Document:

Unassociated Document

    
      

      

    

    Exhibit
      10.1

     

    SECURITIES
      PURCHASE AGREEMENT

     

    SECURITIES
      PURCHASE AGREEMENT
      (the
      "Agreement"),
      dated
      as of May ___, 2007, by and among nCoat, Inc., formerly Tylerstone Ventures
      Corporation, a Delaware corporation (the "Company")
      and
      the investors listed on the Schedule of Buyers attached hereto (individually,
      a
      "Buyer"
      and
      collectively, the "Buyers").

     

    WHEREAS:

     

    A.   The
      Company and each Buyer is executing and delivering this Agreement in reliance
      upon the exemption from securities registration afforded by Section 4(2) of
      the
      Securities Act of 1933, as amended (the "1933
      Act"),
      and
      Rule 506 of Regulation D ("Regulation D")
      as
      promulgated by the United States Securities and Exchange Commission (the
      "SEC")
      under
      the 1933 Act.

     

    B.   The
      Company has authorized two new series of convertible notes of the Company,
      in
      the forms attached hereto as Exhibit
      A
      (the
      "Series
      A Notes")
      and
      Exhibit B (the “Series
      B Notes”),
      (collectively the “Notes”)
      which
      Notes shall be convertible into the Company's common stock, par value $0.0001
      per share (the "Common
      Stock")
      (as
      converted, the “Series A Conversion
      Shares”
or
      “Series
      B Conversion Shares”),
      in
      accordance with the terms of the Notes (the Series A Conversion Shares and
      the
      Series B Conversion Shares shall collectively be referred to herein as the
      “Conversion
      Shares”).

     

    C.   Each
      Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
      conditions stated in this Agreement, (i) that aggregate principal amount of
      the Notes set forth opposite such Buyer's name in column (3) on the Schedule
      of
      Buyers attached hereto (which aggregate amount for all Buyers shall be
      $17,750,000 (“Aggregate
      Principal Amount of Series A Notes and Series B Notes”)
      in
      amounts as subscribed by the Buyers), (ii) that number of shares of Common
      Stock
      (“Shares”)
      set
      forth opposite such Buyer's name in column (4) on the Schedule of Buyers
      attached hereto (which aggregate amount for all Buyers shall be up to 14,250,000
      Shares (“Aggregate
      Number of Shares”),
      in
      amounts as subscribed by the Buyers) (each such Share being sold at a price
      of
      $0.40) and (iii) warrants, in substantially the form attached hereto as
Exhibit
      C
      (the
      "Series
      A Warrants")
      and
Exhibit
      D
      (the
“Series
      B Warrants”),
      (collectively the “Warrants”)
      to
      acquire up to that number of additional shares of Common Stock set forth
      opposite such Buyer's name in column (5) of the Schedule of Buyers (as
      exercised, the “Series
      A Warrant Shares”
and
      “Series
      B Warrant Shares”,
      collectively referred to herein as the "Warrant
      Shares").
      Of
      the $17,750,000 principal amount of Notes being issued in connection with this
      transaction, not more than $9,000,000 principal amount of Notes shall be
      designated as Series A Notes.

     

    D.   In
      the
      event that a Buyer elects to subscribe directly for Shares, rather than Notes,
      the Aggregate Principal Amount of Notes being offered shall automatically be
      reduced by one (1) dollar for every two and one-half (2.5) shares subscribed
      for
      by Buyers up to an aggregate of $5,700,000, or 14,250,000 Shares. 

     

    

    
      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    

    E.   Contemporaneously
      with the execution and delivery of this Agreement, the Company and the
      purchasers of the Series A Notes, Shares and Series A Warrants are executing
      and
      delivering a Registration Rights Agreement, substantially in the form attached
      hereto as Exhibit
      E
      (the
      "Registration
      Rights Agreement"),
      pursuant to which the Company will agree to provide certain registration rights
      with respect to the Registrable Securities (as defined in the Registration
      Rights Agreement) under the 1933 Act and the rules and regulations promulgated
      thereunder, and applicable state securities laws.

     

    F.   The
      Notes, the Conversion Shares, the Shares, the Warrants and the Warrant Shares
      collectively are referred to herein as the "Securities."

     

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

     

    
      	 	
              1.

            	
              PURCHASE
                AND SALE OF NOTES, SHARES AND WARRANTS.

            

    

     

    
      	 	
              (a)

            	
              Purchase
                of Notes, Shares and Warrants.

            

    

     

    (i)   Notes,
      Shares and Warrants. Subject
      to the satisfaction (or waiver) of the conditions set forth in Sections 6 and
      7
      below, the Company shall issue and sell to each Buyer, and each Buyer severally,
      but not jointly, agrees to purchase from the Company on either the Initial
      Closing Date (as defined below) or the Final Closing Date (as defined below),
      (x) a principal amount of Notes as is set forth opposite such Buyer's name
      in column (3) on the Schedule of Buyers, (y) the number of Shares as is set
      forth opposite such Buyer’s name in column (4) on the Schedule of Buyers each at
      a purchase price of $0.40 per share, and (z) Warrants to acquire up to that
      number of Warrant Shares as is set forth opposite such Buyer's name in column
      (5) on the Schedule of Buyers, (the "Closing").
      Buyer
      will receive one Warrant for each Share purchased or each Conversion Share
      underlying the Notes purchased pursuant to this Agreement.

     

    (ii)   Closing.
      The
      date and time of the initial Closing (the "Initial
      Closing")
      shall
      be no later than 10:00 a.m., New York City time on May 25, 2007 (or such later
      date as is mutually agreed to by the Company and each Buyer) (the “Initial
      Closing Date”)
      after
      notification of satisfaction (or waiver) of the conditions to the Closing set
      forth in Sections 6 and 7 below, with any additional closings (the “Additional
      Closing Dates”) to take place on or before June 18, 2007 (“Termination
      Date”)
      with
      the date of the final Closing (the “Final
      Closing”)
      occurring on before the Termination Date (the “Final
      Closing Date”),
      each
      to occur at the offices of Richardson & Patel LLP, 405 Lexington Avenue,
      26th Floor, New York, New York 10174 unless the Company and the Buyers (as
      defined below) agree otherwise. The Initial Closing and the Final Closing may
      be
      referred to herein collectively as a “Closing.”
      

     

    (iii)   Purchase
      Price.
      The
      aggregate purchase price for the Notes, Shares and Warrants to be purchased
      by
      each such Buyer at each Closing (the "Purchase
      Price")
      shall
      be the amount set forth opposite each Buyer's name in column (6) of the Schedule
      of Buyers. The aggregate Purchase Price amount for all Buyers in the Initial
      Closing shall be no less than $1,000,000. The aggregate Purchase Price for
      all
      Buyers in the Additional Closings shall be $17,750,000 less the aggregate
      Purchase Price of Securities in the Initial Closing. 

     

    

    
      
        
          
          

        

        
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    (b)   Form
      of Payment.
      On the
      Initial Closing Date, each of the Additional Closings and the Final Closing
      Date, (i) each Buyer, shall deliver its Purchase Price, to the Escrow Agent
      (as
      defined below) pursuant to Section 2 of the Escrow Agreement, dated as of March
      22, 2007 and subsequently amended as of May 15, 2007, by and among the Company,
      the Agent (as defined in Section 3(g)) and American Stock Transfer and Trust
      Company ("Escrow
      Agent"),
      a
      financial institution chartered under the laws of the State of New York,
      attached hereto as Exhibit
      F
      (the
      "Escrow
      Agreement"),
      or to
      the Company directly as directed by the Agent (as defined below), and
      (ii) the Company shall deliver to each Buyer the Notes (allocated in the
      principal amounts as such Buyer shall request) which such Buyer is then
      purchasing hereunder along with the Shares, if so purchased, and the Warrants
      (allocated in the amounts as such Buyer shall request) which such Buyer is
      purchasing, in each case duly executed on behalf of the Company and registered
      in the name of such Buyer or its designee. 

     

    2.   BUYER'S
      REPRESENTATIONS AND WARRANTIES.
      Each
      Buyer, severally and not jointly, represents and warrants with respect to only
      itself that:

     

    (a)   No
      Sale or Distribution.
      Such
      Buyer is acquiring the Shares, Notes and Warrants, and upon conversion of the
      Notes and exercise of the Warrants will acquire the Conversion Shares issuable
      upon conversion of the Notes and the Warrant Shares issuable upon exercise
      of
      the Warrants, as principal for its own account and not with a view towards,
      or
      for resale in connection with, the public sale or distribution thereof, except
      pursuant to sales registered or exempted under the 1933 Act; provided, however,
      that by making the representations herein, such Buyer does not agree to hold
      any
      of the Securities for any minimum or other specific term and reserves the right
      to dispose of the Securities at any time in accordance with or pursuant to
      a
      registration statement or an exemption under the 1933 Act and pursuant to the
      applicable terms of the Transaction Documents (as defined in Section 3(b)).
      Such
      Buyer is acquiring the Securities hereunder in the ordinary course of its
      business. Such Buyer does not presently have any agreement or understanding,
      directly or indirectly, with any Person (as defined in Section 3(t)) to
      distribute any of the Securities.

     

    (b)   Accredited
      Investor Status.
      At the
      time such Buyer was offered the Securities, it was, and at the date hereof
      it
      is, and on each date on which it exercises any Warrants, it will be either:
      (i)
      an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or
      (a)(8) under the Securities Act or (ii) a “qualified institutional buyer” as
      defined in Rule 144A(a) under the Securities Act. Such Buyer is not required
      to
      be registered as a broker-dealer under Section 15 of the Exchange
      Act.

     

    (c)   Reliance
      on Exemptions.
      Such
      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 such Buyer's compliance with, the
      representations, warranties, agreements, acknowledgments and understandings
      of
      such Buyer set forth herein in order to determine the availability of such
      exemptions and the eligibility of such Buyer to acquire the
      Securities.

     

    

    
      
        
          
          

        

        
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    (d)   Information.
      Such
      Buyer and its advisors, if any, have been furnished with all materials relating
      to the business, finances and operations of the Company and materials relating
      to the offer and sale of the Securities that have been requested by such Buyer.
      Such Buyer and its advisors, if any, have been afforded the opportunity to
      ask
      questions of the Company. Neither such inquiries nor any other due diligence
      investigations conducted by such Buyer or its advisors, if any, or its
      representatives shall modify, amend or affect such Buyer's right to rely on
      the
      Company's representations and warranties contained herein. Such Buyer
      understands that its investment in the Securities involves a high degree of
      risk
      and is able to afford a complete loss of such investment. Such 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.

     

    (e)   No
      Governmental Review.
      Such
      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 Resale.
      Such
      Buyer understands that except as provided in the Registration Rights Agreement
      (which relates solely to the Series A Conversion Shares, the Shares and the
      Series A Warrant Shares): (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, (B) such Buyer shall have delivered to the Company an
      opinion of counsel, in a form reasonably acceptable to the Company, to the
      effect that such Securities to be sold, assigned or transferred may be sold,
      assigned or transferred pursuant to an exemption from such registration, or
      (C)
      such Buyer provides the Company with reasonable assurance that such Securities
      can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
      promulgated under the 1933 Act, as amended (or a successor rule thereto)
      (collectively, "Rule
      144"),
      notwithstanding the foregoing, the requirement to deliver a legal opinion as
      set
      out in clause (B) above shall not apply to transfers to an affiliate of the
      Buyer; (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. The Securities
      may be pledged in connection with a bona fide margin account or other loan
      or
      financing arrangement secured by the Securities and such pledge of Securities
      shall not be deemed to be a transfer, sale or assignment of the Securities
      hereunder, and no Buyer effecting a pledge of Securities shall be required
      to
      provide the Company with any notice thereof or otherwise make any delivery
      to
      the Company pursuant to this Agreement or any other Transaction Document (as
      defined in Section 3(b)), including, without limitation, this Section
      2(f).

    

      (g)   Legends.
        Such
        Buyer understands that the certificates or other instruments representing
        the
        Notes, Shares and Warrants and, solely with respect to the Series A Conversion
        Shares, the Shares and the Series A Warrant Shares until such time as the
        resale
        of the Series A Conversion Shares, the Shares and the Series A Warrant Shares
        have been registered under the 1933 Act as contemplated by the Registration
        Rights Agreement, the stock certificates representing the Conversion Shares,
        the
        Shares and the Warrant Shares, except as set forth below, shall bear any
        legend
        as required by the "blue sky" laws of any state and a restrictive legend
        in
        substantially the following form (and a stop-transfer order may be placed
        against transfer of such stock certificates):

    

    

    
      
        
          
          

        

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

     

    The
      legend set forth above shall be removed and the Company shall issue a
      certificate without such legend to the holder of the Securities upon which
      it is
      stamped, if, unless otherwise required by state securities laws, (i) such
      Securities are registered for resale under the 1933 Act, (ii) in connection
      with
      a sale, assignment or other transfer, such holder provides the Company with
      an
      opinion of a law firm reasonably acceptable to the Company (with Richardson
      & Patel LLP being deemed acceptable), in a form reasonably acceptable to the
      Company, to the effect that such sale, assignment or transfer of the Securities
      may be made without registration under the applicable requirements of the 1933
      Act, or (iii) such holder provides the Company with reasonable assurance that
      the Securities can be sold, assigned or transferred pursuant to Rule 144 or
      Rule
      144A.

     

    (h)   Validity;
      Enforcement.
      This
      Agreement and the Registration Rights Agreement to which such Buyer of Series
      A
      Notes, Shares and Series A Warrants is a party have been duly and validly
      authorized, executed and delivered on behalf of such Buyer and shall constitute
      the legal, valid and binding obligations of such Buyer enforceable against
      such
      Buyer in accordance with their respective terms, except as such enforceability
      may be limited by general principles of equity or to applicable bankruptcy,
      insolvency, reorganization, moratorium, liquidation and other similar laws
      relating to, or affecting generally, the enforcement of applicable creditors'
      rights and remedies.

     

    (i)   No
      Conflicts.
      The
      execution, delivery and performance by such Buyer of this Agreement and the
      Registration Rights Agreement (solely with respect to the Buyers of Series
      A
      Notes, Series A Warrants and Shares) and the consummation by such Buyer of
      the
      transactions contemplated hereby and thereby will not (i) result in a violation
      of the organizational documents of such Buyer 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 such Buyer is a party, or (iii) result in a violation of
      any
      law, rule, regulation, order, judgment or decree (including federal and state
      securities laws) applicable to such Buyer, except in the case of clauses (ii)
      and (iii) above, for such conflicts, defaults, rights or violations which would
      not, individually or in the aggregate, reasonably be expected to have a material
      adverse effect on the ability of such Buyer to perform its obligations
      hereunder.

    

    
      
        
          
          

        

        
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    (j)   Residency.
      Such
      Buyer is a resident of that jurisdiction specified below its address on the
      Schedule of Buyers.

     

    (k)   Buyer's
      Broker Fees.
      Each
      Buyer shall be responsible for the payment of any placement agent's fees,
      financial advisory fees, or brokers' commissions for placement agents, financial
      advisors and/or brokers engaged by such Buyer relating to or arising out of
      the
      transactions contemplated hereby.

     

    (l)   Certain
      Trading Activities.
      Other
      than the transactions contemplated herein, since the time that such Buyer was
      first contacted by the Company, the Agent or any other Person regarding this
      investment in the Company, neither the Buyer nor any Affiliate of such Buyer
      which (x) had knowledge of the transactions contemplated hereby, (y) has or
      shares discretion relating to such Buyer's investments or trading or information
      concerning such Buyer's investments and (z) is subject to such Buyer's review
      or
      input concerning such Affiliate's investments or trading (collectively,
      "Trading
      Affiliates")
      has
      directly or indirectly, nor has any Person acting on behalf of or pursuant
      to
      any understanding with such Buyer or Trading Affiliate, effected or agreed
      to
      effect any transactions in the securities of the Company. Such Buyer hereby
      covenants and agrees not to, and shall cause its Trading Affiliates not to,
      engage, directly or indirectly, in any transactions in the securities of the
      Company or involving the Company's securities during the period from the date
      hereof until the earlier to occur of (i) such time as the transactions
      contemplated by this Agreement are first publicly announced as described in
      Section 4(i) hereof or (ii) such time as this Agreement is terminated in full
      pursuant to Section 8 hereof. Other than to other Persons party to this
      Agreement and those expressly acknowledged by the Company, such Buyer has
      maintained the confidentiality of the existence and terms of this transaction.
      "Short
      Sales"
      include, without limitation, all “short sales” as defined in Rule 200
      promulgated under Regulation SHO under the Exchange Act and all types of direct
      and indirect stock pledges, forward sale contracts, options, puts, calls, short
      sales, swaps and similar arrangements (including on a total return basis),
      and
      sales and other transactions through non-U.S. broker-dealers or foreign
      regulated brokers. Such Buyer acknowledges the SEC's position set forth in
      Item
      65, Section 5 under Section A, of the Manual of Publicly Available Telephone
      Interpretations, dated July 1997, compiled by the Office of Chief Counsel,
      Division of Corporation Finance, and such Buyer will adhere to such
      position.

     

     

     

     

     

     

     

     

     

     

    

    
      
        
          
          

        

        
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    3.   REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY.
      Except
      as
      set forth in the Disclosure Schedules, which Disclosure Schedules shall be
      deemed a part hereof and shall qualify any representation made herein to the
      extent of the disclosure contained in the corresponding section of the
      Disclosure Schedules, the Company hereby represents and warrants to each of
      the
      Buyers that, as of the date hereof and as of each of the Initial Closing Date,
      Additional Closing Dates and the Final Closing Date:

     

    (a)   Organization
      and Qualification.
      The
      Company and its "Subsidiaries"
      (which
      for purposes of this Agreement means any joint venture or any entity in which
      the Company, directly or indirectly, owns any of the capital stock or holds
      an
      equity or similar interest) are entities validly existing and in good standing
      under the laws of the jurisdiction in which they are formed, and have the
      requisite power and authorization 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 entity 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 would not
      reasonably be expected to have a Material Adverse Effect. As used in this
      Agreement, "Material
      Adverse Effect"
      means
      any material adverse effect on the business, properties, assets, operations,
      results of operations, condition (financial or otherwise) or prospects of the
      Company and its Subsidiaries, individually or taken as a whole, or on the
      transactions contemplated hereby or in the other Transaction Documents or by
      the
      agreements and instruments to be entered into in connection herewith or
      therewith, or on the authority or ability of the Company to perform in any
      material respect its obligations under the Transaction Documents (as defined
      below). The Company has no Subsidiaries except as set forth on Schedule
      3(a).

     

    (b)   Authorization;
      Enforcement; Validity.
      The
      Company has the requisite corporate power and authority to enter into and
      perform its obligations under this Agreement, the Notes, the Warrants, the
      Registration Rights Agreement, the Transfer Agent Instructions (as defined
      in
      Section 5(b)), and each of the other agreements entered into by the parties
      hereto in connection with the transactions contemplated by this Agreement
      (collectively, the "Transaction
      Documents")
      and to
      issue the Securities in accordance with the terms hereof and thereof. The
      execution and delivery of the Transaction Documents by the Company and the
      consummation by the Company of the transactions contemplated hereby and thereby,
      including, without limitation, the issuance of the Notes, the Shares and the
      Warrants, the reservation for issuance and the issuance of the Conversion
      Shares issuable
      upon conversion of the Notes and the reservation for issuance and issuance
      of
      Warrant Shares issuable upon exercise of the Warrants have been duly authorized
      by the Company's Board of Directors and, except as set forth in Section 3(e),
      no
      further filing, consent, or authorization is required by the Company, its Board
      of Directors or its stockholders. This Agreement and the other Transaction
      Documents of even date herewith have been duly executed and delivered by the
      Company, and constitute the legal, valid and binding obligations of the Company,
      enforceable against the Company in accordance with their respective 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 applicable
      creditors' rights and remedies.

     

     

     

     

     

    

    
      
        
          
          

        

        
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    (c)   Issuance
      of Securities.
      The
      issuance of the Notes, Shares and Warrants are duly authorized and are free
      from
      all taxes, liens and charges with respect to the issue thereof. At Closing,
      the
      Company shall have reserved from its duly authorized capital stock not less
      than
      the sum of 120% of the maximum number of shares of Common Stock issuable (x)
      upon conversion of the Notes (without taking into account any limitations on
      the
      conversion of the Notes set forth in the Notes), and (y) upon exercise of the
      Warrants (without taking into account any limitations on the exercise of the
      Warrants set forth in the Warrants). Upon conversion or exercise in accordance
      with the Notes or the Warrants, as the case may be, the Conversion Shares and
      the Warrant Shares, respectively, will be validly issued, fully paid and
      nonassessable and free from all preemptive or similar rights, 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. Upon the issuance of the Shares
      in accordance with this Agreement, the Shares will be validly issued, fully
      paid
      and nonassessable and free from all preemptive or similar rights, taxes, liens
      and charges with respect to the issue thereof. Assuming the accuracy of each
      of
      the representations and warranties set forth in Section 2 of this Agreement,
      the
      offer and issuance by the Company of the Securities is exempt from registration
      under the 1933 Act.

     

    (d)   No
      Conflicts.
      Except
      as set forth on Schedule
      3(d),
      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 issuance of the Notes, Shares and
      Warrants and reservation for issuance and issuance of the Conversion Shares
      and
      the Warrant Shares) will not (i) result in a violation of any articles of
      incorporation, articles of formation, any articles of designations or other
      constituent documents of the Company or any of its Subsidiaries, any capital
      stock of the Company or any of its Subsidiaries or bylaws of the Company or
      any
      of its Subsidiaries or (ii) conflict with, or constitute a default (or an event
      which with notice or lapse of time or both would become a default) in any
      respect 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 (iii) result in a
      violation of any law, rule, regulation, order, judgment or decree (including
      foreign, federal and state securities laws and regulations and the rules and
      regulations of the NASD’s OTC Bulletin Board (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 each of clauses (ii) and (iii), such as could not have or reasonably
      be expected to result in a Material Adverse Effect.

     

    (e)   Consents.
      Neither
      the Company nor any of its Subsidiaries is required to obtain any consent,
      authorization or order of, or make any filing or registration with, any court,
      governmental agency or any regulatory or self-regulatory agency or any other
      Person in order for it to execute, deliver or perform any of its obligations
      under or contemplated by the Transaction Documents, in each case in accordance
      with the terms hereof or thereof, except for the following consents,
      authorizations, orders, filings and registrations (none of which is required
      to
      be filed or obtained before the Closing): (i) the filing with the SEC of one
      or
      more registration statements (“Registration
      Statement”)
      in
      accordance with the requirements of the Registration Rights Agreement and (ii)
      the filing of a listing application for the Shares, the Conversion Shares and
      the Warrant Shares with the Principal Market, if applicable, which shall be
      done
      pursuant to the rules of the Principal Market. The Company and its Subsidiaries
      are unaware of any facts or circumstances that might prevent the Company from
      obtaining or effecting any of the registration, application or filings pursuant
      to the preceding sentence. The Company is not in violation of the listing
      requirements of the Principal Market and has no knowledge of any facts that
      would reasonably lead to delisting or suspension of the Common Stock on the
      Principal Market in the foreseeable future.

     

     

     

     

    

    
      
        
          
          

        

        
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    (f)   Acknowledgement
      Regarding Buyer’s Trading Activity.
      Anything in this Agreement or elsewhere herein to the contrary notwithstanding
      (except as set forth in Section 2(l)), it is understood and acknowledged by
      the
      Company (i) that none of the Buyers have been asked by the Company to agree,
      nor
      has any Buyer agreed, to desist from purchasing or selling, long and/or short,
      securities of the Company, or “derivative” securities based on securities issued
      by the Company or to hold the Securities for any specified term; (ii) that
      past
      or future open market or other transactions by any Buyer, including Short Sales,
      and specifically including, without limitation, Short Sales or “derivative”
transactions, before or after the Closing of this or future private placement
      transactions, may negatively impact the market price of the Company’s
      publicly-traded securities; (iii) that any Buyer, and counter-parties in
“derivative” transactions to which any such Buyer is a party, directly or
      indirectly, presently may have a “short” position in the Common Stock, and (iv)
      that each Buyer shall not be deemed to have any affiliation with or control
      over
      any arm’s length counter-party in any “derivative” transaction. The
      Company further understands and acknowledges that (a) one or more Buyers may
      engage in hedging activities at various times during the period that the
      Securities are outstanding, including, without limitation, during the periods
      that the value of the Warrant Shares deliverable with respect to Securities
      are
      being determined and (b) such hedging activities (if any) could reduce the
      value
      of the existing stockholders' equity interests in the Company at and after
      the
      time that the hedging activities are being conducted.  The Company
      acknowledges that such aforementioned hedging activities do not constitute
      a
      breach of any of the Transaction Documents.

     

    (g)   Acknowledgment
      Regarding Buyer's Purchase of Securities.
      The
      Company acknowledges and agrees that each Buyer is acting solely in the capacity
      of an arm's length purchaser with respect to the Transaction Documents and
      the
      transactions contemplated hereby and thereby and that no Buyer is (i) an officer
      or director of the Company, (ii) an "affiliate" of the Company or any of its
      Subsidiaries (as defined in Rule 144 of the 1933 Act) or (iii) to the knowledge
      of the Company, a "beneficial owner" of more than 10% of the shares of Common
      Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange Act
      of
      1934, as amended (the "1934
      Act")).
      The
      Company further acknowledges that no Buyer is acting as a financial advisor
      or
      fiduciary of the Company or any of its Subsidiaries (or in any similar capacity)
      with respect to the Transaction Documents and the transactions contemplated
      hereby and thereby, and any advice given by a 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 such
      Buyer's purchase of the Securities. The Company further represents to each
      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.

     

    (h)   No
      General Solicitation; Placement Agent's Fees.
      Neither
      the Company, nor any of its Subsidiaries or 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) in connection with the offer
      or
      sale of the Securities. The Company shall be responsible for the payment of
      any
      placement agent's fees, financial advisory fees, or brokers' commissions (other
      than for persons engaged by any Buyer or its investment advisor) relating to
      or
      arising out of the transactions contemplated hereby. The Company acknowledges
      that it has engaged Knight Capital Markets, LLC as placement agent (the
      "Agent")
      in
      connection with the sale of the Securities. The fees and expenses payable to
      the
      Agent are set forth on Schedule
      3(h)
      attached
      hereto. Other than the Agent, neither the Company nor any of its Subsidiaries
      has engaged any placement agent or other agent in connection with the sale
      of
      the Securities.

     

    

    
      
        
          
          

        

        
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    (i)   No
      Integrated Offering.
      None of
      the Company, its Subsidiaries, any of their affiliates, and any Person acting
      on
      their behalf has, directly or indirectly, made any offers or sales of any
      security or solicited any offers to buy any security, under circumstances that
      would require registration of any of the Securities under the 1933 Act or cause
      this offering of the Securities to be integrated with prior offerings by the
      Company for purposes of the 1933 Act or any applicable stockholder approval
      provisions, including, without limitation, under the rules and regulations
      of
      any exchange or automated quotation system on which any of the securities of
      the
      Company are listed or designated. None of the Company, its Subsidiaries, their
      affiliates and any Person acting on their behalf will take any action or steps
      referred to in the preceding sentence that would require registration of any
      of
      the Securities under the 1933 Act or cause the offering of the Securities to
      be
      integrated with other offerings.

     

    (j)   Dilutive
      Effect.
      The
      Company understands and acknowledges that the number of Conversion Shares
      issuable upon conversion of the Notes and the Warrant Shares issuable upon
      exercise of the Warrants will increase in certain circumstances. The Company
      further acknowledges that its obligation to issue Conversion Shares upon
      conversion of the Notes in accordance with this Agreement and the
      Notes and
      its
      obligation to issue the Warrant Shares upon exercise of the Warrants in
      accordance with this Agreement and the Warrants is, in each case, absolute
      and
      unconditional, regardless of the dilutive effect that such issuance may have
      on
      the ownership interests of other stockholders of the Company.

     

    (k)   Application
      of Takeover Protections; Rights Agreement.
      Except
      as set forth on Schedule
      3(k),
      the
      Company and its board of directors have taken 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 Articles of Incorporation
      (as
      defined in Section 3(r)) or the laws of the state of its incorporation which
      is
      or could become applicable to any Buyer as a result of the transactions
      contemplated by this Agreement, including, without limitation, the Company's
      issuance of the Securities and any Buyer's ownership of the Securities.

     

     

     

     

     

     

     

     

    

    
      
        
          
          

        

        
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    (l)   SEC
      Documents; Financial Statements.
      Except
      as set forth on Schedule
      3(l),
      during
      the two (2) years prior to the date hereof, 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, notes and schedules thereto and documents
      incorporated by reference therein being hereinafter referred to as the
      "SEC
      Documents"),
      or
      has received a valid extension of such time of filing and has filed all SEC
      Documents prior to the expiration of any such extension. The Company has
      delivered to the Buyers or their respective representatives true, correct and
      complete copies of the SEC Documents not available on the EDGAR system. As
      of
      their respective filing dates, 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, 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 the
      light of the circumstances under which they were made, not misleading. As of
      their respective filing dates, 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). No other
      information provided by or on behalf of the Company to the Buyers which is
      not
      included in the SEC Documents, including, without limitation, information
      referred to in Section 2(d) of this Agreement or in any disclosure schedules,
      contains any untrue statement of a material fact or omits to state any material
      fact necessary in order to make the statements therein, in the light of the
      circumstance under which they are or were made not misleading. 

     

    (m)   Absence
      of Certain Changes.
      Since
      the date of the latest audited financial statements included in the Tylerstone
      Ventures Corporation 10-KSB filed on October 3, 2006, the financial statements
      for the year ended December 31, 2006 (reflecting the operations of the
      acquisition company completed February 14, 2007) included in the Form 8-K filed
      May 18, 2007 and the financial statements for the three-month period ended
      March
      31, 2007 included in the Form 10-QSB filed by the Company (as a consolidated
      post-merger combination of the two companies) on May 22, 2007, except as
      specifically disclosed in a subsequent SEC Report filed prior to the date hereof
      or as set forth on Schedule
      3(m),
      (i)
      there has been no event, occurrence or development that has had or that could
      reasonably be expected to result in a Material Adverse Effect, or be required
      to
      be disclosed by the Company under applicable securities laws on a registration
      statement filed with the SEC relating to an issuance and sale by the Company
      of
      its Common Stock and which has not been publicly announced, (ii) the Company
      has
      not incurred any liabilities (contingent or otherwise) other than (A) trade
      payables and accrued expenses incurred in the ordinary course of business
      consistent with past practice and (B) liabilities not required to be reflected
      in the Company’s financial statements pursuant to GAAP or disclosed in filings
      made with the SEC, (iii) the Company has not altered its method of accounting,
      (iv) the Company has not declared or made any dividend or distribution of cash
      or other property to its stockholders or purchased, redeemed or made any
      agreements to purchase or redeem any shares of its capital stock and (v) the
      Company has not issued any equity securities to any officer, director or
      Affiliate, except pursuant to existing Company stock option plans or pursuant
      to
      conversion of outstanding debt. The Company does not have pending before the
      SEC
      any request for confidential treatment of information. Except for the issuance
      of the Securities contemplated by this Agreement or as set forth on Schedule
      3(m),
      no
      event, liability or development has occurred or exists with respect to the
      Company or its Subsidiaries or their respective business, properties, operations
      or financial condition, that would be required to be disclosed by the Company
      under applicable securities laws at the time this representation is made or
      deemed made that has not been publicly disclosed at least 1 Trading Day prior
      to
      the date that this representation is made.

     

    

    
      
        
          
          

        

        
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    (n)   Intentionally
      left blank.

     

    (o)   Conduct
      of Business; Regulatory Permits.
      Neither
      the Company nor any of its Subsidiaries is in violation of any term of or in
      default under its respective Certificates or Articles of Incorporation or its
      Bylaws or their organizational charter or bylaws, respectively. To the best
      of
      the Company’s knowledge, neither the Company nor any of its Subsidiaries is in
      violation of any judgment, decree or order or any statute, ordinance, rule
      or
      regulation applicable to the Company or its Subsidiaries, and neither the
      Company nor any of its Subsidiaries will conduct its business in violation
      of
      any of the foregoing, except for possible violations which could not,
      individually or in the aggregate, reasonably be expected to have a Material
      Adverse Effect. Without limiting the generality of the foregoing, the Company
      is
      not in violation of any of the rules, regulations or requirements of the
      Approved Market and has no knowledge of any facts or circumstances that would
      reasonably lead to delisting or suspension of the Common Stock by its Approved
      Market in the foreseeable future. Since February 20, 2007, (i) the Common Stock
      has been designated for quotation on the Principal Market, (ii) trading in
      the
      Common Stock has not been suspended by the SEC or the Principal Market and
      (iii)
      the Company has received no communication, written or oral, from the SEC or
      the
      Principal Market regarding the suspension or delisting of the Common Stock
      from
      the Principal Market. Except as set forth on Schedule
      3(o),
      the
      Company and its Subsidiaries possess all certificates, authorizations and
      permits issued by the appropriate regulatory authorities necessary to conduct
      their respective businesses, except where the failure to possess such
      certificates, authorizations or permits would not have, individually or in
      the
      aggregate, a Material Adverse Effect, 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)   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
      or any of its Subsidiaries (i) used any corporate funds for any unlawful
      contribution, gift, entertainment or other unlawful expenses relating to
      political activity; (ii) made any direct or indirect unlawful payment to any
      foreign or domestic government official or employee from corporate funds; (iii)
      violated or is in violation of any provision of the U.S. Foreign Corrupt
      Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,
      payoff, influence payment, kickback or other unlawful payment to any foreign
      or
      domestic government official or employee.

     

    (q)   Sarbanes-Oxley
      Act.
      To the
      knowledge of the Company, except as set forth on Schedule
      3(q),
      the
      Company is in compliance with any and all applicable requirements of the
      Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any
      and
      all applicable rules and regulations promulgated by the SEC thereunder that
      are
      effective as of the date hereof.

     

    (r)   Transactions
      With Affiliates.
      Except
      as set forth in the SEC Documents filed at least ten (10) days prior to the
      date
      hereof and other than the grant of stock options disclosed on Schedule
      3(r),
      none of
      the officers, directors or employees of the Company or any of its Subsidiaries
      is presently a party to any transaction with the Company or any of its
      Subsidiaries (other than for ordinary course services as employees, officers
      or
      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 such
      officer, director or employee or, to the knowledge of the Company or any of
      its
      Subsidiaries, any corporation, partnership, trust or other entity in which
      any
      such officer, director, or employee has a substantial interest or is an officer,
      director, trustee or partner, in each case in excess of $60,000 other than
      for
      (i) payment of salary or consulting fees for services rendered, (ii)
      reimbursement for expenses incurred on behalf of the Company and (iii) other
      employee benefits, including stock option agreements under any stock option
      plan
      of the Company.

     

    

    
      
        
          
          

        

        
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    (s)   Equity
      Capitalization.
      As of
      the date hereof, the capitalization of the Company is as set forth on
Schedule
      3(s).
      Except
      as disclosed in Schedule
      3(s):
      (i)
      none of the Company's capital stock is 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 options, warrants, scrip, rights to
      subscribe to, calls or commitments of any character whatsoever relating to,
      or
      securities or rights convertible into, or exercisable or exchangeable for,
      any
      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 capital stock of the
      Company or any of its Subsidiaries or options, warrants, scrip, rights to
      subscribe to, calls or commitments of any character whatsoever relating to,
      or
      securities or rights convertible into, or exercisable or exchangeable for,
      any
      capital stock of the Company or any of its Subsidiaries; (iii) other than the
      Notes being issued pursuant to this Agreement there are no outstanding debt
      securities, notes, credit agreements, credit facilities or other agreements,
      documents or instruments evidencing Indebtedness of the Company or any of its
      Subsidiaries or by which the Company or any of its Subsidiaries is or may become
      bound; (iv) there are no financing statements securing obligations in any
      material amounts, either singly or in the aggregate, filed in connection with
      the Company or any of its Subsidiaries; (v) 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 pursuant
      to the Registration Rights Agreement); (vi) 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; (vii) there are no securities or instruments containing
      anti-dilution or similar provisions that will be triggered by the issuance
      of
      the Securities; (viii) the Company does not have any stock appreciation rights
      or "phantom stock" plans or agreements or any similar plan or agreement; and
      (ix) the Company and its Subsidiaries have no liabilities or obligations
      required to be disclosed in the SEC Documents but not so disclosed in the SEC
      Documents, other than those incurred in the ordinary course of the Company's
      or
      its Subsidiaries' respective businesses and which, individually or in the
      aggregate, do not or would not have a Material Adverse Effect. The Company
      has
      furnished to the Buyers true, correct and complete 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 Bylaws, as amended and as in effect on the date hereof (the
      "Bylaws"),
      and
      the terms of all securities convertible into, or exercisable or exchangeable
      for, shares of Common Stock and the material rights of the holders thereof
      in
      respect thereto.

     

     

     

     

     

     

     

    
 

    
      
        
          
          

        

        
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    (t)   Indebtedness
      and Other Contracts.
      Since
      the date of the latest audited financial statements included in the Tylerstone
      Ventures Corporation 10-KSB filed on October 3, 2006 and the financial
      statements for the year ended December 31, 2006 included in the Form 8-K filed
      by the Company on May 18, 2007 and except as disclosed in Schedule
      3(t),
      neither
      the Company nor any of its Subsidiaries (i) has any additional outstanding
      Indebtedness (as defined below), (ii) is a party to any contract, agreement
      or
      instrument, the violation of which, or default under which, by the other
      party(ies) to such contract, agreement or instrument could reasonably be
      expected to result in a Material Adverse Effect, (iii) is in violation of any
      term of or in default under any contract, agreement or instrument relating
      to
      any Indebtedness, except where such violations and defaults would not result,
      individually or in the aggregate, in a Material Adverse Effect, or (iv) is
      a
      party to any contract, agreement or instrument relating to any Indebtedness,
      the
      performance of which, in the judgment of the Company's officers, has or is
      expected to have a Material Adverse Effect. Schedule
      3(t)
      provides
      a detailed description of the material terms of any such outstanding
      Indebtedness. For purposes of this Agreement: (x) "Indebtedness"
      of any
      Person means, ,without duplication (A) all indebtedness for borrowed money,
      (B)
      all obligations issued, undertaken or assumed as the deferred purchase price
      of
      property or services, including (without limitation) "capital leases" in
      accordance with generally accepted accounting principles (other than trade
      payables entered into in the ordinary course of business), (C) all reimbursement
      or payment obligations with respect to letters of credit, surety bonds and
      other
      similar instruments, (D) all obligations evidenced by notes, bonds, debentures
      or similar instruments, including obligations so evidenced incurred in
      connection with the acquisition of property, assets or businesses, (E) all
      indebtedness created or arising under any conditional sale or other title
      retention agreement, or incurred as financing, in either case with respect
      to
      any property or assets acquired with the proceeds of such indebtedness (even
      though the rights and remedies of the seller or bank under such agreement in
      the
      event of default are limited to repossession or sale of such property), (F)
      all
      monetary obligations under any leasing or similar arrangement which, in
      connection with generally accepted accounting principles, consistently applied
      for the periods covered thereby, is classified as a capital lease, (G) all
      indebtedness referred to in clauses (A) through (F) above secured by (or for
      which the holder of such Indebtedness has an existing right, contingent or
      otherwise, to be secured by) any mortgage, lien, pledge, charge, security
      interest or other encumbrance upon or in any property or assets (including
      accounts and contract rights) owned by any Person, even though the Person which
      owns such assets or property has not assumed or become liable for the payment
      of
      such indebtedness, and (H) all Contingent Obligations in respect of indebtedness
      or obligations of others of the kinds referred to in clauses (A) through (G)
      above; (y) "Contingent
      Obligation"
      means,
      as to any Person, any direct or indirect liability, contingent or otherwise,
      of
      that Person with respect to any indebtedness, lease, dividend or other
      obligation of another Person if the primary purpose or intent of the Person
      incurring such liability, or the primary effect thereof, is to provide assurance
      to the obligee of such liability that such liability will be paid or discharged,
      or that any agreements relating thereto will be complied with, or that the
      holders of such liability will be protected (in whole or in part) against loss
      with respect thereto; and (z) "Person"
      means
      an individual or legal entity, including but not limited to a corporation,
      a
      limited liability company, a partnership, a joint venture, a trust, an
      unincorporated organization and a government or any department or agency
      thereof.

     

    (u)   Absence
      of Litigation.
      To the
      knowledge of the Company, except as set forth in Schedule
      3(u),
      there
      is no action, suit, proceeding, inquiry or investigation before or by the
      Principal Market, any court, public board, government agency, self-regulatory
      organization or body pending or, threatened against or affecting the Company
      or
      any of its Subsidiaries, the Common Stock or any of the Company's Subsidiaries
      or any of the Company's or its Subsidiaries' officers or directors that, if
      adversely decided against the Company, would have a Material Adverse Effect
      on
      the Company.

     

    

    
      
        
          
          

        

        
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    (v)   Insurance.
      Except
      as set forth on Schedule
      3(v),
      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 have a Material
      Adverse Effect.

     

    (w)   Employee
      Relations.
      Neither
      the Company nor any of its Subsidiaries is a party to any collective bargaining
      agreement or employs any member of a union. The Company and its Subsidiaries
      believe that their relations with their employees are good. No executive officer
      of the Company or any of its Subsidiaries (as defined in Rule 501(f) of the
      1933
      Act) has notified the Company or any such Subsidiary that such officer intends
      to leave the Company or any such Subsidiary or otherwise terminate such
      officer's employment with the Company or any such Subsidiary. To the knowledge
      of the Company, no executive officer of the Company or any of its Subsidiaries,
      is, or is now expected to be, in violation of any material term of any
      employment contract, confidentiality, disclosure or proprietary information
      agreement, non-competition agreement, or any other contract or agreement or
      any
      restrictive covenant, and the continued employment of each such executive
      officer does not subject the Company or any of its Subsidiaries to any liability
      with respect to any of the foregoing matters. The Company and its Subsidiaries,
      to their knowledge, are in compliance with all federal, state, local and foreign
      laws and regulations respecting labor, employment and employment practices
      and
      benefits, terms and conditions of employment and wages and hours, except where
      failure to be in compliance would not, either individually or in the aggregate,
      reasonably be expected to result in a Material Adverse Effect.

     

    (x)   Title.
      Except
      as set forth on Schedule
      3(x),
      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(x)
      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.

     

    

    
      
        
          
          

        

        
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    (y)   Intellectual
      Property Rights.
      The
      Company and its Subsidiaries own or possess adequate rights or licenses to
      use
      all trademarks, service marks and all applications and registrations therefor,
      trade names, patents, patent rights, copyrights, original works of authorship,
      inventions, trade secrets and other intellectual property rights ("Intellectual
      Property Rights")
      necessary to conduct their respective businesses as now conducted. None of
      the
      Company's registered, or applied for, Intellectual Property Rights, to the
      extent the Company has such Intellectual Property Rights, have expired or
      terminated or have been abandoned, or are expected to expire or terminate or
      expected to be abandoned, within three years from the date of this Agreement.
      The Company does not have any knowledge of any infringement by the Company
      or
      its Subsidiaries of Intellectual Property Rights of others. There is no claim,
      action or proceeding being made or brought, or to the knowledge of the Company,
      being threatened, against the Company or its Subsidiaries regarding its
      Intellectual Property Rights. Neither the Company nor any of its Subsidiaries
      is
      aware of any facts or circumstances which might give rise to any of the
      foregoing infringements or claims, actions or proceedings. The Company and
      its
      Subsidiaries have taken reasonable security measures to protect the secrecy,
      confidentiality and value of all of their Intellectual Property Rights, except
      where failure to do so would not, individually or in the aggregate, reasonably
      be expected to have a Material Adverse Effect.

     

    (z)    Environmental
      Laws.
      Except
      as set forth on Schedule
      3(z),
      the
      Company and its Subsidiaries, to their knowledge, (i) are in compliance with
      any
      and all Environmental Laws (as hereinafter defined), (ii) have received all
      permits, licenses or other approvals required of them under applicable
      Environmental Laws to conduct their respective businesses, (iii) are in
      compliance with all terms and conditions of any such permit, license or
      approval, (iv) do not own or operate any real property contaminated with any
      substance that is in violation of Environmental Laws, and (v) is liable for
      any
      off-site disposal or contamination pursuant to any Environmental Laws where,
      in
      each of the foregoing clauses (i), (ii), (iii), (iv) and (v) the failure to
      so
      comply could be reasonably expected to have, individually or in the aggregate,
      a
      Material Adverse Effect. There is no civil, criminal or administrative action,
      suit, investigation, inquiry or proceeding pending or, to the knowledge of
      the
      Company, threatened by or before any court or governmental authority against
      the
      Company or any of its Subsidiaries relating to or arising from the Company's
      nor
      any Subsidiary's non-compliance with any Environmental Laws, nor has the Company
      received written notice of any alleged violations of Environmental Laws. The
      term "Environmental
      Laws"
      means
      all federal, state, local or foreign laws relating to pollution or protection
      of
      human health or the environment (including, without limitation, ambient air,
      surface water, groundwater, land surface or subsurface strata), including,
      without limitation, laws relating to emissions, discharges, releases or
      threatened releases of chemicals, pollutants, contaminants, or toxic or
      hazardous substances or wastes (collectively, "Hazardous
      Materials") into
      the
      environment, or otherwise relating to the manufacture, processing, distribution,
      use, treatment, storage, disposal, transport or handling of Hazardous Materials,
      as well as all authorizations, codes, decrees, demands or demand letters,
      injunctions, judgments, licenses, notices or notice letters, orders, permits,
      plans or regulations issued, entered, promulgated or approved
      thereunder.

     

    (aa)   Subsidiary
      Rights.
      The
      Company or one of its Subsidiaries has the unrestricted right to vote, and
      (subject to limitations imposed by applicable law) to receive dividends and
      distributions on, all capital securities of its Subsidiaries as owned by the
      Company or such Subsidiary. 

     

    

    
      
        
          
          

        

        
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    (bb)   Tax
      Status.
      Except
      as set forth on Schedule
      3(bb),
      the
      Company and each of its Subsidiaries (i) has made or filed all foreign, federal
      and state income and all other tax returns, reports and declarations required
      by
      any jurisdiction to which it is subject, (ii) 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 (iii) 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.

     

    (cc)   Internal
      Accounting and Disclosure Controls.
      The
      Company and each of its Subsidiaries maintain a system of internal accounting
      controls sufficient to provide reasonable assurance that (i) transactions are
      executed in accordance with management's general or specific authorizations,
      (ii) transactions are recorded as necessary to permit preparation of financial
      statements in conformity with generally accepted accounting principles and
      to
      maintain asset and liability accountability, (iii) access to assets or
      incurrence of liabilities is permitted only in accordance with management's
      general or specific authorization and (iv) the recorded accountability for
      assets and liabilities is compared with the existing assets and liabilities
      at
      reasonable intervals and appropriate action is taken with respect to any
      difference. The Company maintains disclosure controls and procedures (as such
      term is defined in Rule 13a-14 under the 1934 Act) that are effective in
      ensuring that information required to be disclosed by the Company in the reports
      that it files or submits under the 1934 Act is recorded, processed, summarized
      and reported, within the time periods specified in the rules and forms of the
      SEC, including, without limitation, controls and procedures designed in to
      ensure that information required to be disclosed by the Company in the reports
      that it files or submits under the 1934 Act is accumulated and communicated
      to
      the Company's management, including its principal executive officer or officers
      and its principal financial officer or officers, as appropriate, to allow timely
      decisions regarding required disclosure. During the twelve months prior to
      the
      date hereof neither the Company nor any of its Subsidiaries have received any
      notice or correspondence from any accountant relating to any potential material
      weakness in any part of the system of internal accounting controls of the
      Company or any of its Subsidiaries.

     

    (dd)   Ranking
      of Notes.
      The
      Notes shall be issued as general obligations of the Company and on a similar
      standing of priority with other unsecured Indebtedness of the Company incurred
      prior to the date hereof and senior to any unsecured Indebtedness incurred
      on or
      after the date hereof. 

     

    (ee)   Off
      Balance Sheet Arrangements.
      There
      is no transaction, arrangement, or other relationship between the Company and
      an
      unconsolidated or other off balance sheet entity that is required to be
      disclosed by the Company in its 1934 Act filings and is not so disclosed or
      that
      otherwise would be reasonably likely to have a Material Adverse
      Effect.

     

    (ff)   Investment
      Company Status.
      The
      Company is not, and upon consummation of the sale of the Securities will not
      be,
      an "investment company," a company controlled by an "investment company" or
      an
      "affiliated person" of, or "promoter" or "principal underwriter" for, an
      "investment company" as such terms are defined in the Investment Company Act
      of
      1940, as amended.

     

    

    
      
        
          
          

        

        
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    (gg)   Transfer
      Taxes.
      On each
      of the Initial Closing Date and the Final Closing Date, all stock transfer
      or
      other taxes (other than income or similar taxes) which are required to be paid
      in connection with the sale and transfer of the Securities to be sold to each
      Buyer hereunder will be, or will have been, fully paid or provided for by the
      Company, and all laws imposing such taxes will be or will have been complied
      with.

     

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

     

    (ii)    Disclosure.
      To the
      best of the Company’s knowledge, all disclosure provided by the Company to the
      Buyers regarding the Company or any of its Subsidiaries, their business and
      the
      transactions contemplated hereby in the Transaction Documents and the Schedules
      to this Agreement is true and correct and does not contain any untrue statement
      of a material fact or omit to state any material fact necessary in order to
      make
      the statements made therein, in the light of the circumstances under which
      they
      were made, not misleading. Each press release issued by the Company or any
      of
      its Subsidiaries during the period of time from October 21, 2006 to the date
      of
      this Agreement did not at the time of release contain any untrue statement
      of a
      material fact or omit to state a material fact required to be stated therein
      or
      necessary in order to make the statements therein, in the light of the
      circumstances under which they were made, not misleading. No event or
      circumstance has occurred or information exists with respect to the Company
      or
      any of its Subsidiaries or its or their business, properties, prospects,
      operations or financial conditions, which, under applicable law, rule or
      regulation, requires public disclosure or announcement by the Company but which
      has not been so publicly announced or disclosed. 

     

    
      	 	
              4.

            	
              COVENANTS.

            

    

     

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

     

    (b)   Form
      D
      and Blue Sky.
      The
      Company agrees to file a Form D with respect to the Securities as required
      under
      Regulation D and to provide a copy thereof to each Buyer promptly after such
      filing. The Company shall, on or before the Initial Closing Date, take such
      action as the Company shall reasonably determine is necessary in order to obtain
      an exemption for or to qualify the Securities for sale to the Buyers at the
      Closing pursuant to this Agreement under applicable securities or "Blue Sky"
      laws of the states of the United States (or to obtain an exemption from such
      qualification), and shall provide evidence of any such action so taken to the
      Buyers on or prior to each of the Initial Closing Date and the Final Closing
      Date. The Company shall make all filings and reports relating to the offer
      and
      sale of the Securities required under applicable securities or "Blue Sky" laws
      of the states of the United States following the Initial Closing Date or the
      Final Closing Date, as the case may be. 

     

    

    
      
        
          
          

        

        
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    (c)   Reporting
      Status.
      Until
      the date on which the Investors (as defined in the Registration Rights
      Agreement) shall have sold all the Conversion Shares, Shares and Warrant
      Shares and
      none
      of the Notes or
      Warrants is outstanding, (the "Reporting
      Period"),
      the
      Company shall file, in a timely manner, all reports required to be filed with
      the SEC pursuant to the 1934 Act, and the Company shall not terminate its status
      as an issuer required to file reports under the 1934 Act even if the 1934 Act
      or
      the rules and regulations thereunder would permit such termination.

     

    (d)   Use
      of
      Proceeds.
      The
      Company will use the proceeds from the sale of the Securities for general
      corporate purposes, and not for (A) the repayment of any outstanding
      Indebtedness of the Company or any of its Subsidiaries, except for the repayment
      of outstanding indebtedness as set forth on Schedule
      4(d),
      or (B)
      redemption or repurchase of any of its or its Subsidiaries' equity
      securities.

     

    (e)   Financial
      Information.
      The
      Company agrees to send the following to each Buyer during the Reporting Period
      (i) unless the following are filed with the SEC through EDGAR and are available
      to the public through the EDGAR system, within one (1) Business Day after the
      filing thereof with the SEC, a copy of its Annual Reports and Quarterly Reports
      on Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or any consolidated
      balance sheets, income statements, stockholders' equity statements and/or cash
      flow statements for any period other than annual, any Current Reports on Form
      8-K and any registration statements (other than on Form S-8) or amendments
      filed
      pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimile
      or e-mailed copies of all press releases issued by the Company or any of its
      Subsidiaries, and (iii) copies of any notices and other information made
      available or given to the stockholders of the Company generally,
      contemporaneously with the making available or giving thereof to the
      stockholders. As used herein, "Business
      Day"
      means
      any day other than Saturday, Sunday or other day on which commercial banks
      in
      the City of New York are authorized or required by law to remain
      closed.

     

    (f)   Listing.
      The
      Company shall promptly secure the listing of all of the Registrable Securities
      (as defined in the Registration Rights Agreement), all of the Series B
      Conversion Shares and all of the Series B Warrant Shares upon each national
      securities exchange and automated quotation system, if any, upon which the
      Common Stock is then listed (subject to official notice of issuance) and shall
      maintain, in accordance with the Notes and Warrants, such listing of all
      Registrable Securities, Series B Conversion Shares and Series B Warrant Shares
      from time to time issuable under the terms of the Transaction Documents. The
      Company shall maintain the Common Stocks' authorization for quotation on the
      Principal Market or an Approved Market (as defined below). Neither the Company
      nor any of its Subsidiaries shall take any action which would be reasonably
      expected to result in the delisting or suspension of the Common Stock on the
      Principal Market or an Approved Market. As used herein, "Approved
      Market"
      shall
      mean any of the following: The New York Stock Exchange, The NASDAQ Global Select
      Market, The NASDAQ Global Market, The NASDAQ Capital Market, the American Stock
      Exchange or the NASD’s OTC Bulletin Board. The Company shall pay all fees and
      expenses in connection with satisfying its obligations under this Section
      4(f).

     

    

    
      
        
          
          

        

        
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    (g)   Fees.
      Subject
      to Section 8 below, at Closing, the Company shall pay all of the legal fees
      of
      the Agent’s counsel and up to $15,000 in legal fees for Buyer’s counsel incurred
      in connection with the transactions contemplated by the Transaction Documents.
      The Company shall be responsible for the payment of any placement agent's fees
      (including the placement agent fees of the Agent as set forth on Schedule 3(h),
      financial advisory fees, or broker's commissions relating to or arising out
      of
      the transactions contemplated hereby, including, without limitation, any fees
      payable to the Agent. The Company shall pay, and hold each Buyer harmless
      against, any liability, loss or expense (including, without limitation,
      reasonable attorney's fees and out-of-pocket expenses) arising in connection
      with any claim relating to any such payment. 

     

    (h)   Pledge
      of Securities.
      The
      Company acknowledges and agrees that the Securities may be pledged by a Buyer
      in
      connection with a bona fide margin agreement or other loan or financing
      arrangement that is secured by the Securities. The pledge of Securities shall
      not be deemed to be a transfer, sale or assignment of the Securities hereunder,
      and no Investor effecting a pledge of Securities shall be required to provide
      the Company with any notice thereof or otherwise make any delivery to the
      Company pursuant to this Agreement or any other Transaction Document, including,
      without limitation, Section 2(f) hereof; provided that an Investor and its
      pledgee shall be required to comply with the provisions of Section 2(f) hereof
      in order to effect a sale, transfer or assignment of Securities to such pledgee.
      The Company hereby agrees to execute and deliver such documentation as a pledgee
      of the Securities may reasonably request in connection with a pledge of the
      Securities to such pledgee by an Investor.

     

    (i)   Disclosure
      of Transactions and Other Material Information.
      The
      Company shall (i) by 8:30 a.m., New York City time, on the first Business Day
      following the date of this Agreement issue a press release describing the
      material terms of the transactions contemplated hereby, and (ii) by 8:30 a.m.,
      New York City time on or before the fourth Business Day immediately following
      the date of this Agreement, file a Current Report on Form 8-K describing the
      terms of the transactions contemplated by the Transaction Documents in the
      form
      required by the 1934 Act and attaching the material Transaction Documents
      (including, without limitation, this Agreement, the form of the Notes, the
      form
      of the Warrants and the form of the Registration Rights Agreement) as exhibits
      to such filing (including all attachments, the "8-K
      Filing").
      The
      Company shall not, and shall cause each of its Subsidiaries and its and each
      of
      their respective officers, directors, employees and agents, not to, provide
      any
      Buyer with any material, nonpublic information regarding the Company or any
      of
      its Subsidiaries from and after the filing of the 8-K Filing with the SEC
      without the express written consent of such Buyer. From and after the deadline
      specified above, if a Buyer has, or believes it has, received any such material,
      nonpublic information regarding the Company or any of its Subsidiaries, it
      shall
      provide the Company with written notice thereof. The Company shall, within
      five
      (5) Trading Days (as defined in the Notes) of receipt of such notice, make
      public disclosure of such material, nonpublic information. In the event of
      a
      breach of the foregoing covenant by the Company, any of its Subsidiaries, or
      any
      of its or their respective officers, directors, employees and agents, in
      addition to any other remedy provided herein or in the Transaction Documents,
      a
      Buyer shall have the right to make a public disclosure, in the form of a press
      release, public advertisement or otherwise, of such material, nonpublic
      information without the prior approval by the Company, its Subsidiaries, or
      any
      of its or their respective officers, directors, employees or agents. No Buyer
      shall have any liability to the Company, its Subsidiaries, or any of its or
      their respective officers, directors, employees, stockholders or agents for
      any
      such disclosure. Subject to the foregoing, neither the Company, its Subsidiaries
      nor any Buyer shall issue any press releases or any other public statements
      with
      respect to the transactions contemplated hereby; provided, however, that the
      Company shall be entitled, without the prior approval of any Buyer, to make
      any
      press release or other public disclosure with respect to such transactions
      (i)
      in substantial conformity with the 8-K Filing and contemporaneously therewith
      and (ii) as is required by applicable law and regulations. Without the prior
      written consent of any applicable Buyer, neither the Company nor any of its
      Subsidiaries or affiliates shall disclose the name of such Buyer in any filing,
      announcement, release or otherwise; provided, however, that such consent shall
      be deemed to be given for any disclosure required by law in the reasonable
      opinion of the Company or its counsel.

     

    

    
      
        
          
          

        

        
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    (j)   Restriction
      on Redemption and Cash Dividends.
      So long
      as fifteen percent (15%) or more of the total dollar amount of Notes originally
      issued remain outstanding, the Company shall not, directly or indirectly,
      redeem, or declare or pay any cash dividend or distribution on, the Common
      Stock
      without the prior express written consent of the holders of Notes representing
      not less than 75% of the aggregate principal amount of the then outstanding
      Notes.

     

    (k)   Additional
      Notes; Variable Securities; Dilutive Issuances.
      So long
      as fifteen percent (15%) or more of the total dollar amount of Notes originally
      issued remain outstanding, the Company will not issue any Notes other than
      to
      the Buyers as contemplated hereby and the Company shall not issue any other
      securities that would cause a breach or default under the Notes. For so long
      as
      any Notes or Warrants originally issued remain outstanding, the Company shall
      not, in any manner, enter into or affect any Dilutive Issuances (as defined
      in
      the Notes) if the effect of such Dilutive Issuance is to cause the Company
      to be
      required to issue upon conversion of any Note or exercise of any Warrant any
      shares of Common Stock in excess of that number of shares of Common Stock which
      the Company may issue upon conversion of the Notes and exercise of the Warrants
      without breaching the Company's obligations under the rules or regulations
      of
      the Principal Market. 

     

    (l)   Corporate
      Existence.
      So long
      as any Buyer beneficially owns any Securities, the Company shall not be party
      to
      any Fundamental Transaction (as defined in the Notes) unless the Company is
      in
      compliance with the applicable provisions governing Fundamental Transactions
      set
      forth in the Notes and the Warrants.

     

    (m)   Reservation
      of Shares.
      The
      Company shall take all action necessary to at all times have authorized and
      reserved for the purpose of issuance no less than, from each of the Initial
      Closing Date and the Final Closing Date, 120% of the sum of the number of shares
      of Common Stock issuable (i) upon conversion of the Notes issued at the Closing
      and (ii) upon exercise of the Warrants issued at the Closing (without taking
      into account any limitations on the Conversion of the Notes or exercise of
      the
      Warrants set forth in the Notes and Warrants, respectively).

     

    (n)   Conduct
      of Business.
      The
      business of the Company and its Subsidiaries shall not be conducted in violation
      of any law, ordinance or regulation of any governmental entity, except where
      such violations would not result, either individually or in the aggregate,
      in a
      Material Adverse Effect.

     

    (o)   Delivery
      of Certificates.
      Upon
      conversion or exercise of the Notes and Warrants, respectively, and request
      for
      removal of restrictive legends on the shares of Common Stock issuable in
      connection therewith, certificates for shares of Common Stock will be delivered
      to the Investor within three (3) Trading Days. If such delivery is made more
      than two (2) additional Trading Days after conversion or exercise or request
      for
      removal of legend, as the case may be, the Company will compensate the Investor
      at a rate of $100 per day for each of the first ten (10) Trading Days and $200
      per day thereafter for each $10,000 of securities. In such event, after the
      first such ten (10) Trading Days noted above, the Investor will also have right
      to rescind its conversion notice for the Notes and/or its exercise notice for
      the Warrants. In addition, if the certificates have not been delivered by the
      fifth (5th)
      Trading
      Day, then, if the Investor has sold shares of Common Stock after the conversion
      or exercise date, as the case may be, the Company will compensate Investor
      for
      extra costs, if any, incurred to cover the sale, all as agreed upon and
      reflected in the Transaction Documents.

     

     

    

    
      
        
          
          

        

        
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    (p)   Additional
      Issuances of Securities.

     

    (i)   For
      purposes of this Section 4(p) and Section 4(q) below, the following definitions
      shall apply.

     

    (1)   "Convertible
      Securities"
      means
      any stock or securities (other than Options) convertible into or exercisable
      or
      exchangeable for shares of Common
      Stock.

     

    (2)   "Options"
      means
      any rights, warrants or options to subscribe for or purchase shares of
Common
      Stock or
      Convertible Securities.

     

    (3)   "Common
      Stock Equivalents"
      means,
      collectively, Options and Convertible Securities.

     

    (4)   “Additional
      Issuance Restrictions”
      shall
      mean the requirements set forth in Section 4(p)(ii) and 4(p)(iii)
      below.

     

    (ii)   From
      the
      date hereof until 90 days after the Effective Date, neither the Company nor
      any
      Subsidiary shall issue shares of Common Stock or Common Stock Equivalents,
      other
      than pursuant to this Agreement or upon the conversion of Notes or exercise
      of
      Warrants issued in connection with this Agreement; provided,
      however,
      the 90
      day period set forth in this Section 4(p) shall be extended for the number
      of
      Trading Days during such period in which (i) trading in the Common Stock is
      suspended by any Trading Market, or (ii) following the Effective Date, the
      Registration Statement is not effective or the prospectus included in the
      Registration Statement may not be used by the Buyers for the resale of the
      Conversion Shares, Shares or Warrant Shares.

     

     

     

     

     

    
 

    
      
        
          
          

        

        
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    (iii)   During
      the period that any Note or Warrant remains outstanding, notwithstanding whether
      or not an issuance of securities is deemed to be an issuance of Excluded
      Securities (as defined in the Notes), the Company shall not issue or sell,
      or
      agree to issue or sell Variable Equity Securities (as defined below), or any
      securities of the Company pursuant to an Equity Line (as defined below)
      structure or format or any securities of the Company in exchange for goods
      or
      services, without obtaining the prior written approval of each of the Buyers,
      with the exception of any such agreements, transactions or Equity Lines existing
      as of the date hereof. For purposes hereof, an “Equity Line” shall mean a
      transaction involving a written agreement between the Company and an investor
      or
      underwriter whereby the Company has the right to “put” its securities to the
      investor or underwriter over an agreed period of time and at an agreed price
      or
      price formula. For purposes hereof, the following shall be collectively referred
      to herein as, the “Variable Equity Securities”: (A) any debt or equity
      securities which are convertible into, exercisable or exchangeable for, or
      carry
      the right to receive additional shares of Common Stock either (1) at any
      conversion, exercise or exchange rate or other price that is based upon and/or
      varies with the trading prices of or quotations for Common Stock at any time
      after the initial issuance of such debt or equity security, or (2) with a fixed
      conversion, exercise or exchange price that is subject to being reset at some
      future date at any time after the initial issuance of such debt or equity
      security due to a change in the market price of the Company’s Common Stock since
      the date of initial issuance, or (B) any amortizing convertible security which
      amortizes prior to its maturity date, where the Company is required to or has
      the option to (or the investor in such transaction has the option to require
      the
      Company to) make such amortization payments in shares of Common Stock (whether
      or not such payments in stock are subject to certain equity conditions), or
      (C)
      any debenture, note or preferred stock that is accompanied by a number of
      warrants greater than 100% of the original principal amount, divided by the
      Weighted Average Price at the time of closing of such debenture, note or
      preferred stock, or (D) any Common Stock that is sold at a discount to the
      Market Price at the time of closing that is greater than 10%, or (E) any
      adjustable warrant where the number of shares issuable thereunder is subject
      to
      increase, or (F) any common stock that is accompanied by a number of warrants
      greater than 100% of the number of shares of common stock sold by the Company
      in
      such transaction, or (G) any warrant, convertible security or other Common
      Stock
      Equivalent with a conversion, exercise or exchange price that is set at a price
      that is less than 70% of the initial Conversion Price of the Note, or (H) any
      note, debenture or other debt obligation that is accompanied by shares of Common
      Stock for which the additional consideration paid per share of Common Stock
      is
      less than 90% of the Weighted Average Price at the time of closing. For purposes
      of the above, the “Weighted Average Price” at time of closing shall mean the
      Weighted Average Price, as defined in the Notes. Any Buyer shall be entitled
      to
      obtain injunctive relief against the Company to preclude any such issuance,
      which remedy shall be in addition to any right to collect damages. 

     

    (iv)   Notwithstanding
      the foregoing, this Section 4(p) shall not apply in respect of any Excluded
      Securities (as defined in the Notes), except that no Variable Equity Securities
      or Equity Line transaction shall be deemed to be included in the definition
      of
      Excluded Securities (as defined in the Notes).

     

    (v)   The
      Company recognizes that in the event that it breaches any of the requirements
      of
      this Section 4(p) or of Section 4(w) below, that irreparable harm will result
      and any remedy at law would be inadequate relief to the Buyers. The Company
      therefore agrees that the Buyers shall be entitled to seek temporary and
      permanent injunctive relief in any such case without the necessity of proving
      actual damages and without posting a bond or other security.

     

    

    
      
        
          
          

        

        
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    (q)   Participation
      in Future Financing. 

     

    (i)   From
      the
      date hereof until the date that is the 12 month anniversary of the Effective
      Date, upon any issuance by the Company or any of its Subsidiaries of Common
      Stock or Common Stock Equivalents for cash consideration (a “Subsequent
      Financing”),
      each
      Buyer shall have the right to participate in the Subsequent Financing, on a
      pro
      rata basis, up to an amount up to 50% of the Subsequent Financing (the
“Participation
      Maximum”)
      on the
      same terms, conditions and price provided for in the Subsequent
      Financing.

     

    (ii)   At
      least
      5 Trading Days prior to the closing of the Subsequent Financing, the Company
      shall deliver to each Buyer a written notice of its intention to effect a
      Subsequent Financing (“Pre-Notice”),
      which
      Pre-Notice shall ask such Buyer if it wants to review the details of such
      financing (such additional notice, a “Subsequent
      Financing Notice”). 
      Upon the request of a Buyer, which shall be delivered to the Company within
      one
      (1) Trading Day of the Company’s delivery of a Pre-Notice, and only upon a
      request by such Buyer, for a Subsequent Financing Notice, the Company shall
      promptly, but no later than one (1) Trading Day after such request, deliver
      a
      Subsequent Financing Notice to such Buyer.  The Subsequent Financing Notice
      shall describe in reasonable detail the proposed terms of such Subsequent
      Financing, the amount of proceeds intended to be raised thereunder and the
      Person or Persons through or with whom such Subsequent Financing is proposed
      to
      be effected and shall include a term sheet or similar document relating thereto
      as an attachment.   

     

    (iii)   Any
      Buyer
      desiring to participate in such Subsequent Financing must provide written notice
      to the Company by not later than 5:30 p.m. (New York City time) on the
      5th
      Trading
      Day after all of the Buyers have received the Pre-Notice that the Buyer is
      willing to participate in the Subsequent Financing, the amount of the Buyer’s
      participation, and that the Buyer has such funds ready, willing, and available
      for investment on the terms set forth in the Subsequent Financing Notice. If
      the
      Company receives no notice from a Buyer as of such 5th
      Trading
      Day, such Buyer shall be deemed to have notified the Company that it does not
      elect to participate.  

     

    (iv)   If
      by
      5:30 p.m. (New York City time) on the 5th
      Trading
      Day after all of the Buyers have received the Pre-Notice, notifications by
      the
      Buyers of their willingness to participate in the Subsequent Financing (or
      to
      cause their designees to participate) is, in the aggregate, less than the total
      amount of the Subsequent Financing, then the Company may effect the remaining
      portion of such Subsequent Financing on the terms and with the Persons set
      forth
      in the Subsequent Financing Notice.  

     

    (v)   If
      by
      5:30 p.m. (New York City time) on the 5th
      Trading
      Day after all of the Buyers have received the Pre-Notice, the Company receives
      responses to a Subsequent Financing Notice from Buyers seeking to purchase
      more
      than the aggregate amount of the Participation Maximum, each such Buyer shall
      have the right to purchase its Pro Rata Portion (as defined below) of the
      Participation Maximum.  “Pro
      Rata Portion”
means
      the ratio of (x) the Subscription Amount of Securities purchased on the Closing
      Date by a Buyer participating under this Section 4(q) and (y) the sum of the
      aggregate Subscription Amounts of Securities purchased on the Closing Date
      by
      all Buyers participating under this Section 4(q).

     

    

    
      
        
          
          

        

        
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    (vi)   The
      Company must provide the Buyers with a second Subsequent Financing Notice,
      and
      the Buyers will again have the right of participation set forth above in this
      Section 4(q), if the Subsequent Financing subject to the initial Subsequent
      Financing Notice is not consummated for any reason on the terms set forth in
      such Subsequent Financing Notice within 60 Trading Days after the date of the
      initial Subsequent Financing Notice.

     

    (vii)   Notwithstanding
      the foregoing, this Section 4(q) shall not apply in respect of (i) any
      Excluded Securities (as defined in the Notes), or
      (ii)
      an underwritten public offering of Common Stock.

     

    (r)   Most
      Favored Nation Provision. 
      From the date hereof until the date that is the 18 month anniversary of the
      Final Closing Date, upon any Subsequent Financing, each Buyer may elect, in
      its
      sole discretion, to exchange all or some of the Notes and/or Shares (but not
      the
      Warrants) then held by such Buyer for additional securities (including any
      additional securities issued as part of a unit with such security) of the same
      type issued in such Subsequent Financing (such
      exchange to be made at the same time as the closing of such Subsequent
      Financing), on the same terms and conditions as the Subsequent Financing, based
      on the Per Share Purchase Price multiplied by the number of Shares being
      exchanged. 
      By way of example, if the Company undertakes a Subsequent Financing of
      convertible debentures and warrants, each Buyer shall have the right to
      participate in such Subsequent Financing and use the exchange of its Notes
      and/or its Shares as consideration, on a $1 for $1 basis, in lieu of cash
      consideration. The Company shall provide prior written notice of any such
      Subsequent Financing in the manner set forth in Section 4(q). Notwithstanding
      the foregoing, this Section 4(r) shall not apply in respect of any Excluded
      Securities (as defined in the Notes). With respect to the exchange of Shares,
      this Section 4(r) shall only apply if such Buyer exchanges the original Common
      Stock certificate issued in connection with the transactions

     

    (s)   Company’s
      Disclosure of Material, Non-Public Information.
      Notwithstanding anything to the contrary stated herein, if the Company, in
      connection with this financing, discloses material, non-public information
      to
      the Buyers, including without limitation the items set forth on Schedule 4(s)
      (collectively, the “Information”),
      in
      addition to the existence and terms of the financing, the Company covenants
      that
      the Information will be disclosed in the ordinary course of its business, either
      by Form 8-K or press release, or both, on or before the first Business Day
      after
      the Initial Closing, or on or before the first Business Day after any Additional
      Closing if additional material non-public information is disclosed to the Buyers
      after the Initial Closing, but in any event the Company shall make public
      disclosure of all material non-public information that has been disclosed to
      the
      Buyers by not later than June 30, 2007, at which point the Buyers will no longer
      be in possession of any material, non-public information. The Company covenants
      and agrees that thereafter, neither it nor any other Person acting on its behalf
      will provide any Buyer or its agents or counsel with any information that the
      Company believes constitutes material non-public information, unless prior
      thereto such Buyer shall have executed a written agreement regarding the
      confidentiality and use of such information. The Company understands and
      confirms that each Buyer shall be relying on the foregoing representations
      in
      effecting transactions in securities of the Company. In the event of a breach
      of
      the foregoing covenant by the Company, or any of its Subsidiaries, or any of
      its
      or their respective officers, directors, employees and agents, in addition
      to
      any other remedy provided herein or in the Transaction Documents, the Company
      shall publicly disclose any material, non-public information in a Form 8-K
      within five (5) Business Days of the date that it discloses such information
      to
      the Buyer. In
      the
      event of a breach of any of the foregoing covenant by the Company, any of its
      Subsidiaries, or any of its or their respective officers, directors, employees
      and agents, in addition to any other remedy provided herein or in the
      Transaction Documents, a Buyer shall have the right to make a public disclosure,
      in the form of a press release, public advertisement or otherwise, of such
      material, nonpublic information without the prior approval by the Company.
      No
      Buyer shall have any liability to the Company, its Subsidiaries, or any of
      its
      or their respective officers, directors, employees, stockholders or agents
      for
      any such disclosure.

     

    

    
      
        
          
          

        

        
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    (t)    Retention
      of Investor Relations Firm.
      From
      the
      date hereof until the date that is the 12 month anniversary of the Final Closing
      Date, the Company shall continue to retain and use the services of Bakerview
      Investor Relations Inc. in at least such capacity and scope as is in effect
      immediately prior to the date hereof. The Company shall use commercially
      reasonable efforts to undertake any such measures as the Agent shall recommend
      that are acceptable to the board of directors of the Company in its good faith
      judgment.

     

    (u)   Retention
      of Transfer Agent.
      The
      Company will engage the services of a transfer agent for its Common Stock that
      is a participant in the Depository Trust Company’s Full Fast Program prior to
      the date on which the Registration Statement is declared effective by the
      SEC. 

     

    (v)   Shareholder
      Issuance Vote Upon National Listing.
      If the
      Company, at any time while any of the Notes or Warrants are outstanding, becomes
      listed on a National Exchange (as defined below)(a “National
      Listing”),
      and
      the rules or regulations of such National Exchange limit the number of shares
      of
      Common Stock which the Company may issue upon conversion or exercise, as
      applicable, of the Notes and Warrants (the amount of such limit is referred
      to
      herein as the “Exchange
      Cap Amount”),
      then,
      within thirty (30) days of the date of such National Listing, the Company shall
      (i) prepare a proxy statement, (ii) file a preliminary and definitive proxy
      statement with the SEC and (iii) mail the definitive proxy statement to its
      shareholders, requesting and recommending that they vote affirmatively (a
“Shareholder
      Issuance Vote”)
      on a
      proposal to approve the issuance, under the applicable rules of such National
      Exchange, of all of the Conversion Shares and Warrant Shares and other shares
      of
      Common Stock issuable pursuant to the Transaction Documents without regard
      to
      the Exchange Cap Amount and to eliminate any prohibitions under applicable
      law
      or the rules or regulations of any stock exchange, interdealer quotation system
      or other self-regulatory organization with jurisdiction over the Company or
      any
      of its securities on the Company’s ability to issue shares of Common Stock in
      excess of the Exchange Cap Amount (the shareholder approval of such proposal
      is
      referred to herein as the “Shareholder
      Issuance Approval”).
      The
      Shareholder Issuance Approval, if required hereunder, shall occur before the
      date that is ninety (90) days after the date of the National Listing (the
“Shareholder
      Issuance Voting Deadline”).
      For
      purposes hereof, “National Exchange” shall mean an Approved Market other than
      NASD’s OTC Bulletin Board. 

     

     

     

     

     

    

    
      
        
          
          

        

        
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    (w)   Limitation
      On Sale Or Disposition Of Intellectual Property to Related
      Parties.So
      long
      as any portion of the Notes remain outstanding, so long as the Company shall
      have any obligation under the Notes or so long as any of the Warrants remain
      outstanding, the Company shall not sell, convey, dispose of, spin off or assign
      any or all of its Intellectual Property Rights (as defined in Section 3(y)
      above), or the rights to receive proceeds from patent licensing agreements,
      patent infringement litigation or other litigation related to such Intellectual
      Property Rights, in each case without Buyer’s written consent, to any Related
      Party (as defined below). For purposes hereof, “Related
      Party”
      shall
      mean any of the Company’s or any Subsidiary’s officers, directors, persons who
      were officers or directors at any time during the previous two (2) years,
      stockholders who beneficially own five percent (5%) or more of the Common Stock,
      or Affiliates (as defined below) or (ii) with any individual related by blood,
      marriage, or adoption to any such individual or with any entity in which any
      such entity or individual owns a five percent (5%) or more beneficial interest.
      “Affiliate”
      for
      purposes hereof means, with respect to any person or entity, another person
      or
      entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
      interest in that person or entity, (ii) has ten percent (10%) or more common
      ownership with that person or entity, (iii) controls that person or entity,
      or
      (iv) shares common control with that person or entity. “Control”
      or
“Controls”
      for
      purposes hereof means that a person or entity has the power, direct or indirect,
      to conduct or govern the policies of another person or entity.

     

    
      	 	
              5.

            	
              REGISTER;
                TRANSFER AGENT INSTRUCTIONS.

            

    

     

    (a)   Register.
      The
      Company shall maintain at its principal executive offices (or such other office
      or agency of the Company as it may designate by notice to each holder of
      Securities), a register for the Notes and the Warrants in which the Company
      shall record the name and address of the Person in whose name the Notes
      and the
      Warrants have been issued (including the name and address of each transferee),
      the principal amount of Notes held by such Person, the number of Conversion
      Shares issuable upon conversion of the Notes and the number of Warrant Shares
      issuable upon exercise of the Warrants held by such Person. The Company shall
      keep the register open and available at all times during business hours for
      inspection of any Buyer or its legal representatives.

     

    (b)   Transfer
      Agent Instructions.
      The
      Company shall issue irrevocable instructions to its transfer agent, and any
      subsequent transfer agent, to issue certificates or credit shares to the
      applicable balance accounts at The Depository Trust Company ("DTC"),
      registered in the name of each Buyer or its respective nominee(s), for the
      Conversion Shares, Shares and the Warrant Shares issued at the Closing or upon
      conversion of the Notes or exercise of the Warrants in such amounts as specified
      from time to time by each Buyer to the Company upon conversion of the Notes
      or
      exercise of the Warrants in the form of Exhibit
      E
      attached
      hereto (the "Transfer
      Agent Instructions").
      The
      Company warrants that no instruction other than the Transfer Agent Instructions
      referred to in this Section 5(b), and stop transfer instructions to give effect
      to Section 2(g) hereof, will be given by the Company to its transfer agent,
      and
      that the Conversion Shares, the Shares and the Warrant 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 other Transaction Documents. If a Buyer
      effects a sale, assignment or transfer of the Securities in accordance with
      Section 2(f), the Company shall permit the transfer and shall promptly instruct
      its transfer agent to issue one or more certificates or credit shares to the
      applicable balance accounts at DTC in such name and in such denominations as
      specified by such Buyer to effect such sale, transfer or assignment. In the
      event that such sale, assignment or transfer involves Conversion Shares, Shares
      or Warrant Shares sold, assigned or transferred pursuant to an effective
      registration statement or pursuant to Rule 144, the transfer agent shall issue
      such Securities to the Buyer, assignee or transferee, as the case may be,
      without any restrictive legend. The Company acknowledges that a breach by it
      of
      its obligations hereunder will cause irreparable harm to a Buyer. Accordingly,
      the Company acknowledges that the remedy at law for a breach of its obligations
      under this Section 5(b) will be inadequate and agrees, in the event of a breach
      or threatened breach by the Company of the provisions of this Section 5(b),
      that
      a Buyer shall be entitled, in addition to all other available remedies, to
      an
      order and/or injunction restraining any breach and requiring immediate issuance
      and transfer, without the necessity of showing economic loss and without any
      bond or other security being required.

     

    

    
      
        
          
          

        

        
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    (c)   Additional
      Relief.
      If the
      Company shall fail for any reason or for no reason to issue to such holder
      unlegended certificates or to credit the holder's balance account with DTC
      within two (2) Trading Days of (x) receipt of documents necessary for the
      removal of legend set forth above or (y) the date of its obligation to deliver
      the shares of Common Stock as contemplated pursuant to clause (ii) below (the
      "Deadline
      Date"),
      then
      the Company will compensate the holder at a rate of $100 per day for each of
      the
      first ten (10) Trading Days and $200 per day thereafter for each $10,000 of
      securities. If the Company shall fail for any reason or for no reason to issue
      to such holder unlegended certificates or to credit the holder's balance account
      with DTC within five (5) Trading Days of the Deadline Date and if on or after
      the Trading Day (as defined in the Warrants) immediately following such Deadline
      Date, the holder purchases (in an open market transaction or otherwise) shares
      of Common Stock to deliver in satisfaction of a sale by the holder of shares
      of
      Common Stock that the holder anticipated receiving from the Company (a
"Buy-In"),
      then
      the Company shall, within three (3) Trading Days after the holder's request
      and
      in the holder's discretion, either (i) pay cash to the holder in an amount
      equal
      to the holder's total purchase price (including brokerage commissions, if any)
      for the shares of Common Stock so purchased (the "Buy-In
      Price"),
      at
      which point the Company's obligation to deliver such certificate (and to issue
      such shares of Common Stock) shall terminate, or (ii) promptly honor its
      obligation to deliver to the holder a certificate or certificates representing
      such shares of Common Stock and pay cash to the holder in an amount equal to
      the
      excess (if any) of the Buy-In Price over the product of (A) such number of
      shares of Common Stock, times (B) the Closing Bid Price on the Deadline Date.
      "Closing
      Bid Price"
      means,
      for any security as of any date, the last closing price for such security on
      Principal Market, as reported by Bloomberg, or, if the Principal Market begins
      to operate on an extended hours basis and does not designate the closing bid
      price then the last bid price of such security prior to 4:00:00 p.m., New York
      Time, as reported by Bloomberg, or, if the Principal Market is not the principal
      securities exchange or trading market for such security, the last closing price
      of such security on the principal securities exchange or trading market where
      such security is listed or traded as reported by Bloomberg, or if the foregoing
      do not apply, the last closing price of such security in the over-the-counter
      market on the electronic bulletin board for such security as reported by
      Bloomberg, or, if no closing bid price is reported for such security by
      Bloomberg, the average of the bid prices of any market makers for such security
      as reported in the "pink sheets" by Pink Sheets LLC (formerly the National
      Quotation Bureau, Inc.). If the Closing Bid Price cannot be calculated for
      a
      security on a particular date on any of the foregoing bases, the Closing Bid
      Price of such security on such date shall be the fair market value as mutually
      determined by the Company and the holder. If the Company and the holder are
      unable to agree upon the fair market value of such security, then such dispute
      shall be resolved pursuant to Section 22 of the Series A Convertible Note
      Agreement. All such determinations to be appropriately adjusted for any stock
      dividend, stock split, stock combination or other similar transaction during
      the
      applicable calculation period.

     

    

    
      
        
          
          

        

        
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              6.

            	
              CONDITIONS
                TO THE COMPANY'S OBLIGATION TO
                SELL.

            

    

     

    The
      obligation of the Company hereunder to issue and sell the Notes, the Shares
      and
      the related Warrants to each Buyer at the Closing is subject to the
      satisfaction, at or before each of the Initial Closing Date, Additional Closing
      Dates and the Final Closing Date, as the case may be, of each of the following
      conditions, provided that these conditions are for the Company's sole benefit
      and may be waived by the Company at any time in its sole discretion by providing
      each Buyer with prior written notice thereof:

     

    (i)   Such
      Buyer shall have executed each of the Transaction Documents to which it is
      a
      party and delivered the same to the Company.

     

    (ii)   Such
      Buyer and each other Buyer shall have delivered to the Company the Purchase
      Price for the Notes, Shares and the related Warrants being purchased by such
      Buyer at the Closing by wire transfer of immediately available funds pursuant
      to
      the wire instructions provided by the Company.

     

    (iii)   The
      representations and warranties of such Buyer shall be true and correct in all
      material respects (except for those representations and warranties that are
      qualified by materiality or Material Adverse Effect, which shall be true and
      correct in all respects) as of the date when made and as of the Initial Closing
      Date, the Additional Closing Date or the Final Closing Date, as the case may
      be,
      as though made at that time (except for representations and warranties that
      speak as of a specific date, which shall be true and correct as of such
      specified date), and such Buyer shall have performed, satisfied and complied
      in
      all material respects with the covenants, agreements and conditions required
      by
      this Agreement to be performed, satisfied or complied with by such Buyer at
      or
      prior to the Initial Closing Date, Additional Closing Date or the Final Closing
      Date, as the case may be.

     

    
      	 	
              7.

            	
              CONDITIONS
                TO EACH BUYER'S OBLIGATION TO
                PURCHASE.

            

    

     

    The
      obligation of each Buyer hereunder to purchase the Notes, the Shares and
      the
      related Warrants at the Closing is subject to the satisfaction, at or before
      each of the Initial Closing Date, Additional Closing Dates and the Final Closing
      Date, as the case may be, of each of the following conditions, provided that
      these conditions are for each Buyer's sole benefit and may be waived by such
      Buyer at any time in its sole discretion by providing the Company with prior
      written notice thereof:

     

    (i)   The
      Company shall have duly executed and delivered (physically or by electronic
      copy) to such Buyer (i) each of the Transaction Documents (not including the
      Registration Rights Agreement or the Transfer Agent Instructions to each Buyer
      of Series B Notes and Series B Warrants), (ii) the Notes (allocated
      in such principal amounts as such Buyer shall request), being purchased by
      such
      Buyer at the Closing pursuant to this Agreement,
      (iii)
      the Shares (allocated in such amounts as such Buyer shall request), being
      purchased by such Buyer at the Closing pursuant to this Agreement, and (iii)
      the
      related Warrants (allocated in such amounts as such Buyer shall request) being
      issued to such Buyer at the Closing pursuant to this Agreement in an amount
      equal to one Warrant for each Conversion Share underlying the Notes issued
      to
      Buyer, or in the case of the purchase of Shares in an amount equal to one
      Warrant for each Shares purchased by Buyer, at an exercise price of $1.00 per
      share.

     

    

    
      
        
          
          

        

        
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    (ii)   Such
      Buyer shall have received the opinion of Durham Jones & Pinegar, P.C., the
      Company's outside counsel (“Opinion
      of Counsel”),
      dated
      as of the Closing Date each Additional Closing Date and the Final Closing Date,
      in substantially the form of Exhibit H
      attached
      hereto.

     

    (iii)   The
      Company shall have delivered to such Buyer of Notes, Shares and Warrants a
      copy
      of the Transfer Agent Instructions, in the form of Exhibit G
      attached
      hereto, which instructions shall have been delivered to the Company's transfer
      agent.

     

    (iv)   The
      Company shall have delivered to such Buyer a certificate evidencing the
      formation and good standing of the Company and each of its Subsidiaries in
      such
      entity's jurisdiction of formation issued by the Secretary of State (or
      comparable office) of such jurisdiction, as of a date within 10 days of the
      Initial Closing Date.

     

    (v)   The
      Company shall have delivered to such Buyer a certificate evidencing the
      Company's qualification as a foreign corporation and good standing issued by
      the
      Secretary of State (or comparable office) of each jurisdiction in which the
      Company conducts business, as of a date within 10 days of the Initial Closing
      Date.

     

    (vi) 
         The
      Company shall have delivered to such Buyer a certified copy of the Certificate
      of Incorporation as certified by the Secretary of State of the State of Delaware
      within ten (10) days of the Initial Closing Date.

     

    (vii) 
        The
      Company shall have delivered to such Buyer a certificate, executed by the
      Secretary of the Company and dated as of each of the Initial Closing Date,
      Additional Closing Date(s) and the Final Closing Date, as the case may be,
      as to
      (i) the resolutions consistent with Section 3(b) as adopted by the Company's
      Board of Directors in a form reasonably acceptable to such Buyer, (ii) the
      Articles of Incorporation and (iii) the Bylaws, each as in effect at the
      Closing, in the form attached hereto as Exhibit I.

     

    (viii)
        The
      representations and warranties of the Company shall be true and correct in
      all
      material respects (except for those representations and warranties that are
      qualified by materiality or Material Adverse Effect, which shall be true and
      correct in all respects) as of the date when made and as of each of the Initial
      Closing Date, Additional Closing Date(s) and the Final Closing Date as though
      made at that time (except for representations and warranties that speak as
      of a
      specific date, which shall be true and correct as of such specified date) and
      the Company shall have performed, satisfied and complied in all material
      respects 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 Initial Closing Date, the Additional Closing Date(s) and
      the
      Final Closing Date. Such Buyer shall have received a certificate, executed
      by
      the Chief Executive Officer of the Company, dated as of each of the Initial
      Closing Date, the Additional Closing Date(s) and the Final Closing Date, to
      the
      foregoing effect and as to such other matters as may be reasonably requested
      by
      such Buyer in the form attached hereto as Exhibit
      J.

     

    

    
      
        
          
          

        

        
          -
            - - 30 - -
            -

          
            

          

        

        
          
          

        

      

    

    

    (ix)   Each
      of
      the Company’s officers, directors, 5% or greater shareholders and such other
      shareholders of the Company as determined by the Agent in its sole discretion,
      shall have entered into a lock-up agreement with the Company, in the form
      attached hereto as Exhibit
      K.

     

    (x)   The
      Common Stock (I) shall be designated for quotation or listed on the Principal
      Market and (II) shall not have been suspended, as of the Initial Closing Date,
      Additional Closing Date or the Final Closing Date, by the SEC or the Principal
      Market from trading on the Principal Market nor shall suspension by the SEC
      or
      the Principal Market have been threatened, as of the Initial Closing Date or
      the
      Final Closing Date, either (A) in writing by the SEC or the Principal Market
      or
      (B) by falling below the minimum listing maintenance requirements of the
      Principal Market.

     

    (xi)   The
      Company shall have delivered to such Buyer such other documents relating to
      the
      transactions contemplated by this Agreement as such Buyer or its counsel may
      reasonably request.

     

    8.   TERMINATION.
      This
      Agreement may be terminated by any Buyer, as to such Buyer’s obligations
      hereunder only and without any effect whatsoever on the obligations between
      the
      Company and the other buyers, by written notice to the other parties, if the
      Initial Closing has not been consummated on or before May 25, 2007, or, after
      the Initial Closing has been consummated if the Final Closing has not been
      consummated on or before June 18, 2007; provided, however, that no such
      termination will affect the right of any party to sue for any breach by the
      other party (or parties) and further provided that if this Agreement is
      terminated pursuant to this Section 8, the Company shall remain obligated to
      reimburse the non-breaching Buyers for the expenses described in Section 4(g)
      above.

     

    
      	 	
              9.

            	
              MISCELLANEOUS.

            

    

     

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

     

    

    
      
        
          
          

        

        
          -
            - - 31 - -
            -

          
            

          

        

        
          
          

        

      

    

    

    (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.

     

    (e)   Entire
      Agreement; Amendments.
      This
      Agreement and the other Transaction Documents supersede all other prior oral
      or
      written agreements between the Buyers, 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
      and therein contain the entire understanding of the parties with respect to
      the
      matters covered herein and therein and, except as specifically set forth herein
      or therein, neither the Company nor any Buyer makes any representation,
      warranty, covenant or undertaking with respect to such matters. No provision
      of
      this Agreement may be amended other than by an instrument in writing signed
      by
      the Company and the holders of at least 85% of the aggregate number of
      Conversion Shares, Shares and Warrant Shares issued and issuable hereunder,
      and
      any amendment to this Agreement made in conformity with the provisions of this
      Section 9(e) shall be binding on all Buyers and holders of Securities as
      applicable. No provision hereof may be waived other than by an instrument in
      writing signed by the party against whom enforcement is sought. No such
      amendment shall be effective to the extent that it applies to less than all
      of
      the holders of the applicable Securities then outstanding. No consideration
      shall be offered or paid to any Person to amend or consent to a waiver or
      modification of any provision of any of the Transaction Documents unless the
      same consideration also is offered to all of the parties to the Transaction
      Documents, holders of Notes or holders of the Warrants, as the case may be.
      The
      Company has not, directly or indirectly, made any agreements with any Buyers
      relating to the terms or conditions of the transactions contemplated by the
      Transaction Documents except as set forth in the Transaction Documents. Without
      limiting the foregoing, the Company confirms that, except as set forth in this
      Agreement, no Buyer has made any commitment or promise or has any other
      obligation to provide any financing to the Company or otherwise. 

     

    

    
      
        
          
          

        

        
          -
            - - 32 - -
            -

          
            

          

        

        
          
          

        

      

    

    

    (f)   Notices.
      Any and
      all notices or other communications or deliveries required or permitted to
      be
      provided hereunder shall be in writing and shall be deemed given and effective
      on the earliest of (a) the date of transmission, if such notice or communication
      is delivered via facsimile at the facsimile number set forth on the signature
      pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading
      Day,
      (b) the next Trading Day after the date of transmission, if such notice or
      communication is delivered via facsimile at the facsimile number set forth
      on
      the signature pages attached hereto on a day that is not a Trading Day or later
      than 5:30 p.m. (New York City time) on any Trading Day, (c) the 2nd
      Trading
      Day following the date of mailing, if sent by U.S. nationally recognized
      overnight courier service, or (d) upon actual receipt by the party to whom
      such
      notice is required to be given. The address for such notices and communications
      shall be as set forth on the signature pages attached hereto.

     

    (g)   Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their respective successors and assigns, including any purchasers of the Notes
      or the Warrants. The Company shall not assign this Agreement or any rights
      or
      obligations hereunder without the prior written consent of the holders of at
      least 75% of the aggregate number of Conversion Shares, Shares and Warrant
      Shares issued and issuable hereunder, including by way of a Fundamental
      Transaction. A Buyer may assign some or all of its rights hereunder without
      the
      consent of the Company, in which event such assignee shall be deemed to be
      a
      Buyer hereunder with respect to such assigned rights

     

    (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)   Survival.
      Unless
      this Agreement is terminated under Section 8, the representations and warranties
      of the Company and the Buyers contained in Sections 2 and 3, and the agreements
      and covenants set forth in Sections 4, 5 and 9 shall survive the Closing. Each
      Buyer shall be responsible only for its own representations, warranties,
      agreements and covenants hereunder.

     

    (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 any 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.

     

    

    
      
        
          
          

        

        
          -
            - - 33 - -
            -

          
            

          

        

        
          
          

        

      

    

    

    (k)   Indemnification.
      (1) By
      the Company. In consideration of each Buyer's execution and delivery of the
      Transaction Documents and acquiring the Securities thereunder and in addition
      to
      all of the Company's other obligations under the Transaction Documents, the
      Company shall defend, protect, indemnify and hold harmless each Buyer and each
      other holder of the Securities and all of their stockholders, partners, members,
      officers, directors, employees and direct or indirect investors and any of
      the
      foregoing Persons' agents or other representatives (including, without
      limitation, those retained in connection with the transactions contemplated
      by
      this Agreement) (collectively, the "Indemnitees")
      from
      and against any and all actions, causes of action, suits, claims, losses, costs,
      penalties, fees, liabilities and damages, and expenses in connection therewith
      (irrespective of whether any such Indemnitee is a party to the action for which
      indemnification hereunder is sought), and including reasonable attorneys' fees
      and disbursements (the "Indemnified
      Liabilities"),
      incurred by any Indemnitee as a result of, or arising out of, or relating to
      (a)
      any misrepresentation or breach of any representation or warranty made by the
      Company 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
      by a third party (including for these purposes a derivative action brought
      on
      behalf of the Company) and arising out of or resulting from (i) the execution,
      delivery, performance or enforcement of the Transaction Documents or any other
      certificate, instrument or document contemplated hereby or thereby, (ii) any
      transaction financed or to be financed in whole or in part, directly or
      indirectly, with the proceeds of the issuance of the Securities, (iii) any
      disclosure made by such Buyer pursuant to Section 4(i), or (iv) the status
      of
      such Buyer or holder of the Securities as an investor in the Company pursuant
      to
      the transactions contemplated by the Transaction Documents. The Company shall
      not be obligated to indemnify an Indemnitee pursuant to this Section 9(k) for
      Indemnified Liabilities to the extent such Indemnified Liabilities are caused
      by
      acts of gross negligence or willful misconduct on the part of such 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 that is permissible
      under applicable law. Except as otherwise set forth herein, the mechanics and
      procedures with respect to the rights and obligations under this Section 9(k)
      shall be the same as those set forth in Section 6 of the Registration Rights
      Agreement. 

     

    (l)   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.

     

    (m)
  Remedies.
      The
      Company, each Buyer, and each holder of the Securities shall have all rights
      and
      remedies set forth in the Transaction Documents and all rights and remedies
      which such Company or holders have been granted at any time under any other
      agreement or contract and all of the rights which such holders have under any
      law. Any Person having any rights under any provision of this Agreement shall
      be
      entitled to enforce such rights specifically (without posting a bond or other
      security), to recover damages by reason of any breach of any provision of this
      Agreement and to exercise all other rights granted by law. Furthermore, the
      Company recognizes that in the event that it fails to perform, observe, or
      discharge any or all of its obligations under the Transaction Documents, any
      remedy at law may prove to be inadequate relief to the Buyers. The Company
      therefore agrees that the Buyers shall be entitled to seek temporary and
      permanent injunctive relief in any such case without the necessity of proving
      actual damages and without posting a bond or other security.

     

    

    
      
        
          
          

        

        
          -
            - - 34 - -
            -

          
            

          

        

        
          
          

        

      

    

    

    (n)   Rescission
      and
      Withdrawal Right.
      Notwithstanding anything to the contrary contained in (and without limiting
      any
      similar provisions of) the Transaction Documents, whenever any Buyer exercises
      a
      right, election, demand or option under a Transaction Document and the Company
      does not perform, in a timely manner, its related obligations within the periods
      therein provided, then such Buyer may rescind or withdraw, in its sole
      discretion from time to time upon written notice to the Company, any relevant
      notice, demand or election in whole or in part without prejudice to its future
      actions and rights.

     

    (o)   Payment
      Set Aside.
      To the
      extent that the Company makes a payment or payments to the Buyers hereunder
      or
      pursuant to any of the other Transaction Documents or the Buyers enforce or
      exercise their rights hereunder or thereunder, and such payment or payments
      or
      the proceeds of such enforcement or exercise or any part thereof are
      subsequently invalidated, declared to be fraudulent or preferential, set aside,
      recovered from, disgorged by or are required to be refunded, repaid or otherwise
      restored to the Company, a trustee, receiver or any other Person under any
      law
      (including, without limitation, any bankruptcy law, foreign, state or federal
      law, common law or equitable cause of action), then to the extent of any such
      restoration the obligation or part thereof originally intended to be satisfied
      shall be revived and continued in full force and effect as if such payment
      had
      not been made or such enforcement or setoff had not occurred.

     

    (p)   Independent
      Nature of Buyers' Obligations and Rights.
      The
      obligations of each Buyer under any Transaction Document are several and not
      joint with the obligations of any other Buyer, and no Buyer shall be responsible
      in any way for the performance of the obligations of any other Buyer under
      any
      Transaction Document. Nothing contained herein or in any other Transaction
      Document, and no action taken by any Buyer pursuant hereto or thereto, shall
      be
      deemed to constitute the Buyers as, and the Company acknowledges that the Buyers
      do not so constitute, a partnership, an association, a joint venture or any
      other kind of entity, or create a presumption that the Buyers are in any way
      acting in concert or as a group, and the Company will not assert any such claim
      with respect to such obligations or the transactions contemplated by the
      Transaction Documents and the Company acknowledges that the Buyers are not
      acting in concert or as a group with respect to such obligations or the
      transactions contemplated by the Transaction Documents. The Company acknowledges
      and each Buyer confirms that it has independently participated in the
      negotiation of the transaction contemplated hereby with the advice of its own
      counsel and advisors. Each Buyer shall be entitled to independently protect
      and
      enforce its rights, including, without limitation, the rights arising out of
      this Agreement or out of any other Transaction Documents, and it shall not
      be
      necessary for any other Buyer to be joined as an additional party in any
      proceeding for such purpose.

     

     

     

    [Signature
      Pages Follow]

     

     

     

     

     

     

    

    

    

    
      
        
          
          

        

        
          -
            - - 35 - -
            -

          
            

          

        

        
          
          

        

      

    

     

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

     

    

    
      	
              nCOAT
                INC.

               

            	
              Address
                for Notice:

              P.O.
                Box 38

              7237
                Pace Drive 

              Whitsett,
                NC 27377 

            
	 	 
	
              By:__________________________________________

              Name:

              Title:

            	
              Facsimile:
                (336)
                447-2020

              Attention:
                Paul Clayson

            
	 	 
	
              With
                a copy to (which shall not constitute notice):

            	
              Durham
                Jones & Pinegar, P.C.

              111
                East Broadway Suite 900

              Salt
                Lake City, UT 84117

              Facsimile:
                (801) 415-3500

              Attention:
                Jeffrey M. Jones, Esq.

            

    

    

    

    

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK

    SIGNATURE
      PAGE FOR BUYER FOLLOWS]

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    

    
      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

     

    [BUYER
      SIGNATURE PAGES TO nCOAT SECURITIES PURCHASE AGREEMENT]

    

    IN
      WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
      to be duly executed by their respective authorized signatories as of the date
      first indicated above.

     

    Name
      of
      Buyer: ____________________________________________________

     

    Signature
      of Authorized Signatory of Buyer:
      ______________________________

     

    Name
      of
      Authorized Signatory: ________________________________________

     

    Title
      of
      Authorized Signatory: _________________________________________

     

    Email
      Address of Buyer:______________________________________________

     

    Fax
      Number of Buyer: _______________________________________________

     

    Address
      for Notice of Buyer:

    

    

    Address
      for Delivery of Securities for Buyer (if not same as address for
      notice):

    

    Principal
      Amount of Series A Note: $________

    Principal
      Amount of Series B Note: $________

    

    Number
      of
      Shares purchased multiplied by $0.40: $___________

    

    Series
      A
      Warrant Shares: ________________

    Series
      B
      Warrant Shares: ________________

    

    EIN
      Number: [PROVIDE
      THIS UNDER SEPARATE COVER]

     

     

    

    [SIGNATURE
      PAGES CONTINUE]

    

     

    

     

    

     

    

    
      
        
          
          

        

        
          -
            - - 37
            - - -

          
            

          

        

        
          
          

        

      

    

    

    SCHEDULE
      OF NOTES, SHARES AND WARRANT BUYERS

     

    
      	
              (1)

            	
              (2)

            	
              (3)

            	
              (4)

            	
              (5)

            	
              (6)

            	
              (7)

            
	 	 	 	 	 	 	 
	
              Buyer

            	
              Address
                and

              Facsimile

              Number

            	
              Aggregate

              Principal

              Amount
                of

              Series
                A

              Notes

            	
              Number
                of

              Shares

              purchased

            	
              Number
                of

              Series
                A

              Warrants

            	
              Aggregate

              Purchase

              Price

            	
              Legal
                Representative's Address and Facsimile

              Number

            
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	
              Buyer

            	
              Address
                and

              Facsimile

              Number

            	
              Aggregate

              Principal

              Amount
                of

               Series
                B

               Notes

            	
              Number
                of

              Shares

              purchased

            	
              Number
                of

              Series
                B

              Warrants

            	
              Aggregate

              Purchase

              Price

            	
              Legal
                Representative's Address and Facsimile

              Number

            
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 

    

    

     

     

     

     

     

     

     

     

     

    
 

    

    

    
      
        
          
          

        

        
          -
            - - 38
            - - -

          
            

          

        

        
          
          

        

      

    

     

    EXHIBITS

     

    
      	
              Exhibit
                A

            	
              Form
                of Series A Note

            

    

    
      	
              Exhibit
                B

            	
              Form
                of Series B Note

            

    

    
      	
              Exhibit
                C

            	
              Form
                of Series A Warrant

            

    

    
      	
              Exhibit
                D

            	
              Form
                of Series B Warrant

            

    

    
      	
              Exhibit
                E

            	
              Form
                of Registration Rights Agreement

            

    

    
      	
              Exhibit
                F

            	
              Form
                of Escrow Agreement

            

    

    
      	
              Exhibit
                G

            	
              Form
                of Transfer Agent Instructions

            

    

    
      	
              Exhibit
                H

            	
              Form
                of Opinion of Company’s Counsel

            

    

    
      	
              Exhibit
                I

            	
              Form
                of Secretary's Certificate

            

    

    
      	
              Exhibit
                J

            	
              Form
                of Officer’s Certificate

            

    

    
      	
              Exhibit
                K

            	
              Form
                of Lockup Agreement

            

    

     

    SCHEDULES

     

    
      	
              Schedule
                3(a)

            	
              Subsidiaries

            

    

    
      	
              Schedule
                3(c)

            	
              Reservation
                of Shares

            

    

    
      	
              Schedule
                3(d)

            	
              No
                Conflicts

            

    

    
      	
              Schedule
                3(h)

            	
              Placement
                Agent's Fees

            

    

    
      	
              Schedule
                3(i)

            	
              Integrated
                offering

            

    

    
      	
              Schedule
                3(k

            	
              Application
                of Takeover Protections

            

    

    
      	
              Schedule
                3(l)

            	
              SEC
                Documents

            

    

    
      	
              Schedule
                3(m)(i) &(ii)

            	
              Absence
                of Certain Changes

            

    

    
      	
              Schedule
                3(r)

            	
              Transactions
                with Affiliates

            

    

    
      	
              Schedule
                3(s) 

            	
              Equity
                Capitalization

            

    

    
      	
              Schedule
                3(t)

            	
              Indebtedness
                and Other Contracts

            

    

    
      	
              Schedule
                3(u)

            	
              Absence
                of Litigation

            

    

    
      	
              Schedule
                3(v)

            	
              Insurance

            

    

    
      	Schedule3(w)	
              Employee
                Relations 

            

    

    
      	
              Schedule
                3(bb)

            	
              Tax
                Status

            

    

    
      	
              Schedule
                3(ii)

            	
              Disclosures

            

    

    
      	
              Schedule
                4(b)

            	
              Form
                D and Blue Sky

            

    

    
      	
              Schedule
                4(d)

            	
              Use
                of Proceeds

            

    

    
      	
              Schedule
                5(b)

            	
              Transfer
                Agent

            

    

    
      	
              Schedule
                7(xiii)

            	
              Piggyback
                Waivers 

            

    

    

    
 

     

     

    -
      - - 39
      - - -Exhibit 10.2 - Form of Series A Notes

    
      

      

    

    

      Exhibit
        10.2

       

      EXHIBIT
        A 

       

      FORM
        OF SERIES A CONVERTIBLE NOTE

       

      NEITHER
        THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR
        THE
        SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
        UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
        LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
        (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
        UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL,
        IN A
        FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED
        UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
        SAID
        ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
        WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
        BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE
        TERMS
        OF THIS NOTE, INCLUDING SECTIONS 3(d)(iii) AND 17(a) HEREOF. THE PRINCIPAL
        AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE
        UPON
        CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
        PURSUANT TO SECTION 3(d)(iii) OF THIS NOTE.

       

      nCOAT,
        Inc.

       

      Series
        A Convertible Note

       

      
        	
                Issuance
                  Date: May       ,
                  2007

              	
                Original
                  Principal Amount: U.S.
                  $_____________

              

      

      

      FOR
        VALUE RECEIVED, nCOAT,
        Inc., a Delaware corporation (the "Company"),
        hereby promises to pay to [___________] or its registered assigns ("Holder")
        the
        amount set out above as the Original Principal Amount (as reduced pursuant
        to
        the terms hereof pursuant to conversion or otherwise, the "Principal")
        when
        due, whether upon the Maturity Date (as defined below), acceleration, redemption
        or otherwise (in each case in accordance with the terms hereof) and to pay
        interest ("Interest")
        on any
        outstanding Principal at the Interest Rate as required by Section 2 hereof.
        This
        Series A Convertible Note (including all Convertible Notes issued in exchange,
        transfer or replacement hereof, this "Note")
        is one
        of an issue of Convertible Notes issued pursuant to the Securities Purchase
        Agreement (as defined below) on the Closing Date (collectively, the
        "Notes”
and
        such other Convertible Notes, the “Other
        Notes”).
        Certain capitalized terms used herein are defined in Section 27. Capitalized
        terms used but not defined herein shall have the meanings set forth in the
        Securities Purchase Agreement (as defined below). 

       

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      (1)      
         PAYMENTS
        OF PRINCIPAL.
        On the
        Maturity Date, the Company shall pay to the Holder an amount in cash
        representing all outstanding Principal, accrued and unpaid Interest, if any,
        and
        accrued and unpaid Late Charges, if any, on such Principal and Interest.
        The
        "Maturity Date"
        shall
        be three years from the date of the Initial Closing, as may be extended at
        the
        option of the Holder (i) in the event that, and for so long as, a Trigger
        Event
        (as defined in Section 4(a)) shall have occurred and be continuing on the
        Maturity Date (as may be extended pursuant to this Section 1) or any event
        that
        shall have occurred and be continuing that with the passage of time and the
        failure to cure would result in a Trigger Event, and (ii) through the date
        that
        is ten (10) Business Days after the consummation of a Change of Control in
        the
        event that a Change of Control is publicly announced or a Change of Control
        Notice (as defined in Section 5(b)) is delivered prior to the Maturity Date.
        Other than as specifically permitted by the Note, the Company may not prepay
        any
        portion of the outstanding Principal, accrued and unpaid Interest or accrued
        and
        unpaid Late Charges, if any, on Principal and Interest.

       

      (2)      
         INTEREST;
        INTEREST RATE.
        During
        the term of this Note, Interest shall accrue on outstanding Principal at
        an
        interest rate equal to six percent (6%) per annum (the “Interest
        Rate”)
        commencing on the Issuance Date. Interest
        shall be calculated on the basis of a 365-day year and the actual number
        of days
        elapsed, to the extent permitted by applicable law. Any Interest that shall
        accrue hereunder shall be payable quarterly in arrears on each January 1,
        April
        1, July 1 and October 1 (each an “Interest
        Payment Due Date”),
        beginning on the first such date after the Issuance Date hereof, in cash
        or
        registered shares of Common Stock (“Interest
        Shares”)
        at the
        option of the Company. If the Company elects to pay any Interest due in
        registered shares of the Company’s common stock, par value $0.001 per share (the
“Common
        Stock”):
        (i)
        the issuance price of the Interest Shares will be 90% of the 5-day Weighted
        Average Price (as defined in Section 27(hh)) of the Common Stock ending on
        the
        day prior to the Interest payment due date, (ii) the Common
        Stock
        shall
        have traded an average of at least 125,000 shares per day for each of the
        five
        trading days prior to the applicable Interest Payment Due Date, (iii) a
        registration statement covering the resale by the Holder of the Interest
        Shares
        shall be current and effective as of the date of delivery of such Interest
        Shares to the Holder, and (iv) a
        Trigger
        Event, as defined below, in accordance with Section 4(a)(v),
        shall
        not have occurred.
        Interest
        hereunder will be paid to the Holder or its assignee in whose name this Note
        is
        registered on the records of the Company regarding registration and transfers
        of
        Notes.

       

      (3) 
          CONVERSION
        OF NOTES.
        This
        Note shall be convertible by the Holder into shares of the Company's Common
        Stock on the terms and conditions set forth in this Section 3.

       

      (a) Conversion
        Right.
        At any
        time or times on or after the Issuance Date, the Holder shall be entitled
        to
        convert, at the Holder’s sole option, any portion of the outstanding and unpaid
        Conversion Amount (as defined below) into fully paid and nonassessable shares
        of
        Common Stock in accordance with Section 3(d), at the Conversion Rate (as
        defined
        below). The Company shall not issue any fraction of a share of Common Stock
        upon
        any conversion. 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 to the nearest whole share. The Company shall pay any and
        all
        taxes that may be payable with respect to the issuance and delivery of Common
        Stock upon conversion of any Conversion Amount; provided
        that the
        Company shall not be required to pay any tax that may be payable in respect
        of
        any issuance of Common Stock to any Person other than the converting Holder
        or
        with respect to any income tax due by the Holder with respect to such Common
        Stock.

       

       

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

      (b) Forced
        Conversion.
        Upon
        thirty (30) days prior written notice to all of the Holders, the Company
        shall
        have the right to call all, but not less than all, of the Notes for Conversion
        at the Conversion Price (as defined below)(the call date specified in such
        notice is referred to herein as the “Forced
        Conversion Date”)
        provided that: (i) the Company’s Common Stock has closed at a price equal to or
        greater than 300% of the then applicable Conversion Price for each of the
        twenty
        (20) trading days immediately preceding the Forced Conversion Date
        (“Measurement
        Period”);
        (ii)
        there is either an effective registration statement providing for the resale
        of
        the shares of Common Stock underlying the Notes during each trading day of
        the
        Measurement Period or all of the shares of Common Stock underlying the Notes
        may
        be resold pursuant to Rule 144(k) of the Securities Act without restriction
        during each trading day of the Measurement Period; and (iii) the Common Stock
        has traded an average of 500,000 shares per day during the Measurement Period.
        Notwithstanding the foregoing, in no event shall the Company force the
        conversion of a Holder of Notes if such forced conversion would result in
        such
        Holder beneficially owning more than Maximum Percentage I or Maximum Percentage
        II (each as defined below in Section 3(e)(1)(A) and Section 3(e)(1)(A),
        respectively).

       

      (c) Conversion
        Rate.
        The
        number of shares of Common Stock issuable upon conversion of any Conversion
        Amount shall be determined by dividing (x) such Conversion Amount by (y)
        the
        then applicable Conversion Price (the "Conversion
        Rate").

       

      (i)   "Conversion
        Amount"
        means
        the sum of (A) the portion of the Principal to be converted, redeemed or
        otherwise with respect to which this determination is being made, (B) accrued
        and unpaid Interest with respect to such Principal, if any, and (C) accrued
        and
        unpaid Late Charges with respect to such Principal and Interest, if
        any.

       

      (ii)   "Conversion
        Price"
        means,
        as of any Conversion Date (as defined below) or other date of determination,
        an
        amount equal to $0.40, subject to adjustment as provided herein.

       

      (d) Mechanics
        of Conversion.

       

      (i)   Optional
        Conversion.
        To
        convert any Conversion Amount into shares of Common Stock on any date (a
        "Conversion
        Date"),
        the
        Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
        on or
        prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice
        of conversion in the form attached hereto as Exhibit
        I
        (the
        "Conversion
        Notice")
        to the
        Company and (B) if required by Section 3(d)(iii), surrender this Note to
        a
        common carrier for delivery to the Company as soon as practicable on or
        following such date (or an indemnification undertaking with respect to this
        Note
        in the case of its loss, theft or destruction). On or before the second
        (2nd)
        Trading
        Day following the date of receipt of a Conversion Notice, the Company shall
        transmit by facsimile a confirmation of receipt of such Conversion Notice
        to the
        Holder and the Company's transfer agent (the "Transfer
        Agent").
        If
        this Note is physically surrendered for conversion as required by Section
        3(d)(iii) and the outstanding Principal of this Note is greater than the
        Principal portion of the Conversion Amount being converted, then the Company
        shall as soon as practicable and in no event later than three (3) Business
        Days
        after receipt of this Note and at its own expense, issue and deliver to the
        holder a new Note (in accordance with Section 17(d)) representing the
        outstanding Principal not converted. The Person or Persons entitled to receive
        the shares of Common Stock issuable upon a conversion of this Note shall
        be
        treated for all purposes as the record holder or holders of such shares of
        Common Stock on the Conversion Date. 

       

       

      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      

      (ii)   Delivery
        of
        Certificates. On or before the third (3rd) Trading Day following the date of
        receipt of a Conversion Notice (the "Share Delivery Date") or
        request for removal of restrictive legends on the shares of Common Stock
        issuable in connection therewith, the Company shall (X) provided that the
        Transfer Agent is participating in the Depository Trust Company
        ("DTC") Fast Automated Securities Transfer Program, credit such
        aggregate number of shares of Common Stock to which the Holder shall be entitled
        to the Holder's or its designee's balance account with DTC through its Deposit
        Withdrawal Agent Commission system or (Y) if the Transfer Agent is not
        participating in the DTC Fast Automated Securities Transfer Program, issue
        and
        deliver to the address as specified in the Conversion Notice, a certificate,
        registered in the name of the Holder or its designee, for the number of shares
        of Common Stock to which the Holder shall be entitled. 

       

      (A) 
          If
        such
        delivery is made more than two (2) additional Trading Days after conversion
        or
        request for removal of legend (a “Conversion
        Failure”),
        as
        the case may be, then the Company will compensate the Holder at a rate of
        $100
        per day for each of the first ten (10) Trading Days and $200 per day thereafter
        for each $10,000 of securities. In such event, after the first such ten (10)
        Trading Days noted above, the Holder will also have the right to rescind
        its
        Conversion Notice for the Notes. 

       

      (B) 
          If
        the
        certificates have not been delivered by the fifth (5th)
        Trading
        Day after conversion or request for removal of legend, as the case may be,
        and
        the Holder has purchased (in an open market transaction or otherwise) Common
        Stock to deliver in satisfaction of a sale by the Holder of Common Stock
        issuable upon such conversion that the Holder anticipated receiving from
        the
        Company (a "Buy-In"),
        then
        the Company shall, within three (3) Trading Days after the Holder's request
        and
        in the Holder's discretion, either (i) pay cash to the Holder in an amount
        equal
        to the Holder's total purchase price (including brokerage commissions and
        other
        out-of-pocket expenses, if any) for the shares of Common Stock so purchased
        (the
"Buy-In
        Price"),
        at
        which point the Company's obligation to deliver such certificate (and to
        issue
        such Common Stock) shall terminate, or (ii) promptly honor its obligation
        to
        deliver to the Holder a certificate or certificates representing such Common
        Stock and pay cash to the Holder in an amount equal to the excess (if any)
        of
        the Buy-In Price over the product of (A) such number of shares of Common
        Stock,
        times (B) the Closing Bid Price on the Conversion Date.

       

      (iii) 
          Registration;
        Book-Entry.
        The
        Company shall maintain a register (the "Register")
        for
        the recordation of the names and addresses of the holders of each Note and
        the
        principal amount of the Notes held by such holders (the "Registered
        Notes").
        The
        entries in the Register shall be conclusive and binding for all purposes
        absent
        manifest error. The Company and the holders of the Notes shall treat each
        Person
        whose name is recorded in the Register as the owner of a Note for all purposes,
        including, without limitation, the right to receive payments of principal
        and
        interest hereunder, notwithstanding notice to the contrary. A Registered
        Note
        may be assigned or sold in whole or in part only by registration of such
        assignment or sale on the Register. Upon its receipt of a request to assign
        or
        sell all or part of any Registered Note by a Holder, the Company shall record
        the information contained therein in the Register and issue one or more new
        Registered Notes in the same aggregate principal amount as the principal
        amount
        of the surrendered Registered Note to the designated assignee or transferee
        pursuant to Section 17. Notwithstanding anything to the contrary set forth
        herein, upon conversion of any portion of this Note in accordance with the
        terms
        hereof, the Holder shall not be required to physically surrender this Note
        to
        the Company unless (A) the full Conversion Amount represented by this Note
        is
        being converted or (B) the Holder has provided the Company with prior written
        notice (which notice may be included in a Conversion Notice) requesting
        reissuance of this Note upon physical surrender of this Note. The Holder
        and the
        Company shall maintain records showing the Principal, Interest and Late Charges,
        if any, converted and the dates of such conversions or shall use such other
        method, reasonably satisfactory to the Holder and the Company, so as not
        to
        require physical surrender of this Note upon conversion.

       

       

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      

      (iv) 
          Pro
        Rata Conversion; Disputes.
        In the
        event that the Company receives a Conversion Notice from more than one holder
        of
        Notes for the same Conversion Date and the Company can convert some, but
        not
        all, of such portions of the Notes submitted for conversion, the Company
        shall
        convert from each holder of Notes electing to have Notes converted on such
        date
        a pro rata amount of such holder's portion of its Notes submitted for conversion
        based on the principal amount of Notes submitted for conversion on such date
        by
        such holder relative to the aggregate principal amount of all Notes submitted
        for conversion on such date. In the event of a dispute as to the number of
        shares of Common Stock issuable to the Holder in connection with a conversion
        of
        this Note, the Company shall issue to the Holder the number of shares of
        Common
        Stock not in dispute and resolve such dispute in accordance with Section
        22.

       

      (e)   Limitations
        on Conversions. 

       

      (1)
        Beneficial Ownership.
        (A) The
        Company shall not effect the conversion of this Note or issue Interest Shares,
        and the Holder shall not have the right to convert this Note or receive Interest
        Shares, to the extent that after giving effect to such conversion or issuance,
        such Person (together with such Person's affiliates) would beneficially own
        in
        excess of 4.99% (the "Maximum
        Percentage I")
        of the
        shares of Common Stock outstanding immediately after giving effect to such
        conversion or issuance, as the case may be. For purposes of the foregoing
        sentence, the aggregate number of shares of Common Stock beneficially owned
        by
        such Person and its affiliates shall include the number of shares of Common
        Stock issuable upon conversion
        of
        this
        Note with respect to which the determination of such sentence is being made,
        but
        shall exclude shares of Common Stock which would be issuable upon (i) conversion
        of the remaining, unconverted portion of this Note beneficially owned by
        such
        Person and its affiliates and (ii) exercise or conversion of the unexercised
        or
        unconverted portion of any other securities of the Company beneficially owned
        by
        such Person and its affiliates (including, without limitation, any convertible
        notes or convertible preferred stock or warrants) subject to a limitation
        on
        conversion or exercise analogous to the limitation contained herein. Except
        as
        set forth in the preceding sentence, for purposes of this paragraph, beneficial
        ownership shall be calculated in accordance with Section 13(d) of the Securities
        Exchange Act of 1934, as amended. For purposes of this Note, in determining
        the
        number of outstanding shares of Common Stock, the Holder may rely on the
        number
        of outstanding shares of Common Stock as reflected in (1) the Company's most
        recent Form 10-K, Form 10-KSB, Form 10-Q, Form 10-QSB, Current Report on
        Form
        8-K or other public filing with the Securities and Exchange Commission, as
        the
        case may be, (2) a more recent public announcement by the Company or (3)
        any
        other notice by the Company or the Transfer Agent setting forth the number
        of
        shares of Common Stock outstanding. For any reason at any time, upon the
        written
        or oral request of the Holder, the Company shall within one Business Day
        confirm
        orally and in writing to the Holder the number of shares of Common Stock
        then
        outstanding. In any case, the number of outstanding shares of Common Stock
        shall
        be determined after giving effect to the conversion or exercise of securities
        of
        the Company, including the Notes and the Warrants, by the Holder and its
        affiliates since the date as of which such number of outstanding shares of
        Common Stock was reported. By written notice to the Company, the Holder may
        from
        time to time increase or decrease the Maximum Percentage I to any other
        percentage in excess of 4.99% specified in such notice; provided that (i)
        any
        such increase will not be effective until the sixty-first (61st)
        day
        after such notice is delivered to the Company, and (ii) any such increase
        or
        decrease will apply only to the Holder and not to any other holder of
        Warrants.

       

       

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

      (B)
        The
        Company shall not effect the conversion of this Note or issue Interest Shares,
        and the Holder shall not have the right to convert this Note or receive Interest
        Shares, to the extent that after giving effect to such conversion or issuance,
        such Person (together with such Person's affiliates) would beneficially own
        in
        excess of 9.99% (the "Maximum
        Percentage II")
        of the
        shares of Common Stock outstanding immediately after giving effect to such
        conversion or issuance, as the case may be. For purposes of the foregoing
        sentence, the aggregate number of shares of Common Stock beneficially owned
        by
        such Person and its affiliates shall include the number of shares of Common
        Stock issuable upon
        conversion of this Note with respect to which the determination of such sentence
        is being made, but shall exclude shares of Common Stock which would be issuable
        upon (i) conversion of the remaining, unconverted portion of this Note
        beneficially owned by such Person and its affiliates and (ii) exercise or
        conversion of the unexercised or unconverted portion of any other securities
        of
        the Company beneficially owned by such Person and its affiliates (including,
        without limitation, any convertible notes or convertible preferred stock
        or
        warrants) subject to a limitation on conversion or exercise analogous to
        the
        limitation contained herein. Except as set forth in the preceding sentence,
        for
        purposes of this paragraph, beneficial ownership shall be calculated in
        accordance with Section 13(d) of the Securities Exchange Act of 1934, as
        amended. For purposes of this Note, in determining the number of outstanding
        shares of Common Stock, the Holder may rely on the number of outstanding
        shares
        of Common Stock as reflected in (1) the Company's most recent Form 10-K,
        Form
        10-KSB, Form 10-Q, Form 10-QSB, Current Report on Form 8-K or other public
        filing with the Securities and Exchange Commission, as the case may be, (2)
        a
        more recent public announcement by the Company or (3) any other notice by
        the
        Company or the Transfer Agent setting forth the number of shares of Common
        Stock
        outstanding. For any reason at any time, upon the written or oral request
        of the
        Holder, the Company shall within one Business Day confirm orally and in writing
        to the Holder the number of shares of Common Stock then outstanding. In any
        case, the number of outstanding shares of Common Stock shall be determined
        after
        giving effect to the conversion or exercise of securities of the Company,
        including the Notes and the Warrants, by the Holder and its affiliates since
        the
        date as of which such number of outstanding shares of Common Stock was reported.
        By written notice to the Company, the Holder may from time to time increase
        or
        decrease the Maximum Percentage II to any other percentage in excess of 9.99%
        specified in such notice; provided that (i) any such increase will not be
        effective until the sixty-first (61st)
        day
        after such notice is delivered to the Company, and (ii) any such increase
        or
        decrease will apply only to the Holder and not to any other holder of
        Warrants.

       

       

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      

      (2)
        Principal Market Regulation.
        

       

      (a)
        Exchange Cap.
        The
        Company shall not be obligated to issue any shares of Common Stock upon
        conversion of this Note or exercise of the Warrants and no Buyer shall be
        entitled to receive any shares of Common Stock if the issuance of such shares
        of
        Common Stock would exceed that number of shares of Common Stock which the
        Company may issue upon exercise or conversion, as applicable, of the Warrants
        and Notes or otherwise without breaching the Company's obligations under
        the
        rules or regulations of any applicable Eligible Market (the "Exchange
        Cap"),
        except that such limitation shall not apply in the event that the Company
        (A)
        obtains the approval of its stockholders as required by the applicable rules
        of
        the Eligible Market for issuances of shares of Common Stock in excess of
        such
        amount or (B) obtains a written opinion from outside counsel to the Company
        that
        such approval is not required, which opinion shall be reasonably satisfactory
        to
        the Required Holders. Until such approval or written opinion is obtained,
        no
        Buyer shall be issued in the aggregate, upon exercise or conversion, as
        applicable, of any Warrants or Notes, shares of Common Stock in an amount
        greater than the product of the Exchange Cap multiplied by a fraction, the
        numerator of which is the total number of shares of Common Stock underlying
        the
        Notes issued to such Buyer pursuant to the Securities Purchase Agreement
        on the
        Issuance Date and the denominator of which is the aggregate number of shares
        of
        Common Stock underlying the Series A Notes and Series B Notes issued to the
        Buyers pursuant to the Securities Purchase Agreement on the Issuance Date
        (with
        respect to each Buyer, the "Exchange
        Cap Allocation").
        In
        the event that any Buyer shall sell or otherwise transfer any of such Buyer's
        Notes, the transferee shall be allocated a pro rata portion of such Buyer's
        Exchange Cap Allocation, and the restrictions of the prior sentence shall
        apply
        to such transferee with respect to the portion of the Exchange Cap Allocation
        allocated to such transferee. In the event that any holder of Notes shall
        convert all of such holder's Notes into a number of shares of Common Stock
        which, in the aggregate, is less than such holder's Exchange Cap Allocation,
        then the difference between such holder's Exchange Cap Allocation and the
        number
        of shares of Common Stock actually issued to such holder shall be allocated
        to
        the respective Exchange Cap Allocations of the remaining holders of the Series
        A
        Notes and Series B Notes on a pro rata basis in proportion to the total number
        of shares of Common Stock underlying the Series A Notes and Series B Notes
        then
        held by each such holder. In the event that the Company is prohibited from
        issuing any Conversion Shares for which a Conversion Notice has been received
        as
        a result of the operation of this Section 3(e)(2), the Company shall pay
        cash in
        exchange for cancellation of such Conversion Shares, at a price per Conversion
        Share equal to the Weighted Average Price as of the date of the attempted
        conversion.

       

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

      (b)
        Redemption Upon Exchange Cap Violation. In
        the
        event that, anytime after the Shareholder Issuance Voting Deadline (as defined
        in the Securities Purchase Agreement), (A) the Shareholder Issuance Approval
        (as
        defined in the Securities Purchase Agreement), if applicable, has not been
        obtained and (B) the then Holder’s current Fully Diluted Amount (as defined
        below) would exceed the Holder’s Pro-Rata Portion (as defined below) of the
        Exchange Cap (an “Exchange
        Cap Violation”),
        then
        the Company shall be required to redeem, from time to time, a sufficient
        amount
        of the Notes such that the Holder’s Fully Diluted Amount after such redemption
        equals the Holder’s Pro-Rata Portion of the Exchange Cap (an “Exchange
        Cap Redemption”).
        Each
        Exchange Cap Redemption shall be at a redemption price, in cash, equal to
        the
        outstanding principal amount of this Note to be redeemed, plus all accrued
        and
        unpaid Interest, Late Charges and any other amounts when and as due under
        this
        Note (the “Exchange
        Cap Redemption Amount”).
        The
        Exchange Cap Redemption Amount shall be applied first to accrued and unpaid
        Interest, Late Charges and any other amounts when and as due under this Note,
        and then to the principal amount of the Note.

      

      The
        Exchange Cap Redemption Amount shall be due and payable to the Holder within
        five (5) Business Days of the date of each applicable Exchange Cap Violation
        (each, an “Exchange
        Redemption Payment Date”).
        

      

      For
        purposes hereof, “Fully
        Diluted Amount”
shall
        mean (i) the aggregate number of shares of Common Stock that have been issued
        to
        the Holder upon the conversion of Holder’s Note, plus (ii) the aggregate number
        of shares of Common Stock that would be issuable to the Holder upon the full
        Conversion of all of Holder’s outstanding Note, together with any accrued and
        unpaid Interest, Late Charges and any other amounts when and as due under
        this
        Note and the full exercise of Holders Warrants (in each case, without regard
        to
        any limitations on conversion herein or elsewhere, including but not limited
        to
        the Exchange Cap, Maximum Percentage I or Maximum Percentage II, and without
        regard to whether or not a sufficient number of shares are authorized and
        reserved to effect any such exercise and issuance).

      

      “Holder’s
        Pro-Rata Portion”
shall
        mean the purchase price of the Note purchased by the Holder in this offering,
        divided by the aggregate purchase price of all Notes sold by the Company
        in this
        offering. 

      

       

      
        	
              	(4)	
                RIGHTS
                  UPON TRIGGER EVENT.

              

      

       

      (a) Trigger
        Event.
        Each of
        the following events shall constitute a "Trigger
        Event":

       

       

      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

      (i)   the
        failure of the applicable Registration Statement (as defined in the Registration
        Rights Agreement) required to be filed pursuant to the Registration Rights
        Agreement to be declared effective by the SEC on or prior to the date that
        is
        sixty (60) days after the applicable Effectiveness Date (as defined in the
        Registration Rights Agreement), or, while the applicable Registration Statement
        is required to be maintained effective pursuant to the terms of the Registration
        Rights Agreement, the effectiveness of the applicable Registration Statement
        lapses for any reason (including, without limitation, the issuance of a stop
        order) or is unavailable to any holder of the Notes for sale of all of such
        holder's 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
        days or for more than an aggregate of thirty (30) days in any 365-day period
        (other than days during an Allowable Grace Period (as defined in the
        Registration Rights Agreement)). Notwithstanding the foregoing, the parties
        acknowledge that there may occur, from time to time, lapses of an effective
        Registration Statement in the event that there is a post-effective amendment
        of
        a Registration Statement filed, as required by the SEC’s rules and regulations,
        and pending the SEC’s review such lapse in effectiveness of such Registration
        Statement shall continue until the SEC subsequently declares such Registration
        Statement effective. In such case or cases during the course of this Agreement,
        such lapse shall not be considered a Trigger Event, provided that the Company
        shall respond to any SEC comments within seven days and the total time of
        the
        lapse during such period does not exceed forty-five days;

       

      (ii)   the
        suspension from trading or failure of the Common Stock to be listed on the
        Principal Market or an Eligible Market for a period of five (5) consecutive
        Trading Days or for more than an aggregate of ten (10) Trading Days in any
        365-day period;

       

      (iii)      
         the
        Company's (A) failure to cure a Conversion Failure by delivery of the required
        number of shares of Common Stock within ten (10) Trading Days after the
        applicable Conversion Date or (B) notice, written or oral, to any holder
        of the
        Notes, including by way of public announcement or through any of its agents,
        at
        any time, of its intention not to comply with a request for conversion of
        any
        Notes into shares of Common Stock that is tendered in accordance with the
        provisions of the Notes;

       

      (iv)  
          at
        any
        time following the tenth (10th)
        consecutive Business Day that the Holder's Authorized Share Allocation is
        less
        than the number of shares of Common Stock that the Holder would be entitled
        to
        receive upon a conversion of the full Conversion Amount of this Note (without
        regard to any limitations on conversion);

       

      (v)   the
        Company's failure to pay to the Holder any amount of Principal (including,
        without limitation, any redemption payments), Interest, Late Charges or other
        amounts when and as due under this Note or any other Transaction Document
        (as
        defined in the Securities Purchase Agreement) or any other agreement, document,
        certificate or other instrument delivered in connection with the transactions
        contemplated hereby and thereby to which the Holder is a party, except, in
        the
        case of a failure to pay any Interest and Late Charges when and as due, in
        which
        case only if such failure continues for a period of at least five (5) Business
        Days;

       

       

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

      (vi)     
         (A)
        any
        payment default or other default occurs under any Indebtedness of the Company
        or
        any of its Subsidiaries (as defined in Section 3(a) of the Securities Purchase
        Agreement) that results in a redemption of or acceleration prior to maturity
        of
        $100,000 or more of such Indebtedness in the aggregate, or (B) any material
        default occurs under any Indebtedness of the Company or any of its Subsidiaries
        having an aggregate outstanding balance in excess of $100,000 and such default
        continues uncured for more than ten (10) Business Days, other than, in each
        case
        (A) or (B) above, or a default with respect to any Other Notes;

       

      (vii)     
         the
        Company or any of its Subsidiaries, pursuant to or within the meaning of
        Title
        11, U.S. Code, or any similar Federal, foreign or state law for the relief
        of
        debtors (collectively, "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
        receiver, trustee, assignee, liquidator or similar official (a "Custodian"),
        (D)
        makes a general assignment for the benefit of its creditors or (E) admits
        in
        writing that it is generally unable to pay its debts as they become
        due;

       

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

       

      (ix)     
         a
        final
        judgment or judgments for the payment of money aggregating in excess of $250,000
        are rendered against the Company or any of its Subsidiaries and which judgments
        are not, within sixty (60) days after the entry thereof, bonded, discharged
        or
        stayed pending appeal, or are not discharged within sixty (60) days after
        the
        expiration of such stay; provided, however, that any judgment which is covered
        by insurance or an indemnity from a credit worthy party shall not be included
        in
        calculating the $250,000 amount set forth above so long as the Company provides
        the Holder a written statement from such insurer or indemnity provider (which
        written statement shall be reasonably satisfactory to the Holder) to the
        effect
        that such judgment is covered by insurance or an indemnity and the Company
        will
        receive the proceeds of such insurance or indemnity within thirty (30) days
        of
        the issuance of such judgment;

       

      (x)      
         the
        Company breaches any representation, warranty, covenant or other term or
        condition of any Transaction Document, except, in the case of a breach of
        a
        covenant which is curable, only if such breach continues for a period of
        at
        least ten (10) consecutive Business Days;

       

      (xi)      
         any
        breach or failure in any respect to comply with Section 12 of this
        Note;

       

      (xii)    
         the
        Company’s failure to engage
        the services of a transfer agent for its Common Stock that is a participant
        in
        the Depository Trust Company’s Full Fast Program prior to the date on which the
        Registration Statement is declared effective by the SEC; 

       

      (xiii)     
         any
        Trigger Event (as defined in the Notes) occurs with respect to any Notes;
        or

       

      
        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      

      (xiv)    
         the
        Company has failed to comply in good faith with the Dispute Resolution
        Procedures (as defined herein) or has failed to adjust the Conversion Price
        as
        required hereunder following a Dilutive Issuance, or otherwise (after any
        applicable Dispute Resolution Procedure required herein).

       

      (b) Redemption
        Right.
        Upon
        the occurrence of a Trigger Event with respect to this Note or any Other
        Note,
        the Company shall within (1) Business Day deliver written notice thereof
        via
        facsimile or e-mail and overnight courier (a "Trigger
        Event Notice")
        to the
        Holder. At any time after the earlier of the Holder's receipt of a Trigger
        Event
        Notice and the Holder becoming aware of a Trigger Event, the Holder may require
        the Company to redeem all or any portion of this Note by delivering written
        notice thereof (the "Trigger
        Event Redemption Notice")
        to the
        Company, which Trigger Event Redemption Notice shall indicate the portion
        of
        this Note the Holder is electing to have redeemed. Each portion of this Note
        subject to redemption by the Company pursuant to this Section 4(b) shall
        be
        redeemed by the Company at an
        amount
        equal to
any
        accrued and unpaid liquidated damages, plus the greater of (A) the
        Conversion Amount to be redeemed multiplied by the Redemption
        Premium,
        or (B)
        the Conversion Amount to be redeemed multiplied by the quotient of (i) the
        Closing Sale Price at the time of the Triggering Event (or at the time of
        payment of the redemption price, if greater) divided by (ii) the Conversion
        Price
        (the
        "Trigger
        Event Redemption
        Price"),
        provided, however, (B) shall be applicable only in the event that a Trigger
        Event of the type specified in Section 4(a)(i), (ii), (iii) or (iv) hereof
        has
        occurred and remains uncured or the Conversion Shares otherwise could not
        be
        received or sold by the Holder without any resale restrictions
        (or
        pursuant to an effective Registration Statement).
        After
        a
        Trigger Event occurs, the Conversion Price shall be permanently decreased
        (but
        not increased) on the first Business Day of each calendar month thereafter
        (each
        a “Trigger
        Adjustment Date”)
        until
        either the Trigger Event is cured or the Trigger Event Redemption Price is
        paid
        in full, to a price (the “Trigger
        Event Reset Price”)
        equal
        to the lesser of (i) the Conversion Price then in effect, or (ii) the lowest
        Weighted Average Price that has occurred on any Trigger Adjustment Date since
        the date of occurrence of the Trigger Event. Redemptions required by this
        Section 4(b) shall be made in accordance with the provisions of Section 11.
        To
        the extent redemptions required by this Section 4(b) are deemed or determined
        by
        a court of competent jurisdiction to be prepayments of the Note by the Company,
        such redemptions shall be deemed to be voluntary prepayments. The parties
        hereto
        agree that in the event of the Company's redemption of any portion of the
        Note
        under this Section 4(b), the Holder's damages would be uncertain and difficult
        to estimate because of the parties' inability to predict future interest
        rates
        and the uncertainty of the availability of a suitable substitute investment
        opportunity for the Holder. Accordingly, any Triggering Event Redemption
        Price
        due under this Section 4(b) is intended by the parties to be, and shall be
        deemed, a reasonable estimate of the Holder's actual loss of its investment
        opportunity and not as a penalty.

       

      
        	
              	(5)	
                RIGHTS
                  UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

              

      

       

       

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

      (a) Assumption.
        The
        Company shall not enter into or be party to a Fundamental Transaction unless
        (i)
        the Successor Entity assumes in writing all of the obligations of the Company
        under this Note and the other Transaction Documents in accordance with the
        provisions of this Section 5(a) pursuant to written agreements in form and
        substance satisfactory to the Required Holders and approved by the Required
        Holders prior to such Fundamental Transaction, including agreements to deliver
        to each holder of Notes in exchange for such Notes a security of the Successor
        Entity evidenced by a written instrument substantially similar in form and
        substance to the Notes, including, without limitation, having a principal
        amount
        and interest rate equal to the principal amounts then outstanding and the
        interest rates of the Notes held by such holder, having similar conversion
        rights as the Notes and having similar ranking to the Notes, and satisfactory
        to
        the Required Holders and (ii) the Successor Entity (including its Parent
        Entity)
        is a publicly traded corporation whose common stock is quoted on or listed
        for
        trading on an Eligible Market and has "Substantially Similar Trading
        Characteristics" (as defined below) as the Company. For purposes hereof,
        an
        entity shall have Substantially Similar Trading Characteristics as the Company
        if the average daily dollar trading volume of the common stock of such entity
        is
        equal to or in excess of $500,000
        for the
        60th through the 16th day prior to the public announcement of such transaction.
        Upon the occurrence of any Fundamental Transaction, the Successor Entity
        shall
        succeed to, and be substituted for (so that from and after the date of such
        Fundamental Transaction, the provisions of this Note referring to the "Company"
        shall refer instead to the Successor Entity), and may exercise every right
        and
        power of the Company and shall assume all of the obligations of the Company
        under this Note with the same effect as if such Successor Entity had been
        named
        as the Company herein. Upon consummation of the Fundamental Transaction,
        the
        Successor Entity shall deliver to the Holder confirmation that there shall
        be
        issued upon conversion or redemption of this Note at any time after the
        consummation of the Fundamental Transaction, in lieu of the shares of the
        Company's Common Stock (or other securities, cash, assets or other property)
        issuable upon the conversion or redemption of the Notes prior to such
        Fundamental Transaction, such shares of the publicly traded common stock
        (or
        their equivalent) of the Successor Entity (including its Parent Entity),
        as
        adjusted in accordance with the provisions of this Note. The provisions of
        this
        Section shall apply similarly and equally to successive Fundamental Transactions
        and shall be applied without regard to any limitations on the conversion
        or
        redemption of this Note.

       

      (b) Redemption
        Right.
        No
        sooner than fifteen (15) days nor later than ten (10) days prior to the
        consummation of a Change of Control, but not prior to the public announcement
        of
        such Change of Control, the Company shall deliver written notice thereof
        via
        facsimile and overnight courier to the Holder (a "Change
        of Control Notice").
        At
        any time during the period beginning on the date of the Holder's receipt
        of a
        Change of Control Notice and ending twenty (20) Trading Days after the
        consummation of such Change of Control, the Holder may require the Company
        to
        redeem all or any portion of this Note by delivering written notice thereof
        ("Change
        of Control Redemption Notice")
        to the
        Company, which Change of Control Redemption Notice shall indicate the Conversion
        Amount the Holder is electing to have redeemed. The portion of this Note
        subject
        to redemption pursuant to this Section 5 shall be redeemed by the Company
        in
        cash for an amount equal to any accrued and unpaid liquidated damages, plus
        the
        greater of (i) the product of (x) the Conversion Amount being redeemed and
        (y)
        the quotient determined by dividing (A) the greater of the Closing Sale Price
        of
        the Common Stock immediately prior to the consummation of the Change of Control,
        the Closing Sale Price immediately following the public announcement of such
        proposed Change of Control and the Closing Sale Price of the Common Stock
        immediately prior to the public announcement of such proposed Change of Control
        by (B) the Conversion Price and (ii) 110% of the Conversion Amount being
        redeemed (the "Change
        of Control Redemption Price").
        Redemptions required by this Section 5 shall be made in accordance with the
        provisions of Section 11 and shall have priority to payments to stockholders
        in
        connection with a Change of Control. To the extent redemptions required by
        this
        Section 5(b) are deemed or determined by a court of competent jurisdiction
        to be
        prepayments of the Note by the Company, such redemptions shall be deemed
        to be
        voluntary prepayments. Notwithstanding anything to the contrary in this Section
        5, until the Change of Control Redemption Price is paid in full, the Conversion
        Amount submitted for redemption under this Section 5(b) may be converted,
        in
        whole or in part, by the Holder into Common Stock pursuant to Section 3.
        The
        parties hereto agree that in the event of the Company's redemption of any
        portion of the Note under this Section 5(b), the Holder's damages would be
        uncertain and difficult to estimate because of the parties' inability to
        predict
        future interest rates and the uncertainty of the availability of a suitable
        substitute investment opportunity for the Holder. Accordingly, any redemption
        premium due under this Section 5(b) is intended by the parties to be, and
        shall
        be deemed, a reasonable estimate of the Holder's actual loss of its investment
        opportunity and not as a penalty.

       

       

      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

      
        	
              	(6)	
                RIGHTS
                  UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE
                  EVENTS.

              

      

       

      (a) Purchase
        Rights.
        If at
        any time the Company grants, issues or sells any Options, Convertible Securities
        or rights to purchase stock, warrants, securities or other property pro rata
        to
        the record holders of any class of Common Stock (the "Purchase
        Rights"),
        then
        the Holder will be entitled to acquire, upon the terms applicable to such
        Purchase Rights, the aggregate Purchase Rights which the Holder could have
        acquired if the Holder had held the number of shares of Common Stock acquirable
        upon complete conversion of this Note (without taking into account any
        limitations or restrictions on the convertibility of this Note) immediately
        before the date on which a record is taken for the grant, issuance or sale
        of
        such Purchase Rights, or, if no such record is taken, the date as of which
        the
        record holders of Common Stock are to be determined for the grant, issue
        or sale
        of such Purchase Rights.

       

      (b) Other
        Corporate Events.
        In
        addition to and not in substitution for any other rights hereunder, prior
        to the
        consummation of any Fundamental Transaction pursuant to which holders of
        shares
        of Common Stock are entitled to receive securities or other assets with respect
        to or in exchange for shares of Common Stock (a "Corporate
        Event"),
        the
        Company shall make appropriate provision to insure that the Holder will
        thereafter have the right to receive upon a conversion of this Note, (i)
        in
        addition to the shares of Common Stock receivable upon such conversion, such
        securities or other assets to which the Holder would have been entitled with
        respect to such shares of Common Stock had such shares of Common Stock been
        held
        by the Holder upon the consummation of such Corporate Event (without taking
        into
        account any limitations or restrictions on the convertibility of this Note)
        or
        (ii) in lieu of the shares of Common Stock otherwise receivable upon such
        conversion, such securities or other assets received by the holders of shares
        of
        Common Stock in connection with the consummation of such Corporate Event
        in such
        amounts as the Holder would have been entitled to receive had this Note
        initially been issued with conversion rights for the form of such consideration
        (as opposed to shares of Common Stock) at a conversion rate for such
        consideration commensurate with the Conversion Rate. Provision made pursuant
        to
        the preceding sentence shall be in a form and substance satisfactory to the
        Required Holders. The provisions of this Section shall apply similarly and
        equally to successive Corporate Events and shall be applied without regard
        to
        any limitations on the conversion or redemption of this Note.

       

       

      

       

      

       

      

       

      

       

      

       

      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      

      (7)     
         ADJUSTMENT
        OF CONVERSION PRICE UPON SUBDIVISION OR COMBINATION OF COMMON
        STOCK.
        If the
        Company at any time on or after the Subscription Date subdivides (by any
        stock
        split, stock dividend, recapitalization or otherwise) one or more classes
        of its
        outstanding shares of Common Stock into a greater number of shares, the
        Conversion Price in effect immediately prior to such subdivision will be
        proportionately reduced. If the Company at any time on or after the Subscription
        Date combines (by combination, reverse stock split or otherwise) one or more
        classes of its outstanding shares of Common Stock into a smaller number of
        shares, the Conversion Price in effect immediately prior to such combination
        will be proportionately increased.

       

      (8)
   ADJUSTMENT
        UPON ISSUANCE OF SHARES OF COMMON STOCK.
        If the
        Company issues or sells, or in accordance with this Section 8 is deemed to
        have
        issued or sold, any shares of Common Stock (including the issuance or sale
        of
        shares of Common Stock owned or held by or for the account of the Company,
        but
        excluding shares of Common Stock deemed to have been issued by the Company
        in
        connection with any Excluded Securities for a consideration per share (the
        "New
        Issuance Price")
        less
        than a price (the "Applicable
        Price")
        equal
        to the Conversion Price in effect immediately prior to such issue or sale
        or
        deemed issuance or sale (the foregoing a "Dilutive
        Issuance"),
        then
        immediately after such Dilutive Issuance, the Conversion Price then in effect
        shall be reduced to an amount equal to the New Issuance Price. Upon each
        such
        adjustment of the Conversion Price hereunder, the number of Conversion Shares
        shall be adjusted to the number of shares of Common Stock determined by
        multiplying the Conversion Price in effect immediately prior to such adjustment
        by the number of Conversion Shares acquirable upon conversion of this Note
        immediately prior to such adjustment and dividing the product thereof by
        the
        Conversion Price resulting from such adjustment. For purposes of determining
        the
        adjusted Conversion Price under this Section 8, the following shall be
        applicable:

       

      (a)   Issuance
        of Options.
        If the
        Company in any manner grants any Options and the lowest price per share for
        which one share of Common Stock is issuable upon the exercise of any such
        Option
        or upon conversion, exercise or exchange of any Convertible Securities issuable
        upon exercise of any such Option is less than the Applicable Price, then
        such
        share of Common Stock shall be deemed to be outstanding and to have been
        issued
        and sold by the Company at the time of the granting or sale of such Option
        for
        such price per share. For purposes of this Section 8(a), the "lowest price
        per
        share for which one share of Common Stock is issuable upon exercise of such
        Options or upon conversion, exercise or exchange of such Convertible Securities"
        shall be equal to the sum of the lowest amounts of consideration (if any)
        received or receivable by the Company with respect to any one share of Common
        Stock upon the granting or sale of the Option, upon exercise of the Option
        and
        upon conversion, exercise or exchange of any Convertible Security issuable
        upon
        exercise of such Option. No further adjustment of the Conversion Price or
        number
        of Conversion Shares shall be made upon the actual issuance of such shares
        of
        Common Stock or of such Convertible Securities upon the exercise of such
        Options
        or upon the actual issuance of such shares of Common Stock upon conversion,
        exercise or exchange of such Convertible Securities. 

       

       

      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

      

      (b)   Issuance
        of Convertible Securities.
        If the
        Company in any manner issues or sells any Convertible Securities and the
        lowest
        price per share for which one share of Common Stock is issuable upon the
        conversion, exercise or exchange thereof is less than the Applicable Price,
        then
        such share of Common Stock shall be deemed to be outstanding and to have
        been
        issued and sold by the Company at the time of the issuance or sale of such
        Convertible Securities for such price per share. For the purposes of this
        Section 8(b), the "lowest price per share for which one share of Common Stock
        is
        issuable upon the conversion, exercise or exchange" shall be equal to the
        sum of
        the lowest amounts of consideration (if any) received or receivable by the
        Company with respect to one share of Common Stock upon the issuance or sale
        of
        the Convertible Security and upon conversion, exercise or exchange of such
        Convertible Security. No further adjustment of the Conversion Price or number
        of
        Conversion Shares shall be made upon the actual issuance of such shares of
        Common Stock upon conversion, exercise or exchange of such Convertible
        Securities, and if any such issue or sale of such Convertible Securities
        is made
        upon exercise of any Options for which adjustment of this Note has been or
        is to
        be made pursuant to other provisions of this Section 8, no further adjustment
        of
        the Conversion Price or number of Conversion Shares shall be made by reason
        of
        such issue or sale. 

       

      (c)   Change
        in Option Price or Rate of Conversion.
        If the
        purchase price provided for in any Options, the additional consideration,
        if
        any, payable upon the issue, conversion, exercise or exchange of any Convertible
        Securities, or the rate at which any Convertible Securities are convertible
        into
        or exercisable or exchangeable for shares of Common Stock increases or decreases
        at any time, the Conversion Price and the number of Conversion Shares in
        effect
        at the time of such increase or decrease shall be adjusted to the Conversion
        Price and the number of Conversion Shares which would have been in effect
        at
        such time had such Options or Convertible Securities provided for such increased
        or decreased purchase price, additional consideration or increased or decreased
        conversion rate, as the case may be, at the time initially granted, issued
        or
        sold. For purposes of this Section 8(c), if the terms of any Option or
        Convertible Security that was outstanding as of the date of issuance of this
        Note are increased or decreased in the manner described in the immediately
        preceding sentence, then such Option or Convertible Security and the shares
        of
        Common Stock deemed issuable upon exercise, conversion or exchange thereof
        shall
        be deemed to have been issued as of the date of such increase or decrease.
        No
        adjustment pursuant to this Section 8 shall be made if such adjustment would
        result in an increase of the Conversion Price then in effect or a decrease
        in
        the number of Conversion Shares.

       

      (d)   Calculation
        of Consideration Received.
        In case
        any Option is issued in connection with the issue or sale of other securities
        of
        the Company, together comprising one integrated transaction, the Options
        will be
        deemed to have been issued for the difference of (i) the aggregate fair market
        value of such Options and other securities issued or sold in such integrated
        transaction, less (ii) the fair market value of the securities other than
        such
        Option, issued or sold in such transaction and the other securities issued
        or
        sold in such integrated transaction will be deemed to have been issued or
        sold
        for the balance of the consideration received by the Company. If any shares
        of
        Common Stock, Options or Convertible Securities are issued or sold or deemed
        to
        have been issued or sold for cash, the consideration received therefor will
        be
        deemed to be the net amount received by the Company therefor. If any shares
        of
        Common Stock, Options or Convertible Securities are issued or sold for a
        consideration other than cash, the amount of such consideration received
        by the
        Company will be the fair value of such consideration, except where such
        consideration consists of securities, in which case the amount of consideration
        received by the Company will be the Weighted Average Price of such security
        on
        the date of receipt. If any shares of Common Stock, Options or Convertible
        Securities are issued to the owners of the non-surviving entity in connection
        with any merger in which the Company is the surviving entity, the amount
        of
        consideration therefor will be deemed to be the fair value of such portion
        of
        the net assets and business of the non-surviving entity as is attributable
        to
        such shares of Common Stock, Options or Convertible Securities, as the case
        may
        be. The fair value of any consideration other than cash or securities will
        be
        determined jointly by the Company and the Required Holders. If such parties
        are
        unable to reach agreement within ten (10) days after the occurrence of an
        event
        requiring valuation (the "Valuation
        Event"),
        the
        fair value of such consideration will be determined within five (5) Business
        Days after the tenth day following the Valuation Event by an independent,
        reputable appraiser jointly selected by the Company and the Required Holders.
        The determination of such appraiser shall be final and binding upon all parties
        absent manifest error and the fees and expenses of such appraiser shall be
        borne
        by the Company.

       

       

      
        
          
          

        

        
          15

          
            

          

        

        
          
          

        

      

      (e)   Record
        Date.
        If the
        Company takes a record of the holders of shares of Common Stock for the purpose
        of entitling them (i) to receive a dividend or other distribution payable
        in
        shares of Common Stock, Options or in Convertible Securities or (ii) to
        subscribe for or purchase shares of Common Stock, Options or Convertible
        Securities, then such record date will be deemed to be the date of the issue
        or
        sale of the shares of Common Stock deemed to have been issued or sold upon
        the
        declaration of such dividend or the making of such other distribution or
        the
        date of the granting of such right of subscription or purchase, as the case
        may
        be.

       

      (9)    NONCIRCUMVENTION.
        The
        Company hereby covenants and agrees that the Company will not, by amendment
        of
        its Certificate of Incorporation, Bylaws or through any reorganization, transfer
        of assets, consolidation, merger, scheme of arrangement, dissolution, issue
        or
        sale of securities, or any other voluntary action, avoid or seek to avoid
        the
        observance or performance of any of the terms of this Note, and will at all
        times in good faith carry out all of the provisions of this Note and take
        all
        action as may be required to protect the rights of the Holder of this Note.
        

       

      
        	
              	(10)	
                RESERVATION
                  OF AUTHORIZED SHARES.

              

      

       

      (a) Reservation.
        So long
        as any of the Notes are outstanding, the Company shall take all action necessary
        to reserve and keep available out of its authorized and unissued Common Stock,
        solely for the purpose of effecting the conversion of the Notes, 120% of
        the
        number of shares of Common Stock as shall from time to time be necessary
        to
        effect the conversion of all of the Notes then outstanding; provided that
        at no
        time shall the number of shares of Common Stock so reserved be less than
        the
        number of shares required to be reserved by the previous sentence (without
        regard to any limitations on conversions) (the "Required
        Reserve Amount").
        The
        number of shares of Common Stock reserved for conversions of the Notes and
        each
        increase in the number of shares so reserved shall be allocated pro rata
        among
        the holders of the Notes based on the principal amount of the Notes held
        by each
        holder at the Closing (as defined in the Securities Purchase Agreement) or
        increase in the number of reserved shares, as the case may be (the "Authorized
        Share Allocation").
        In
        the event that a holder shall sell or otherwise transfer any of such holder's
        Notes, each transferee shall be allocated a pro rata portion of such holder's
        Authorized Share Allocation. Any shares of Common Stock reserved and allocated
        to any Person which ceases to hold any Notes shall be allocated to the remaining
        holders of Notes, pro rata based on the principal amount of the Notes then
        held
        by such holders.

       

       

      
        
          
          

        

        
          16

          
            

          

        

        
          
          

        

      

      (b) Insufficient
        Authorized Shares.
        If at
        any time while any of the Notes remain outstanding the Company does not have
        a
        sufficient number of authorized and unreserved shares of Common Stock to
        satisfy
        its obligation to reserve for issuance upon conversion of the Notes at least
        a
        number of shares of Common Stock equal to the Required Reserve Amount (an
        "Authorized
        Share Failure"),
        then
        the Company shall immediately take all action necessary to increase the
        Company's authorized shares of Common Stock to an amount sufficient to allow
        the
        Company to reserve the Required Reserve Amount for the Notes then outstanding.
        Without limiting the generality of the foregoing sentence, as soon as
        practicable after the date of the occurrence of an Authorized Share Failure,
        but
        in no event later than sixty (60) days after the occurrence of such Authorized
        Share Failure, the Company shall hold a meeting of its stockholders for the
        approval of an increase in the number of authorized shares of Common Stock.
        In
        connection with such meeting, the Company shall provide each stockholder
        with a
        proxy statement and shall use its best efforts to solicit its stockholders'
        approval of such increase in authorized shares of Common Stock and to cause
        its
        board of directors to recommend to the stockholders that they approve such
        proposal.

       

      
        	
              	(11)	
                HOLDER'S
                  REDEMPTIONS.

              

      

       

      (a) The
        Company shall deliver the applicable Trigger Event Redemption Price to the
        Holder within five (5) Business Days after the Company's receipt of the Holder's
        Trigger Event Redemption Notice. If the Holder has submitted a Change of
        Control
        Redemption Notice in accordance with Section 5(b), the Company shall deliver
        the
        applicable Change of Control Redemption Price to the Holder concurrently
        with
        the consummation of such Change of Control if such notice is received prior
        to
        the consummation of such Change of Control and within five (5) Business Days
        after the Company's receipt of such notice otherwise. In the event of a
        redemption of less than all of the Conversion Amount of this Note, the Company
        shall promptly cause to be issued and delivered to the Holder a new Note
        (in
        accordance with Section 17(d)) representing the outstanding Principal which
        has
        not been redeemed. In the event that the Company does not pay the applicable
        Redemption Price to the Holder within the time period required, at any time
        thereafter and until the Company pays such unpaid Redemption Price in full,
        the
        Holder shall have the option, in lieu of redemption, to require the Company
        to
        promptly return to the Holder all or any portion of this Note representing
        the
        Conversion Amount that was submitted for redemption and for which the applicable
        Redemption Price (together with any Late Charges thereon) has not been paid.
        Upon the Company's receipt of such notice, (x) the Redemption Notice shall
        be
        null and void with respect to such Conversion Amount, (y) the Company shall
        immediately return this Note, or issue a new Note (in accordance with Section
        17(d)) to the Holder representing such Conversion Amount and (z) the Conversion
        Price of this Note or such new Notes shall be adjusted to the lesser of (A)
        the
        Conversion Price as in effect on the date on which the Redemption Notice
        is
        voided and (B) the lowest Closing Bid Price of the Common Stock during the
        period beginning on and including the date on which the Redemption Notice
        is
        delivered to the Company and ending on and including the date on which the
        Redemption Notice is voided. The Holder's delivery of a notice voiding a
        Redemption Notice and exercise of its rights following such notice shall
        not
        affect the Company's obligations to make any payments of Late Charges which
        have
        accrued prior to the date of such notice with respect to the Conversion Amount
        subject to such notice.

       

      
        
          
          

        

        
          17

          
            

          

        

        
          
          

        

      

      (b) Redemption
        by Other Holders. Upon
        the
        Company's receipt of notice from any of the holders of the Other Notes for
        redemption or repayment as a result of an event or occurrence substantially
        similar to the events or occurrences described in Section 4(b) or Section
        5(b)
        (each, an "Other
        Redemption Notice"),
        the
        Company shall immediately, but no later than one (1) Business Day of its
        receipt
        thereof, forward to the Holder by facsimile a copy of such notice. If the
        Company receives a Redemption Notice and one or more Other Redemption Notices,
        during the seven (7) Business Day period beginning on and including the date
        which is three (3) Business Days prior to the Company's receipt of the Holder's
        Redemption Notice and ending on and including the date which is three (3)
        Business Days after the Company's receipt of the Holder's Redemption Notice
        and
        the Company is unable to redeem all principal, interest and other amounts
        designated in such Redemption Notice and such Other Redemption Notices received
        during such seven (7) Business Day period, then the Company shall redeem
        a pro
        rata amount from each holder of the Notes (including the Holder) based on
        the
        principal amount of the Notes submitted for redemption pursuant to such
        Redemption Notice and such Other Redemption Notices received by the Company
        during such seven (7) Business Day period.

       

      (12)
          VOTING
        RIGHTS.
        The
        Holder shall have no voting rights as the holder of this Note, except as
        required by law, including, but not limited to, Delaware General Corporation
        Law, Title 8, Chapter 1, and as expressly provided in this Note.

       

      (13)
          COVENANTS.

       

      (a) Rank. All
        payments due under this Note (A) shall rank pari
        passu
        with all
        of the Series A Notes and the Series B Notes, and (B) shall rank senior to
        all
        other unsecured Indebtedness of the Company and its Subsidiaries incurred
        on or
        after the date of this Note.

       

      (b) Incurrence
        of Indebtedness.
        So long
        as there remains fifteen percent (15%) or more of the original Notes
        outstanding, the Company shall not, and the Company shall not permit any
        of its
        Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer
        to
        exist any Indebtedness, other than (i) the Indebtedness evidenced by this
        Note
        and the Other Notes, and (ii) other Permitted Indebtedness, without the prior
        written consent of the Holders of 75% of the then outstanding
        Notes.

       

      (c) Existence
        of Liens.
        So long
        as there remains fifteen percent (15%) or more of the original Notes
        outstanding, the Company shall not, and the Company shall not permit any
        of its
        Subsidiaries to, directly or indirectly, allow or suffer to exist any mortgage,
        lien, pledge, charge, security interest or other encumbrance upon or in any
        property or assets (including accounts and contract rights) owned by the
        Company
        or any of its Subsidiaries (collectively, "Liens")
        other
        than Permitted Liens, without the prior written consent of the Holders of
        75% of
        the then outstanding Notes. 

       

      (d) Restricted
        Payments.
        The
        Company shall not, and the Company shall not permit any of its Subsidiaries
        to,
        directly or indirectly, redeem, defease, repurchase, repay or make any payments
        in respect of, by the payment of cash or cash equivalents (in whole or in
        part,
        whether by way of open market purchases, tender offers, private transactions
        or
        otherwise), all or any portion of any Permitted Indebtedness (other than
        this
        Note and the Other Notes), whether by way of payment in respect of principal
        of
        (or premium, if any) or interest on such Indebtedness, if at the time such
        payment is due or is otherwise made or after giving effect to such payment,
        an
        event constituting, or that with the passage of time and without being cured
        would constitute, a Trigger Event has occurred and is continuing.

       

       

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

      

      (e) Restriction
        on Redemption and Cash Dividends.
        Until
        all of the Notes have been converted, redeemed or otherwise satisfied in
        accordance with their terms, the Company shall not, directly or indirectly,
        redeem, repurchase or declare or pay any cash dividend or distribution on
        its
        capital stock without the prior express written consent of the Required
        Holders.

       

      (14)    
         PARTICIPATION.
        The
        Holder, as the holder of this Note, shall be entitled to receive such dividends
        paid and distributions made to the holders of Common Stock to the same extent
        as
        if the Holder had converted this Note into Common Stock (without regard to
        any
        limitations on conversion herein or elsewhere) and had held such shares of
        Common Stock on the record date for such dividends and distributions. Payments
        under the preceding sentence shall be made concurrently with the dividend
        or
        distribution to the holders of Common Stock. 

       

      (15)    
         VOTE
        TO ISSUE, OR CHANGE THE TERMS OF, NOTES.
        The
        affirmative vote of the Required Holders at a meeting duly called for such
        purpose or the written consent without a meeting of the Required Holders
        shall
        be required for any change or amendment to this Note or the Other Notes.
        No
        consideration shall be offered or paid to any holder of Notes to amend or
        consent to a waiver or modification of the Notes unless the same consideration
        also is offered to all of the holders of Notes.

       

      (16)    
         TRANSFER.
        This
        Note may be offered, sold, assigned or transferred by the Holder without
        the
        consent of the Company, subject only to the provisions of Section 2(f) of
        the
        Securities Purchase Agreement.

       

      (17)    
         REISSUANCE
        OF THIS NOTE.

       

      (a) Transfer.
        If this
        Note is to be transferred, the Holder shall surrender this Note to the Company,
        whereupon the Company will forthwith issue and deliver upon the order of
        the
        Holder a new Note (in accordance with Section 17(d)), registered as the Holder
        may request, representing the outstanding Principal being transferred by
        the
        Holder and, if less then the entire outstanding Principal is being transferred,
        a new Note (in accordance with Section 17(d)) to the Holder representing
        the
        outstanding Principal not being transferred. The Holder and any assignee,
        by
        acceptance of this Note, acknowledge and agree that, by reason of the provisions
        of Section 3(d)(iii) following conversion or redemption of any portion of
        this
        Note, the outstanding Principal represented by this Note may be less than
        the
        Principal stated on the face of this Note.

       

      (b) Lost,
        Stolen or Mutilated Note.
        Upon
        receipt by the Company of evidence reasonably satisfactory to the Company
        of the
        loss, theft, destruction or mutilation of this Note, and, in the case of
        loss,
        theft or destruction, of any indemnification undertaking by the Holder to
        the
        Company in customary form and, in the case of mutilation, upon surrender
        and
        cancellation of this Note, the Company shall execute and deliver to the Holder
        a
        new Note (in accordance with Section 17(d)) representing the outstanding
        Principal.

       

       

      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

      

      (c) Note
        Exchangeable for Different Denominations.
        This
        Note is exchangeable, upon the surrender hereof by the Holder at the principal
        office of the Company, for a new Note or Notes (in accordance with Section
        17(d)) representing in the aggregate the outstanding Principal of this Note,
        and
        each such new Note will represent such portion of such outstanding Principal
        as
        is designated by the Holder at the time of such surrender.

       

      (d) Issuance
        of New Notes.
        Whenever the Company is required to issue a new Note pursuant to the terms
        of
        this Note, such new Note (i) shall be of like tenor with this Note, (ii)
        shall
        represent, as indicated on the face of such new Note, the Principal remaining
        outstanding (or in the case of a new Note being issued pursuant to Section
        17(a)
        or Section 17(c), the Principal designated by the Holder which, when added
        to
        the principal represented by the other new Notes issued in connection with
        such
        issuance, does not exceed the Principal remaining outstanding under this
        Note
        immediately prior to such issuance of new Notes), (iii) shall have an issuance
        date, as indicated on the face of such new Note, which is the same as the
        Issuance Date of this Note, (iv) shall have the same rights and conditions
        as
        this Note, and (v) shall represent accrued and unpaid Interest and Late Charges
        on the Principal and Interest of this Note, if any, from the Issuance
        Date.

       

      (18)   
         REMEDIES,
        CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
        RELIEF.
        The
        remedies provided in this Note shall be cumulative and in addition to all
        other
        remedies available under this Note and any of the other Transaction Documents
        at
        law or in equity (including a decree of specific performance and/or other
        injunctive relief), and nothing herein shall limit the Holder's right to
        pursue
        actual and consequential damages for any failure by the Company to comply
        with
        the terms of this Note. Amounts set forth or provided for herein with respect
        to
        payments, conversion and the like (and the computation thereof) shall be
        the
        amounts to be received by the Holder and shall not, except as expressly provided
        herein, be subject to any other obligation of the Company (or the performance
        thereof). The Company acknowledges that a breach by it of its obligations
        hereunder will cause irreparable harm to the Holder 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, specifically including but
        not
        limited to the Company’s failure to adjust the Conversion Price as required
        hereunder following a Dilutive Issuance, the Holder 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.

       

      (19)    
         PAYMENT
        OF COLLECTION, ENFORCEMENT AND OTHER COSTS.
        If (a)
        this Note is placed in the hands of an attorney for collection or enforcement
        or
        is collected or enforced through any legal proceeding or the Holder otherwise
        takes action to collect amounts due under this Note or to enforce the provisions
        of this Note or (b) there occurs any bankruptcy, reorganization, receivership
        of
        the Company or other proceedings affecting Company creditors' rights and
        involving a claim under this Note, then the Company shall pay the costs incurred
        by the Holder for such collection, enforcement or action or in connection
        with
        such bankruptcy, reorganization, receivership or other proceeding, including,
        but not limited to, financial advisory fees and attorneys' fees and
        disbursements.

       

       

      
        
          
          

        

        
          20

          
            

          

        

        
          
          

        

      

      (20)    
         CONSTRUCTION;
        HEADINGS.
        This
        Note shall be deemed to be jointly drafted by the Company and all the Purchasers
        and shall not be construed against any person as the drafter hereof. The
        headings of this Note are for convenience of reference and shall not form
        part
        of, or affect the interpretation of, this Note.

       

      (21)    
         FAILURE
        OR INDULGENCE NOT WAIVER.
        No
        failure or delay on the part of the Holder 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)    
         DISPUTE
        RESOLUTION.
        In the
        case of a dispute as to the determination of the Closing Bid Price, the Closing
        Sale Price or the Weighted Average Price, the determination of the occurrence
        of
        a Dilutive Issuance which would trigger a reset of the Conversion Price,
        the
        determination of the Company entering into an agreement to issue securities
        pursuant to an Equity Line (as defined in the Securities Purchase Agreement),
        the determination of the Company entering into an agreement to issue Variable
        Equity Securities (as defined in the Securities Purchase Agreement) or the
        arithmetic calculation of the Conversion Rate or any Redemption Price, or
        the
        determination of the Company entering into a transaction that would violate
        any
        of the Additional Issuance Restrictions (as defined in the Securities Purchase
        Agreement) the Company shall submit the disputed determinations or arithmetic
        calculations via facsimile within one (1) Business Day of receipt, or deemed
        receipt, of the Conversion Notice or Redemption Notice or other event giving
        rise to such dispute, as the case may be, to the Holder. If the Holder and
        the
        Company are unable to agree upon such determination or calculation within
        one
        (1) Business Day of such disputed determination or arithmetic calculation
        being
        submitted to the Holder, then the Company shall, within one (1) Business
        Day
        submit via facsimile (a) the disputed determination of the Closing Bid Price,
        the Closing Sale Price or the Weighted Average Price to an independent,
        reputable investment bank (which is ranked in the top 10 investment banks
        nationally, by revenue) selected by the Company and approved by the Holder,
        or
        (b) a copy of the disputed agreement or other documentation pursuant to which
        the Holder believes securities may be issued pursuant to an Equity Line or
        as
        Variable Equity Securities, or which Holder believes may be a Dilutive Issuance
        which would trigger a reset of the Conversion Price, or which Holder believes
        may violate the Additional Issuance Restrictions, to an independent law firm
        selected by the Company and approved by Holder or (c) the disputed arithmetic
        calculation of the Conversion Rate or any Redemption Price to the Company's
        independent, outside accountant (which is ranked in the top 10 accounting
        firms
        nationally, by revenue). The Company, at the Company's expense, shall cause
        the
        investment bank, the law firm or the accountant, as the case may be, to perform
        the determinations or calculations and notify the Company and the Holder
        of the
        results no later than five (5) Business Days from the time it receives the
        disputed determinations or calculations. Such investment bank's, law firm’s or
        accountant's determination or calculation, as the case may be, shall be binding
        upon all parties absent demonstrable error. The procedures required by this
        Section 22 are collectively referred to herein as the “Dispute
        Resolution Procedures.”

       

       

      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

      

      (23)    
         NOTICES;
        PAYMENTS.

       

      (a) Notices.
        Whenever notice is required to be given under this Note, unless otherwise
        provided herein, such notice shall be given in accordance with Section 9(f)
        of
        the Securities Purchase Agreement. The Company shall provide the Holder with
        prompt written notice of all actions taken pursuant to this Note, including
        in
        reasonable detail a description of such action and the reason therefore.
        Without
        limiting the generality of the foregoing, the Company will give written notice
        to the Holder (i) immediately upon any adjustment of the Conversion Price,
        setting forth in reasonable detail, and certifying, the calculation of such
        adjustment and (ii) at least twenty (20) days prior to the date on which
        the
        Company closes its books or takes a record (A) with respect to any dividend
        or
        distribution upon the Common Stock, (B) with respect to any pro rata
        subscription offer to holders of Common Stock or (C) for determining rights
        to
        vote with respect to any Fundamental Transaction, dissolution or liquidation,
        provided in each case that such information shall be made known to the public
        prior to or in conjunction with such notice being provided to the
        Holder.

       

      (b) Payments.
        Whenever any payment of cash is to be made by the Company to any Person pursuant
        to this Note, such payment shall be made in lawful money of the United States
        of
        America by a check drawn on the account of the Company and sent via overnight
        courier service to such Person at such address as previously provided to
        the
        Company in writing (which address, in the case of each of the Purchasers,
        shall
        initially be as set forth on the Schedule of Buyers attached to the Securities
        Purchase Agreement); provided that the Holder may elect to receive a payment
        of
        cash via wire transfer of immediately available funds by providing the Company
        with prior written notice setting out such request and the Holder's wire
        transfer instructions. Whenever any amount expressed to be due by the terms
        of
        this Note is due on any day which is not a Business Day, the same shall instead
        be due on the next succeeding day which is a Business Day and, in the case
        of
        any Interest Date which is not the date on which this Note is paid in full,
        the
        extension of the due date thereof shall not be taken into account for purposes
        of determining the amount of Interest due on such date. Any amount of Principal
        or other amounts due under the Transaction Documents which is not paid when
        due
        shall result in a late charge being incurred and payable by the Company in
        an
        amount equal to interest on such amount at the rate of eighteen percent (18.0%)
        per annum from the date such amount was due until the same is paid in full
        ("Late
        Charge").

       

      (24)    
         CANCELLATION.
        After
        all Principal, accrued Interest and other amounts at any time owed on this
        Note
        have been paid in full, this Note shall automatically be deemed canceled,
        shall
        be surrendered to the Company for cancellation and shall not be
        reissued.

       

      (25)    
         WAIVER
        OF NOTICE.
        To the
        extent permitted by law, the Company hereby waives demand, notice, protest
        and
        all other demands and notices in connection with the delivery, acceptance,
        performance, default or enforcement of this Note and the Securities Purchase
        Agreement.

       

       

      
        
          
          

        

        
          22

          
            

          

        

        
          
          

        

      

      (26)    
         GOVERNING
        LAW; JURISDICTION; SEVERABILITY; JURY TRIAL.
        This
        Note shall be construed and enforced in accordance with, and all questions
        concerning the construction, validity, interpretation and performance of
        this
        Note shall be governed by, the internal laws of the State of New York, without
        giving effect to any choice of law or conflict of law provision or rule (whether
        of the State of New York or any other jurisdictions) that would cause the
        application of the laws of any jurisdictions other than the State of New
        York.
        The Company hereby irrevocably submits to the exclusive jurisdiction of the
        state and federal courts sitting in The City of New York, Borough of Manhattan,
        for the adjudication of any dispute hereunder or in connection herewith or
        with
        any transaction contemplated hereby or discussed herein, and hereby irrevocably
        waives, and agrees not to assert in any suit, action or proceeding, any claim
        that it is not personally subject to the jurisdiction of any such court,
        that
        such suit, action or proceeding is brought in an inconvenient forum or that
        the
        venue of such suit, action or proceeding is improper. Nothing contained herein
        shall be deemed to limit in any way any right to serve process in any manner
        permitted by law. In the event that any provision of this Note is invalid
        or
        unenforceable under any applicable statute or rule of law, then such provision
        shall be deemed inoperative to the extent that it may conflict therewith
        and
        shall be deemed modified to conform with such statute or rule of law. Any
        such
        provision which may prove invalid or unenforceable under any law shall not
        affect the validity or enforceability of any other provision of this Note.
        Nothing contained herein shall be deemed or operate to preclude the Holder
        from
        bringing suit or taking other legal action against the Company in any other
        jurisdiction to collect on the Company's obligations to the Holder, to realize
        on any collateral or any other security for such obligations, or to enforce
        a
        judgment or other court ruling in favor of the Holder. THE
        COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
        REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
        CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
        HEREBY.

       

      (27)    
         CERTAIN
        DEFINITIONS.
        For
        purposes of this Note, the following terms shall have the following
        meanings:

       

      (a) "Approved
        Stock Plan"
        means
        any employee benefit plan which has been or hereafter is approved by the
        Board
        of Directors of the Company, pursuant to which the Company's securities may
        be
        issued to any employee, officer or director for services provided to the
        Company.

       

      (b) "Bloomberg"
        means
        Bloomberg Financial Markets.

       

      (c) "Business
        Day"
        means
        any day other than Saturday, Sunday or other day on which commercial banks
        in
        The City of New York are authorized or required by law to remain
        closed.

       

      (d) "Change
        of Control"
        means
        any Fundamental Transaction other than (A) any reorganization, recapitalization
        or reclassification of Common Stock, in which holders of the Company's voting
        power immediately prior to such reorganization, recapitalization or
        reclassification continue after such reorganization, recapitalization or
        reclassification to hold publicly traded securities and, directly or indirectly,
        the voting power of the surviving entity or entities necessary to elect a
        majority of the members of the board of directors (or their equivalent if
        other
        than a corporation) of such entity or entities, or (B) pursuant to a migratory
        merger effected solely for the purpose of changing the jurisdiction of
        incorporation of the Company.

       

       

      
        
          
          

        

        
          23

          
            

          

        

        
          
          

        

      

      (e) "Closing
        Bid Price"
        and
        "Closing
        Sale Price"
        means,
        for any security as of any date, the last closing bid price and last closing
        trade price, respectively, for such security on the Principal Market, as
        reported by Bloomberg, or, if the Principal Market begins to operate on an
        extended hours basis and does not designate the closing bid price or the
        closing
        trade price, as the case may be, then the last bid price or last trade price,
        respectively, of such security prior to 4:00:00 p.m., New York Time, as reported
        by Bloomberg, or, if the Principal Market is not the principal securities
        exchange or trading market for such security, the last closing bid price
        or last
        trade price, respectively, of such security on the principal securities exchange
        or trading market where such security is listed or traded as reported by
        Bloomberg, or if the foregoing do not apply, the last closing bid price or
        last
        trade price, respectively, of such security in the over-the-counter market
        on
        the electronic bulletin board for such security as reported by Bloomberg,
        or, if
        no closing bid price or last trade price, respectively, is reported for such
        security by Bloomberg, the average of the bid prices, or the ask prices,
        respectively, of any market makers for such security as reported in the "pink
        sheets" by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).
        If
        the Closing Bid Price or the Closing Sale Price cannot be calculated for
        a
        security on a particular date on any of the foregoing bases, the Closing
        Bid
        Price or the Closing Sale Price, as the case may be, of such security on
        such
        date shall be the fair market value as mutually determined by the Company
        and
        the Holder. If the Company and the Holder are unable to agree upon the fair
        market value of such security, then such dispute shall be resolved pursuant
        to
        Section 22. All such determinations to be appropriately adjusted for any
        stock
        dividend, stock split, stock combination or other similar transaction during
        the
        applicable calculation period.

       

      (f) "Closing
        Date"
        shall
        have the meaning set forth in the Securities Purchase Agreement, which date
        is
        the date the Company initially issued Notes pursuant to the terms of the
        Securities Purchase Agreement.

       

      (g) "Contingent
        Obligation"
        means,
        as to any Person, any direct or indirect liability, contingent or otherwise,
        of
        that Person with respect to any indebtedness, lease, dividend or other
        obligation of another Person if the primary purpose or intent of the Person
        incurring such liability, or the primary effect thereof, is to provide assurance
        to the obligee of such liability that such liability will be paid or discharged,
        or that any agreements relating thereto will be complied with, or that the
        holders of such liability will be protected (in whole or in part) against
        loss
        with respect thereto.

       

      (h) “Convertible
        Notes”
has
        the
        meaning ascribed to such term in the Securities Purchase Agreement, and shall
        include all notes issued in exchange thereof or replacement
        thereof.

       

      (i) "Convertible
        Securities"
        means
        any stock or securities (other than Options) directly or indirectly convertible
        into or exercisable or exchangeable for Common Stock.

       

      (j) "Eligible
        Market"
        means
        The New York Stock Exchange, Inc., the American Stock Exchange, The NASDAQ
        Global Select Market, The NASDAQ Global Market, The NASDAQ Capital Market,
        or
        the NASD’s OTC Bulletin Board.

       

       

      
        
          
          

        

        
          24

          
            

          

        

        
          
          

        

      

      (k) "Effective
        Date"
        has the
        meaning ascribed to such term in the Registration Rights Agreement.

       

      (l) "Excluded
        Securities"
        means
        any Common Stock issued or issuable: (i) issued in connection with Securities
        Purchase Agreement (ii) in connection with any Approved Stock Plan; (iii)
        upon
        conversion of the Series A Notes or Series B Notes or the exercise of the
        Series
        A Warrants or the Series B Warrants; (iv) upon conversion of any Options
        or
        Convertible Securities which are outstanding on the day immediately preceding
        the Subscription Date, provided that the terms of such Options or Convertible
        Securities are not amended, modified or changed on or after the Subscription
        Date; (v) in connection with mergers, acquisitions, strategic business
        partnerships or joint ventures, in each case with non-affiliated third parties
        and otherwise on an arm's-length basis, the
        primary purpose of which is not to raise additional capital;
        and
        (vi) upon the issuance of Options or the exercise of any Options issued to
        financial institutions in connection with commercial credit agreements or
        issuance of non-convertible debt by the Company, each of which the primary
        purpose is not to raise additional capital.

       

      (m) "Fundamental
        Transaction"
        means
        that the Company shall, directly or indirectly, in one or more related
        transactions, (i) consolidate or merge with or into (whether or not the Company
        is the surviving corporation) another Person or Persons, or (ii) sell, assign,
        transfer, convey or otherwise dispose of all or substantially all of the
        properties or assets of the Company to another Person, or (iii) allow another
        Person to make a purchase, tender or exchange offer that is accepted by the
        holders of more than the 50% of the outstanding shares of Voting Stock (not
        including any shares of Voting Stock held by the Person or Persons making
        or
        party to, or associated or affiliated with the Persons making or party to,
        such
        purchase, tender or exchange offer), or (iv) consummate a stock purchase
        agreement or other business combination (including, without limitation, a
        reorganization, recapitalization, spin-off or scheme of arrangement) with
        another Person whereby such other Person acquires more than the 50% of the
        outstanding shares of Voting Stock (not including any shares of Voting Stock
        held by the other Person or other Persons making or party to, or associated
        or
        affiliated with the other Persons making or party to, such stock purchase
        agreement or other business combination), (v) reorganize, recapitalize or
        reclassify its Common Stock or (vi) any "person" or "group" (as these terms
        are
        used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or
        shall
        become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
        Act),
        directly or indirectly, of 50% of the aggregate ordinary voting power
        represented by issued and outstanding Common Stock.

       

      (n) "GAAP"
        means
        United States generally accepted accounting principles, consistently
        applied.

       

       

       

       

       

       

       

       

      
        
          
          

        

        
          25

          
            

          

        

        
          
          

        

      

      (o) "Indebtedness"
        of any
        Person means, without duplication (i) all indebtedness for borrowed money,
        (ii)
        all obligations issued, undertaken or assumed as the deferred purchase price
        of
        property or services, including (without limitation) "capital leases" in
        accordance with generally accepted accounting principles (other than trade
        payables entered into in the ordinary course of business), (iii) all
        reimbursement or payment obligations with respect to letters of credit, surety
        bonds and other similar instruments, (iv) all obligations evidenced by notes,
        bonds, debentures or similar instruments, including obligations so evidenced
        incurred in connection with the acquisition of property, assets or businesses,
        (v) all indebtedness created or arising under any conditional sale or other
        title retention agreement, or incurred as financing, in either case with
        respect
        to any property or assets acquired with the proceeds of such indebtedness
        (even
        though the rights and remedies of the seller or bank under such agreement
        in the
        Trigger Event are limited to repossession or sale of such property), (vi)
        all
        monetary obligations under any leasing or similar arrangement which, in
        connection with generally accepted accounting principles, consistently applied
        for the periods covered thereby, is classified as a capital lease, (vii)
        all
        indebtedness referred to in clauses (i) through (vi) above secured by (or
        for
        which the holder of such Indebtedness has an existing right, contingent or
        otherwise, to be secured by) any mortgage, lien, pledge, charge, security
        interest or other encumbrance upon or in any property or assets (including
        accounts and contract rights) owned by any Person, even though the Person
        which
        owns such assets or property has not assumed or become liable for the payment
        of
        such indebtedness, and (viii) all Contingent Obligations in respect of
        indebtedness or obligations of others of the kinds referred to in clauses
        (i)
        through (vii) above. Indebtedness shall not, however, include any Indebtedness
        incurred in the ordinary course of the Company’s business, unless otherwise
        referred to in this Section 27(o). 

       

      (p) "Options"
        means
        any rights, warrants or options to subscribe for or purchase shares of Common
        Stock or Convertible Securities.

       

      (q) "Parent
        Entity"
        of a
        Person means an entity that, directly or indirectly, controls the applicable
        Person and whose common stock or equivalent equity security is quoted or
        listed
        on an Eligible Market, or, if there is more than one such Person or Parent
        Entity, the Person or Parent Entity with the largest public market
        capitalization as of the date of consummation of the Fundamental
        Transaction.

       

      (r) "Permitted
        Indebtedness"
        means
        (i) the Indebtedness evidenced by this Note and the Other Notes, and (ii)
        bonds
        required to be posted by the company to obtain regulatory permits, licenses
        or
        insurance as part of conducting its business.

       

      (s) "Permitted
        Liens"
        means
        (i) any Lien for taxes not yet due or delinquent or being contested in good
        faith by appropriate proceedings for which adequate reserves have been
        established in accordance with GAAP, (ii) any statutory Lien arising in the
        ordinary course of business by operation of law with respect to a liability
        that
        is not yet due or delinquent, (iii) any Lien created by operation of law,
        such
        as materialmen’s liens, mechanics' liens and other similar liens, arising in the
        ordinary course of business with respect to a liability that is not yet due
        or
        delinquent or that are being contested in good faith by appropriate proceedings,
        (iv) Liens (A) upon or in any equipment acquired or held by the Company or
        any
        of its Subsidiaries to secure the purchase price of such equipment or
        indebtedness incurred solely for the purpose of financing the acquisition
        or
        lease of such equipment, or (B) existing on such equipment at the time of
        its
        acquisition, provided that the Lien is confined solely to the property so
        acquired and improvements thereon, and the proceeds of such equipment, (v)
        Liens
        incurred in connection with the extension, renewal or refinancing of the
        indebtedness secured by Liens of the type described in clauses (i) and (iv)
        above, provided that any extension, renewal or replacement Lien shall be
        limited
        to the property encumbered by the existing Lien and the principal amount
        of the
        Indebtedness being extended, renewed or refinanced does not increase, (vi)
        leases or subleases and licenses and sublicenses granted to others in the
        ordinary course of the Company's business, not interfering in any material
        respect with the business of the Company and its Subsidiaries taken as a
        whole,
        (vii) Liens in favor of customs and revenue authorities arising as a matter
        of
        law to secure payments of custom duties in connection with the importation
        of
        goods, and (viii) Liens arising from judgments, decrees or attachments in
        circumstances not constituting a Trigger Event under Section
        4(a)(vii).

       

       

      
        
          
          

        

        
          26

          
            

          

        

        
          
          

        

      

      (t) "Person"
        means
        an individual or legal entity, including but not limited to a corporation,
        a
        limited liability company, a partnership, a joint venture, a trust, an
        unincorporated organization and a government or any department or agency
        thereof. 

       

      (u) "Principal
        Market"
        means
        the NASD OTC Bulletin Board.

       

      (v) "Redemption
        Notices"
        means,
        collectively, the Trigger Event Redemption Notices and the Change of Control
        Redemption Notices, each of the foregoing, individually, a Redemption
        Notice.

       

      (w) "Redemption
        Premium"
        means
        (i) in the case of the Trigger Events described in Section 4(a)(i) - (vi)
        and
        (ix) - (xiv), 125% during the first twelve months that this Note is outstanding
        and 115% thereafter or (ii) in the case of the Trigger Events described in
        Section 4(a)(vii) - (viii), 100%.

       

      (x) "Redemption
        Prices"
        means,
        collectively, the Trigger Event Redemption Price and the Change of Control
        Redemption Price, each of the foregoing, individually, a Redemption
        Price.

       

      (y) "Registration
        Rights Agreement"
        means
        that certain registration rights agreement dated as of the Subscription Date
        by
        and among the Company and the initial holders of the Notes relating to, among
        other things, the registration of the resale of the Common Stock issuable
        upon
        conversion of the Notes and exercise of the Warrants.

       

      (z) "Required
        Holders"
        means,
        in the event that there remains fifteen percent (15%) or more of the original
        dollar amount of the Notes issued still outstanding, holders of Notes
        representing at least seventy-five percent (75%) of the aggregate principal
        amount of the Notes then outstanding.

       

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

       

      (bb) "Securities
        Purchase Agreement"
        means
        that certain securities purchase agreement dated as of the Subscription Date
        by
        and among the Company and the initial holders of the Notes pursuant to which
        the
        Company issued the Notes and the Warrants. 

       

      (cc) "Subscription
        Date"
        means
        May __, 2007.

       

      (dd) "Subsidiary"
        means
        any entity in which the Company, directly or indirectly, owns any of the
        capital
        stock or holds an equity or similar interest. 

       

       

      
        
          
          

        

        
          27

          
            

          

        

        
          
          

        

      

      (ee) "Successor
        Entity"
        means
        the Person, which may be the Company, formed by, resulting from or surviving
        any
        Fundamental Transaction or the Person with which such Fundamental Transaction
        shall have been made, provided that if such Person is not a publicly traded
        entity whose common stock or equivalent equity security is quoted or listed
        for
        trading on an Eligible Market, Successor Entity shall mean such Person's
        Parent
        Entity.

       

      (ff)  "Trading
        Day"
        means
        any day on which the Common Stock is traded on the Principal Market, or,
        if the
        Principal Market is not the principal trading market for the Common Stock,
        then
        on the principal securities exchange or securities market on which the Common
        Stock is then traded; provided that "Trading Day" shall not include any day
        on
        which the Common Stock is scheduled to trade on such exchange or market for
        less
        than 4.5 hours or any day that the Common Stock is suspended from trading
        during
        the final hour of trading on such exchange or market (or if such exchange
        or
        market does not designate in advance the closing time of trading on such
        exchange or market, then during the hour ending at 4:00:00 p.m., New York
        Time).

       

      (gg) "Voting
        Stock"
        of a
        Person means capital stock of such Person of the class or classes pursuant
        to
        which the holders thereof have the general voting power to elect, or the
        general
        power to appoint, at least a majority of the board of directors, managers
        or
        trustees of such Person (irrespective of whether or not at the time capital
        stock of any other class or classes shall have or might have voting power
        by
        reason of the happening of any contingency).

       

      (hh) "Warrants"
        has the
        meaning ascribed to such term in the Securities Purchase Agreement, and shall
        include all warrants issued in exchange therefor or replacement
        thereof.

       

      (ii)  "Weighted
        Average Price"
        means,
        for any security as of any date, the dollar volume-weighted average price
        for
        such security on the Principal Market during the period beginning at 9:30:01
        a.m., New York Time (or such other time as the Principal Market publicly
        announces is the official open of trading), and ending at 4:00:00 p.m., New
        York
        Time (or such other time as the Principal Market publicly announces is the
        official close of trading) as reported by Bloomberg through its "Volume at
        Price" functions, or, if the foregoing does not apply, the dollar
        volume-weighted average price of such security in the over-the-counter market
        on
        the electronic bulletin board for such security during the period beginning
        at
        9:30:01 a.m., New York Time (or such other time as such market publicly
        announces is the official open of trading), and ending at 4:00:00 p.m., New
        York
        Time (or such other time as such market publicly announces is the official
        close
        of trading) as reported by Bloomberg, or, if no dollar volume-weighted average
        price is reported for such security by Bloomberg for such hours, the average
        of
        the highest closing bid price and the lowest closing ask price of any of
        the
        market makers for such security as reported in the "pink sheets" by Pink
        Sheets
        LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average
        Price cannot be calculated for a security on a particular date on any of
        the
        foregoing bases, the Weighted Average Price of such security on such date
        shall
        be the fair market value as mutually determined by the Company and the Holder.
        If the Company and the Holder are unable to agree upon the fair market value
        of
        such security, then such dispute shall be resolved pursuant to Section 22.
        All
        such determinations to be appropriately adjusted for any stock dividend,
        stock
        split, stock combination or other similar transaction during the applicable
        calculation period.

       

       

      
        
          
          

        

        
          28

          
            

          

        

        
          
          

        

      

      (28)    
         DISCLOSURE.
        Upon
        receipt or delivery by the Company of any notice in accordance with the terms
        of
        this Note, unless the Company has in good faith determined that the matters
        relating to such notice do not constitute material, nonpublic information
        relating to the Company or its Subsidiaries, the Company shall within four
        (4)
        Business Days after any such receipt or delivery publicly disclose such
        material, nonpublic information on a Current Report on Form 8-K or otherwise.
        In
        the event that the Company believes that a notice contains material, nonpublic
        information, relating to the Company or its Subsidiaries, the Company shall
        indicate to the Holder contemporaneously with delivery of such notice, and
        in
        the absence of any such indication, the Holder shall be allowed to presume
        that
        all matters relating to such notice do not constitute material, nonpublic
        information relating to the Company or its Subsidiaries.

       

       

       

      [Signature
        Page Follows]

       

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      
        
          
          

        

        
          29

          
            

          

        

        
          
          

        

      

      IN
        WITNESS WHEREOF, the Company has caused this Note to be duly executed as
        of the
        Issuance Date set out above.

      

      
        	 	
                nCOAT,
                  INC.

              
	 	 
	 	
                By:

              	                                                                             
                
	 	
                Name:

              	 
	 	
                Title:

              	 

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

      EXHIBIT
        I

       

      nCOAT,
        INC.

       

      CONVERSION
        NOTICE

       

      Reference
        is made to the Series A Convertible Note (the "Series A Note")
        issued
        to the undersigned by nCOAT, Inc. (the "Company").
        In
        accordance with and pursuant to the Note, the undersigned hereby elects to
        convert the Conversion Amount (as defined in the Note) of the Note indicated
        below into shares of Common Stock par value $0.0001 per share (the "Common
        Stock")
        of the
        Company, as of the date specified below.

       

      
        
           

          Date
            of
            Conversion: 
______________________________________________________________________________________________

           

          Aggregate
            Conversion Amount to be converted: 
_________________________________________________________________________

           

          Please
            confirm the following information:

           

          Conversion
            Price: 
________________________________________________________________________________________________

           

          Number
            of
            shares of Common Stock to be
            issued: ________________________________________________________________________

           

          Please
            issue the Common Stock into which the Note is being converted in the
            following
            name and to the following address:

           

          Issue
            to: 
_______________________________________________________________________________________________________

                            
             
_______________________________________________________________________________________________________

                              
            _______________________________________________________________________________________________________

           

          Facsimile
            Number: 
_______________________________________________________________________________________________

           

          Authorization: 
            ___________________________________________________________________________________________________

           

          By: 
            ________________________________________________________________________________________________________

           

          Title: 
            ____________________________________________________________________________________________________

           

          Dated: ____________________________________________________________________________________________________________

           

          Account
            Number: 
________________________________________________________________________________________________

          (if
            electronic book entry transfer)

           

          Transaction
            Code Number: 
_________________________________________________________________________________________

          (if
            electronic book entry transfer)

        

         

      

      

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ACKNOWLEDGMENT

      The
        Company hereby acknowledges this Conversion Notice and hereby directs Nevada
        Agency & Trust Company to issue the above-indicated number of shares of
        Common Stock in accordance with the Transfer Agent Instructions dated May
        __,
        2007 from the Company and acknowledged and agreed to by Nevada Agency &
Trust Company.

      

      

      
        	 	
                nCOAT,
                  INC.

              
	 	 
	 	
                By:

              	                                                                                      
                
	 	
                Name:

              	 
	 	
                Title:

              	 

      

      
 

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      32

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