1933
Act.

      (b) Blue Sky. The Company shall take such action, if any, as is reasonably
necessary in order to obtain an exemption for or to qualify (i) the initial sale
of the  Commitment  Shares  and any  Purchase  Shares  to the Buyer  under  this
Agreement and (ii) any subsequent sale of the Commitment  Shares or any Purchase
Shares by the Buyer,  in each case,  under  applicable  securities or "Blue Sky"
laws of the  states  of the  United  States  in  such  states  as is  reasonably
requested by the Buyer from time to time, and shall provide evidence of any such
action so taken to the Buyer.

      (c) Listing.  The Company shall promptly  secure the listing of all of the
Purchase  Shares,  the Signing Shares and  Commitment  Shares upon each national
securities exchange and automated quotation system, if any, upon which shares of
Common Stock are then listed  (subject to official notice of issuance) and shall
maintain,  so long as any other shares of Common Stock shall be so listed,  such
listing of all such securities from time to time issuable under the terms of the
Transaction   Documents.   The  Company  shall   maintain  the  Common   Stock's
authorization for quotation on the Principal Market. Neither the Company nor any
of its Subsidiaries  shall take any action that would be reasonably  expected to
result in the  delisting  or  suspension  of the Common  Stock on the  Principal
Market.  The Company  shall  promptly,  and in no event later than the following
Business  Day,  provide to the Buyer copies of any notices it receives  from the
Principal  Market  regarding the continued  eligibility  of the Common Stock for
listing on such automated quotation system or securities  exchange.  The Company
shall pay all fees and expenses in connection  with  satisfying its  obligations
under this Section.

                                      -10-
<PAGE>

      (d) Limitation on Short Sales and Hedging  Transactions.  The Buyer agrees
that  beginning  on the  date  of  this  Agreement  and  ending  on the  date of
termination of this  Agreement as provided in Section  11(k),  the Buyer and its
agents,  representatives and affiliates shall not in any manner whatsoever enter
into or effect,  directly or  indirectly,  any (i) "short sale" (as such term is
defined in  Section  242.200  of  Regulation  SHO of the 1934 Act) of the Common
Stock or (ii) hedging  transaction,  which establishes a net short position with
respect to the Common Stock.

      (e)  Issuance of  Commitment  Shares;  Limitation  on Sales of  Commitment
Shares.  Immediately  upon the  execution of this  Agreement,  the Company shall
issue to the Buyer as  consideration  for the Buyer entering into this Agreement
3,500,000  shares of Common Stock (the "  Commitment  Shares").  The  Commitment
Shares and the Initial Purchase Shares shall be issued in certificated  form and
(subject to Section 5 hereof) shall bear the following restrictive legend:

      THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE  HAVE NOT BEEN REGISTERED
      UNDER  THE  SECURITIES  ACT OF  1933,  AS  AMENDED,  OR  APPLICABLE  STATE
      SECURITIES  LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
      NOT BE OFFERED FOR SALE,  SOLD,  TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
      AN  EFFECTIVE   REGISTRATION   STATEMENT  FOR  THE  SECURITIES  UNDER  THE
      SECURITIES ACT OF 1933, AS AMENDED,  OR APPLICABLE  STATE SECURITIES LAWS,
      UNLESS SOLD PURSUANT TO: (1) RULE 144 UNDER THE SECURITIES ACT OF 1933, AS
      AMENDED,  OR (2) AN OPINION OF HOLDER'S COUNSEL, IN A CUSTOMARY FORM, THAT
      REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES
      LAWS.

        The  Buyer  agrees  that  the  Buyer  shall  not  transfer  or sell  the
Commitment  Shares  until  the  earlier  of (a) 500  Business  Days (25  Monthly
Periods)  from the date hereof or (b) the date on which this  Agreement has been
terminated,  provided,  however,  that such restrictions shall not apply: (i) in
connection  with any  transfers to or among  affiliates  (as defined in the 1934
Act),  (ii) in connection with any pledge in connection with a bona fide loan or
margin account,  (iii) in the event that the  Commencement  does not occur on or
before May 1, 2007,  due to the failure of the Company to satisfy the conditions
set forth in Section 7 or (iv) if an Event of Default has occurred, or any event
which,  after  notice  and/or  lapse of time,  would become an Event of Default,
including any failure by the Company to timely issue Purchase  Shares under this
Agreement.  Notwithstanding  the  forgoing,  the Buyer may  transfer  Commitment
Shares to a third  party in order to  settle a sale made by the Buyer  where the
Buyer  reasonably  expects the Company to deliver  Purchase  Shares to the Buyer
under  this  Agreement  so long as the  Buyer  maintains  ownership  of the same
overall number of shares of Common Stock by "replacing" the Commitment Shares so
transferred with Purchase Shares when the Purchase Shares are actually issued by
the Company to the Buyer.

      (g) Due  Diligence.  The Buyer shall have the right,  from time to time as
the Buyer may reasonably deem appropriate,  to perform  reasonable due diligence
on the Company during normal  business  hours.  The Company and its officers and
employees shall provide  information and reasonably  cooperate with the Buyer in
connection  with any reasonable  request by the Buyer related to the Buyer's due
diligence of the Company,  including,  but not limited to, any such request made
by the Buyer in  connection  with (i) the filing of the  registration  statement
described  in Section 4(a) hereof and (ii) the  Commencement.  Each party hereto
agrees not to disclose any  Confidential  Information  of the other party to any
third party and shall not use the Confidential Information for any purpose other
than in connection  with, or in furtherance  of, the  transactions  contemplated
hereby. Each party hereto  acknowledges that the Confidential  Information shall
remain the  property of the  disclosing  party and agrees that it shall take all
reasonable  measures  to protect  the  secrecy of any  Confidential  Information
disclosed by the other party.

                                      -11-
<PAGE>

      5.    TRANSFER AGENT INSTRUCTIONS.

      Immediately  upon the  execution  of this  Agreement,  the  Company  shall
deliver  to the  Transfer  Agent a letter in the form as set forth as  Exhibit E
attached  hereto with respect to the issuance of the Commitment  Shares.  On the
Commencement  Date,  the  Company  shall  cause  any  restrictive  legend on the
Commitment  Shares, the Initial Purchase Shares and the 200,000 shares of Common
Stock issued to the Buyer upon signing that certain Term Sheet between the Buyer
and the Company and dated as of December 19, 2006 (the  "Signing  Shares") to be
removed  and all of the  remaining  Purchase  Shares  to be  issued  under  this
Agreement  shall be issued  without  any  restrictive  legend  unless  the Buyer
expressly consents otherwise.  The Company shall issue irrevocable  instructions
to the Transfer  Agent,  and any subsequent  transfer  agent,  to issue Purchase
Shares  in the name of the  Buyer  for the  Purchase  Shares  (the  "Irrevocable
Transfer  Agent  Instructions").  The  Company  warrants  to the  Buyer  that no
instruction  other than the Irrevocable  Transfer Agent  Instructions  expressly
referred to in this Agreement will be given by the Company to the Transfer Agent
with  respect to the  Purchase  Shares and that the  Commitment  Shares  Signing
Shares and the Purchase  Shares shall  otherwise be freely  transferable  on the
books and records of the Company as and to the extent provided in this Agreement
and the Registration  Rights Agreement subject to the provisions of Section 4(e)
in the case of the Commitment Shares.

      6.    CONDITIONS  TO THE  COMPANY'S  RIGHT TO COMMENCE  SALES OF SHARES OF
            COMMON STOCK UNDER THIS AGREEMENT.

      The right of the  Company  hereunder  to  commence  sales of the  Purchase
Shares is subject to the satisfaction of each of the following  conditions on or
before the Commencement Date (the date that the Company may begin sales):

      (a)   The Buyer shall have executed each of the Transaction  Documents and
            delivered the same to the Company;

      (b)   A registration  statement covering the sale of all of the Commitment
            Shares,  Signing Shares and Purchase Shares shall have been declared
            effective  under  the  1933  Act by the SEC and no stop  order  with
            respect to the registration statement shall be pending or threatened
            by the SEC.

      7.    CONDITIONS TO THE BUYER'S  OBLIGATION TO MAKE PURCHASES OF SHARES OF
            COMMON STOCK.

      The obligation of the Buyer to buy Purchase Shares under this Agreement is
subject to the satisfaction of each of the following conditions on or before the
Commencement  Date (the date that the  Company  may begin  sales)  and once such
conditions  have  been  initially  satisfied,  there  shall  not be any  ongoing
obligation to satisfy such conditions after the Commencement has occurred:

      (a) The Company shall have executed each of the Transaction  Documents and
delivered the same to the Buyer;

                                      -12-
<PAGE>

      (b) The Company shall have issued to the Buyer the  Commitment  Shares and
shall  have  removed  the  restrictive  transfer  legend  from  the  certificate
representing the Commitment  Shares, the Initial Purchase Shares and the Signing
Shares;

      (c) The Common Stock shall be  authorized  for  quotation on the Principal
Market, trading in the Common Stock shall not have been within the last 365 days
suspended by the SEC or the  Principal  Market and the  Purchase  Shares and the
Commitment Shares shall be approved for listing upon the Principal Market;

      (d) The Buyer shall have  received  the  opinions of the  Company's  legal
counsel dated as of the Commencement Date substantially in the form of Exhibit A
attached hereto;

      (e) The  representations  and  warranties of the Company shall be true and
correct  in all  material  respects  (except  to the  extent  that  any of  such
representations and warranties is already qualified as to materiality in Section
3 above, in which case, such  representations  and warranties  shall be true and
correct  without further  qualification)  as of the date when made and as of the
Commencement  Date as though made at that time (except for  representations  and
warranties  that  speak  as of a  specific  date)  and the  Company  shall  have
performed, satisfied and complied with the covenants,  agreements and conditions
required by the  Transaction  Documents to be  performed,  satisfied or complied
with by the Company at or prior to the  Commencement  Date. The Buyer shall have
received a  certificate,  executed by the CEO,  President or CFO of the Company,
dated as of the Commencement  Date, to the foregoing effect in the form attached
hereto as Exhibit B;

      (f) The Board of Directors of the Company  shall have adopted  resolutions
in the form attached hereto as Exhibit C which shall be in full force and effect
without any amendment or supplement thereto as of the Commencement Date;

      (g) As of the  Commencement  Date,  the Company shall have reserved out of
its  authorized and unissued  Common Stock,  solely for the purpose of effecting
purchases  of  Purchase  Shares  hereunder,  19,166,666  shares of Common  Stock
including the Initial Purchase Shares;

      (h) The Irrevocable Transfer Agent Instructions, in form acceptable to the
Buyer shall have been  delivered to and  acknowledged  in writing by the Company
and the Company's Transfer Agent;

      (i) The Company shall have delivered to the Buyer a certificate evidencing
the  incorporation  and good  standing  of the  Company in the State of Delaware
issued by the  Secretary  of State of the State of  Delaware as of a date within
ten (10)  Business  Days of the  Commencement  Date and the  Company  shall have
delivered to the Buyer a certificate  evidencing good standing of the Company in
the  State of  California  issued  by the  Secretary  of  State of the  State of
California as of a date within ten (10) Business Days of the Commencement Date;

      (j) The Company shall have  delivered to the Buyer a certified copy of the
Certificate of Incorporation as certified by the Secretary of State of the State
of Delaware within ten (10) Business Days of the Commencement Date;

      (k)  The  Company  shall  have   delivered  to  the  Buyer  a  secretary's
certificate  executed  by  the  Secretary  of  the  Company,  dated  as  of  the
Commencement Date, in the form attached hereto as Exhibit D;

                                      -13-
<PAGE>

      (l) A  registration  statement  covering the sale of all of the Commitment
Shares,  the  Signing  Shares  and  Purchase  Shares  shall  have been  declared
effective  under the 1933 Act by the SEC and no stop order  with  respect to the
registration  statement  shall be pending or  threatened by the SEC. The Company
shall have  prepared and  delivered  to the Buyer a final and  complete  form of
prospectus,  dated and current as of the  Commencement  Date,  to be used by the
Buyer in connection with any sales of any Commitment  Shares, the Signing Shares
or any  Purchase  Shares,  and to be filed by the Company one Business Day after
the  Commencement  Date.  The  Company  shall  have made all  filings  under all
applicable  federal  and state  securities  laws  necessary  to  consummate  the
issuance of the Commitment  Shares,  the Signing Shares and the Purchase  Shares
pursuant to this Agreement in compliance with such laws;

      (m) No Event of Default has  occurred,  or any event  which,  after notice
and/or lapse of time, would become an Event of Default has occurred;

      (n) On or prior to the  Commencement  Date,  the  Company  shall  take all
necessary action, if any, and such actions as reasonably requested by the Buyer,
in  order  to  render  inapplicable  any  control  share  acquisition,  business
combination,  shareholder rights plan or poison pill (including any distribution
under a rights  agreement) or other similar  anti-takeover  provision  under the
Certificate of Incorporation or the laws of the state of its incorporation which
is or could  become  applicable  to the  Buyer as a result  of the  transactions
contemplated by this Agreement,  including,  without  limitation,  the Company's
issuance of the Securities and the Buyer's ownership of the Securities; and

      (o) The  Company  shall  have  provided  the  Buyer  with the  information
requested by the Buyer in connection with its due diligence  requests made prior
to, or in connection  with, the  Commencement,  in accordance  with the terms of
Section 4(g) hereof.

      8.    INDEMNIFICATION.

      In consideration of the Buyer's  execution and delivery of the Transaction
Documents and acquiring the  Securities  hereunder and in addition to all of the
Company's other obligations under the Transaction  Documents,  the Company shall
defend,  protect,  indemnify  and  hold  harmless  the  Buyer  and  all  of  its
affiliates,  shareholders, officers, directors, employees and direct or indirect
investors  and any of the  foregoing  person's  agents or other  representatives
(including,   without   limitation,   those  retained  in  connection  with  the
transactions contemplated by this Agreement)  (collectively,  the "Indemnitees")
from and against any and all actions,  causes of action, suits, claims,  losses,
costs,  penalties,  fees,  liabilities  and damages,  and expenses in connection
therewith  (irrespective of whether any such Indemnitee is a party to the action
for  which  indemnification  hereunder  is  sought),  and  including  reasonable
attorneys' fees and disbursements (the "Indemnified  Liabilities"),  incurred by
any  Indemnitee  as a result  of,  or  arising  out of, or  relating  to (a) any
misrepresentation  or  breach  of any  representation  or  warranty  made by the
Company in the  Transaction  Documents or any other  certificate,  instrument or
document  contemplated  hereby  or  thereby,  (b) any  breach  of any  covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby, or
(c) any cause of action,  suit or claim brought or made against such  Indemnitee
and arising out of or resulting  from the  execution,  delivery,  performance or
enforcement of the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby,  other than with respect to Indemnified
Liabilities  which  directly and primarily  result from the gross  negligence or
willful  misconduct  of  the  Indemnitee.  To  the  extent  that  the  foregoing
undertaking  by the Company  may be  unenforceable  for any reason,  the Company
shall make the maximum  contribution to the payment and  satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law.

                                      -14-
<PAGE>

      9.    EVENTS OF DEFAULT.

      An "Event of Default"  shall be deemed to have occurred at any time as any
of the following events occurs:

      (a)  while  any  registration  statement  is  required  to  be  maintained
effective  pursuant  to the  terms of the  Registration  Rights  Agreement,  the
effectiveness of such registration  statement lapses for any reason  (including,
without limitation, the issuance of a stop order) or is unavailable to the Buyer
for sale of all of the  Registrable  Securities (as defined in the  Registration
Rights  Agreement)  in  accordance  with the  terms of the  Registration  Rights
Agreement,  and such lapse or unavailability  continues for a period of ten (10)
consecutive  Business Days or for more than an aggregate of thirty (30) Business
Days in any 365-day period;

      (b) the  suspension  from  trading or  failure  of the Common  Stock to be
listed on the Principal  Market for a period of three (3)  consecutive  Business
Days;

      (c) the delisting of the Company's Common Stock from the Principal Market,
provided,  however, that the Common Stock is not immediately  thereafter trading
on the New York Stock  Exchange,  the Nasdaq Global  Market,  the Nasdaq Capital
Market, or the American Stock Exchange;

      (d) the failure  for any reason by the  Transfer  Agent to issue  Purchase
Shares to the Buyer within five (5) Business Days after the applicable  Purchase
Date which the Buyer is entitled to receive;

      (e) the Company breaches any representation,  warranty,  covenant or other
term or  condition  under any  Transaction  Document if such breach could have a
Material Adverse Effect and except,  in the case of a breach of a covenant which
is reasonably  curable,  only if such breach  continues for a period of at least
five (5) Business Days;

      (f) if any Person  commences a proceeding  against the Company pursuant to
or within the meaning of any Bankruptcy Law ;

      (g) if the Company  pursuant  to or within the  meaning of any  Bankruptcy
Law; (A) commences a voluntary  case,  (B) consents to the entry of an order for
relief against it in an involuntary  case, (C) consents to the  appointment of a
Custodian of it or for all or  substantially  all of its  property,  (D) makes a
general assignment for the benefit of its creditors,  (E) becomes insolvent,  or
(F) is generally unable to pay its debts as the same become due;

      (h) a court of competent  jurisdiction enters an order or decree under any
Bankruptcy  Law that (A) is for relief  against  the  Company in an  involuntary
case, (B) appoints a Custodian of the Company or for all or substantially all of
its property, or (C) orders the liquidation of the Company or any Subsidiary; or

      (i) a material  adverse  change in the business,  properties,  operations,
financial condition or results of operations of the Company and its Subsidiaries
taken as a whole.

                                      -15-
<PAGE>

In addition  to any other  rights and  remedies  under  applicable  law and this
Agreement, including the Buyer termination rights under Section 11(k) hereof, so
long as an Event of Default  has  occurred  and is  continuing,  or if any event
which, after notice and/or lapse of time, would become an Event of Default,  has
occurred  and is  continuing,  or so long as the  Purchase  Price is  below  the
Purchase Price Floor, the Buyer shall not be obligated to purchase any shares of
Common Stock under this  Agreement.  If pursuant to or within the meaning of any
Bankruptcy Law, the Company commences a voluntary case or any Person commences a
proceeding  against the Company, a Custodian is appointed for the Company or for
all or  substantially  all of its  property,  or the  Company  makes  a  general
assignment for the benefit of its creditors,  (any of which would be an Event of
Default as described  in Sections  9(f),  9(g) and 9(h)  hereof) this  Agreement
shall  automatically  terminate  without any liability or payment to the Company
without  further  action or notice by any Person.  No such  termination  of this
Agreement  under  Section  11(k)(i)  shall  affect the  Company's or the Buyer's
obligations  under this  Agreement  with  respect to pending  purchases  and the
Company and the Buyer shall complete their  respective  obligations with respect
to any pending purchases under this Agreement.

      10.   CERTAIN DEFINED TERMS.

      For  purposes  of this  Agreement,  the  following  terms  shall  have the
following meanings:

      (a) "1933 Act" means the Securities Act of 1933, as amended.

      (b) "Available Amount" means initially Eight Million Five Hundred Thousand
Dollars  ($8,500,000)  in the  aggregate  which  amount  shall be reduced by the
Purchase Amount each time the Buyer purchases shares of Common Stock pursuant to
Section 1 hereof.

      (c) "Bankruptcy  Law" means Title 11, U.S. Code, or any similar federal or
state law for the relief of debtors.

      (d) "Base Purchase  Notice" shall mean an irrevocable  written notice from
the  Company  to the Buyer  directing  the Buyer to buy up to the Base  Purchase
Amount in Purchase  Shares as specified by the Company therein at the applicable
Purchase Price on the Purchase Date.

      (e) "Block  Purchase  Amount"  shall mean such  Block  Purchase  Amount as
specified  by the Company in a Block  Purchase  Notice  subject to Section  1(b)
hereof.

      (f) "Block Purchase Notice" shall mean an irrevocable  written notice from
the Company to the Buyer directing the Buyer to buy the Block Purchase Amount in
Purchase  Shares as specified by the Company therein at the Block Purchase Price
as of the Purchase Date subject to Section 1 hereof.

                                      -16-
<PAGE>

      (d) "Business Day" means any day on which the Principal Market is open for
trading  including any day on which the Principal Market is open for trading for
a period of time less than the customary time.

      (e) "Closing Sale Price" means,  for any security as of any date, the last
closing trade price for such security on the Principal Market as reported by the
Principal  Market,  or, if the Principal Market is not the principal  securities
exchange or trading  market for such  security,  the last closing trade price of
such security on the principal  securities exchange or trading market where such
security is listed or traded as reported by the Principal Market.

      (f) "Confidential  Information" means any information  disclosed by either
party to the other party, either directly or indirectly,  in writing,  orally or
by inspection of tangible objects  (including,  without  limitation,  documents,
prototypes,   samples,   plant   and   equipment),   which  is   designated   as
"Confidential,"   "Proprietary"   or  some  similar   designation.   Information
communicated  orally  shall  be  considered  Confidential  Information  if  such
information is confirmed in writing as being Confidential Information within ten
(10) business days after the initial  disclosure.  Confidential  Information may
also  include  information  disclosed to a  disclosing  party by third  parties.
Confidential  Information shall not, however,  include any information which (i)
was publicly  known and made  generally  available in the public domain prior to
the time of disclosure by the disclosing  party; (ii) becomes publicly known and
made  generally  available  after  disclosure  by the  disclosing  party  to the
receiving party through no action or inaction of the receiving  party;  (iii) is
already in the  possession of the  receiving  party at the time of disclosure by
the  disclosing  party as shown  by the  receiving  party's  files  and  records
immediately  prior to the time of disclosure;  (iv) is obtained by the receiving
party from a third party without a breach of such third party's  obligations  of
confidentiality;  (v) is independently  developed by the receiving party without
use of or reference to the disclosing party's Confidential Information, as shown
by documents and other competent  evidence in the receiving party's  possession;
or (vi) is required by law to be disclosed by the receiving party, provided that
the receiving  party gives the  disclosing  party prompt  written notice of such
requirement  prior to such  disclosure  and  assistance  in  obtaining  an order
protecting the information from public disclosure.

      (g)  "Custodian"  means any  receiver,  trustee,  assignee,  liquidator or
similar official under any Bankruptcy Law.

      (h)  "Maturity  Date" means the date that is 500 Business Days (25 Monthly
Periods) from the Commencement Date.

      (i)  "Monthly  Period"  means  each  successive  20  Business  Day  period
commencing with the Commencement Date.

      (j) "Person" means an individual or entity including any limited liability
company,  a  partnership,   a  joint  venture,   a  corporation,   a  trust,  an
unincorporated  organization  and a  government  or  any  department  or  agency
thereof.

      (k)  "Principal  Market"  means the Nasdaq OTC  Bulletin  Board;  provided
however,  that in the event the Company's  Common Stock is ever listed or traded
on the Nasdaq  Global  Market,  the Nasdaq  Capital  Market,  the New York Stock
Exchange or the American Stock Exchange,  than the "Principal Market" shall mean
such other market or exchange on which the Company's Common Stock is then listed
or traded.

      (l) "Purchase Amount" means, with respect to any particular  purchase made
hereunder,  the portion of the  Available  Amount to be  purchased  by the Buyer
pursuant to Section 1 hereof as set forth in a valid Base  Purchase  Notice or a
valid Block Purchase Notice which the Company delivers to the Buyer.

      (m)  "Purchase  Date" means with respect to any  particular  purchase made
hereunder,  the Business Day after receipt by the Buyer of a valid Base Purchase
Notice or a valid Block Purchase Notice that the Buyer is to buy Purchase Shares
pursuant to Section 1 hereof.

      (n)  "Purchase  Price" means the lower of the (A) the lowest Sale Price of
the Common  Stock on the  Purchase  Date and (B) the  arithmetic  average of the
three (3) lowest Closing Sale Prices for the Common Stock during the twelve (12)
consecutive Business Days ending on the Business Day immediately  preceding such
Purchase   Date  (to  be   appropriately   adjusted   for  any   reorganization,
recapitalization, non-cash dividend, stock split or other similar transaction).

                                      -17-
<PAGE>

      (o) "Sale Price" means,  any trade price for the shares of Common Stock on
the Principal Market as reported by the Principal Market.

      (q) "SEC" means the United States Securities and Exchange Commission.

      (r) "Transfer  Agent" means the transfer agent of the Company as set forth
in Section 11(f) hereof or such other person who is then serving as the transfer
agent for the Company in respect of the Common Stock.

      11.   MISCELLANEOUS.

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

      (b) Counterparts.  This Agreement may be executed in two or more identical
counterparts,  all of which shall be considered  one and the same  agreement and
shall  become  effective  when  counterparts  have been signed by each party and
delivered  to the other  party;  provided  that a facsimile  signature  shall be
considered  due execution  and shall be binding upon the signatory  thereto with
the same force and effect as if the signature were an original,  not a facsimile
signature.

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

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

                                      -18-
<PAGE>

      (e) Entire  Agreement.  With the  exception  of the  Mutual  Nondisclosure
Agreement  between the parties  dated as of November  16, 2006,  this  Agreement
supersedes  all other prior oral or written  agreements  between the Buyer,  the
Company, their affiliates and persons acting on their behalf with respect to the
matters discussed herein,  and this Agreement,  the other Transaction  Documents
and the instruments  referenced  herein contain the entire  understanding of the
parties with respect to the matters  covered  herein and therein and,  except as
specifically  set forth  herein or  therein,  neither  the Company nor the Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters.  The Company  acknowledges and agrees that is has not relied on, in any
manner whatsoever,  any  representations  or statements,  written or oral, other
than as expressly set forth in this Agreement.

      (f) Notices.  Any notices,  consents or other  communications  required or
permitted to be given under the terms of this  Agreement  must be in writing and
will be  deemed  to  have  been  delivered:  (i)  upon  receipt  when  delivered
personally;  (ii) upon receipt when sent by facsimile (provided  confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending  party);  or (iii) one  Business  Day after  deposit  with a  nationally
recognized  overnight  delivery service,  in each case properly addressed to the
party to  receive  the  same.  The  addresses  and  facsimile  numbers  for such
communications shall be:

      If to the Company:
            e.Digital Corporation
            16770 West Bernardo Drive
            San Diego, California 92127
            Telephone:  858-304-3016
            Facsimile:  858-304-3023
            Attention:  Chief Financial Officer

      With a copy to:
            McConnell, Dunning & Barwick LLP
            15 Enterprise, Suite 360
            Aliso Viejo, California 92656
            Telephone:   949-900-4400
            Facsimile:   949-900-4401
            Attention:   Curt C. Barwick, Esq.

      If to the Buyer:
            Fusion Capital Fund II, LLC
            222 Merchandise Mart Plaza, Suite 9-112
            Chicago, IL 60654
            Telephone:  312-644-6644
            Facsimile:  312-644-6244
            Attention:  Steven G. Martin

      If to the Transfer Agent:
            Interwest Transfer Co.
            1981 E. 4800 S., Suite 100
            Salt Lake City, UT  84117
            Telephone:  801-272-9294
            Facsimile:  801.277.3147
            Attention:  Kurt Hughes

                                      -19-
<PAGE>

or at such other address and/or facsimile number and/or to the attention of such
other person as the  recipient  party has  specified by written  notice given to
each other  party three (3)  Business  Days prior to the  effectiveness  of such
change.  Written  confirmation  of receipt  (A) given by the  recipient  of such
notice,  consent or other  communication,  (B)  mechanically  or  electronically
generated by the sender's  facsimile  machine  containing  the time,  date,  and
recipient facsimile number or (C) provided by a nationally  recognized overnight
delivery service,  shall be rebuttable evidence of personal service,  receipt by
facsimile or receipt from a nationally  recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.

      (g) Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective  successors and assigns.  The
Company shall not assign this Agreement or any rights or  obligations  hereunder
without  the  prior  written  consent  of the  Buyer,  including  by  merger  or
consolidation.  The Buyer may not assign its  rights or  obligations  under this
Agreement.

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

      (i) Publicity.  The Buyer shall have the right to approve before  issuance
any press  release,  SEC  filing or any other  public  disclosure  made by or on
behalf of the Company  whatsoever with respect to, in any manner, the Buyer, its
purchases  hereunder  or any  aspect  of  this  Agreement  or  the  transactions
contemplated  hereby;  provided,  however,  that the Company  shall be entitled,
without  the prior  approval  of the Buyer,  to make any press  release or other
public  disclosure  (including  any filings  with the SEC) with  respect to such
transactions  as is required by applicable  law and  regulations  so long as the
Company and its counsel consult with the Buyer in connection with any such press
release or other public  disclosure  at least two (2) Business Days prior to its
release.  The  Buyer  must be  provided  with a copy  thereof  at least  two (2)
Business  Days prior to any release or use by the Company  thereof.  The Company
agrees and  acknowledges  that its failure to fully  comply with this  provision
constitutes a material  adverse effect on its ability to perform its obligations
under this Agreement.

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

      (k) Termination. This Agreement may be terminated only as follows:

            (i) By the Buyer any time an Event of  Default  exists  without  any
      liability or payment to the Company. However, if pursuant to or within the
      meaning of any Bankruptcy  Law, the Company  commences a voluntary case or
      any Person  commences a  proceeding  against the  Company,  a Custodian is
      appointed for the Company or for all or substantially all of its property,
      or  the  Company  makes  a  general  assignment  for  the  benefit  of its
      creditors,  (any of which  would be an Event of  Default as  described  in
      Sections 9(f),  9(g) and 9(h) hereof) this Agreement  shall  automatically
      terminate  without any liability or payment to the Company without further
      action or notice by any  Person.  No such  termination  of this  Agreement
      under this  Section  11(k)(i)  shall  affect the  Company's or the Buyer's
      obligations under this Agreement with respect to pending purchases and the
      Company and the Buyer shall complete  their  respective  obligations  with
      respect to any pending purchases under this Agreement.

                                      -20-
<PAGE>

            (ii) In the event that the Commencement shall not have occurred, the
      Company shall have the option to terminate  this  Agreement for any reason
      or for no reason without liability of any party to any other party.

            (iii) In the event that the Commencement  shall not have occurred on
      or before May 1, 2007,  due to the failure to satisfy the  conditions  set
      forth in  Sections 6 and 7 above with  respect  to the  Commencement,  the
      nonbreaching  party shall have the option to terminate  this  Agreement at
      the close of business on such date or thereafter  without liability of any
      party to any other party.

            (iv) If by the  Maturity  Date for any  reason or for no reason  the
      full  Available  Amount  under this  Agreement  has not been  purchased as
      provided  for in Section 1 of this  Agreement,  by the Buyer  without  any
      liability or payment to the Company.

            (v) At any time after the Commencement  Date, the Company shall have
      the option to terminate  this Agreement for any reason or for no reason by
      delivering notice (a "Company  Termination  Notice") to the Buyer electing
      to terminate this Agreement without any liability or payment to the Buyer.
      The  Company  Termination  Notice  shall  not be  effective  until one (1)
      Business Day after it has been received by the Buyer.

            (vi) This Agreement shall  automatically  terminate on the date that
      the Company  sells and the Buyer  purchases the full  Available  Amount as
      provided herein, without any action or notice on the part of any party.

Except as set forth in  Sections  11(k)(i)  (in  respect  of an Event of Default
under  Sections  9(f),  9(g) and 9(h)) and  11(k)(vi),  any  termination of this
Agreement  pursuant to this  Section  11(k) shall be effected by written  notice
from the Company to the Buyer, or the Buyer to the Company,  as the case may be,
setting forth the basis for the  termination  hereof.  The  representations  and
warranties of the Company and the Buyer contained in Sections 2, 3 and 5 hereof,
the indemnification  provisions set forth in Section 8 hereof and the agreements
and covenants set forth in Section 11, shall  survive the  Commencement  and any
termination of this Agreement. No termination of this Agreement shall affect the
Company's or the Buyer's rights or obligations (i) under the Registration Rights
Agreement which shall survive any such  termination or (ii) under this Agreement
with respect to pending  purchases and the Company and the Buyer shall  complete
their respective  obligations  with respect to any pending  purchases under this
Agreement.

      (l) No Financial Advisor,  Placement Agent,  Broker or Finder. The Company
represents  and  warrants  to the Buyer that it has not  engaged  any  financial
advisor,  placement agent,  broker or finder in connection with the transactions
contemplated  hereby.  The Buyer  represents and warrants to the Company that it
has not engaged any  financial  advisor,  placement  agent,  broker or finder in
connection  with the  transactions  contemplated  hereby.  The Company  shall be
responsible for the payment of any fees or commissions, if any, of any financial
advisor,  placement  agent,  broker or finder  relating to or arising out of the
transactions  contemplated  hereby.  The Company  shall pay,  and hold the Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorneys' fees and out of pocket expenses)  arising in connection with any such
claim.

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

                                      -21-
<PAGE>

      (n) Remedies,  Other  Obligations,  Breaches and  Injunctive  Relief.  The
Buyer's remedies  provided in this Agreement shall be cumulative and in addition
to all other remedies available to the Buyer under this Agreement,  at law or in
equity  (including  a decree of specific  performance  and/or  other  injunctive
relief),  no remedy of the Buyer  contained  herein  shall be deemed a waiver of
compliance  with the  provisions  giving rise to such remedy and nothing  herein
shall limit the Buyer's  right to pursue  actual  damages for any failure by the
Company to comply with the terms of this  Agreement.  The  Company  acknowledges
that a breach by it of its obligations  hereunder will cause irreparable harm to
the Buyer and that the remedy at law for any such breach may be inadequate.  The
Company  therefore  agrees that,  in the event of any such breach or  threatened
breach,  the  Buyer  shall be  entitled,  in  addition  to all  other  available
remedies,  to an  injunction  restraining  any breach,  without the necessity of
showing economic loss and without any bond or other security being required.

      (0)  Enforcement  Costs.  If: (i) this Agreement is placed by the Buyer in
the hands of an attorney for enforcement or is enforced by the Buyer through any
legal proceeding;  or (ii) an attorney is retained to represent the Buyer in any
bankruptcy,   reorganization,   receivership  or  other  proceedings   affecting
creditors'  rights  and  involving  a claim  under this  Agreement;  or (iii) an
attorney is retained to represent the Buyer in any other proceedings  whatsoever
in connection with this  Agreement,  then the Company shall pay to the Buyer, as
incurred by the Buyer,  all reasonable costs and expenses  including  attorneys'
fees  incurred in  connection  therewith,  in addition to all other  amounts due
hereunder.

      (p) Failure or Indulgence Not Waiver.  No failure or delay in the exercise
of any power,  right or privilege  hereunder  shall operate as a waiver thereof,
nor shall any single or partial  exercise of any such power,  right or privilege
preclude  other or  further  exercise  thereof or of any other  right,  power or
privilege.

                                     * * * * *

                                      -22-
<PAGE>

      IN WITNESS  WHEREOF,  the Buyer and the  Company  have  caused this Common
Stock Purchase Agreement to be duly executed as of the date first written above.

                                    THE COMPANY:
                                    ------------

                                    e.Digital Corporation

                                    By: /s/Robert Putnam
                                        --------------------
                                    Name:  Robert Putnam
                                    Title: Senior Vice President

                                    BUYER:
                                    ------

                                    Fusion Capital Fund II, LLC
                                    By: Fusion Capital Partners, LLC
                                    By: Rockledge Capital Corporation

                                    By: /s/Josh Scheinfeld
                                        ----------------------
                                    Name:  Josh Scheinfeld
                                    Title: President

                                      -23-
<PAGE>

                                    SCHEDULES

Schedule 3(a)     Subsidiaries
Schedule 3(c)     Capitalization
Schedule 3(e)     Conflicts
Schedule 3(f)     1934 Act Filings
Schedule 3(g)     Material Changes
Schedule 3(h)     Litigation
Schedule 3(k)     Intellectual Property
Schedule 3(m)     Liens
Schedule 3(q)     Certain Transactions

                                    EXHIBITS

Exhibit A         Form of Company Counsel Opinion
Exhibit B         Form of Officer's Certificate
Exhibit C         Form of Resolutions of Board of Directors of the Company
Exhibit D         Form of Secretary's Certificate
Exhibit E         Form of Letter to Transfer Agent

<PAGE>

                              DISCLOSURE SCHEDULES

                          Schedule 3(a) - Subsidiaries

                         Schedule 3(c) - Capitalization

                          Schedule 3(e) - No Conflicts

                        Schedule 3(f) - 1934 Act Filings

                   Schedule 3(g) - Absence of Certain Changes

                           Schedule 3(h) - Litigation

                  Schedule 3(k) - Intellectual Property Rights

                              Schedule 3(m) - Title

                  Schedule 3(q) - Transactions with Affiliates

<PAGE>

                                    EXHIBIT A
                                    ---------

                         FORM OF COMPANY COUNSEL OPINION

      Capitalized terms used herein but not defined herein, have the meaning set
forth in the  Common  Stock  Purchase  Agreement.  Based on the  foregoing,  and
subject to the assumptions and  qualifications  set forth herein,  we are of the
opinion that:

            1. The Company is a corporation  existing and in good standing under
the laws of the State of Delaware.  The Company is qualified to do business as a
foreign corporation and is in good standing in the State of California.

            2. The Company has the corporate  power to execute and deliver,  and
perform its obligations under, each Transaction Document to which it is a party.
The Company has the  corporate  power to conduct its business as, to the best of
our knowledge, it is now conducted,  and to own and use the properties owned and
used by it.

            3. The  execution,  delivery and  performance  by the Company of the
Transaction  Documents to which it is a party have been duly  authorized  by all
necessary  corporate  action  on the  part of the  Company.  The  execution  and
delivery of the  Transaction  Documents by the Company,  the  performance of the
obligations  of  the  Company  thereunder  and  the  consummation  by it of  the
transactions  contemplated therein have been duly authorized and approved by the
Company's Board of Directors and no further  consent,  approval or authorization
of the  Company,  its Board of Directors or its  stockholders  is required.  The
Transaction  Documents  to which the Company is a party have been duly  executed
and  delivered by the Company and are the valid and binding  obligations  of the
Company,  enforceable  against the Company in accordance with their terms except
as such  enforceability  may be  limited  by  general  principles  of  equity or
applicable bankruptcy,  insolvency,  liquidation or similar laws relating to, or
affecting creditor's rights and remedies.

            4. The  execution,  delivery and  performance  by the Company of the
Transaction  Documents,  the  consummation  by the  Company of the  transactions
contemplated thereby including the offering, sale and issuance of the Commitment
Shares,  and the Purchase  Shares in accordance with the terms and conditions of
the Common Stock Purchase  Agreement,  and fulfillment and compliance with terms
of the  Transaction  Documents,  does not and  shall  not:  (i)  conflict  with,
constitute a breach of or default (or an event which,  with the giving of notice
or  lapse of time or  both,  constitutes  or  could  constitute  a  breach  or a
default),  under  (a) the  Certificate  of  Incorporation  or the  Bylaws of the
Company,  (b) any  material  agreement,  note,  lease,  mortgage,  deed or other
material instrument to which to our knowledge the Company is a party or by which
the Company or any of its assets are bound,  (ii) result in any violation of any
statute,  law,  rule or regulation  applicable  to the Company,  or (iii) to our
knowledge,  violate any order,  writ,  injunction  or decree  applicable  to the
Company or any of its subsidiaries.

            5.  The  issuance  of  the  Purchase  Shares,   Signing  Shares  and
Commitment  Shares  pursuant  to the terms  and  conditions  of the  Transaction
Documents has been duly authorized and the Signing Shares,  the Initial Purchase
Shares and Commitment Shares are validly issued,  fully paid and non-assessable,
to our knowledge,  free of all taxes, liens,  charges,  restrictions,  rights of
first refusal and preemptive  rights.  ________ shares of Common Stock have been
properly reserved for issuance under the Common Stock Purchase  Agreement.  When
issued and paid for in accordance with the Common Stock Purchase Agreement,  the
Purchase Shares shall be validly issued,  fully paid and non-assessable,  to our
knowledge,  free of all taxes,  liens,  charges,  restrictions,  rights of first
refusal and preemptive  rights. To our knowledge,  the execution and delivery of
the Registration  Rights Agreement do not, and the performance by the Company of
its  obligations  thereunder  shall  not,  give rise to any  rights of any other
person for the registration  under the 1933 Act of any shares of Common Stock or
other securities of the Company which have not been waived.

<PAGE>

            6. As of the  date  hereof,  the  authorized  capital  stock  of the
Company  consists of _______ shares of common stock, par value $0.001 per share,
of which to our knowledge  __________ shares are issued and outstanding.  Except
as set forth on Schedule  3(c) of the Common Stock  Purchase  Agreement,  to our
knowledge,  there are no outstanding shares of capital stock or other securities
convertible  into or exchangeable or exercisable for shares of the capital stock
of the Company.

            7. Assuming the accuracy of the  representations and your compliance
with the covenants made by you in the Transaction Documents,  the offering, sale
and  issuance  of the  Commitment  Shares,  the  signing  Shares and the Initial
Purchase  Shares to you pursuant to the  Transaction  Documents  was exempt from
registration  under the 1933 Act and the securities  laws and regulations of the
State of California.

            8. Other than that which has been  obtained and  completed  prior to
the date hereof, no authorization,  approval,  consent, filing or other order of
any federal or state governmental body,  regulatory agency, or stock exchange or
market,  or any court,  or, to our knowledge,  any third party is required to be
obtained  by the Company to enter into and  perform  its  obligations  under the
Transaction  Documents or for the Company to issue and sell the Purchase  Shares
as contemplated by the Transaction Documents.

            9. The Common Stock is  registered  pursuant to Section 12(g) of the
1934 Act.  To our  knowledge,  since  January 1, 2006,  the  Company has been in
compliance with the reporting  requirements of the 1934 Act applicable to it. To
our  knowledge,  since January 1, 2006, the Company has not received any written
notice  from the  Principal  Market  stating  that the  Company  has not been in
compliance with any of the rules and regulations (including the requirements for
continued listing) of the Principal Market.

      We  further  advise  you that to our  knowledge,  except as  disclosed  on
Schedule 3(h) in the Common Stock Purchase Agreement,  there is no action, suit,
proceeding,  inquiry or  investigation  before or by any court,  public board or
body, any governmental  agency, any stock exchange or market, or self-regulatory
organization, which has been threatened in writing or which is currently pending
against the Company,  any of its subsidiaries,  any officers or directors of the
Company or any of its  subsidiaries  or any of the  properties of the Company or
any of its subsidiaries.

      In addition,  we have  participated in the preparation of the Registration
Statement (SEC File  #________)  covering the sale of the Purchase  Shares,  the
Commitment Shares including the prospectus dated ____________, contained therein
and in  conferences  with  officers  and other  representatives  of the  Company
(including the Company's  independent auditors) during which the contents of the
Registration  Statement  and related  matters were  discussed  and reviewed and,
although we are not passing  upon and do not assume any  responsibility  for the
accuracy,   completeness  or  fairness  of  the  statements   contained  in  the
Registration  Statement,  on the basis of the information  that was developed in
the course of the performance of the services  referred to above,  considered in
the  light of our  understanding  of the  applicable  law,  nothing  came to our
attention that caused us to believe that the Registration  Statement (other than
the financial  statements and schedules and the other  financial and statistical
data  included  therein,  as to which we express no belief),  as of their dates,
contained  any  untrue  statement  of a  material  fact or  omitted to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.

<PAGE>

                                    EXHIBIT B
                                    ---------

                          FORM OF OFFICER'S CERTIFICATE

         This Officer's Certificate  ("Certificate") is being delivered pursuant
to Section 7(e) of that  certain  Common Stock  Purchase  Agreement  dated as of
_________,  ("Common  Stock  Purchase  Agreement"),  by  and  between  e.Digital
Corporation, a Delaware corporation (the "Company"), and Fusion Capital Fund II,
LLC (the  "Buyer").  Terms used herein and not otherwise  defined shall have the
meanings ascribed to them in the Common Stock Purchase Agreement.

         The undersigned,  ___________,  ______________  of the Company,  hereby
certifies as follows:

            1. I am the  _____________  of the Company  and make the  statements
      contained in this Certificate;

            2. The  representations  and  warranties of the Company are true and
      correct in all  material  respects  (except to the extent that any of such
      representations  and warranties is already  qualified as to materiality in
      Section 3 of the Common  Stock  Purchase  Agreement,  in which case,  such
      representations  and  warranties  are true  and  correct  without  further
      qualification) as of the date when made and as of the Commencement Date as
      though made at that time (except for  representations  and warranties that
      speak as of a specific date);

            3. The Company has performed, satisfied and complied in all material
      respects  with  covenants,  agreements  and  conditions  required  by  the
      Transaction  Documents to be performed,  satisfied or complied with by the
      Company at or prior to the Commencement Date.

            4. The  Company  has not taken  any  steps,  and does not  currently
      expect to take any steps,  to seek  protection  pursuant to any Bankruptcy
      Law nor does the Company or any of its Subsidiaries  have any knowledge or
      reason  to  believe  that its  creditors  intend to  initiate  involuntary
      bankruptcy or insolvency  proceedings.  The Company is financially solvent
      and is generally able to pay its debts as they become due.

      IN WITNESS  WHEREOF,  I have hereunder signed my name on this ___ day of

_________________.

                                    ----------------------
                                    Name:
                                    Title:

      The undersigned as Secretary of ________, a ________  corporation,  hereby
certifies that ___________ is the duly elected, appointed,  qualified and acting
________ of  _________  and that the  signature  appearing  above is his genuine
signature.

                                    -----------------------------------
                                    Secretary

<PAGE>

                                   EXHIBIT C-1
                                   -----------

                           FORM OF COMPANY RESOLUTIONS
                         FOR SIGNING PURCHASE AGREEMENT

                          UNANIMOUS WRITTEN CONSENT OF

                              e.Digital Corporation

      Pursuant to Section ______ of the _________, the undersigned, being all of
the   directors  of  e.Digital   Corporation,   a  Delaware   corporation   (the
"Corporation")  do hereby consent to and adopt the following  resolutions as the
action of the Board of Directors for and on behalf of the Corporation and hereby
direct  that this  Consent be filed with the minutes of the  proceedings  of the
Board of Directors:

      WHEREAS,  there  has  been  presented  to the  Board of  Directors  of the
Corporation  a draft of the  Common  Stock  Purchase  Agreement  (the  "Purchase
Agreement")  by and  between the  Corporation  and Fusion  Capital  Fund II, LLC
("Fusion"),  providing  for the  purchase by Fusion of up to Eight  Million Five
Hundred Thousand  Dollars  ($8,500,000) of the  Corporation's  common stock, par
value $0.001 (the "Common Stock"); and

      WHEREAS,  after  careful  consideration  of the  Purchase  Agreement,  the
documents  incident  thereto and other factors  deemed  relevant by the Board of
Directors, the Board of Directors has determined that it is advisable and in the
best interests of the Corporation to engage in the transactions  contemplated by
the Purchase Agreement, including, but not limited to, the issuance of 3,500,000
shares of Common Stock to Fusion as a commitment fee (the  "Commitment  Shares")
and the sale of  shares of Common  Stock to  Fusion up to the  available  amount
under the Purchase Agreement (the "Purchase Shares").

                              Transaction Documents
                              ---------------------

      NOW,  THEREFORE,  BE IT RESOLVED,  that the transactions  described in the
Purchase  Agreement  are hereby  approved and  ___________________________  (the
"Authorized  Officers")  are  severally  authorized  to execute  and deliver the
Purchase Agreement,  and any other agreements or documents  contemplated thereby
including,   without   limitation,   a   registration   rights   agreement  (the
"Registration Rights Agreement") providing for the registration of the shares of
the  Company's  Common Stock  issuable in respect of the  Purchase  Agreement on
behalf  of  the  Corporation,  with  such  amendments,  changes,  additions  and
deletions as the Authorized  Officers may deem to be appropriate  and approve on
behalf of, the  Corporation,  such approval to be conclusively  evidenced by the
signature of an Authorized Officer thereon; and

      FURTHER RESOLVED, that the terms and provisions of the Registration Rights
Agreement by and among the  Corporation  and Fusion are hereby  approved and the
Authorized  Officers  are  authorized  to execute and  deliver the  Registration
Rights Agreement  (pursuant to the terms of the Purchase  Agreement),  with such
amendments,  changes, additions and deletions as the Authorized Officer may deem
appropriate  and  approve on behalf of, the  Corporation,  such  approval  to be
conclusively evidenced by the signature of an Authorized Officer thereon; and

<PAGE>

      FURTHER  RESOLVED,  that the terms and  provisions of the Form of Transfer
Agent Instructions (the  "Instructions")  are hereby approved and the Authorized
Officers are authorized to execute and deliver the Instructions (pursuant to the
terms of the Purchase Agreement),  with such amendments,  changes, additions and
deletions as the Authorized  Officers may deem appropriate and approve on behalf
of, the Corporation, such approval to be conclusively evidenced by the signature
of an Authorized Officer thereon; and

                         Execution of Purchase Agreement
                         -------------------------------

      FURTHER  RESOLVED,  that the Corporation be and it hereby is authorized to
execute the Purchase Agreement providing for the purchase of common stock of the
Corporation having an aggregate value of up to $8,500,000.00; and

                            Issuance of Common Stock
                            ------------------------

      FURTHER  RESOLVED,  that the  Corporation  was authorized to issue 200,000
shares of Common Stock to Fusion pursuant to the Confidential Term Sheet between
the Company and Fusion dated as of December 19, 2006 ("Signing Shares") and that
upon  issuance  of the  Signing  Shares,  the  Signing  Shares  have  been  duly
authorized,  validly  issued,  fully  paid and  nonassessable  with no  personal
liability attaching to the ownership thereof; and

      FURTHER  RESOLVED,  that the  Corporation  is hereby  authorized  to issue
3,500,000  shares of Common Stock to Fusion  Capital Fund II, LLC as  Commitment
Shares and that upon issuance of the Commitment  Shares pursuant to the Purchase
Agreement, the Commitment Shares shall be duly authorized, validly issued, fully
paid and  nonassessable  with no personal  liability  attaching to the ownership
thereof; and

      FURTHER  RESOLVED,  that the  Corporation  is hereby  authorized  to issue
shares of Common Stock upon the purchase of Purchase  Shares up to the available
amount under the Purchase Agreement in accordance with the terms of the Purchase
Agreement  and that,  upon  issuance  of the  Purchase  Shares  pursuant  to the
Purchase Agreement, the Purchase Shares will be duly authorized, validly issued,
fully  paid  and  nonassessable  with no  personal  liability  attaching  to the
ownership thereof; and

      FURTHER RESOLVED,  that the Corporation shall initially reserve 19,166,666
shares of Common  Stock for  issuance  as  Purchase  Shares  under the  Purchase
Agreement.

                               Approval of Actions
                               -------------------

      FURTHER  RESOLVED,  that,  without limiting the foregoing,  the Authorized
Officers are, and each of them hereby is,  authorized and directed to proceed on
behalf of the  Corporation  and to take all such  steps as deemed  necessary  or
appropriate, with the advice and assistance of counsel, to cause the Corporation
to consummate the agreements  referred to herein and to perform its  obligations
under such agreements; and

      FURTHER RESOLVED, that the Authorized Officers be, and each of them hereby
is,  authorized,  empowered  and  directed  on  behalf of and in the name of the
Corporation,  to take or cause  to be taken  all  such  further  actions  and to
execute and  deliver or cause to be  executed  and  delivered  all such  further
agreements,   amendments,   documents,    certificates,    reports,   schedules,
applications,  notices,  letters and  undertakings and to incur and pay all such
fees and expenses as in their judgment  shall be necessary,  proper or desirable
to carry into  effect  the  purpose  and intent of any and all of the  foregoing
resolutions, and that all actions heretofore taken by any officer or director of
the  Corporation  in  connection  with  the  transactions  contemplated  by  the
agreements  described herein are hereby approved,  ratified and confirmed in all
respects.
<PAGE>

      IN WITNESS WHEREOF, the Board of Directors has executed and delivered this
Consent effective as of __________, 200__.

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

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

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

being all of the directors of ____________

<PAGE>

                                   EXHIBIT C-2
                                   -----------

          FORM OF COMPANY RESOLUTIONS APPROVING REGISTRATION STATEMENT

                          UNANIMOUS WRITTEN CONSENT OF

                              e.Digital Corporation

      Pursuant to Section ______ of the _________, the undersigned, being all of
the   directors  of  e.Digital   Corporation,   a  Delaware   corporation   (the
"Corporation")  do hereby consent to and adopt the following  resolutions as the
action of the Board of Directors for and on behalf of the Corporation and hereby
direct  that this  Consent be filed with the minutes of the  proceedings  of the
Board of Directors.

      WHEREAS,  there  has  been  presented  to the  Board of  Directors  of the
Corporation a Common Stock Purchase Agreement (the "Purchase  Agreement") by and
among the Corporation and Fusion Capital Fund II, LLC ("Fusion"),  providing for
the  purchase by Fusion of up to Eight  Million Five  Hundred  Thousand  Dollars
($8,500,000.00) of the Corporation's common stock, par value $0.001 (the "Common
Stock"); and

      WHEREAS,  after  careful  consideration  of the  Purchase  Agreement,  the
documents  incident  thereto and other factors  deemed  relevant by the Board of
Directors,  the Board of Directors  has approved the Purchase  Agreement and the
transactions contemplated thereby and the Company has executed and delivered the
Purchase Agreement to Fusion; and

      WHEREAS, in connection with the transactions  contemplated pursuant to the
Purchase Agreement, the Company has agreed to file a registration statement with
the  Securities  and Exchange  Commission  (the  "Commission")  registering  the
Commitment Shares (as defined in the Purchase Agreement) and the Purchase Shares
(as herein defined in the Purchase Agreement);

      WHEREAS,  the management of the  Corporation has prepared an initial draft
of a Registration Statement on Form ___ (the "Registration  Statement") in order
to  register  the  sale of the  Purchase  Shares,  the  Signing  Shares  and the
Commitment Shares (collectively, the "Shares"); and

      WHEREAS, the Board of Directors has determined to approve the Registration
Statement and to authorize the  appropriate  officers of the Corporation to take
all such actions as they may deem appropriate to effect the offering.

      NOW,  THEREFORE,  BE IT RESOLVED,  that the officers and  directors of the
Corporation  be, and each of them hereby is,  authorized and directed,  with the
assistance of counsel and accountants for the Corporation,  to prepare,  execute
and file with the  Commission the  Registration  Statement,  which  Registration
Statement  shall be filed  substantially  in the form  presented to the Board of
Directors,  with such  changes  therein  as the Chief  Executive  Officer of the
Corporation or any Vice President of the Corporation shall deem desirable and in
the best  interest  of the  Corporation  and its  shareholders  (such  officer's
execution   thereof   including   such  changes  shall  be  deemed  to  evidence
conclusively such determination); and

<PAGE>

      FURTHER  RESOLVED,  that the officers of the  Corporation  be, and each of
them hereby is,  authorized  and  directed,  with the  assistance of counsel and
accountants  for  the  Corporation,  to  prepare,  execute  and  file  with  the
Commission all amendments,  including post-effective amendments, and supplements
to the  Registration  Statement,  and  all  certificates,  exhibits,  schedules,
documents and other instruments relating to the Registration  Statement, as such
officers  shall deem  necessary or  appropriate  (such  officer's  execution and
filing thereof shall be deemed to evidence conclusively such determination); and

      FURTHER RESOLVED,  that the execution of the Registration Statement and of
any  amendments  and  supplements  thereto by the officers and  directors of the
Corporation  be,  and  the  same  hereby  is,  specifically   authorized  either
personally or by the Authorized  Officers as such  officer's or director's  true
and lawful attorneys-in-fact and agents; and

      FURTHER  RESOLVED,  that the Authorized  Officers are hereby designated as
"Agent for  Service" of the  Corporation  in  connection  with the  Registration
Statement  and the  filing  thereof  with  the  Commission,  and the  Authorized
Officers  hereby are authorized to receive  communications  and notices from the
Commission with respect to the Registration Statement; and

      FURTHER  RESOLVED,  that the officers of the  Corporation  be, and each of
them hereby is, authorized and directed to pay all fees, costs and expenses that
may  be  incurred  by  the  Corporation  in  connection  with  the  Registration
Statement; and

      FURTHER  RESOLVED,  that it is desirable  and in the best  interest of the
Corporation  that the  Shares be  qualified  or  registered  for sale in various
states;  that the  officers of the  Corporation  be, and each of them hereby is,
authorized to determine the states in which appropriate action shall be taken to
qualify  or  register  for sale all or such part of the  Shares as they may deem
advisable;  that said  officers  be, and each of them hereby is,  authorized  to
perform  on  behalf  of the  Corporation  any and all such acts as they may deem
necessary or advisable in order to comply with the  applicable  laws of any such
states, and in connection therewith to execute and file all requisite papers and
documents,  including, but not limited to, applications,  reports, surety bonds,
irrevocable  consents,  appointments  of  attorneys  for  service of process and
resolutions; and the execution by such officers of any such paper or document or
the doing by them of any act in  connection  with the  foregoing  matters  shall
conclusively  establish  their  authority  therefor from the Corporation and the
approval and  ratification  by the  Corporation  of the papers and  documents so
executed and the actions so taken; and

      FURTHER  RESOLVED,  that if,  in any  state  where  the  securities  to be
registered or qualified for sale to the public,  or where the  Corporation is to
be registered in connection with the public offering of the Shares, a prescribed
form of  resolution  or  resolutions  is  required to be adopted by the Board of
Directors,  each such  resolution  shall be  deemed  to have been and  hereby is
adopted,  and the Secretary is hereby  authorized to certify the adoption of all
such resolutions as though such resolutions were now presented to and adopted by
the Board of Directors; and

      FURTHER RESOLVED, that the officers of the Corporation with the assistance
of counsel be, and each of them hereby is,  authorized  and directed to take all
necessary steps and do all other things  necessary and appropriate to effect the
listing of the Shares on the Nasdaq OTC Bulletin Board market, if any.

<PAGE>

                               Approval of Actions
                               -------------------

      FURTHER  RESOLVED,  that,  without limiting the foregoing,  the Authorized
Officers are, and each of them hereby is,  authorized and directed to proceed on
behalf of the Corporation and to take all such steps as are deemed  necessary or
appropriate, with the advice and assistance of counsel, to cause the Corporation
to take all such  action  referred  to herein  and to  perform  its  obligations
incident to the registration, listing and sale of the Shares; and

      FURTHER RESOLVED, that the Authorized Officers be, and each of them hereby
is,  authorized,  empowered  and  directed  on  behalf of and in the name of the
Corporation,  to take or cause  to be taken  all  such  further  actions  and to
execute and  deliver or cause to be  executed  and  delivered  all such  further
agreements,   amendments,   documents,    certificates,    reports,   schedules,
applications,  notices,  letters and  undertakings and to incur and pay all such
fees and expenses as in their judgment  shall be necessary,  proper or desirable
to carry into  effect  the  purpose  and intent of any and all of the  foregoing
resolutions, and that all actions heretofore taken by any officer or director of
the  Corporation  in  connection  with  the  transactions  contemplated  by  the
agreements  described herein are hereby approved,  ratified and confirmed in all
respects.

IN WITNESS WHEREOF, the Board of Directors has executed and delivered this
Consent effective as of __________, 200_.

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

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

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

being all of the directors of ____________

<PAGE>

                                    EXHIBIT D
                                    ---------

                         FORM OF SECRETARY'S CERTIFICATE

      This Secretary's  Certificate  ("Certificate") is being delivered pursuant
to Section 7(k) of that  certain  Common Stock  Purchase  Agreement  dated as of
__________,  ("Common  Stock  Purchase  Agreement"),  by and  between  e.Digital
Corporation,  a Delaware corporation (the "Company") and Fusion Capital Fund II,
LLC (the  "Buyer"),  pursuant  to which the  Company may sell to the Buyer up to
Eight Million Five Hundred Thousand Dollars ($8,500,000) of the Company's Common
Stock,  par value $0.001 per share (the "Common  Stock").  Terms used herein and
not  otherwise  defined  shall have the meanings  ascribed to them in the Common
Stock Purchase Agreement.

      The undersigned,  ____________, Secretary of the Company, hereby certifies
as follows:

            1. I am the  Secretary  of  the  Company  and  make  the  statements
      contained in this Secretary's Certificate.

            2. Attached hereto as Exhibit A and Exhibit B are true,  correct and
      complete  copies of the Company's  bylaws  ("Bylaws")  and  Certificate of
      Incorporation  ("Articles"),  in each case,  as amended  through  the date
      hereof,  and no  action  has been  taken by the  Company,  its  directors,
      officers or  shareholders,  in  contemplation of the filing of any further
      amendment relating to or affecting the Bylaws or Articles.

            3.  Attached  hereto as  Exhibit C are true,  correct  and  complete
      copies of the  resolutions  duly  adopted by the Board of Directors of the
      Company  on  _____________,  at  which a quorum  was  present  and  acting
      throughout.  Such resolutions have not been amended, modified or rescinded
      and  remain in full force and  effect  and such  resolutions  are the only
      resolutions adopted by the Company's Board of Directors,  or any committee
      thereof,  or the  shareholders of the Company relating to or affecting (i)
      the entering into and performance of the Common Stock Purchase  Agreement,
      or the  issuance,  offering  and  sale  of the  Purchase  Shares  and  the
      Commitment  Shares  and (ii) and the  performance  of the  Company  of its
      obligation under the Transaction Documents as contemplated therein.

            4. As of the  date  hereof,  the  authorized,  issued  and  reserved
      capital stock of the Company is as set forth on Exhibit D hereto.

      IN WITNESS  WHEREOF,  I have hereunder signed my name on this ___ day of
___________________.

-------------------------
                                          Secretary

The  undersigned as ___________ of __________,  a ________  corporation,  hereby
certifies that ____________ is the duly elected, appointed, qualified and acting
Secretary of _________,  and that the signature  appearing  above is his genuine
signature.

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

<PAGE>

                                    EXHIBIT E
                                    ---------

    FORM OF LETTER TO THE TRANSFER AGENT FOR THE ISSUANCE OF THE COMMITMENTS
                   SHARES AT SIGNING OF THE PURCHASE AGREEMENT

                              [COMPANY LETTERHEAD]

[DATE]

[TRANSFER AGENT]

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

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

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

Re: Issuance of Common Shares to Fusion Capital Fund II, LLC

Dear ________,

On behalf of e.Digital Corporation,  (the "Company"),  you are hereby instructed
to issue as soon as possible  ________ shares of our common stock in the name of
Fusion Capital Fund II, LLC. The share certificate  should be dated [DATE OF THE
COMMON STOCK PURCHASE  AGREEMENT].  I have included a true and correct copy of a
unanimous  written  consent  executed  by all of the  members  of the  Board  of
Directors of the Company  adopting  resolutions  approving the issuance of these
shares. The shares should be issued subject to the following restrictive legend:

      THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE  HAVE NOT BEEN REGISTERED
      UNDER  THE  SECURITIES  ACT OF  1933,  AS  AMENDED,  OR  APPLICABLE  STATE
      SECURITIES  LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
      NOT BE OFFERED FOR SALE,  SOLD,  TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
      AN  EFFECTIVE   REGISTRATION   STATEMENT  FOR  THE  SECURITIES  UNDER  THE
      SECURITIES ACT OF 1933, AS AMENDED,  OR APPLICABLE  STATE SECURITIES LAWS,
      UNLESS SOLD PURSUANT TO: (1) RULE 144 UNDER THE SECURITIES ACT OF 1933, AS
      AMENDED,  OR (2) AN OPINION OF HOLDER'S COUNSEL, IN A CUSTOMARY FORM, THAT
      REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES
      LAWS.

<PAGE>

The share  certificate  should be sent as soon as possible via overnight mail to
the following address:

                  Fusion Capital Fund II, LLC
                  222 Merchandise Mart Plaza, Suite 9-112
                  Chicago, IL 60654
                  Attention: Steven Martin

Thank you very much for your help.  Please call me at ______________ if you have
any questions or need anything further.

e.Digital Corporation

BY:_____________________________
      [name]
      [title]

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