Document:

Securities Purchase Agreement With the Sands Brothers Purchasers

Exhibit 10.1
     

      
        

      

    

    
      
        

      

    

     

    XA,
      INC.

     

     

    SECURITIES
      PURCHASE AGREEMENT

     

     

    

     

     

    As
      of
      June 22, 2007

     

     

    

     

    

     

    

     

    
      
        
           

          

        

        
        

      

      
        -1-

        
          

        

      

      
        
        

        
          

        

      

    

    THIS
      SECURITIES PURCHASE AGREEMENT,
      dated
      as of this 22nd day of June, 2007 (this “Agreement”),
      between XA, INC., a Nevada corporation (the “Company”),
      and
      Sands Brothers Venture Capital LLC, Sands Brothers Venture Capital II LLC,
      Sands
      Brothers Venture Capital III LLC, Sands Brothers Venture Capital IV LLC and
      Katie &
      Adam Bridge Partners, L.P.
      (collectively the “Purchaser”).
      

     

    W
      I T N E S S E T H:

     

    WHEREAS,
      the
      Company has previously entered into Securities Purchase Agreements on August
      8,
      2006, September 26, 2006 and October 23, 2006 (the “Prior
      Closing”
and
      the
“Prior
      Purchase Agreements”),
      whereby it sold an aggregate of $2,700,000 in 11% Senior Secured Convertible
      Promissory Notes (the “Prior
      Notes”)
      and
      392,500 warrants to purchase shares of its common stock at an exercise price
      of
      $1.10 per share and 433,333 warrants to purchase shares of its common stock
      at
      an exercise price of $0.30 per share (collectively the “Prior
      Warrants”),
      to
      six entities (including the Purchaser) and two individuals (the “Prior
      Purchasers”)
      which
      Prior Notes were secured by Security Agreements (the “Prior
      Security Agreements”).
      The
      shares of common stock which the Prior Notes were convertible into and the
      shares of common stock which the Prior Warrants were convertible into and an
      aggregate of 1,000,000 additional warrants previously issued exercisable at
      $0.30 per share (collectively the “Prior
      Underlying Shares”),
      were
      granted registration rights pursuant to Registration Rights Agreements (the
      “Prior
      Registration Agreements”);
      

     

    WHEREAS,
      the
      Company desires to issue to the Purchaser, and the Purchaser desires to purchase
      from the Company, the additional Securities (as such term is defined below)
      as
      set forth below (the “Offering”);
      and

     

    WHEREAS,
      certain
      capitalized terms used in this Agreement are defined in Section
      9.1
      hereof;

     

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

     

    1. Sale
      and Purchase of Securities.

     

    1.1  Sale
      and Purchase of Securities.
      Subject
      to the terms and conditions of this Agreement, on the Closing Date (as defined
      in Section
      3.1
      hereof),
      the Company shall issue, sell and deliver to the Purchaser, and the Purchaser
      shall purchase from the Company for the Purchase Price (as defined in
Section
      2.1
      hereof)
      (i) 11% Senior Subordinated Secured Convertible Promissory Notes in the
      aggregate principal amount of $200,000 (the “Notes”)
      and
      (ii) warrants to purchase Two
      Hundred Thousand (200,000) shares (subject to adjustment as described therein),
      of the Company’s common stock, par value $0.001 per share (the “Common
      Stock”)
      at an
      exercise price of $0.30 per share (subject to adjustment as described therein),
      of the Company’s Common Stock (each a “Warrant”
and
      collectively the “Warrants”).
      The
      Notes and Warrants shall hereinafter sometimes be collectively referred to
      as
      the “Securities.”
The
      names, addresses and principal amount of Notes purchased and Warrants received
      by the Purchaser shall be set forth on Schedule
      1.1
      hereto.

     

    
      
         

         

        

        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

     

    2. Purchase
      Price.

     

    2.1  Purchase
      Price.
      (i)
      The
      aggregate purchase price of the Securities to be purchased pursuant to
Section
      1.1
      shall be
      $200,000 (the “Purchase
      Price”).

     

    2.2  Payment
      of the Purchase Price.
      At the
      Closing (as defined in Section
      3.1
      hereof),
      the Purchaser shall pay the Purchase Price by wire transfer of immediately
      available funds or by such other method as may be reasonably acceptable to
      the
      Company and the Purchaser, to such account of the Company as shall have been
      designated in advance to the Purchaser by the Company. 

     

    3. Closing.

     

    3.1  Closing
      Date.
      The
      closing of the sale and purchase of the Securities (the “Closing”)
      shall
      take place on June 22, 2007, or at such other time, date or place as the parties
      hereto may mutually agree; provided,
      that
      all conditions to the Closing set forth in this Agreement have been satisfied
      or
      waived by such date. The date on which the Closing is held is referred to in
      this Agreement as the “Closing
      Date.”
At
      the
      Closing (i) the Company shall deliver, or cause to be delivered, the Notes
      and
      Warrants, each executed by the Company and (ii) the documents referred to in
      Section
      8
      hereof.

     

    4. Representations
      and Warranties of the Company.
      The
      Company hereby represents, covenants and warrants as of the date hereof and
      as
      of the Closing Date to the Purchaser, acknowledging that the Purchaser is
      relying upon the accuracy and completeness of the representations and warranties
      set forth herein to, among other things, ensure that registration under
      Section 5 of the Securities Act is not required in connection with the sale
      of the Securities hereby, as follows:

     

    4.1  Organization
      and Good Standing; Capitalization.

     

    (a) The
      Company (and each Subsidiary) is duly organized, validly existing and in good
      standing under the laws of the state of Nevada and has the corporate power
      and
      authority to own, lease and operate its properties and assets and to carry
      on
      its business as now conducted and as it is proposed to be conducted. The Company
      is in good standing under the laws of each jurisdiction in which the conduct
      of
      its business or the ownership of its properties or assets requires such
      qualification or authorization.

     

    (b) All
      the
      outstanding shares of capital stock of the Company have been duly authorized,
      and are validly issued, fully paid and non-assessable. Except as disclosed
      on
Schedule
      4.1(b)
      (i)
      there is no option, warrant, call, right, commitment or other agreement of
      any
      character to which the Company is a party, (ii) there are no securities of
      the
      Company outstanding which upon conversion or exchange, and (iii) there are
      no
      share appreciation rights, or other similar rights based on securities of the
      Company which, in the case of clause (i), (ii) or (iii), would require the
      issuance, sale or transfer of any additional shares of capital stock or other
      equity securities of the Company or other securities convertible into,
      exchangeable for or evidencing the right to subscribe for or purchase share
      capital or other equity securities of the Company. Other than as contemplated
      by
      this Agreement or Transaction Documents (as defined in Section
      4.2),
      the
      Company is not a party to, nor is it aware of, any voting trust or other voting,
      stockholders or similar agreement with respect to any of the securities of
      the
      Company or of any agreement relating to the issuance, sale, redemption, transfer
      or other disposition of the shares of capital stock on other securities of
      the
      Company.

     

    
      
         

         

        

        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

     

    4.2  Authorization
      of Agreement; Enforceability.
      The
      Company has all requisite corporate power and authority to execute and deliver
      this Agreement and each other agreement, document, instrument and certificate,
      including, but not limited to, Waiver Agreements, the Bank Consent, the Notes,
      Warrants, Registration Rights Agreement and Security Agreement, to be executed
      by the Company in connection with the consummation of the transactions
      contemplated by this Agreement (collectively, the “Transaction
      Documents”),
      and
      to perform fully its obligations hereunder and thereunder. The execution,
      delivery and performance by the Company of this Agreement and the Transaction
      Documents have been duly authorized by all necessary corporate action on the
      part of the Company and its stockholders. This Agreement and each of the
      Transaction Documents have been duly and validly executed and delivered by
      the
      Company and, assuming the due authorization, execution and delivery thereof
      by
      the Purchaser, this Agreement and each of the Transaction Documents constitutes
      the legal, valid and binding obligations of the Company, enforceable against
      the
      Company in accordance with its respective terms, subject to applicable
      bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
      creditors’ rights and remedies generally and subject, as to enforceability, to
      general principles of equity (regardless of whether enforcement is sought in
      a
      proceeding at law or in equity).

     

    4.3
       No
      Conflicts.
      The
      execution, delivery and performance of the Transaction Documents by the Company
      and the consummation by the Company of the transactions contemplated thereby,
      do
      not and will not (i) conflict with or violate any provision of the
      Company’s and/or any Subsidiary’s Articles of Incorporation or by-laws and any
      and all amendments thereto (collectively, the “Internal
      Documents”),
      (ii) conflict with, or constitute a default (or an event that 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 (with or without
      notice, lapse of time or both) of, any agreement, credit facility, debt or
      other
      instrument (evidencing a Company or Subsidiary debt or otherwise), or other
      understanding to which the Company or any Subsidiary is a party or by which
      any
      property or asset of the Company or any Subsidiary is bound or affected, or
      (iii) result in a violation of any law, rule, regulation, order, judgment,
      injunction, decree or other restriction of any court or governmental authority
      to which the Company or a Subsidiary is subject (including federal and state
      securities laws and regulations), or by which any property or asset of the
      Company or a Subsidiary is bound or affected.

     

    4.4  Subsidiaries,
      Joint Ventures, Partnerships, Etc.
      

     

    (a) As
      of the
      Closing (i) The Experiential Agency, Inc., (ii) XA Scenes, Inc., (iii) XA
      Interactive, Inc., and (iv) Fiori XA, Inc. (collectively the “Subsidiaries”)
      are
      the only subsidiaries of the Company. Each Subsidiary is wholly owned by the
      Company, is duly organized, validly existing and in good standing under the
      laws
      of the jurisdiction of its incorporation with corporate power and corporate
      authority under such laws to own, lease and operate its properties and conduct
      its business as currently conducted; and is in good standing (if applicable)
      in
      each other jurisdiction in which it owns or leases property of a nature, or
      transacts business of a type, that would make such qualification necessary
      other
      than such qualifications which the failure to have would not reasonably be
      expected to have a Material Adverse Effect.

      
        
           

           

          

          
          

        

        
          -4-

          
            

          

        

        
          
          

        

      

    

     

    (b) Neither
      the Company nor its Subsidiaries is a party to any joint venture, partnership
      or
      similar arrangement or agreement. 

     

    4.5  Consents
      of Third Parties.
      None of
      the execution and delivery by the Company of this Agreement and the Transaction
      Documents, the Bank Consent, the consummation of the transactions contemplated
      hereby or thereby, or compliance by the Company with any of the provisions
      hereof or thereof will (a) conflict with, or result in the breach of, any
      provision of the Certificate of Incorporation or Bylaws of the Company (or
      any
      Subsidiary), (b) conflict with, violate, result in the breach or termination
      of,
      or constitute a default or give rise to any right of termination or acceleration
      or right to increase the obligations or otherwise modify the terms thereof
      under
      any Permit or Order to which the Company (or any Subsidiary) is a party or
      any
      Contract to which the Company or its Subsidiaries is bound or by which the
      Company or any of its properties or assets is bound, other than such conflicts,
      violations, breaches, defaults, termination or accelerations that would not
      reasonably be expected to have a Material Adverse Effect, (c) constitute a
      violation of any Law applicable to the Company (or any Subsidiary) or (d) result
      in the creation of any Lien upon the properties or assets of the Company (or
      any
      Subsidiary). No consent, waiver, approval, Order, Permit or authorization of,
      or
      declaration or filing with, or notification to, any Person or Governmental
      Body
      is required on the part of the Company and/or its Subsidiaries in connection
      with the execution and delivery of this Agreement, and/or the Transaction
      Documents, or the compliance by the Company with any of the provisions hereof
      or
      thereof.

     

    4.6  Authorization
      of Securities.

     

    (a) On
      the
      Closing Date, the issuance, sale, and delivery of the Securities to be purchased
      pursuant to Section
      1.1
      will
      have been duly authorized by all requisite action of the Company, and, when
      issued, sold, delivered and paid for in accordance with this Agreement, the
      Securities will be validly issued and outstanding, with no personal liability
      attaching to the ownership thereof.

     

    (b) On
      the
      Closing Date, the issuance and delivery of the shares of Common Stock to be
      delivered upon conversion of the Notes (the “Conversion
      Shares”)
      and
      upon exercise of the Warrants (the “Warrant
      Shares”)
      in
      accordance with the terms thereof (collectively, the Conversion Shares and
      the
      Warrants Shares, the “Underlying
      Shares”)
      will
      have been duly authorized by all requisite action of the Company and, when
      issued and delivered in accordance with the terms of the Securities, the
      Underlying Shares will be validly issued and outstanding, fully paid and
      non-assessable, with no personal liability attaching to the ownership thereof,
      and not subject to preemptive or any other similar rights of the stockholders
      of
      the Company or others.

     

    4.7 [Intentionally
      removed.]

    
      
         

         

        

        
        

      

      
        -5-

        
          

        

      

      
        
        

      

    

     

    4.8  Capitalization.
      Schedule
      4.8
      hereto
      sets forth in detail all outstanding securities of the Company (including the
      terms, the holders and the amounts thereof). Other than as disclosed in
Schedule
      4.8,
      (i)  there are no outstanding securities of the Company or any of its
      Subsidiaries which contain any preemptive, redemption or similar provisions,
      nor
      is any holder of securities of the Company or any Subsidiary entitled to
      preemptive or similar rights arising out of any agreement or understanding
      with
      the Company or any Subsidiary by virtue of any of the Transaction Documents,
      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; (ii) the Company does not have any
      stock appreciation rights or "phantom stock" plans or agreements or any similar
      plan or agreement; and (iii) there are no outstanding options, warrants, script
      rights to subscribe to, calls or commitments of any character whatsoever
      relating to, or securities, except as a result of the purchase and sale of
      the
      Transaction Securities, or rights or obligations convertible into or
      exchangeable for, or giving any Person any right to subscribe for or acquire,
      any shares of Common Stock, or contracts, commitments, understandings, or
      arrangements by which the Company or any Subsidiary is or may become bound
      to
      issue additional shares of Common Stock, or secur-ities or rights convertible
      or
      exchangeable into shares of Common Stock. 

     

    4.9  SEC
      Reports; Financial Statements.
      The
      Company has filed all reports required to be filed by it under the Securities
      Act and the Exchange Act, including pursuant to Section 13(a) or
      Section 15(d) of the Exchange Act, for the one (1) year preceding the
      date hereof (or such shorter period as the Company was required by law to file
      such material) (the foregoing materials, including the exhibits thereto, being
      collectively referred to herein as the “SEC
      Reports”).
      As of
      their respective dates, the SEC Reports complied in all material respects with
      the requirements of the Securities Act and the Exchange Act and the rules and
      regulations of the Commission promulgated thereunder, as applicable, and none
      of
      the SEC Reports, when filed, contained any untrue statement of a material fact
      or omitted to state a material fact required to be stated therein or necessary
      in order to make the statements therein, in light of the circumstances under
      which they were made, not misleading. All material agreements to which the
      Company is a party or to which the property or assets of the Company are subject
      have been filed as exhibits to the SEC Reports to the extent required. The
      financial statements of the Company included in the SEC Reports comply in all
      material respects with applicable accounting requirements and the rules and
      regulations of the Commission with respect thereto as in effect at the time
      of
      filing. Such financial statements have been prepared in accordance with
      generally accepted accounting principles applied on a consistent basis during
      the periods involved (“GAAP”),
      except as may be otherwise specified in such financial statements or the notes
      thereto and except that unaudited financial statements may not contain all
      footnotes required by GAAP, and fairly present in all material respects the
      financial position of the Company and its consolidated subsidiaries as of and
      for the dates thereof and the results of operations and cash flows for the
      periods then ended, subject, in the case of unaudited statements, to normal,
      immaterial, year-end audit adjustments. Additionally, since the adoption of
      the
      Sarbanes-Oxley Act of 2002 (the “New
      Act”)
      and to
      the extent that the Company is subject to the New Act, the Company has complied
      in all material respects with the laws, rules and regulation under the New
      Act.

     

    4.10 Material
      Changes.
      Since
      December 31, 2006, (i) there has been no event, occurrence or development
      that has had or that could reasonably be expected to result in a Material
      Adverse Effect, (ii) the Company has not incurred any material 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 required to be disclosed in filings made with
      the
      Commission, (iii) the Company has not altered its method of accounting or
      the identity of its auditors, (iv) the Company has not declared or made
      payment or distribution of any dividend or distribution of cash or other
      property to its holders of Common Stock 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.

    
      
         

         

        

        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    

     

    4.11 No
      Undisclosed Liabilities.
      Other
      than as disclosed in the SEC Reports, neither the Company nor its Subsidiaries
      has any liabilities (whether accrued, absolute, contingent or otherwise, and
      whether due or to become due or asserted or unasserted), except (a) liabilities
      provided for in the Financial Statements (other than liabilities which, in
      accordance with GAAP, need not be disclosed), (b) liabilities disclosed on
      Schedule
      4.11
      hereto
      and (c) liabilities incurred in the ordinary course of business which do not
      materially exceed historic levels.

     

    4.12 Absence
      of Certain Developments.
      In the
      ordinary course of business or in the context of the Transactions contemplated
      in this Agreement and the Transaction Documents:

     

    (a) there
      has
      not been any Material Adverse Change nor has any event occurred which could
      result in any Material Adverse Change;

     

    (b) there
      has
      not been any declaration, setting a record date, setting aside or authorizing
      the payment of, any dividend or other distribution in respect of any shares
      of
      capital stock of the Company or its Subsidiaries or any repurchase, redemption
      or other acquisition by the Company or its Subsidiaries, of any of the
      outstanding shares of capital stock or other securities of, or other ownership
      interest in, the Company or its Subsidiaries;

     

    (c) there
      has
      not been any transfer, issue, sale or other disposition by the Company of any
      shares of capital stock or other securities of the Company or its Subsidiaries
      or any grant of options, warrants, calls or other rights to purchase or
      otherwise acquire shares of such capital stock or such other
      securities;

     

    (d) neither
      the Company nor its Subsidiaries has (i) awarded or paid any bonuses to
      employees or representatives of the Company, (ii) entered into any employment,
      deferred compensation, severance or similar agreements (nor amended any such
      agreement), other than in the ordinary course of business;

     

    (e) neither
      the Company nor its Subsidiaries has made any loans, advances (other than
      advances to officers and employees of the Company or its Subsidiaries which
      advances are made in the ordinary course of business), or capital contributions
      to, or investments in, any Person or paid any fees or expenses to any Affiliate
      of the Company other than its Subsidiaries;

     

    (f) neither
      the Company nor its Subsidiaries has transferred or granted any rights under
      any
      Contracts or licenses, used by the Company in its business;

    
      
         

         

        

        
        

      

      
        -7-

        
          

        

      

      
        
        

      

    

    
      (g) there
        has
        not been any damage, destruction or loss, whether or not covered by insurance,
        with respect to the property or assets of the Company or its Subsidiaries
        having
        a replacement cost of more than $10,000 for any single loss or $20,000 for
        all
        such losses;

    

     

    (h) neither
      the Company nor its Subsidiaries has mortgaged, pledged or subjected to any
      Lien
      any of its assets, or acquired any assets for a purchase price in excess of
      $10,000 in the aggregate or sold, assigned, transferred, conveyed, leased or
      otherwise disposed of any assets of the Company or its Subsidiaries for a sale
      price in excess of $10,000 in the aggregate except for assets acquired or sold,
      assigned, transferred, conveyed, leased or otherwise disposed of in the ordinary
      course of business;

     

    (i) neither
      the Company nor its Subsidiaries has canceled or compromised any debt or claim,
      or amended, canceled, terminated, relinquished, waived or released any Contract
      or right, except in the ordinary course of business consistent with past
      practice and which, individually or in the aggregate, would not be material
      to
      the Company or its Subsidiaries;

     

    (j) neither
      the Company nor its Subsidiaries has made any binding commitment to make any
      capital expenditures or capital additions or betterments in excess of $20,000
      individually or $50,000 in the aggregate;

     

    (k) neither
      the Company nor its Subsidiaries has incurred any debts, obligations or
      liabilities, whether due or to become due, except current liabilities incurred
      in the ordinary course of business, none of which current liabilities
      (individually or in the aggregate) could result in a Material Adverse
      Change;

     

    (l) neither
      the Company nor its Subsidiaries has entered into any transaction other than
      in
      the ordinary course of business except for (in the case of the Company) this
      Agreement;

     

    (m) 
      neither
      the Company nor its Subsidiaries has encountered any labor difficulties or
      labor
      union organizing activities;

     

    (n) neither
      the Company nor its Subsidiaries has made any change in the accounting
      principles, methods or practices followed by it or depreciation or amortization
      policies or rates theretofore adopted;

     

    (o) neither
      the Company nor its Subsidiaries has disclosed to any Person any material trade
      secrets except for disclosures made to Persons subject to valid and enforceable
      confidentiality agreements;

     

    (p) neither
      the Company nor its Subsidiaries has suffered or experienced any change in
      the
      relationship or course of dealings between the Company and/or its Subsidiaries
      and any of their suppliers or customers which supply goods or services to the
      Company or its Subsidiaries or purchase goods or services from the Company
      and
      or its Subsidiaries; and

    
      
         

         

        

        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    

    
      (q) neither
        the Company nor its Subsidiaries has made any payment to, or received any
        payment from, or made or received any investment in, or entered into any
        transaction or series of related transactions (including without limitation,
        the
        purchase, sale, exchange or lease of assets, property or services, or the
        making
        of a loan or guarantee) with any Affiliate in each case, in excess of $10,000
        or
        its equivalent (other than any transactions between or among the Company
        and its
        Subsidiaries) (each, an “Affiliate
        Transaction”).

    

     

    4.13 Taxes.
      The
      Company and its Subsidiaries have filed all Tax returns (including statements
      of
      estimated Taxes owed) and reports required to be filed within the applicable
      periods (subject to extensions) for such filings and have paid all Taxes
      required to be paid, and has established adequate reserves (net of estimated
      Tax
      payments already made) for the payment of all Taxes payable in respect of the
      period subsequent to the last periods covered by such returns. No deficiencies
      for any Tax are currently assessed against the Company or any Subsidiary. There
      is no Tax Lien, whether imposed by any federal, state or local taxing authority,
      outstanding against the assets, properties or business of the Company or its
      Subsidiaries other than Liens for Taxes which are not yet due. Neither the
      Company nor its Subsidiaries has executed any waiver of the statute of
      limitations on the assessment or collection of any Tax or governmental charge.
      The Company and its Subsidiaries have properly charged, collected and paid
      all
      applicable stamp, sales, use and other similar Taxes on or before the Closing
      Date.

     

    4.14 Real
      Property.
      The
      Company currently has (i) leased certain locations for office space , and (ii)
      owns real property, all of which leases and real property are listed (including
      the terms of such leases) on Schedule
      4.14.

     

    4.15 Tangible
      Personal Property; Assets.
      All
      material items of personal property and assets owned or leased by the Company
      and its Subsidiaries are in good operating condition, normal wear and tear
      excepted.

     

    4.16 Intangible
      Property.
      The
      Company and its Subsidiaries own, or possess adequate rights or licenses to
      use
      all trademarks, trade names, service marks, service mark registrations, service
      names, patents, patent rights, copyrights, inventions, licenses, approvals,
      governmental authorizations, trade secrets and rights necessary to conduct
      their
      respective businesses as now conducted, the lack of which could reasonably
      be
      expected to have a Material Adverse Effect. The Company and its Subsidiaries
      do
      not have any knowledge of any infringement by the Company or its Subsidiaries
      of
      trademarks, trade name rights, patents, patent rights, copyrights, inventions,
      licenses, service names, service marks, service mark registrations, trade
      secrets or other similar rights of others, or of any such development of similar
      or identical trade secrets or technical information by others and no claim,
      action or proceeding has been made or brought against, or to the Company's
      knowledge, has been threatened against, the Company or its Subsidiaries
      regarding trademarks, trade name rights, patents, patent rights, inventions,
      copyrights, licenses, service names, service marks, service mark registrations,
      trade secrets or other infringement, except where such infringement, claim,
      action or proceeding would not reasonably be expected to have either
      individually or in the aggregate a Material Adverse Effect. None of the
      Company’s employees, officers, or consultants are obligated under any contract
      (including licenses, covenants, or commitments of any nature) or other
      agreement, or subject to any judgment, decree, or order of any court or
      administrative agency, that would interfere with the use of such employee’s,
      officer’s, or consultant’s commercially reasonable efforts to promote the
      interests of the Company or that would conflict with the Company’s business as
      conducted. Neither the execution nor delivery of the Transaction Documents,
      nor
      the carrying on of the Company’s business by the employees of the Company, nor
      the conduct of the Company’s business, will, to the Company’s knowledge,
      conflict with or result in a breach of the terms, conditions, or provisions
      of,
      or constitute a default under, any contract, covenant, or instrument under
      which
      any of such employees, officers or consultants are now obligated. 

    
      
         

         

        

        
        

      

      
        -9-

        
          

        

      

      
        
        

      

    

    4.17 Material
      Contracts.

     

    Other
      than as set forth on Schedule
      4.17,
      or
      otherwise disclosed in the Company’s Securities and Exchange Commission filings
      (a) neither the Company nor its Subsidiaries nor any of their respective
      properties or assets is a party to or bound by any (i) Contract not made in
      the
      ordinary course of business, or involving a commitment or payment by the Company
      or any Subsidiary in excess of $10,000 or, in the Company’s belief, otherwise
      material to the business of the Company or its Subsidiaries, (ii) Contract
      among
      members or granting a right of first refusal or for a partnership or a joint
      venture or for the acquisition, sale or lease of any assets or share capital
      of
      the Company or any other Person or involving a sharing of profits,
      (iii) mortgage, pledge, conditional sales contract, security agreement,
      factoring agreement or other similar Contract with respect to any real or
      tangible personal property of the Company or its Subsidiaries, (iv) loan
      agreement, credit agreement, promissory note, guarantee, subordination
      agreement, letter of credit or any other similar type of Contract, (v) Contract
      with any Governmental Body outside the ordinary course of business, (vi)
      Contract with respect to the discharge, storage or removal of hazardous
      materials or (vii) binding commitment or agreement to enter into any of the
      foregoing. 

     

    (b) (i) Each
      of
      the Contracts listed on Schedule
      4.17
      are
      valid and enforceable against the Company or its Subsidiaries in accordance
      with
      their terms, subject to applicable bankruptcy, insolvency, reorganization,
      moratorium and similar laws affecting creditors’ rights and remedies generally
      and subject, as to enforceability, to general principles of equity (regardless
      of whether enforcement is sought in a proceeding at law or in equity), and
      there
      is no default under any Contract listed on Schedule 4.17
      by the
      Company or any of its Subsidiaries or, to the knowledge of the Company, by
      any
      other party thereto, which is likely to have a Material Adverse Effect, and
      no
      event has occurred that with the lapse of time or the giving of notice or both
      would constitute a default by the Company thereunder which is likely to have
      a
      Material Adverse Effect.

     

    (ii) No
      previous or current party to any Contract has given written notice to the
      Company or any Subsidiary of, or made a claim, verbal or written, with respect
      to any breach or default thereunder and the Company has no knowledge of any
      notice of or claim with respect to any such breach or default other than such
      notices or claims with respect to any such breaches or defaults that would
      not,
      either individually or in the aggregate, be reasonably expected to have a
      Material Adverse Effect.

     

    (c) With
      respect to the Contracts listed on Schedule
      4.17
      that
      were assigned to the Company or any Subsidiary by a third party, all necessary
      consents to such assignment have been obtained other than such contents which
      the failure to obtain would not be reasonably expected to have a Material
      Adverse Effect.

     

     

     

    
      
         

         

        

        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

    
      4.18 Employee
        Benefits.
        Except
        as set forth on Schedule
        4.18,
        neither
        the Company nor any of its Subsidiaries has in effect any employment agreements,
        consulting agreements, deferred compensation, pension or retirement agreements
        or arrangements, bonus, incentive or profit-sharing plans or arrangements,
        or
        labor or collective bargaining agreements, written or oral. The Company and
        its
        Subsidiaries are in compliance in all material respects with all applicable
        Laws
        relating to labor, employment, fair employment practices, terms and conditions
        of employment, and wages and hours.

    

     

    4.19 Employees.
      

     

    (a) No
      key
      executive Employee, group of Employees nor independent contractors of the
      Company or its Subsidiaries has any plans to terminate his or her employment
      or
      relationship as an Employee or independent contractor with the Company or its
      Subsidiaries.

     

    (b) To
      the
      best of the Company’s knowledge, no key executive Employee or any other Employee
      of the Company or its Subsidiaries is a party to or is otherwise bound by any
      agreement or arrangement (including, without limitation, confidentiality
      agreements, non-competition agreements, licenses, covenants, or commitments
      of
      any nature), or subject to any judgment, decree, or Order of any court or
      Governmental Body, (i) that would conflict with such employee’s obligation
      diligently to promote and further the interest of the Company or its
      Subsidiaries or (ii) that would conflict with the Company’s (or its
      Subsidiaries’) business as now conducted or as proposed to be
      conducted.

     

    (c) Schedule
      4.19(c)
      sets
      forth a list of each of the key executive Employees of the Company who have
      entered into an employment and/or confidentiality agreement with the
      Company.

     

    4.20 Litigation.
      Other
      than is set forth on Schedule
      4.20,
      there
      is no action, suit, inquiry, notice of violation, proceeding or investigation
      pending or, to the knowledge of the Company, currently threatened against or
      affecting the Company, any Subsidiary or any of their respective properties
      before or by any court, arbitrator, governmental or administrative agency and/or
      regulatory authority (federal, state, county, local or foreign), (collectively,
      an “Action”)
      which
      (i) does and/or could adversely affects or challenges the legality, validity
      or
      enforceability of any of the Transaction Documents and/or the Securities or
      to
      consummate the transactions contemplated hereby or thereby or (ii) could,
      if there were an unfavorable decision, have or reasonably be expected to result
      in, either individually or in the aggregate, a Material Adverse Effect. The
      Commission has not issued any stop order or other order suspending the
      effectiveness of any registration statement filed by the Company or any
      Subsidiary under the Exchange Act or the Securities Act. The foregoing includes,
      without limitation, actions, pending or threatened (or any basis therefor known
      to the Company), involving the prior employment of any of the Company’s
      employees, their use in connection with the Company’s business of any
      information or techniques allegedly proprietary to any of their former
      employers, or their obligations under any agreements with prior employers.
      The
      Company is not a party or subject to the provisions of any order, writ,
      injunction, judgment, or decree of any court or government agency or
      instrumentality. 

     

    
      
         

         

        

        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

    4.21 Compliance
      with Laws; Permits.
      Neither
      the Company nor any Subsidiary (i) is in default under or in violation of
      (and no event has occurred that has not been waived that, with notice or lapse
      of time or both, would result in a default by the Company or any Subsidiary
      under), nor has the Company or any Subsidiary received notice of a claim that
      it
      is in default under or that it is in violation of, any indenture, mortgage,
      decree, lease, license, loan or credit agreement or any other agreement or
      instrument to which it is a party or by which it or any of its properties is
      bound (whether or not such default or violation has been waived), (ii) is
      in violation of any order of any court, arbitrator or governmental body, or
      (iii) is or has been in violation of any statute, rule or regulation of any
      governmental authority, including without limitation all foreign, federal,
      state
      and local laws applicable to its business, except in the case of clauses (i),
      (ii) and (iii) as would not result in a Material Adverse Effect.
      Neither the Company nor any of the Subsidiaries has received any written notice
      of any violation of or noncompliance with, any federal, state, local or foreign
      laws, ordinances, regulations and orders (including, without limitation, those
      relating to environmental protection, occupational safety and health, federal
      securities laws, equal employment opportunity, consumer protection, credit
      reporting, “truth-in-lending”, and warranties and trade practices) applicable to
      its business or to the business of any Subsidiary, the violation of, or
      noncompliance with, which would have a materially adverse effect on either
      the
      Company’s business or operations, or that of any Subsidiary, and the Company
      knows of no facts or set of circumstances which would give rise to such a
      notice. The execution, delivery, and performance of the Transaction Documents
      and the consummation of the transactions contemplated thereby will not result
      in
      any such violation or be in conflict with or constitute, with or without the
      passage of time and giving of notice, either a default under any such provision,
      instrument, judgment, order, writ, decree or contract, or an event which results
      in the creation of any lien, charge, or encumbrance upon any assets of the
      Company or the suspension, revocation, impairment, forfeiture, or nonrenewal
      of
      any material permit, license, authorization, or approval applicable to the
      Company, its business or operations, or any of its assets or properties, except
      as would not reasonably be expected to have a Material Adverse
      Effect.

     

    4.22 Environmental
      and Safety Laws.
      Neither
      the Company nor its Subsidiaries are in violation of any applicable Laws
      relating to the environment or occupational health and safety where the failure
      to so comply could have a Material Adverse Effect and no material expenditures
      are or will be required in order to comply with any such existing
      Laws.

     

    
      4.23 Investment
        Company Act.
        The
        Company is not, nor is it directly or indirectly controlled by or acting
        on
        behalf of, any Person that is an investment company within the meaning of
        the
        Investment Company Act of 1940, as amended.

       

      4.24 Financial
        Advisors.
        Except
        for Laidlaw, 
        no
        agent, broker, investment banker, finder, financial advisor or other Person
        is
        or will be entitled to any broker’s or finder’s fee or any other commission or
        similar fee from the Company, directly or indirectly, in connection with
        the
        transactions contemplated by this Agreement or any Transaction Document and
        no
        Person is entitled to any fee or commission or like payment from the Company
        in
        respect thereof based in any way on agreements, arrangements or understandings
        made by or on behalf of the Company.

       

    

    
      4.25 Condition
        of Properties.
        All
        facilities, machinery, equipment, fixtures, vehicles and other properties
        owned,
        leased or used by the Company and its Subsidiaries are in good operating
        condition and repair, are reasonably fit and usable for the purposes for
        which
        they are being used, are adequate and sufficient for the Company and its
        Subsidiaries respective businesses and conform in all material respects with
        all
        applicable Laws.

    

    
      
         

         

        

        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

    
       

    

    4.26 Pending
      Changes.
      The
      Company has no knowledge of any development which might reasonably be expected
      to result in a material adverse affect on the operations or financial condition
      of the Company or its Subsidiaries.

     

    4.27 Securities
      Laws.
      The
      Company has complied in all material respects with all applicable U.S. federal
      and state securities laws in connection with (i) all offers, issuances and
      sales
      of its securities prior to the date hereof and (ii) the offer, issuance and
      sale
      of the Securities. All sales and issuances of currently outstanding securities
      by the Company have been to accredited investors within the meaning of Rule
      501
      of Regulation D under the Securities Act. Prior to the Closing, neither the
      Company nor anyone acting on its behalf has sold, offered to sell or solicited
      offers to buy the Securities or similar securities to, or solicited offers
      with
      respect thereto from, or entered into any preliminary conversations or
      negotiations relating thereto with, any Person, so as to bring the issuance
      and
      sale of the Securities under the registration provisions of the Securities
      Act,
      and applicable state securities laws. Neither the Company nor any Person acting
      on its behalf has offered the Securities to any Person by means of general
      or
      public solicitation or general or public advertising, such as by newspaper
      or
      magazine advertisements, by broadcast media, or at any seminar or meeting whose
      attendees were solicited by such means.

     

    4.28 Registration
      Rights.
      Except
      for any rights granted under the Transaction Documents and the Prior
      Registration Agreements, no Person has demand or other rights to cause the
      Company to file any registration statement under the Securities Act relating
      to
      any securities of the Company or any right to participate in any such
      registration statement.

     

    
      4.29 Disclosure;
        Survival.
        There
        is no fact which has not been disclosed to the Purchaser of which the Company
        has knowledge and which has had or could reasonably be anticipated to result
        in
        a Material Adverse Change. All representations and warranties set forth in
        this
        Agreement or in any of the Transaction Documents or in any writing or
        certificate delivered in connection with this Agreement shall survive the
        execution and delivery of this Agreement and the consummation of the
        transactions contemplated hereby for a period of two (2) years (except where
        expressly stated otherwise) (the “Survival
        Period”)
        and
        shall not be affected by any examination made for or on behalf of the Purchaser,
        the knowledge of the Purchaser, or the acceptance by the Purchaser of any
        certificate or opinion.

       

      4.30
         No
        General Solicitation.
        Neither
        the Company, its Subsidiaries, any of their affiliates nor any person acting
        on
        their behalf, has engaged in any form of general solicitation or general
        advertising (within the meaning of Regulation D under the Securities Act)
        in connection with the offer or sale of the Notes and the Warrants.

       

      4.31 Insurance.
        The
        Company has in full force and effect fire and casualty insurance policies,
        with
        extended coverage, sufficient in amount (subject to reasonable deductibles)
        to
        allow it to replace any of its properties that might be damaged or destroyed,
        and the Company has insurance against other hazards, risks, and liabilities
        to
        persons and property to the extent and in the manner customary for companies
        in
        similar businesses similarly situated.

    

    
      
         

         

        

        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    

    
    

    4.32 Regulatory
      Permits.
      The
      Company and the Subsidiaries possess all licenses, certificates, authorizations
      and permits issued by the appropriate federal, state, local or foreign
      regulatory authorities necessary to conduct their respective businesses, except
      where the failure to possess such permits would not have or reasonably be
      expected to result in a Material Adverse Effect (“Material
      Permits”),
      and
      believes it can obtain, without undue burden or expense, any similar authority
      for the conduct of its business as planned to be conducted, and neither the
      Company nor any Subsidiary has received any notice of proceedings relating to
      the revocation or modification of any Material Permit.

     

    4.33 Title
      to Property and Assets.
      The
      Company (and each Subsidiary) owns its property and assets free and clear of
      all
      mortgages, liens, loans, pledges, security interests, claims, equitable
      interests, charges, and encumbrances, except such encumbrances and liens which
      arise in the ordinary course of business and do not materially impair the
      Company’s (and each Subsidiary’s) ownership or use of such property or assets
      and/or any such liens, encumbrances and security interests which arose in
      connection with the Prior Security Agreement. With respect to the property
      and
      assets it leases, the Company (and each Subsidiary) is in compliance with such
      leases and, to its knowledge, holds a valid leasehold interest free of any
      liens, claims, or encumbrances.

     

    4.34 Foreign
      Assets Control Legislation.
      Neither
      the sale of the Notes nor the Warrants by the Company hereunder nor its use
      of
      the proceeds thereof will violate the Trading with the Enemy Act, as amended,
      or
      any of the foreign assets control regulations of the United States Treasury
      Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling
      legislation or executive order relating thereto. Without limiting the foregoing,
      neither the Company nor any of its Subsidiaries (a) is a person whose property
      or interests in property are    blocked pursuant to Section 1 of
      Executive Order 13224 of September 23, 2001 Blocking Property and Prohibiting
      Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism
      (66 Fed. Reg. 49079 (2001)) or (b) engages in any dealings or transactions,
      or
      be otherwise associated, with any such person. The Company and its Subsidiaries
      are in compliance with the USA Patriot Act of 2001 (signed into law October
      26,
      2001). 

     

    
      4.35 Solvency.
        Based
        on the financial condition of the Company as of the Closing Date (after giving
        effect to the transactions contemplated herein and in the other Transaction
        Documents), the Company’s assets do not constitute unreasonably small capital to
        carry on its business for the current fiscal year as now conducted and as
        proposed to be conducted including its capital needs taking into account
        the
        particular capital requirements of the business conducted by the Company,
        and
        projected capital requirements and capital availability thereof. The Company
        does not intend to incur debts beyond its ability to pay such debts as they
        mature (taking into account the timing and amounts of cash to be payable
        on or
        in respect to its debt).

    

     

    
      
         

         

        

        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

     

    5. Representations
      and Warranties of the Purchaser.
      Each
      Purchaser hereby represents and warrants as of the date hereof and as of the
      Closing Date to the Company, acknowledging that the Company is relying upon
      the
      accuracy and completeness of the representations and warranties set forth herein
      to, among other things, ensure that registration under Section 5 of the
      Securities Act is not required in connection with the sale of the Securities
      hereby, as follows:

     

    5.1 Organization;
      Authority.
      Such
      Purchaser is an entity duly organized, validly existing and in good standing
      under the laws of the jurisdiction of its organization with full right,
      corporate or limited liability company power and authority to enter into and
      to
      consummate the transactions contemplated by the Transaction Documents and
      otherwise to carry out its obligations thereunder. The execution, delivery
      and
      performance by such Purchaser of the transactions contemplated by this Agreement
      have been duly authorized by all necessary corporate or similar action on the
      part of such Purchaser. Each Transaction Document to which it is a party has
      been duly executed by such Purchaser, and when delivered by such Purchaser
      in
      accordance with the terms hereof, will constitute the valid and legally binding
      obligation of such Purchaser, enforceable against it in accordance with its
      terms, except (i) as limited by applicable bankruptcy, insolvency,
      reorganization, moratorium, and other laws of general application affecting
      enforcement of creditors’ rights generally and (ii) as limited by laws
      relating to the availability of specific performance, injunctive relief, or
      other equitable remedies.

     

    5.2 Investment
      Intent.
      The
      Purchaser represents and warrants to the Company that it is (a) an
“accredited investor” as defined in Rule 501 of Regulation D of the Securities
      Act; and (b) acquiring the Purchased Securities to be purchased by it pursuant
      to this Agreement for investment and not with a view to the distribution
      thereof.

     

    5.3 Investment
      Purposes.
      (a) The
      Purchaser is acquiring the Securities for investment purposes only, for its
      own
      account, and not as nominee or agent for any other Person, and not with a view
      to, or for resale in connection with, any distribution thereof within the
      meaning of the Securities Act, (b) it understands and acknowledges that the
      Securities have not been registered under the Securities Act or any other
      securities laws, (c) it is not an “affiliate” (as defined in Rule 144 under the
      Securities Act) of the Company, (d) it has such knowledge and experience in
      financial and business matters as to be capable of evaluating the merits and
      risks of its investment, (e) it is an “accredited investor” within the meaning
      of Rule 501 of Regulation D under the Securities Act, (f) the Company has made
      available to it the opportunity to ask questions and to receive answers, and
      to
      obtain information necessary to evaluate the merits and risks of this
      investment, and (g) it understands, acknowledges and agrees that the Securities
      have not been registered under (and that the Company has no present intention
      to
      register the Securities under) the Securities Act or applicable state securities
      laws, and may not be sold or otherwise transferred by the Purchaser to a United
      States person unless the Securities have been registered under the Securities
      Act and applicable U.S. state securities laws or are sold or transferred in
      a
      transaction exempt therefrom.

     

    5.4 Short
      Selling.
      The
      Purchaser hereby represents to the Company that the Purchaser will not make
      or
      maintain a “short” position in the Company's securities while any Notes or Prior
      Notes held by the Purchaser are outstanding.

     

    
      
         

         

        

        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

     

    5.5 Prior
      Warrants and Prior Notes.
      Purchaser agrees that the $1,250,000 in Prior Notes previously sold to Purchaser
      by the Company on August 8, 2006, shall have their Conversion Price (as defined
      therein) re-priced to the Conversion Price as defined in the Notes dated as
      of
      the date of this Agreement. Purchaser also agrees to waive any anti-dilution
      and/or reset rights that Purchaser may have pursuant to the Prior Warrants
      (as
      provided by Section 4 therein) granted to Purchaser in connection with the
      applicable Prior Closing, in connection with any of the Warrants granted to
      Purchaser herein, and/or any other Warrants granted to any purchasers in
      connection with the offering, of which this Agreement is a part.

    

    6. Further
      Agreements of the Parties.

     

    6.1 Reserved
      Shares.
      For so
      long as the Securities are outstanding, the Company shall reserve that number
      of
      shares of Common Stock issuable upon conversion of the Notes and exercise of
      the
      Warrants, which shares shall not be subject to any preemptive or other similar
      rights.

     

    6.2 Access
      to Information.
      The
      Purchaser and its representatives shall be entitled, upon reasonable notice,
      to
      make such investigation of the properties, business and operations of the
      Company and such examination of the books, records and financial condition
      of
      the Company as it reasonably requests to make extracts and copies of such books
      and records, upon reasonable notice during regular business hours. Any such
      investigation and examination shall be conducted during regular business hours
      and under reasonable circumstances without material interference with the
      Company’s normal business operations, and the Company and its representatives
      shall cooperate fully therein. No investigation by a Purchaser or its
      Representatives prior to or after the date of this Agreement shall diminish
      or
      obviate any of the representations, warranties, covenants or agreements of
      the
      Company contained in this Agreement or the Transaction Documents. In order
      for
      Purchaser to have full opportunity to make such physical, business, accounting
      and legal review, examination of the affairs of the Company and investigation
      as
      may be reasonably requested, the Company shall cause its Representatives to
      cooperate fully with the Representatives of the Purchaser in connection with
      such review and examination.

     

    
      6.3 Confidentiality.
        Except
        as may be required by applicable Law or as otherwise agreed among the parties
        hereto, neither the Company, the Purchaser nor any of its Affiliates shall
        at
        any time divulge, disclose, disseminate, announce or release any information
        to
        any Person concerning this Agreement, the Transaction Documents, the
        transactions contemplated hereby or thereby, any trade secrets or other
        confidential information of the Company or the Purchaser, without first
        obtaining the prior written consent of the other parties hereto.

       

      6.4 Other
        Actions.
        The
        Company and the Purchaser agree to execute and deliver such other documents
        and
        take such other actions as the other parties may reasonably request for the
        purpose of carrying out the intent of this Agreement and the Transaction
        Documents. 

      
        
          
             

             

            

            
            

          

          
            -16-

            
              

            

          

          
            
            

          

        

      

      
 

      6.5
        Indemnification.
        The
        Company shall indemnify and hold harmless each Purchaser, the officers,
        directors, agents and employees of each of them, each Person who controls
        any
        such Purchaser (within the meaning of Section 15 of the Securities Act or
        Section 20 of the Exchange Act) and the officers, directors, agents and
        employees of each such controlling Person, to the fullest extent permitted
        by
        applicable law, from and against any and all losses, claims, damages,
        liabilities, costs (including, without limitation, reasonable attorneys'
        fees)
        and expenses (including the cost (including without limitation, reasonable
        attorneys’ fees) and expenses relating to an Indemnified Party’s (as defined
        below) actions to enforce the provisions of this Section
        6.5)
        (collectively, “Losses”),
        as
        incurred, to the extent arising out of or relating to (i) any material
        misrepresentation or breach of any representation or warranty made by the
        Company in the Transaction Documents, or (ii) any material breach of any
        covenant, agreement or obligation of the Company contained in the Transaction
        Documents, or (iii) any cause of action, suit or claim brought or made against
        such Indemnified Party and arising out of or resulting from the execution,
        delivery, performance or enforcement of the Transaction Documents executed
        pursuant hereto by any of the Indemnified Parties. If the indemnification
        provided for in this Section
        6.5
        is held
        by a court of competent jurisdiction to be unavailable to an Indemnified
        Party
        with respect to any Losses, then the Indemnifying Party (as defined below),
        in
        lieu of indemnifying such Indemnified Party hereunder, shall contribute to
        the
        amount paid or payable by such Indemnified Party as a result of Losses in
        such
        proportion as is appropriate to reflect the relative fault of the Indemnifying
        Party on the one hand and of the Indemnified Party on the other in connection
        with the actions or omissions that resulted in such Losses as well as any
        other
        relevant equitable considerations. The Company shall notify the Purchaser
        promptly of the institution, threat or assertion of any proceeding of which
        the
        Company is aware in connection with the transactions contemplated by this
        Agreement.

    

     

    (b)
      Conduct
      of Indemnification Proceedings.
      If any
      proceeding shall be brought or asserted against any Person entitled to indemnity
      hereunder (an “Indemnified
      Party”),
      such
      Indemnified Party shall promptly notify the other party (the “Indemnifying
      Party”)
      in
      writing, and the Indemnifying Party shall have the right to assume the defense
      thereof, including the employment of counsel reasonably satisfactory to the
      Indemnified Party and the payment of all fees and expenses incurred in
      connection with defense thereof; provided,
      however,
      that
      the failure of any Indemnified Party to give such notice shall not relieve
      the
      Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
      except (and only) to the extent that such failure shall have materially and
      adversely prejudiced the Indemnifying Party.

     

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

    

     

    
      
         

         

        

        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    

     

    The
      indemnification obligations under this Section
      6.5
      are in
      addition to any indemnification or similar obligations under any other
      Transaction Document.

     

    (d) The
      provisions of this Section
      6.5
      shall
      survive the termination of this Agreement for a period of three (3)
      years.

     

    (e) All
      payments to be made to Purchaser pursuant to this Section
      6.5,
      shall
      be paid no later than five (5) business days after request for payment is sent
      to the Company.

    

    6.6 Co-Investment
      Rights.
      Each
      Purchaser hereby shall have the pro rata right of first refusal (which right
      shall be shared with the other Purchasers, who purchase Notes in connection
      with
      the Company’s current offering or Prior Closing) to invest (in such amounts that
      all of such Purchasers (including the Prior Purchasers and other Purchasers
      who
      invest during the offering to which this Agreement is a part) shall so elect)
      in
      any and all future financings (“Future
      Financings”)
      of the
      Company for thirty-six (36) months from the date of this Agreement on the
      identical terms offered to other investors. The Company shall provide each
      Purchaser with (i) express prior written notice of a Future Financing, and
      (ii) all required documentation requested by the Purchaser related to any
      Future Financing all no later than ten (10) business days prior to the final
      date of the offering period (or other applicable investment period) for any
      such
      Future Financings. Such Co-Investment rights shall continue even if a Purchaser
      elects not to invest in one or more Future Financing.

     

    
      6.7 [Internationally
        removed]. 

      

      6.8 Board
        Representation. The
        Company, effective on the Closing, hereby grants Purchaser, which right shall
        be
        shared with all of the Purchasers (including the Prior Purchasers and other
        Purchasers who invest during the offering to which this Agreement is a part),
        the right to appoint one Director, or if it so elects, a Board Advisory Seat
        (with both the Prior Purchasers and current Purchaser electing as a group,
        one
        Director or Board Advisory Seat), and to receive all financial and other
        information provided to board members and to observe at all board meetings.
        The
        Purchaser nominee shall be immediately included and maintained in the Company’s
        Director and Officer insurance coverage. In the event Purchaser exercises
        its
        right to appoint a board member, the Company shall nominate an additional
        board
        member so that the total number of board members will be five (5). The Company
        shall provide to the Purchaser and any then designated observer, concurrently
        with, and by the same method of, transmission to the Board or any committee
        thereof, any notice of meeting, agenda and other materials. 

       

      6.9 Bank
        Consent.
        The
        Company, prior to the Closing Date shall obtain the express written consent
        and/or necessary waivers from LaSalle Bank Nation Association (the “Bank”)
        and
        any other person, so as to approve and/or waive, as the case may be (i) this
        Agreement; (ii) the Notes and Warrants; (iii) any defaults or event of default
        that may have or will have occurred; and (iv) all other such
        Transaction Documents as may be deemed necessary (the “Bank
        Consent”).

    

    
      
         

         

        

        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    

     

    6.10 Fees
      and Expenses.
      Each
      party shall pay the fees and expenses of its advisors, counsel, accountants
      and
      other experts, if any, and all other expenses, incurred by such party incident
      to the negotiation, preparation, execution, delivery and performance of this
      Agreement. Notwithstanding the foregoing sentence, the Company shall pay to
      Sadis & Goldberg LLP fifteen thousand dollars ($15,000), which amount may be
      withheld from the Purchase Price paid upon closing.

    

    7. Other
      Obligations of the Parties.

     

    7.1 Public
      Announcements.
      The
      Company hereby agrees not to, and not to permit its Subsidiaries to, issue
      any
      press release, or otherwise make any public statements (collectively,
“Press
      Releases”)
      with
      respect to the transactions contemplated hereby without the prior written
      consent of the Purchaser, except as may be required by law. Furthermore, where
      the Company desires to issue any such Press Release, the parties agree to
      cooperate in good faith in order to prepare such Press Release in such form
      and
      substance as is agreeable to both parties.

     

    7.2 Furnishing
      Information.
      Each of
      the parties hereto will, as soon as practicable after reasonable request
      therefor, furnish all the information concerning it required for inclusion
      in
      any statement or application made by any of them to any governmental or
      regulatory body in connection with the transactions contemplated by this
      Agreement.

     

    
      7.3
         Transfer
        Restrictions.

       

      (a)The
        Underlying Shares may only be disposed of in compliance with state and federal
        securities laws. In connection with any transfer of the Underlying Shares
        other
        than pursuant to an effective registration statement, or in connection with
        a
        pledge, as contemplated in Section 7.3(c)
        hereof,
        the Company may require the transferor thereof to provide to the Company
        an
        opinion of counsel selected by the transferor, the form and substance of
        which
        opinion shall be reasonably satisfactory to the Company, to the effect that
        such
        transfer does not require registration of such transferred Underlying Shares
        under the Securities Act. As a condition of transfer, any such transferee
        shall
        agree in writing to be bound by the terms of this Agreement and shall have
        the
        rights of a Purchaser under this Agreement and the Registration Rights
        Agreement.

       

      (b)The
        Purchaser agrees to the imprinting, so long as is required by Section 7.3(b),
        of a
        legend on any of the Underlying Shares in the following form:

       

      THESE
        SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
        OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
        REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
        ACT”),
        AND,
        ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
        REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
        EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO THE REGISTRATION REQUIREMENTS
        OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
        LAWS AS
        EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT,
        THE
        SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
        COMPANY.

    

     

    
      
         

         

        

        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    

     

    (c)Certificates
      evidencing the Underlying Shares shall not contain any legend (including the
      legend set forth in Section 7.3(b))
      (i)
      subsequent to the date the Commission declares effective a registration
      statement covering the resale of the Underlying Shares, (ii) following any
      sale of the Underlying Shares pursuant to Rule 144, or (iii) if such
      Underlying Shares are eligible for sale under Rule 144(k). The Company
      agrees that at such time as such legend is no longer required under and pursuant
      to this Section 7.3(c),
      it
      will, no later than two (2) Trading Days following the delivery by a Purchaser
      to the Company or the Company’s transfer agent of a Note for conversion, a
      Warrant that for exercise, a restricted stock certificate or a lost securities
      affidavit, if any, of such securities are lost, as the case may be, deliver
      to
      such Purchaser a certificate representing Underlying Shares that is free from
      all restrictive and other legends (the “Deadline”).
      The
      Company may not make any notation on its records or give instructions to any
      transfer agent of the Company that enlarge the restrictions on transfer set
      forth in this Section.

     

    
      7.4
        Underlying
        Share Delivery Damages.
        In the
        event that a non-legended certificate for Underlying Shares is not received
        by a
        Purchaser by the Deadline, as partial compensation to the Purchaser for such
        loss as a result of such delivery delay, the Company shall pay (as liquidated
        damages and not a penalty) to the Purchaser for late issuance of the Underlying
        Shares an amount of $100 per business day after the Deadline for each $10,000
        of
        principal amount of the Note being converted, and/or or $10,000 of market
        value
        (based upon the then stock price of the Company) of Underlying Shares of
        the
        Warrant being exercised for, as the case may be, which are not timely delivered.
        The penalties in this Section
        7.4
        are in
        addition to and shall not limit any other penalty provisions in the Transaction
        Documents and shall not limit the Purchaser’s right to collect other damages
        and/or remedies. 

       

      

      7.5
        Integration.
        The
        Company shall not sell, offer for sale or solicit offers to buy or otherwise
        negotiate in respect of any security (as defined in Section 2 of the
        Securities Act) that would be integrated with the offer or sale of any of
        the
        Securities in a manner that would require the registration under the Securities
        Act of the sale of the Securities to the Purchaser or that would be integrated
        with the offer or sale of the Securities for purposes of the rules and
        regulations of any Trading Market. The Purchaser and the Company agree that
        the
        current Registration Statement which has been filed with the SEC will be
        withdrawn and refiled.

       

      7.6
        Use
        of
        Proceeds.
        The
        Company covenants and agrees that the net proceeds that it receives from
        the
        sale of the Notes and Warrants pursuant to this Agreement, shall be used
        to
        repay portions of amounts owed to LaSalle Bank National Association in
        connection with the $800,000 construction loan and $750,000 revolver, with
        the
        balance to be utilized for working capital.

    

     

    
      
         

         

        

        
        

      

      
        -20-

        
          

        

      

      
        
        

      

    

    
    

    7.7
      Form D
      and Blue Sky.
      The
      Company shall file a Form D with respect to the Securities as required
      under Regulation D under the Securities Act and, upon written request,
      provide a copy thereof to each Purchaser promptly after such filing. The Company
      shall, on or before the Closing, take such action as the Company shall
      reasonably determine is necessary in order to obtain an exemption for or to
      qualify any Securities for sale to the Purchaser pursuant to this Agreement
      under applicable securities or “Blue Sky” laws of the states of the United
      States, and shall provide evidence of any such action so taken to the Purchaser
      on or prior to the Closing. 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
      Closing. 

     

    7.8
      Reservation
      of Common Stock.
      As of
      the date hereof, the Company has reserved and the Company shall continue to
      reserve and keep available at all times, free of preemptive rights, a sufficient
      number of shares of Common Stock for the purpose of enabling the Company to
      issue the Conversion Shares and the Warrant Shares.

     

    7.9
      Securities
      Laws Disclosure.
      The
      Company shall, by the end of business on the fourth (4th)
      Business Day following the Closing, use its best efforts to issue a press
      release or file a Current Report on Form 8-K, disclosing the transactions
      contemplated hereby and make such other filings and notices in the manner and
      time required by the Commission.

     

    
      8.
        Conditions
        to Closing.

       

      8.1 Conditions
        of Obligations of the Purchaser.
        The
        obligation of the Purchaser to purchase and pay for the Securities is subject
        to
        the fulfillment prior to or on the Closing Date of the following conditions,
        any
        of which may be waived in whole or in part by the Purchaser:

       

      (a) Representations,
        Warranties and Covenants.
        The
        representations and warranties of the Company under this Agreement shall
        be
        deemed to have been made again on the Closing Date (other than those
        representations and warranties made expressly as of a date prior to the Closing
        Date) and shall then be true and correct. The Company shall represent to
        the
        Purchaser that all
        of
        the information contained herein does not contain any untrue statement of
        a
        material fact, or contain any omission of a material fact relating to such
        information that is necessary in order to make the information, in light
        of the
        circumstances under which the information is provided, not
        misleading.

       

      (b) Compliance
        with Agreement.
        The
        Company shall have performed and complied with all covenants, agreements
        and
        conditions required by this Agreement to be performed or complied with by
        the
        Company on or before the Closing Date.

       

      (c) Approvals.
        The
        Company shall have obtained any and all consents, waivers, approvals or
        authorizations, with or by any Governmental Body or any other Person required
        for the valid execution of this Agreement and the transactions contemplated
        hereby.

    

     

    
      
         

         

        

        
        

      

      
        -21-

        
          

        

      

      
        
        

      

    

    
    

    (d) No
      Injunction.
      No
      Governmental Body or any other Person shall have issued an Order which shall
      then be in effect restraining or prohibiting the completion of the transactions
      contemplated hereby, nor shall any such Order be threatened or
      pending.

     

    (e) No
      Material Adverse Change.
      Since
      March 31, 2007, there shall not have been a Material Adverse
      Change.

     

    (f) Certificate
      of Officer.
      The
      Company shall have delivered to the Purchaser a certificate dated the Closing
      Date, executed by its Chief Executive Officer and Chief Financial Officer,
      certifying the satisfaction of the conditions specified in paragraphs (a),
      (b),
      (c), (d) and (e) of this Section
      8.1.

     

    (g) Opinion
      of the Company’s Counsel.
      The
      Purchaser shall have received from Company counsel, in a form satisfactory
      to
      the Purchaser and its counsel, an opinion dated the Closing Date.

     

    (h) Certificate
      of Incorporation and By-Laws.
      The
      Certificate of Incorporation, as amended, and the By-Laws, shall be in full
      force and effect as of the Closing under the laws of the State of Nevada and
      shall not have been further amended or modified. A certified copy of the
      Certificate of Incorporation, as so amended, shall have been delivered to
      counsel for the Purchaser.

     

    (i)  Closing
      Documents Provided By Company.
      The
      Purchaser (or such other person as referred to herein) shall have received
      the
      following:

     

    
      (i) a
        Note in
        favor of each Purchaser, duly executed by the Company, entitling the Purchaser
        to payment in the amount as stated in Schedule
        1.1
        herein;

       

      (ii) Warrants
        in the name of the Purchaser, duly executed by the Company, entitling the
        Purchaser to purchase such amount of Warrant Shares as stated in Schedule
        1.1
        herein;

       

      (iii) 
        the
        Registration Rights Agreement duly executed by the Company; 

       

      (iv) the
        Security Agreement duly executed by the Company and all documents necessary
        to
        perfect the security interest of the Purchaser;

       

      (v) this
        Agreement duly executed by the Company; 

       

      
        (vi) Secretary’s
          Certificate in a form reasonably acceptable to Purchaser,
          with the Officer’s Certificate and good standing certificates of the Company and
          each Subsidiary as of a recent date;

         

        (vii) 
          Legal
          Opinion;

         

        (viii) 
          Copy of
          the Bank Consent for the Company to enter into this new debt and all necessary
          waivers of Bank covenants prohibiting such action;

      

      
        

        
          
            
               

               

              

              
              

            

            
              -22-

              
                

              

            

            
              
              

            

          

        

      

    

    

      (ix) Copies
        of
        all Uniform Commercial Code Financing Statements filed in the State of Nevada,
        California, Illinois, New Jersey and New York in connection with the Security
        Agreement; and

       

      (x) such
        other documents as the Purchaser and/or its legal counsel may request and/or
        deem necessary (including, but not limited to, a Good Standing Certificate
        of
        recent date from the Secretary of State of the State of Nevada).

      

      8.2 Conditions
        of Company’s Obligations.
        The
        Company’s obligation to issue and sell the Securities to the Purchaser on the
        Closing Date is subject to the fulfillment prior to or on the Closing Date
        of
        the following conditions, any of which may be waived in whole or in part
        by the
        Company:

      

      (a) Representations
        and Warranties.
        The
        representations and warranties of the Purchaser under this Agreement shall
        be
        deemed to have been made again on the Closing Date and shall then be true
        and
        correct in all material respects.

       

      (b) Compliance
        with Agreement.
        The
        Purchaser shall have performed and complied with all agreements and conditions
        required by this Agreement to be performed or complied with by such Purchaser
        on
        or before the Closing.

       

      (c) Approvals.
        The
        Purchaser shall have obtained any and all consents, waivers, approvals, Permits
        or authorizations, with or by any Governmental Body or any other Person required
        for the valid execution of this Agreement and the transactions contemplated
        hereby including, but not limited to the approval by.

       

      
        (d) Payment
          of Purchase Price.
          The
          Purchaser shall have delivered to the Company the Purchase Price specified
          in
Section
          2.1
          hereof.

         

        (e) No
          Injunction.
          No
          Governmental Body or any other Person shall have issued an Order which
          shall
          then be in effect restraining or prohibiting the completion of the transactions
          contemplated hereby, nor shall any such Order be threatened or
          pending.

         

        (f)  Closing
          Documents Provided By Purchaser.
          The
          Company shall have received the following:

        

          (i) 
            this
            Agreement duly executed by the Purchaser; 

           

          (ii) 
            the
            Registration Rights Agreement duly executed by the Purchaser; and

           

          (iii) 
            the
            Security Agreement executed by the Purchaser.

           

          
            
              
              

            

            
              -23-

              
                

              

            

            
              
              

            

          

          

          8.3 Post
            Closing Obligations.
            Following the Closing Date:

          

          (i) the
            Company shall file all necessary documents in accordance with their obligations
            under the Security Agreement;

           

          (ii)Company’s
            Counsel shall file all post closing Form D Filings and Blue Sky filings
            in the
            necessary jurisdictions. 

          

          9. Miscellaneous.

           

          9.1 Certain
            Definitions.

           

           

          “Action”
shall
            have the meaning ascribed to such term in Section 4.20.

           

          “Affiliate”
of
            any
            Person means any Person that directly or indirectly controls, or is under
            control with, or is controlled by, such Person. As used in this definition,
            “control”
            (including with its correlative meanings, “controlled
            by”
and
            “under
            control with”)
            shall
            mean the possession, directly or indirectly, of the power to direct or
            cause the
            direction of the management or policies of a Person (whether through
            ownership
            of securities or partnership or other ownership interests, by contract
            or
            otherwise). 

          

           

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

           

           

          “Closing”
means
            the closing of the purchase and sale of the Notes and the Warrants pursuant
            to
Section 3.1 on
            June __, 2007, or such other date as mutually agreed to by the
            parties.

           

           

          “Closing
            Date”
means
            the date of the Closing.

           

          “Code”
means
            the Internal Revenue Code of 1986, as amended, and the rules and regulations
            promulgated thereunder.

           

           

          “Commission”
means
            the Securities and Exchange Commission.

           

          “Common
            Stock”
means
            the shares of common stock, par value $0.001 per share, of the
            Company.

           

           

          “Company
            Counsel”
means
            David M. Loev, Esq.

           

          “Contract”
means
            any contract, agreement, indenture, note, bond, loan, instrument, lease,
            conditional sales contract, mortgage, license, franchise, insurance policy,
            commitment or other arrangement or agreement, whether written or
            oral.

           

           

          “Conversion
            Shares”
            means
            all
            shares of Common Stock issuable upon conversion of the Notes.

           

          “Employee”
means
            any current employee, office consultant, agent, officer or director of
            the
            Company.

           

          
            
              
              

            

            
              -24-

              
                

              

            

            
              
              

            

          

           

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

           

          “Exhibits”
shall
            mean the following exhibits attached hereto and made a part of this
            Agreement:

          

          
            	
                    Exhibit
                      A
                      -

                  	
                    Registration
                      Rights Agreement

                  
	
                    Exhibit
                      B
                      -

                  	
                    Form
                      of Warrants

                  
	
                    Exhibit
                      C
                      -

                  	
                    Form
                      of Note 

                  
	
                    Exhibit
                      D
                      -

                  	
                    Security
                      Agreement

                  

          

          

          “Governmental
            Body”
means
            any government or governmental or regulatory body thereof, or political
            subdivision thereof, whether federal, state, local or foreign, or any
            agency,
            instrumentality or authority thereof, or any court or arbitrator (public
            or
            private).

          

          “Law”
means
            any federal, state, local or foreign law, statute, code, ordinance, rule,
            regulation or other requirement or guideline.

           

          “Legal
            Proceeding”
means
            any judicial, administrative or arbitral actions, suits, proceedings
            (public or
            private), claims or governmental proceedings.

           

          “Lien”
means
            any mortgage, pledge, security interest, encumbrance, lien or charge
            of any
            kind, including, without limitation, any conditional sale or other title
            retention agreement, any lease in the nature thereof and the filing of
            or
            agreement to give any financing statement under the Uniform Commercial
            Code (or
            similar laws) of any jurisdiction and including any lien or charge arising
            by
            statute or other law.

           

          “Material
            Adverse Change”
means
            any material adverse change in the business, assets, liabilities, prospects,
            properties, results of operations or condition (financial or otherwise)
            of the
            Company and its Subsidiaries, taken as a whole.

           

          “Material
            Adverse Effect”
means
            any event, circumstance, condition, fact, effect, or other matter which
            has had
            or could reasonably be expected to have a material adverse effect (i)
            on the
            business, assets, liabilities, prospects, properties, results of operations
            or
            condition (financial or otherwise) of the Company and its Subsidiaries
            taken as
            a whole or (ii) on the ability of the Company or its Subsidiaries to
            perform on
            a timely basis any material obligation under this Agreement or to consummate
            the
            transactions contemplated hereby.

           

          “Notes”
shall
            have the meaning ascribed to such term in Section 1.1.

           

          “Order”
means
            any order, injunction, judgment, decree, ruling, writ, assessment or
            arbitration
            award.

           

          “Permits”
means
            any approvals, authorizations, consents, licenses, permits or certificates
            by or
            of any Governmental Body.

           

          “Person”
means
            any individual, corporation, partnership, firm, joint venture, association,
            joint-stock company, trust, unincorporated organization, Governmental
            Body or
            other entity.

          
            
              
              

            

            
              -25-

              
                

              

            

            
              
              

            

          

           

          “Registration
            Statement”
means
            a
            registration statement meeting the requirements set forth in the Registration
            Rights Agreement and covering, among other items, the resale by the Purchaser
            of
            the Underlying Shares.

           

          “Registration
            Rights Agreement”
means
            the Registration Rights Agreement, dated as of the date of this Agreement,
            among
            the Company and the Purchaser, in the form of Exhibit A
            hereto.

           

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

           

          “SEC
            Reports”
shall
            have the meaning ascribed to such term in Section 4.9.

           

          “Securities
            Act”
means
            the Securities Act of 1933, as amended, or any similar federal statute,
            and the
            rules and regulations of the Securities and Exchange Commission thereunder,
            all
            as the same shall be in effect at the time.

           

          “Subsidiary”
shall
            have the meaning ascribed to such term in Section 4.4.

           

          “Taxes”
means
            any federal, state, local or foreign income, gross receipts, license,
            payroll,
            employment, excise, severance, stamp, occupation, premium, windfall profits,
            environmental (including taxes under Section 59A of the Code), customs
            duties,
            share capital, franchise, profits, withholding, social security (or similar),
            unemployment, disability, real property, personal property, sales, use,
            transfer, registration, value-added, alternative or add-on minimum, estimated,
            or other tax of any kind whatsoever, including any interest, penalty,
            or
            addition thereto, whether disputed or not.

           

          “Trading
            Day”
means
            (a) a day on which the Common Stock is traded on a Trading Market, or
            (b) if the Common Stock is not quoted on a Trading Market, a day on which
            the Common Stock is quoted in the over-the-counter market as reported
            by the
            National Quotation Bureau Incorporated (or any similar organization or
            agency
            succeeding to its functions of reporting price); provided, that in the
            event
            that the Common Stock is not listed or quoted as set forth in (a), and
            (b) hereof, then Trading Day shall mean a Business Day.

           

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

           

          “Warrant
            Shares”
            means
            all
            shares of Common Stock issuable upon exercise of the Warrants.

           

          “Warrants”
            shall
            have the meaning ascribed to such term in Section 1.1.

          
            
              
              

            

            
              -26-

              
                

              

            

            
              
              

            

          

           

          9.2 Further
            Assurances.
            The
            Company and the Purchaser agree to execute and deliver such other documents
            or
            agreements as may be necessary or desirable for the implementation of
            this
            Agreement and the consummation of the transactions contemplated
            hereby.

           

          9.3 Entire
            Agreement; Amendments and Waivers.
            This
            Agreement (including the Schedules and Exhibits hereto) represents the
            entire
            understanding and agreement among the parties hereto with respect to
            the subject
            matter hereof and can be amended, supplemented or changed, and any provision
            hereof can be waived, only by written instrument making specific reference
            to
            this Agreement signed by the parties hereto. No action taken pursuant
            to this
            Agreement, including without limitation, any investigation by or on behalf
            of
            any party, shall be deemed to constitute a waiver by the party taking
            such
            action of compliance with any representation, warranty, covenant or agreement
            contained herein. The waiver by any party hereto of a breach of any provision
            of
            this Agreement shall not operate or be construed as a further or continuing
            waiver of such breach or as a waiver of any other or subsequent breach.
            No
            failure on the part of any party to exercise, and no delay in exercising,
            any
            right, power or remedy hereunder shall operate as a waiver thereof, nor
            shall
            any single or partial exercise of such right, power or remedy by such
            party
            preclude any other or further exercise thereof or the exercise of any
            other
            right, power or remedy. All remedies hereunder are cumulative and are
            not
            exclusive of any other remedies provided by law.

           

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

           

          9.5 Successors
            and Assigns.
            This
            Agreement shall be binding upon and inure to the benefit of the parties
            and
            their successors and permitted assigns. The Company may not assign this
            Agreement or any rights or obligations hereunder without the prior written
            consent of each Purchaser. Any Purchaser, however, may assign any or
            all of its
            Securities and/or rights under any of the Transaction Documents to any
            Person,
            provided such transferee agrees in writing to be bound, with respect
            to the
            transferred Securities and otherwise, by the provisions hereof that apply
            to the
“Purchaser.”

           

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

           

          9.7 Governing
            Law.
            This
            Agreement shall be governed by and construed exclusively in accordance
            with the
            internal laws of the State of New York without regard to the conflicts
            of laws
            principles thereof. The parties hereto hereby irrevocably agree that
            any suit or
            proceeding arising directly and/or indirectly pursuant to or under this
            Agreement, shall be brought solely in a federal or state court located
            in the
            City, County and State of New York. By its execution hereof, the parties
            hereby
            covenant and irrevocably submit to the in personam
            jurisdiction of the federal and state courts located in the City, County
            and
            State of New York and agree that any process in any such action may be
            served
            upon any of them personally, or by certified mail or registered mail
            upon them
            or their agent, return receipt requested, with the same full force and
            effect as
            if personally served upon them in New York City. The parties hereto waive
            any
            claim that any such jurisdiction is not a convenient forum for any such
            suit or
            proceeding and any defense or lack of in personam
            jurisdiction with respect thereto. In the event of any such action or
            proceeding, the party prevailing therein shall be entitled to payment
            from the
            other party hereto of all of its reasonable legal fees and
            expenses.

          
            
              
              

            

            
              -27-

              
                

              

            

            
              
              

            

          

           

          9.8 Headings;
            Interpretive Matters.
            The
            section headings of this Agreement are for reference purposes only and
            are to be
            given no effect in the construction or interpretation of this Agreement.
            No
            provision of this Agreement will be interpreted in favor of, or against,
            any of
            the parties hereto by reason of the extent to which any such party or
            its
            counsel participated in the drafting thereof or by reason of the extent
            to which
            any such provision is inconsistent with any prior draft hereof or
            thereof.

           

          9.9 Confidentiality.
            Each
            party hereto covenants and agrees to treat any non-public information
provided
            to it by the Company concerning the business and finances of the Company
            (“Corporate
            Information”)
            as
            confidential and agrees further that it will not use, exploit, reproduce,
            disclose or provide Corporate Information to any third-party (other than
            any
            agents of the parties who are bound by substantially similar obligations
            of
            confidentiality) on its own behalf or otherwise, except with the consent
            of the
            Company or as required by law, legal process or any federal or state
            regulatory
            body having jurisdiction over such party. The provisions of this Section
            9.9
            shall
            not apply to any information which:

           

          (a) was
            within the public domain prior to the time of disclosure of Corporate
            Information to the receiving party or which comes into the public domain
            other
            than as a result of a breach by the party of this Section
            9.9;

           

          (b) was
            rightfully acquired by the receiving party from a third party without,
            to the
            knowledge of the receiving party, any restriction or any obligation of
            confidentiality; or

           

          (c) was
            independently developed by the receiving party without any use or reference
            to
            the Corporate Information.

           

          The
            provisions of this Section
            9.9
            shall
            survive the termination of this Agreement, either in whole or as to any
            party,
            for a period of two (2) years.

           

          9.10
            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 (a) the next Business Day, if sent by U.S. nationally recognized
            overnight courier service, or (b) upon actual receipt by the party to whom
            such notice is required to be given. The address for such notices and
            communications to the Company shall be as set forth below and for each
            Purchaser
            shall be as set forth on the signature pages attached hereto.

          
            
              
              

            

            
              -28-

              
                

              

            

            
              
              

            

          

          If
            to the
            Company:

          

          
            	 	 	
                    XA,
                      Inc.

                  

          

          875
            North
            Michigan Avenue, Suite 2626, 

          Chicago,
            IL 60611

          Attention:
            Joseph Wagner, President

          Telephone:
            312-397-9100

           

          With
            a
            copy to:

          

          David
            M.
            Loev

          The
            Loev
            Law Firm, PC

          6300
            West
            Loop South, Suite 280

          Bellaire,
            Texas 77401

          Telephone:
            713-524-4110

          

          If
            to the
            Purchaser:

          

          ______________________

          ______________________

          ______________________

          ______________________

          ______________________

          

          With
            a
            copy to:

          

          
            	 	 	
                    ______________________

                  

          

          ______________________

          ______________________

          ______________________

          ______________________

          ______________________

          

          All
            notices are effective upon receipt or upon refusal if properly
            delivered.

          

          9.11 Severability.
            If any
            provision of this Agreement is invalid or unenforceable, the balance
            of this
            Agreement shall remain in effect.

          

          9.12 Binding
            Effect; Assignment.
            This
            Agreement shall be binding upon and insure to the benefit of the parties
            and
            their respective successors and permitted assigns. No assignment of this
            Agreement or of any rights or obligations hereunder may be made by the
            Company
            or the Purchaser (by operation of law or otherwise) without the prior
            written
            consent of the other parties hereto and any attempted assignment without
            the
            required consents shall be void.

          

           

          
            
              
              

            

            
              -29-

              
                

              

            

            
              
              

            

          

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

           

           

          9.14 Incorporation
            by Reference; Breach of Security Agreement.
            Any
            default and/or breach of the Security Agreement shall be considered a
            breach
            and/or default of this Agreement. All covenants, agreements and obligations
            of
            the Company in the Security Agreement shall be expressly incorporated
            by
            reference herein as if made directly herein and shall survive termination
            of
            this Agreement.

          

          

          [The
            rest
            of this page has been intentionally left blank]

           

          

           

          

           

          
            
              
                 

                 

                

              

              
              

            

            
              -30-

              
                

              

            

            
              
              

              
              

            

          

          IN
            WITNESS WHEREOF,
            the
            parties hereto have executed or have caused this Agreement to be executed
            by
            their respective officers thereunto duly authorized, as of the date first
            written above.

           

          

          XA,
            INC.

          

          

          

          By:
            /s/ Joseph Wagner      

          Joseph
            Wagner

          Chief
            Executive Officer

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          
 

          

          
            
               

               

              

              
              

            

            
              -31-

              
                

              

            

            
              
              

            

          

          PURCHASER’S
            SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT

          

          

          Sands
            Brothers Venture Capital LLC 

          

          By:
            /s/ Scott Baily      

          Name:
            Scott Baily

          Title:
            COO

          

          90
            Park Ave. 31st Floor NY, NY 20016

          Address

          

          212-953-4978

          Facsimile
            Number 

          

          $4,000

          

          

          Sands
            Brothers Venture Capital II LLC

          

          
            By:
              /s/ Scott Baily      

            Name:
              Scott Baily

            Title:
              COO

            

            90
              Park Ave. 31st Floor NY, NY 20016

            Address

            

            212-953-4978

            Facsimile
              Number 

          $16,000

          

          Sands
            Brothers Venture Capital III LLC

          

          
            By:
              /s/ Scott Baily      

            Name:
              Scott Baily

            Title:
              COO

            

            90
              Park Ave. 31st Floor NY, NY 20016

            Address

            

            212-953-4978

            Facsimile
              Number 

          $124,000

           

           

          
            
              
              

            

            
              -32-

              
                

              

            

            
              
              

            

          

          Sands
            Brothers Venture Capital IV LLC

          

          
            By:
              /s/ Scott Baily      

            Name:
              Scott Baily

            Title:
              COO

            

            90
              Park Ave. 31st Floor NY, NY 20016

            Address

            

            212-953-4978

            Facsimile
              Number 

          $40,000

          

          

          

          Katie
            & Adam Bridge Partners, L.P.

          

          

           
            
            By:
              /s/ Scott Baily      

            Name:
              Scott Baily

            Title:
              COO

            

            90
              Park Ave. 31st Floor NY, NY 20016

            Address

            

            212-953-4978

            Facsimile
              Number 

          $16,000

          

          

          

          
            
               

               

              

              
              

            

            
              -33-

              
                

              

            

            
              
              

            

          

           

          

            Schedule
              1.1

            

            Purchaser

            

            

            
              	 	 	 	 	 	 
	
                      NAME
                        AND ADDRESS 

                      OF
                        EACH PURCHASER

                    	 	
                      PRINCIPAL
                        NOTE 

                      AMOUNT
                        PURCHASED

                    	 	
                      WARRANT
                        SHARES

                      TO
                        BE RECEIVED

                    	 
	 	 	 	
                    	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 
	
                      Sands
                        Brothers 

                    	 	 	 	 	 	 	 
	
                      Venture
                        Capital LLC 

                    	 	
                      $

                    	
                      4,000

                    	 	 	
                      4,000
                        at $0.30

                    	 
	
                      Sands
                        Brothers 

                    	 	 	 	 	 	 	 
	
                      Venture
                        Capital II LLC

                    	 	
                      $

                    	
                      16,000

                    	 	 	
                      16,000
                        at $0.30

                    	 
	
                      Sands
                        Brothers 

                    	 	 	 	 	 	 	 
	
                      Venture
                        Capital III LLC

                    	 	
                      $

                    	
                      124,000

                    	 	 	
                      124,000
                        at $0.30

                    	 
	
                      Sands
                        Brothers 

                    	 	 	 	 	 	 	 
	
                      Venture
                        Capital IV LLC

                    	 	
                      $

                    	
                      40,000

                    	 	 	
                      40,000
                        at $0.30

                    	 
	
                      Katie
                        & Adam 

                    	 	 	 	 	 	 	 
	
                      Bridge
                        Partners, L.P.

                    	 	
                      $

                    	
                      16,000

                    	 	 	
                      16,000
                        at $0.30

                    	 

            

             

             

             

            
              
                
                

              

              
                -34-11% Senior Secured Convertible Promissory Note with Sands Brothers Venture
      Capital LLC

    Exhibit
      10.2

    
 

    THIS
      NOTE, THE SHARES OF COMMON STOCK AND/OR OTHER SECURITIES ISSUABLE UPON
      CONVERSION OF THIS NOTE (THE “SECURITIES”) HAVE BEEN ACQUIRED FOR INVESTMENT
      PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT
      UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) SHALL HAVE BECOME
      EFFECTIVE WITH RESPECT THERETO OR (ii) RECEIPT BY THE COMPANY OF AN OPINION
      OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT
      REGISTRATION UNDER THE ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
      TRANSFER NOR IS IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS
      LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE AND
      ANY
      SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE.

    

    

    XA,
      INC.

    

    11%
      Senior Secured Convertible Promissory Note

    

    

    

      
        	
                Bridge
                  Note No.: 1

              	
                June
                  22, 2007

              

      

    

     

    

    FOR
      VALUE
      RECEIVED, XA, Inc., a Nevada corporation (collectively with all of its
      Subsidiaries, as defined in the SPA (as defined below), the “Company”)
      with
      its principal executive office at 875 North Michigan Avenue, Suite 2626,
      Chicago, IL 60611, promises to pay to the order of Sands Brothers Venture
      Capital LLC (the “Payee”
or
      the
“Holder
      of this Note”)
      or
      registered assigns on the earlier of (i) June 22, 2008; or (ii) if so
      elected by the Payee, upon consummation by the Company of a merger, combination
      or sale of substantially all of its assets or the purchase by a single entity
      or
      person or group of affiliated entities or persons of more than fifty (50%)
      percent of the voting stock of the Company (the “Maturity
      Date”),
      the
      principal amount of Four
      Thousand ($4,000)
      (the
“Principal
      Amount”)
      in
      such coin or currency of the United States of America as at the time of payment
      shall be legal tender for the payment of public and private debts. Interest
      on
      this Note shall accrue on the Principal Amount outstanding from time to time
      at
      a rate per annum computed in accordance with Section 3
      hereof
      and shall be payable on the Maturity Date, or earlier upon conversion of this
      Note in accordance with the provisions of Section 6
      hereof
      (or as may otherwise be provided in this Note). Nothing in item (ii) of
      this paragraph shall be construed as the consent by the holder of this Note
      to
      any action otherwise prohibited by the terms of this Note or as a waiver of
      any
      such prohibition.

    

    This
      Note
      is secured by a Security Agreement dated the date hereof (the “Security
      Agreement”)
      of the
      Company in favor of the Payee and all other Noteholders covering certain
      collateral (the “Collateral”),
      all
      as more particularly described and provided therein, and is entitled to the
      benefits thereof. The Security Agreement, the Uniform Commercial Code financing
      statements in connection with the Security Agreement and any and all other
      documents executed and delivered by the Company to the Payee under which the
      Payee is granted liens on assets of the Company are collectively referred to
      as
      the “Security
      Documents.”

    

    Each
      payment by the Company pursuant to this Note shall be made without set-off
      or
      counterclaim and in immediately available funds.

    
      
         

        

        

        
        

      

      
        -1-

        
          

        

      

      
        
        

      

    

    

    The
      Company (i) waives presentment, demand, protest or notice of any kind in
      connection with this Note and (ii) agrees, in the event of an Event of
      Default, to pay to the holder of this Note, on demand, all costs and expenses
      (including reasonable legal fees and expenses) incurred in connection with
      the
      enforcement and collection of this Note.

    

    This
      Note, and Prior Notes on substantially similar terms issued in August, September
      and October 2006 in the aggregate amount of $2,700,000 (the “Prior
      Notes”)
      and
      other identical Notes in the aggregate principal amount of up to $500,000 (the
      “Follow
      On Notes”
and
      collectively the “Notes”)
      are
      (were) issued by the Company in connection with a private placement (the
“Bridge
      Financing”)
      by the
      Company of its of Notes and Warrants pursuant and in accordance with (x) a
      Securities Purchase Agreement dated the date hereof by and among the Company
      and
      the Payee (the “SPA”),
      and
      (y) a prior Securities Purchase Agreement relating to the Prior Notes, copies
      of
      which are available for inspection at the Company’s principal office.
      Notwithstanding any provision to the contrary contained herein, this Note is
      subject and entitled to certain terms, conditions, covenants and agreements
      contained in the SPA. Any transferee of this Note, by its acceptance hereof,
      assumes the obligations of the Payee in the SPA with respect to the conditions
      and procedures for transfer of this Note. Reference to the SPA shall in no
      way
      impair the absolute and unconditional obligation of the Company to pay both
      principal hereof and interest hereon as provided herein.

    

    1. No
      Prepayment.
      This
      Note may not be prepaid prior to the Maturity Date (except as otherwise provided
      by Section 6, herein).

    

    2. Investment
      Warrants.
      In
      consideration for the loan evidenced by this Note, the Company shall issue
      to
      the holders of the Note five-year Investment Warrants to purchase in the
      aggregate 4,000 shares of the Company’s common stock, $.001 par value per share
      (the “Common
      Stock”)
      at an
      exercise price of $.30 per share (the “Investment
      Warrants”).
      The
      Holder of this Note may at any time that this Note remains outstanding present
      this Note to the Company in payment of the exercise price of all or any portion
      of the Investment Warrants. The Holder of this Note is purchasing $4,000 in
      Follow On Notes (which represents a portion of the full amount of the Follow
      On
      Notes being offered) and is being granted an aggregate of 4,000 five-year
      Investment Warrants in connection with such investment.

    

    3. Computation
      of Interest.

    

    A. Base
      Interest Rate.
      Subject
      to Subsections 3B
      and 3C
      below,
      the outstanding Principal Amount shall bear interest at the rate of eleven
      (11%)
      percent per annum.

    

    B. Penalty
      Interest.
      In the
      event the Note is not repaid on the Maturity Date, the rate of interest
      applicable to the unpaid Principal Amount shall be adjusted to eighteen (18%)
      percent per annum from the date of default until repayment; provided, that
      in no
      event shall the interest rate exceed the Maximum Rate provided in Section 3C
      below.

    

     

    
      
         

        

        

        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

     

    C. Maximum
      Rate.
      In the
      event that it is determined that, under the laws relating to usury applicable
      to
      the Company or the indebtedness evidenced by this Note (“Applicable
      Usury Laws”),
      the
      interest charges and fees payable by the Company in connection herewith or
      in
      connection with any other document or instrument executed and delivered in
      connection herewith cause the effective interest rate applicable to the
      indebtedness evidenced by this Note to exceed the maximum rate allowed by law
      (the “Maximum
      Rate”),
      then
      such interest shall be recalculated for the period in question and any excess
      over the Maximum Rate paid with respect to such period shall be credited,
      without further agreement or notice, to the Principal Amount outstanding
      hereunder to reduce said balance by such amount with the same force and effect
      as though the Company had specifically designated such extra sums to be so
      applied to principal and the Payee had agreed to accept such extra payment(s)
      as
      a premium-free prepayment. All such deemed prepayments shall be applied to
      the
      principal balance payable at maturity. In no event shall any agreed-to or actual
      exaction as consideration for this Note exceed the limits imposed or provided
      by
      Applicable Usury Laws in the jurisdiction in which the Company is resident
      applicable to the use or detention of money or to forbearance in seeking its
      collection in the jurisdiction in which the Company is resident.

    

    4. Covenants
      of Company.
      For the
      purposes of this Section 4, the term “Company” shall include all of the
      Subsidiaries (as defined in the SPA).

    

    A. Affirmative
      Covenants.
      The
      Company covenants and agrees that, so long as this Note shall be outstanding,
      it
      will perform the obligations set forth in this Section 4A,
      unless
      it has otherwise obtained the prior written consent of the Payee:

    

    (i) Taxes
      and Levies.
      The
      Company will promptly pay and discharge all taxes, assessments, and governmental
      charges or levies imposed upon the Company or upon its income and profits,
      or
      upon any of its property, before the same shall become delinquent, as well
      as
      all claims for labor, materials and supplies which, if unpaid, might become
      a
      lien or charge upon such properties or any part thereof; provided,
      however,
      that
      the Company shall not be required to pay and discharge any such tax, assessment,
      charge, levy or claim so long as the validity thereof shall be contested in
      good
      faith by appropriate proceedings and the Company shall set aside on its books
      adequate reserves in accordance with generally accepted accounting principles
      (“GAAP”)
      with
      respect to any such tax, assessment, charge, levy or claim so
      contested;

    

    (ii) Maintenance
      of Existence.
      The
      Company will do or cause to be done all things reasonably necessary to preserve
      and keep in full force and effect its corporate existence, rights and franchises
      and comply with all laws applicable to the Company, except where the failure
      to
      comply could not reasonably be expected to have a material adverse effect on
      the
      Company;

    

    (iii) Maintenance
      of Property.
      The
      Company will at all times maintain, preserve, protect and keep such property
      material to the conduct of its business in good repair, working order and
      condition, and from time to time make all needful and proper repairs, renewals,
      replacements and improvements thereto as shall be reasonably required in the
      conduct of its business;

    

    (iv) Insurance.
      The
      Company will, to the extent necessary for the operation of its business, keep
      adequately insured by financially sound reputable insurers, all property of
      a
      character usually insured by similar corporations and carry such other insurance
      as is usually carried by similar corporations;

    
      
         

        

        

        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

    
 

    (v) Books
      and Records.
      The
      Company will at all times keep true and correct books, records and accounts
      reflecting all of its business affairs and transactions in accordance with
      GAAP.
      Such books and records shall be open at reasonable times and upon reasonable
      notice to the inspection of the Payee or its agents, subject to the execution
      by
      such persons of a reasonable non-disclosure agreement;

    

    (vi) Underlying
      Securities.
      The
      Company agrees to keep reserved such number of shares of Common Stock as will
      permit full conversion of the Notes at any time or from time to time at the
      Conversion Price (as defined herein);

    

    (vii) Notice
      of Certain Events.
      The
      Company will give prompt written notice (with a description in reasonable
      detail) to the Payee of:

     

    (a) the
      occurrence of any Event of Default (as defined in Section 5
      hereof),
      or any event which, with the giving of notice or the lapse of time, would
      constitute an Event of Default, or an event of default under any document or
      instrument evidencing or governing any indebtedness of the Company and the
      delivery of any notice effecting the acceleration of any such indebtedness;
      and

    

    (b) the
      occurrence of any litigation, arbitration or governmental investigation or
      proceeding not previously disclosed by the Company to the Payee in writing
      which
      has been instituted or, to the knowledge of the Company, is threatened, against
      the Company or to which any of its properties, assets or revenues is subject
      which, if adversely determined, would reasonably be expected to have a material
      adverse effect on the Company;

    

    (c) any
      material adverse development which shall occur in any litigation, arbitration
      or
      governmental investigation or proceeding previously disclosed by the Company
      to
      the Payee; and

    

    (viii) Security
      Interests.
      The
      Company shall perform any and all acts and execute any and all documents
      (including, without limitation, the execution, amendment or supplementation
      of
      any financing statement and continuation statement) for filing under the
      provisions of the Uniform Commercial Code (the “UCC”),
      and
      the rules and regulations thereunder, or any other statute, rule or regulation
      of any applicable jurisdiction which are necessary (and/or advisable at the
      request of the Holders or its counsel) in order to maintain in favor of the
      holders of the Notes, a valid and perfected lien on the Collateral (as defined
      in the Security Agreement), subject only to the Prior Purchasers’ (as defined in
      the SPA) and the prior first priority security interest of LaSalle Bank National
      Association liens.

    

    (ix) Access.
      The
      Company will grant holders of this Note access to Company facilities and
      personnel during normal business hours and with reasonable advance notification.
      The Company will deliver to the Holders annual, quarterly financial statements
      and copies of other financial and other documents and/or information reasonably
      requested by the Holder. 

    
      
         

        

        

        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    

     

    (x)
      Non-Public
      Information.
      The
      Company represents, covenants and agrees that neither it nor any other person
      acting on its behalf has provided or will provide any Holder or its agents
      or
      counsel with any information that the Company believes constitutes material
      non-public information (other than with respect to the transactions contemplated
      by this Agreement), unless prior thereto such Holder shall have been provided
      with notice of the Company’s intent to provide such information, and shall have
      expressly agreed to accept such information. The Company understands and
      confirms that each Holder shall be relying on the foregoing representations
      in
      effecting transactions in securities of the Company.

    

    B. Negative
      Covenants.
      The
      Company covenants and agrees that, so long as this Note shall be outstanding,
      it
      will perform the obligations set forth in this Section 4B
      unless
      it has otherwise obtained the prior written consent of all Holders:

    

    (i)  Liquidation,
      Dissolution.
      The
      Company will not liquidate or dissolve, consolidate with, or merge into or
      with,
      any other corporation or other entity, except that any wholly-owned subsidiary
      may merge with another wholly-owned subsidiary or with the Company (so long
      as
      the Company is the surviving entity and no Event of Default shall occur as
      a
      result thereof). 

    

    (ii) Sales
      of Assets.
      The
      Company will not sell, transfer, lease or otherwise dispose of, or grant
      options, warrants or other rights with respect to, all or a substantial part
      of
      its properties or assets (an “Asset
      Transaction”)
      to any
      person or entity, provided that
      this
      clause (ii) shall not restrict any disposition made in the ordinary
      course of business and consisting of:

    

    (a)
      capital goods that are obsolete or have no remaining useful life;
      or

    

    (b)
      finished goods inventories.

    

    (iii) Redemptions.
      The
      Company will not redeem or repurchase any outstanding securities of the
      Company.

    

    (iv) Indebtedness.
      Without
      the express consent of the Holder, so
      long as
      this Note is 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 the (i) indebtedness
      evidenced by this Note and the other Notes, (ii) the Permitted Senior
      Indebtedness (as defined in the Security Agreement), (iii) indebtedness incurred
      through a Private Offering, and (iv) any Subsequent Financing in which the
      holders of the Rights Option shall invest. 

    

    
      
         

        

        

        
        

      

      
        -5-

        
          

        

      

      
        
        

      

    

    (v) Right
      of First Refusal.
      The
      Company covenants and agrees to promptly notify (in no event later than five
      (5)
      days after making or receiving an applicable offer) in writing each Holder
      of
      the Notes of the terms and conditions of any proposed indebtedness or any offer
      or sale to, or exchange with, any third party of any debt or equity securities
      (a “Subsequent
      Financing”).
      Such
      notice shall describe, in reasonable detail, the proposed Subsequent Financing,
      the
      names
      and investment amounts of all investors participating in the Subsequent
      Financing (if known), and all of the terms and conditions thereof and proposed
      definitive documentation to be entered into in connection therewith. The notice
      shall provide each Holder of the Notes an option (the “Rights
      Option”),
      during the five (5) days following delivery of such notice, to inform the
      Company whether such Holder of the Notes will participate up to its pro
      rata portion
      in such Subsequent Financing on the same, absolute terms and conditions
      contemplated by such Subsequent Financing. If any Holder of the Notes elects
      not
      to participate in any such Subsequent Financing, the other Holders of the Notes
      may therein participate on a pro
      rata
      basis.
      If the Company does not receive notice of exercise of the Rights Option from
      the
      Holder of the Notes within five (5) days of such Holder of the Notes receiving
      such notice, the Company shall have the right to close the Subsequent financing
      on the scheduled closing date with a third party; provided
      that all
      of the material terms and conditions of the closing are the same as those
      provided to the Holder of the Notes. 

    

    (vi)  Negative
      Pledge.
      Except
      for the other Follow On Notes, the Company will not hereafter create, incur,
      assume or suffer to exist any mortgage, pledge, hypothecation, assignment,
      security interest, encumbrance, lien (statutory or other), preference, priority
      or other security agreement or preferential arrangement of any kind or nature
      whatsoever (including any conditional sale or other title retention agreement
      and any financing lease) (each, a “Lien”)
      upon
      any of its property, revenues or assets, whether now owned or hereafter
      acquired, except:

    

    (a) Liens
      for
      taxes, assessments or other governmental charges or levies not at the time
      delinquent or thereafter payable without penalty or being contested in good
      faith by appropriate proceedings and for which adequate reserves in accordance
      with GAAP shall have been set aside on its books;

    

    (b) Liens
      of
      carriers, warehousemen, mechanics, materialman and landlords incurred in the
      ordinary course of business for sums not overdue or being contested in good
      faith by appropriate proceedings and for which adequate reserves in accordance
      with GAAP shall have been set aside on its books;

    

    (c) Liens
      (other than Liens arising under the Employee Retirement Income Security Act
      of
      1974, as amended, or Section 412(n) of the Internal Revenue Code of 1986,
      as amended) incurred in the ordinary course of business in connection with
      workers’ compensation, unemployment insurance or other forms of governmental
      insurance or benefits, or to secure performance of tenders, statutory
      obligations, leases and contracts (other than for borrowed money) entered into
      in the ordinary course of business or to secure obligations on surety or appeal
      bonds; 

    

    (d) judgment
      Liens in existence less than thirty (30) days after the entry thereof or with
      respect to which execution has been stayed;

    

    (e) Liens
      in
      the nature of zoning restrictions, easements and rights or restrictions of
      record on the use of real property which do not materially detract from its
      value or impair its use;

    
      
         

        

        

        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    

    

    (f) Liens
      arising by operation of law in favor of the owner or sublessor of leased
      premises and confined to the property rented;

    

    (g) Liens
      arising from any litigation or proceeds which is being contested in good faith
      by appropriate proceedings, provided, however, that no execution or levy has
      been made; and

    

    (h) Liens
      which secure indebtedness permitted by Section 4B(iv).

    

    (vii) Investments.
      The
      Company will not purchase, own, invest in or otherwise acquire, directly or
      indirectly, any stock or other securities or make or permit to exist any
      investment or capital contribution or acquire any interest whatsoever in any
      other person or entity or permit to exist any loans or advances for such
      purposes except for investments in direct obligations of the United States
      of
      America or any agency thereof, obligations guaranteed by the United States
      of
      America and certificates of deposit or other obligations of any bank or trust
      company organized under the laws of the United States or any state thereof
      and
      having capital and surplus of at least $500,000,000; provided, however, that
      nothing contained in this clause (vii) shall preclude the Company from making
      acquisitions for the purpose of expanding its business.

    

    (viii) Guaranteed
      Indebtedness.
      The
      Company shall not create, incur, assume and/or permit to exist any Guaranteed
      Indebtedness (as defined below) to any bank, lender, or any other person in
      connection with any credit facilities extended by such creditors to the Company
      and/or any of its Subsidiaries (as defined in the SPA), and/or in connection
      with any other contracts or agreements. “Guaranteed
      Indebtedness”
shall
      mean as to any person, any obligation of such person guaranteeing, providing
      comfort or otherwise supporting any indebtedness, lease, dividend, or other
      obligation of any other person in any manner, including any obligation or
      arrangement of such person to (1) purchase or repurchase any such primary
      obligation, (2) advance or supply funds for the purchase or payment of any
      primary obligation or to maintain working capital or otherwise to maintain
      working solvency or any balance sheet condition; (3) purchase property,
      securities or services primarily for the purpose of assuring the owner of any
      such obligation of the ability of the Company to make payment of such
      obligation; (4) protect the beneficiary of such arrangement from loss; or (5)
      indemnify the owner of such obligation against loss. 

    

    (ix) Transactions
      with Affiliates.
      Other
      than as may be expressly permitted in the SPA, neither the Company nor its
      subsidiaries shall repay any indebtedness or enter into any transaction,
      including, without limitation, the purchase, sale, lease or exchange of
      property, real or personal, the purchase or sale of any security, the borrowing
      or lending of any money, or the rendering of any service, with any person or
      entity affiliated with the Company (including officers, directors and
      shareholders owning three (3%) percent or more of the Company’s outstanding
      capital stock); provided,
      however,
      that
      the provisions of this Section 4(B)(xi) shall not apply to the provision of
      legal services by David M. Loev or the The Loev Law Firm, PC.

     

    
      
         

        

        

        
        

      

      
        -7-

        
          

        

      

      
        
        

      

    

     

    (x) Dividends.
      The
      Company will not accrue, declare or pay any cash dividends or distributions,
      whether accrued or otherwise, on its outstanding capital stock, provided,
however,
      that nothing herein contained shall prevent the Company from effecting a stock
      split or declaring or paying any dividend consisting solely of shares of any
      class of Common Stock to the holders of shares of such class of Common Stock,
      provided that (i) such stock split or stock dividend is effected equally
      across all classes of Common Stock and (ii) the holder of the Note
      participates in such events as if the holder had converted the Note immediately
      prior to such event into the number of shares of Common Stock he would be
      entitled to receive if he had so converted.

    

    (xi) The
      Company will not make or create any direct and/or indirect
      subsidiaries.

    

    (xii) Other
      than expressly permitted in the SPA, or pursuant to a Private Offering, the
      Company shall not issue any additional securities.

    

    (xiii) Other
      than as expressly permitted in the SPA, the Company shall not provide and/or
      pay
      any cash bonus or other compensation to any of its employees, officers,
      directors and/or consultants in excess of what is expressly permitted in their
      respective employment agreements (or if no agreements are in place, other than
      what has been historically paid).

    

    5. Events
      of Default.

    

    A. 
      The term
“Event
      of Default”
shall
      mean any of the events set forth in this Section 5A:

    

    (i) Non-Payment
      of Obligations.
      The
      Company shall default in the payment of the principal or accrued interest on
      this Note when and as the same shall become due and payable, whether by
      acceleration or otherwise (and solely with respect to a default in the payment
      of accrued interest on this Note, such default is continuing for five (5)
      days).

    

    (ii) Non-Performance
      of Affirmative Covenants.
      The
      Company shall default in the due observance or performance of any material
      covenant set forth in Section 4A,
      which
      default shall continue uncured for five (5) business days.

    

    (iii) Non-Performance
      of Negative Covenants.
      The
      Company shall default in the due observance or performance of any covenant
      set
      forth in Section 4B,
      which
      default shall continue uncured for two (2) business days.

    

    (iv) Bankruptcy,
      Insolvency, etc.
      The
      Company shall:

    

    (a) generally
      fail or be unable to pay, or admit in writing its inability to pay, its debts
      as
      they become due;

    

    (b) 
      apply
      for, consent to, or acquiesce in, the appointment of a trustee, receiver,
      sequestrator or other custodian for the Company or any of its property, or
      make
      a general assignment for the benefit of creditors;

    
      
         

        

        

        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    

    (c) in
      the
      absence of such application, consent or acquiesce in, permit or suffer to exist
      the appointment of a trustee, receiver, sequestrator or other custodian for
      the
      Company or for any part of its property, and such trustee, receiver,
      sequestrator or other custodian shall not be discharged within thirty (30)
      days;

    

    (d) permit
      or
      suffer to exist the commencement of any bankruptcy, reorganization, debt
      arrangement or other case or proceeding under any bankruptcy or insolvency
      law,
      or any dissolution, winding up or liquidation proceeding, in respect of the
      Company, and, if such case or proceeding is not commenced by the Company or
      converted to a voluntary case, such case or proceeding shall be consented to
      or
      acquiesced in by the Company or shall result in the entry of an order for relief
      or shall remain for sixty (60) days undismissed; or

    

    (e) take
      any
      corporate action authorizing, or in furtherance of, any of the
      foregoing;

    

    (v) Cross-Default.
      The
      Company shall default in the payment when due (including any applicable grace
      period) of any amount payable under any other obligation of the Company for
      money borrowed in excess of $50,000, or of its non-payment under such
      obligations, which default shall continue uncured for three (3) business days;
      

    

    (vi) Cross-Acceleration.
      Any
      indebtedness for borrowed money of the Company or any subsidiary in an aggregate
      principal amount exceeding $50,000 (1) shall be duly declared to be or
      shall become due and payable prior to the stated maturity thereof or
      (2) shall not be paid as and when the same becomes due and payable
      including any applicable grace period;

    

    (vii) Judgments.
      A
      judgment which, with other such outstanding judgments against the Company and
      its subsidiaries (in each case to the extent not covered by insurance), exceeds
      an aggregate of $50,000, shall be rendered against the Company or any subsidiary
      and, within twenty (20) days after entry thereof, such judgment shall not have
      been vacated, discharged or otherwise satisfied or execution thereof stayed
      pending appeal, or, within thirty (30) days after the expiration of any such
      stay, such judgment shall not have been discharged or otherwise satisfied;
      and

    

    (viii) Transaction
      Documents.
      The
      Company shall violate any material representation, warranty, covenant, agreement
      or obligation set forth in the SPA, the Security Documents, the Registration
      Rights Agreement dated as of the date hereof among the Company and the Payee
      (the “Registration
      Rights Agreement”),
      and/or
      the Investment Warrant and such default is continuing for five (5)
      days;

    

    (ix) Security
      Agreement.
      If an
      event of default shall occur for any reason under the Security Agreement;
      and

    
      
         

        

        

        
        

      

      
        -9-

        
          

        

      

      
        
        

      

    

     

    (x) Security
      Documents.
      If any
      Security Document shall cease to be in full force and effect, or shall cease
      to
      give the holder of this Note and the other holders of Notes the liens, rights,
      powers and privileges purported to be created thereby (including, without
      limitation, in all cases,
      a
      first priority perfected security interest in, and lien on, all of the
      Collateral (as defined in the Security Agreement) subject thereto), superior
      to
      and prior to the rights of all third persons and subject to no other liens
      (except to the extent expressly permitted herein or in the Security Agreement),
      which default shall continue uncured for two (2) business days.

    

    B. Action
      if Bankruptcy.
      If any
      Event of Default described in clauses (iv)(1) through (e) of Section 5A
      shall
      occur, the outstanding Principal Amount of this Note and all other obligations
      hereunder shall automatically be and become immediately due and payable, without
      notice or demand.

    

    C. Action
      if Other Event of Default.
      If any
      Event of Default (other than any Event of Default described in clauses (iv)(a)
      through (e) of Section 5A) shall occur for any reason, whether voluntary or
      involuntary, and be continuing, the Holders may, upon notice to the Company,
      declare all or any portion of the outstanding Principal Amount of the Notes
      together with interest accrued thereon to be due and payable and any or all
      other obligations hereunder to be due and payable, whereupon the full unpaid
      Principal Amount (or any portion thereof so demanded), such accrued interest
      and
      any and all other such obligations which shall be so declared due and payable
      shall be and become immediately due and payable, without further notice, demand,
      or presentment.

    

    D. Remedies.
      In case
      any Event of Default shall occur and be continuing, the Payee may proceed to
      protect and enforce its rights by a proceeding seeking the specific performance
      of any covenant or agreement contained in this Note or in aid of the exercise
      of
      any power granted in this Note or may proceed to enforce the payment of this
      Note or to enforce any other legal or equitable rights as such holder shall
      determine.

    

    6. Conversions.
      

    

    A. [Intentionally
      removed].

    

    B. Optional
      Conversion.
      Notwithstanding anything to the contrary contained in Section 6 hereof or
      elsewhere, the Holder, at its sole option, shall have the right to convert
      from
      time to time, any and/or all of the Principal Amount and all accrued, but unpaid
      Interest on this Note into shares of Common Stock (the “Conversion
      Shares”),
      at
      the Conversion Price (the “Optional
      Conversion Right”)
      by
      submitting a written notice (the “Optional
      Conversion Election Form”),
      in
      the form of Exhibit
      A
      annexed
      hereto, electing to exercise its optional conversion rights (the “Optional
      Conversion”).
      

     

    C. Conversion
      Price.
      The
      number of Conversion Shares to be issued upon conversion of the Principal Amount
      and/or Interest shall be determined by dividing the Conversion Amount (as
      defined below) by the applicable Conversion Price (as defined in below). The
      term “Conversion
      Amount”
means,
      with respect to any conversion of this Note, the sum of (i) the Principal
      Amount, and (ii) accrued but unpaid Interest through the date of conversion
      that
      the holder is electing to so convert. The “Conversion
      Price”
shall
      be (subject to anti-dilution adjustments as provided in this Note) the lesser
      of
      (i) $0.50; and (ii) fifty (50%) percent of the effective per share sale price
      of
      the Common Stock (or, alternatively, the conversion price and/or exercise price
      if Common Stock is not sold directly) in any Private Offering (as defined in
      the
      Registration Rights Agreement (as defined in the SPA)); provided,
      however,
      that
      the Conversion Price shall not be less than $0.25 per share (subject to the
      anti-dilution adjustments provided in this Note). 

    
      
         

        

        

        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

     

    D. Conversion
      Mechanics.

    

    (i) Surrender
      of Note Upon Conversion.
      Notwithstanding
      anything to the contrary set forth herein, upon the exercise of Holders Optional
      Conversion Right in accordance with the terms of Section
      6
      of this
      Note, the Holder shall be required to physically surrender this Note (or any
      affidavit of lost Note) to the Company in order to receive the Conversion Shares
      due upon conversion of this Note by the Company. In the event of the partial
      conversion of the Optional Conversion Right, the Company agrees to provide
      Holder a new Note, which shall total the then remaining amount of indebtedness
      owed.

     

    (ii) Delivery
      of Common Stock Upon Conversion. Upon
      receipt by the Company of this Note (or any affidavit of lost Note) and provided
      the Holder has converted any portion of this Note in accordance with the
      requirements of Section
      6
      of this
      Note, the Company shall issue and deliver or cause to be issued and delivered
      to
      or upon the order of the Holder certificates for the Conversion Shares no later
      than two (2) business days after such receipt (the “Deadline”).
      

     

    E. Concerning
      the Shares.
      Conversion Shares may not be sold or transferred unless (i) such shares are
      sold
      pursuant to an effective registration statement under the Act or (ii) the
      Company or its transfer agent shall have been furnished with an opinion of
      counsel (which opinion shall be in form, substance and scope customary for
      opinions of counsel in comparable transactions) to the effect that the shares
      to
      be sold or transferred may be sold or transferred pursuant to an exemption
      from
      such registration or (iii) such shares are sold or transferred pursuant to
      Rule 144 under the Act (or a successor rule) (“Rule
      144”)
      or
      (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of
      the Holder who agrees to sell or otherwise transfer the shares only in
      accordance with this Note and who is an accredited investor. Except as otherwise
      provided in the SPA, until such time as the Conversion Shares have been
      registered under the Act as contemplated by the Registration Rights Agreement
      or
      otherwise may be sold pursuant to Rule 144 without any restriction as to the
      number of securities as of a particular date that can then be immediately sold,
      each certificate for Conversion Shares that has not been so included in an
      effective registration statement or that has not been sold pursuant to an
      effective registration statement or an exemption that permits removal of the
      legend, shall bear a legend substantially in the following form, as
      appropriate:

    

    “THESE
      SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
      OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
      REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
      ACT”),
      AND,
      ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
      REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
      EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO THE REGISTRATION REQUIREMENTS
      OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS
      AS
      EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE
      SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

    
      
         

        

        

        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

     

    The
      legend set forth above shall be removed and the Company shall issue to the
      Holder a new certificate therefor free of any transfer legend if (i) the Company
      or its transfer agent shall have received an opinion of counsel, in form,
      substance and scope customary for opinions of counsel in comparable
      transactions, to the effect that a public sale or transfer of such Common Stock
      may be made without registration under the Securities Act and the shares are
      so
      sold or transferred, (ii) such Holder provides the Company or its transfer
      agent
      with reasonable assurances that the Conversion Shares can be sold pursuant
      to
      Rule 144 or Rule 144(k) or (iii) if the Conversion Shares are registered for
      resale under an effective registration statement filed under the Act. Nothing
      in
      this Note shall limit the Company’s obligation under the Registration Rights
      Agreement. Failure to delivery certificates with the legend for Conversion
      Shares shall result in certain payments to the Holder as set forth in the
      SPA.

     

    F. Status
      as Shareholder. Upon
      submission of this Note by the Holder and the satisfaction of the Conversion
      Conditions by the Holder, (i) the shares covered thereby shall be deemed
      Conversion Shares and (ii) the Holder’s rights as a Holder of this Note shall
      cease and terminate, excepting only the right to receive certificates for the
      Conversion Shares and to any remedies provided herein or otherwise available
      at
      law or in equity to such Holder because of a failure by the Company to comply
      with the terms of this Note. Notwithstanding the foregoing, if a Holder has
      not
      received certificates for all Conversion Shares prior to the second
      (2nd)
      business day after the expiration of the Deadline with respect to any reason,
      then (unless the Holder otherwise elects to retain its status as a holder of
      Common Stock by so notifying the Company) the Holder shall regain the rights
      of
      a Holder of this Note and the Company shall, as soon as practicable, return
      such
      unconverted Note to the Holder or, if the Note has not been surrendered, adjust
      its records to reflect that such portion of this Note has not been converted.
      In
      all cases, the Holder shall retain all of its rights and remedies for the
      Company’s failure to convert this Note.

     

    7. Anti-Dilution
      Provisions.
      The
      Conversion Price in effect at any time and the number and kind of securities
      issuable upon conversion of this Note shall be subject to adjustment from time
      to time upon the happening of certain events as follows:

     

    A. Adjustment
      for Stock Splits and Combinations.
      If the
      Company at any time or from time to time on or after the date of the issuance
      of
      this Note (the “Original
      Issuance Date”)
      effects a subdivision of the outstanding Common Stock, the Conversion Price
      then
      in effect immediately before that subdivision shall be proportionately
      decreased, and conversely, if the Company at any time or from time to time
      on or
      after the Original Issuance Date combines the outstanding shares of Common
      Stock
      into a smaller number of shares, the Conversion
      Price
      then in effect immediately before the combination shall be proportionately
      increased. Any adjustment under this Section
      7A shall
      become effective at the close of business on the date the subdivision or
      combination becomes effective.

    
      
         

        

        

        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

    B. Adjustment
      for Certain Dividends and Distributions.
      If the
      Company at any time or from time to time on or after the Original Issuance
      Date
      makes or fixes a record date for the determination of holders of Common Stock
      entitled to receive, a dividend or other distribution payable in additional
      shares of Common Stock, then and in each such event the Conversion Price then
      in
      effect shall be decreased as of the time of such issuance or, in the event
      such
      record date is fixed, as of the close of business on such record date, by
      multiplying the Conversion Price then in effect by a fraction (1) the numerator
      of which is the total number of shares of Common Stock issued and outstanding
      immediately prior to the time of such issuance or the close of business on
      such
      record date and (2) the denominator of which shall be the total number of shares
      of Common Stock issued and outstanding immediately prior to the time of such
      issuance or the close of business on such record date plus the number of shares
      of Common Stock issuable in payment of such dividend or distribution;
provided,
      however,
      that if
      such record date is fixed and such dividend is not fully paid or if such
      distribution is not fully made on the date fixed therefor, the Conversion Price
      shall be recomputed accordingly as of the close of business on such record
      date
      and thereafter the Conversion Price shall be adjusted pursuant to this
Section 7B
      as of
      the time of actual payment of such dividends or distributions.

     

    C. Adjustments
      for Other Dividends and Distributions.
      In the
      event the Company at any time or from time to time on or after the Original
      Issuance Date makes, or fixes a record date for the determination of holders
      of
      Common Stock entitled to receive, a dividend or other distribution payable
      in
      securities of the Company other than shares of Common Stock, then and in each
      such event provision shall be made so that the Holders of Notes shall receive
      upon conversion thereof, in addition to the number of shares of Common Stock
      receivable thereupon, the amount of securities of the Company which they would
      have received had their Notes been converted into Common Stock on the date
      of
      such event and had they thereafter, during the period from the date of such
      event to and including the conversion date, retained such securities receivable
      by them as aforesaid during such period, subject to all other adjustments called
      for during such period under this Section
      7
      with
      respect to the rights of the Holders of the Notes. 

     

    D. Adjustment
      for Reclassification, Exchange and Substitution.
      In the
      event that at any time or from time to time on or after the Original Issuance
      Date, the Common Stock issuable upon the conversion of the Notes is changed
      into
      the same or a different number of shares of any class or classes of stock,
      whether by recapitalization, reclassification or otherwise (other than a
      subdivision or combination of shares or stock dividend or a reorganization,
      merger, consolidation or sale of assets, provided for elsewhere in this
Section
      7),
      then
      and in any such event each Holder of Notes shall have the right thereafter
      to
      convert such Notes to receive the kind and amount of stock and other securities
      and property receivable upon such recapitalization, reclassification or other
      change, by holders of the maximum number of shares of Common Stock for which
      such Notes could have been converted immediately prior to such recapitalization,
      reclassification or change, all subject to further adjustment as provided
      herein.

     

    E. Sale
      of Shares Below Conversion Price:

     

    (i) If
      at any
      time or from time to time following the Original Issuance Date, the Company
      issues or sells, or is deemed by the express provisions of this Section
      7E
      to have
      issued or sold, Additional Shares of Common Stock (as hereinafter defined),
      other than as a dividend or other distribution on any class
      of stock and other than upon a subdivision or combination of shares of Common
      Stock, in either case as provided in Section
      7A
      or
      Section 7C
      above,
      for an Effective Price (as hereinafter defined) less than the then existing
      Conversion Price, then and in each such case the then existing Conversion Price
      shall be reduced, as of the opening of business on the date of such issue or
      sale, to a price equal to the Effective Price for such Additional Shares of
      Common Stock.  

    
      
         

        

        

        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    

     

    (ii) For
      the
      purpose of making any adjustment required under Section 7E,
      the
      consideration received by the Company for any issue or sale of securities shall
      (I) to the extent it consists of cash be computed at the amount of cash
      received by the Company, (II) to the extent it consists of property other
      than cash, be computed at the fair value of that property as determined in
      good
      faith by the board of directors of the Company (the “Board”),
      (III) if Additional Shares of Common Stock, Convertible Securities (as
      hereinafter defined) or rights or options to purchase either Additional Shares
      of Common Stock or Convertible Securities are issued or sold together with
      other
      stock or securities or other assets of the Company for a consideration which
      covers both, be computed as the portion of the consideration so received that
      may be reasonably determined in good faith by the Board to be allocable to
      such
      Additional Shares of Common Stock, Convertible Securities or rights or options,
      and (IV) be computed after reduction for all expenses payable by the
      Company in connection with such issue or sale.

     

    (iii) For
      the
      purpose of the adjustment required under Section 7E,
      if the
      Company issues or sells any rights, warrants or options for the purchase of,
      or
      stock or other securities convertible into or exchangeable for, Additional
      Shares of Common Stock (such convertible or exchangeable stock or securities
      being hereinafter referred to as “Convertible
      Securities”)
      and if
      the Effective Price of such Additional Shares of Common Stock is less than
      the
      Conversion Price then in effect, then in each case the Company shall be deemed
      to have issued at the time of the issuance of such rights, warrants, options
      or
      Convertible Securities the maximum number of Additional Shares of Common Stock
      issuable upon exercise, conversion or exchange thereof and to have received
      as
      consideration for the issuance of such shares an amount equal to the total
      amount of the consideration, if any, received by the Company for the issuance
      of
      such rights, warrants, options or Convertible Securities, plus, in the case
      of
      such rights, warrants or options, the minimum amounts of consideration, if
      any,
      payable to the Company upon the exercise of such rights, warrants or options,
      plus, in the case of Convertible Securities, the minimum amounts of
      consideration, if any, payable to the Company (other than by cancellation of
      liabilities or obligations evidenced by such Convertible Securities) upon the
      conversion or exchange thereof. No further adjustment of the Conversion Price,
      adjusted upon the issuance of such rights, warrants, options or Convertible
      Securities, shall be made as a result of the actual issuance of Additional
      Shares of Common Stock on the exercise of any such rights, warrants or options
      or the conversion or exchange of any such Convertible Securities. If any such
      rights or options or the conversion or exchange privilege represented by any
      such Convertible Securities shall expire without having been exercised, the
      Conversion Price adjusted upon the issuance of such rights, warrants, options
      or
      Convertible Securities shall be readjusted to the Conversion Price which would
      have been in effect had an adjustment been made on the basis that the only
      Additional Shares of Common Stock so issued were the Additional Shares of Common
      Stock, if any, actually issued or sold on the exercise of such rights, warrants,
      or options or rights of conversion or exchange of such Convertible Securities,
      and such Additional Shares of Common Stock, if any, were issued or sold for
      the
      consideration actually received by the Company upon such exercise, plus the
      consideration, if any, actually received by the Company for the granting of
      all
      such rights, warrants, or options, whether or not exercised, plus the
      consideration received for issuing or selling the Convertible Securities
      actually converted or exchanged, plus the consideration, if any, actually
      received by the Company (other than by cancellation of liabilities or
      obligations evidenced by such Convertible Securities) on the conversion or
      exchange of such Convertible Securities.

    
      
         

        

        

        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

     

    (iv) For
      the
      purpose of the adjustment required under Section 7E,
      if the
      Company issues or sells, or is deemed by the express provisions of this
Section 7 to
      have issued or sold, any rights or options for the purchase of Convertible
      Securities and if the Effective Price of the Additional Shares of Common Stock
      underlying such Convertible Securities is less than the Conversion Price then
      in
      effect, then in each such case the Company shall be deemed to have issued at
      the
      time of the issuance of such rights or options the maximum number of Additional
      Shares of Common Stock issuable upon conversion or exchange of the total amount
      of Convertible Securities covered by such rights or options and to have received
      as consideration for the issuance of such Additional Shares of Common Stock
      an
      amount equal to the amount of consideration, if any, received by the Company
      for
      the issuance of such rights, warrants or options, plus the minimum amounts
      of
      consideration, if any, payable to the Company upon the exercise of such rights,
      warrants or options, plus the minimum amount of consideration, if any, payable
      to the Company (other than by cancellation of liabilities or obligations
      evidenced by such Convertible Securities) upon the conversion or exchange of
      such Convertible Securities. No further adjustment of the Conversion Price,
      adjusted upon the issuance of such rights, warrants or options, shall be made
      as
      a result of the actual issuance of the Convertible Securities upon the exercise
      of such rights, warrants or options or upon the actual issuance of Additional
      Shares of Common Stock upon the conversion or exchange of such Convertible
      Securities. The provisions of paragraph (iii) above for the readjustment of
      the Conversion Price upon the expiration of rights, warrants or options or
      the
      rights of conversion or exchange of Convertible Securities shall apply
mutatis mutandis
      to the
      rights, warrants options and Convertible Securities referred to in this
      paragraph (iv).

     

    (v) “Additional
      Shares of Common Stock”
shall
      mean all shares of Common Stock (or any debt or equity securities convertible
      or
      exercisable into Common Stock) issued by the Company on or after the Original
      Issuance Date, whether or not subsequently reacquired or retired by the Company,
      other than (I) the Conversion Shares and the shares of Common Stock
      issuable upon exercise of the Warrants (the “Underlying
      Shares”),
      (II) shares of Common Stock issuable upon exercise of warrants, options and
      convertible securities outstanding as of the Original Issuance Date (provided
      that the terms of such warrants, options and convertible securities are not
      modified after the Original Issuance Date to adjust the exercise price),
      (III) shares of Common Stock issued pursuant to any event for which
      adjustment is made to the Conversion Price under Section 7
      hereof
      or to the exercise price under the anti-dilution provisions of any securities
      outstanding as of the Original Issuance Date (including the Investment
      Warrants), and (IV) 25,000 shares of common stock which the Company has
      previously agreed to issue to its legal counsel, David M. Loev (as disclosed
      in
      its SEC filings, which shares have not been issued to date). The “Effective
      Price”
of
      Additional Shares of Common Stock shall mean the quotient determined by dividing
      the total number of Additional Shares of Common Stock issued or sold, or deemed
      to have been issued or sold by the Company under this Section 7E,
      into
      the aggregate consideration received, or deemed to have been received, by the
      Company for such issue under this Section 7E,
      for
      such Additional Shares of Common Stock.

    
      
         

        

        

        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

     

    (vi) Other
      than a reduction pursuant to its applicable anti-dilution provisions, any
      reduction in the conversion price of any Convertible Security, whether
      outstanding on the Original Issuance Date or thereafter, or the price of any
      option, warrant or right to purchase Common Stock or any Convertible Security
      (whether such option, warrant or right is outstanding on the Original Issuance
      Date or thereafter), to an Effective Price less than the current Conversion
      Price, shall be deemed to be an issuance of such Convertible Security and all
      such options, warrants or rights at such Effective Price, and the provisions
      of
Section 7E
      (iii),
      (iv)
      and
(v)
      shall
      apply thereto mutatis mutandis.

     

    (vii) Any
      time
      an adjustment is made to the Conversion Price pursuant to Section 7E,
      a
      corresponding proportionate change shall be made to the number of shares of
      Common Stock issuable upon conversion of this Note.

     

    F. No
      Adjustments in Certain Circumstances.
      No
      adjustment in the Conversion Price shall be required unless such adjustment
      would require an increase or decrease of at least one ($0.01) cent in such
      price; provided,
      however,
      that
      any adjustments which by reason of this Section 7F
      are not
      required to be made shall be carried forward and taken into account in any
      subsequent adjustment required to be made hereunder. All calculations under
      this
Section 7F
      shall be
      made to the nearest cent or to the nearest one-hundredth of a share, as the
      case
      may be.

     

    8. Amendments.
      This
      Note may not be modified or amended in any manner except in writing executed
      by
      the Company and all Holders of the Notes.

    

    B. No
      failure or delay on the part of the Payee in exercising any power or right
      under
      this Note shall operate as a waiver thereof, nor shall any single or partial
      exercise of any such power or right preclude any other or further exercise
      thereof or the exercise of any other power or right. No notice to or demand
      on
      the Company in any case shall entitle it to any notice or demand in similar
      or
      other circumstances. No waiver or approval by the Payee shall, except as may
      be
      otherwise stated in such waiver or approval, be applicable to subsequent
      transactions. No waiver or approval hereunder shall require any similar or
      dissimilar waiver or approval thereafter to be granted hereunder.

    

    C. To
      the
      extent that the Company makes a payment or payments to the Payee, and such
      payment or payments or any part thereof are subsequently for any reason
      invalidated, set aside and/or required to be repaid to a trustee, receiver
      or
      any other party under any bankruptcy law, state or federal law, common law
      or
      equitable cause, then to the extent of such recovery, the obligation or part
      thereof originally intended to be satisfied, and all rights and remedies
      therefor, 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.

    

    D. After
      any
      waiver, amendment or supplement under this section becomes effective, the
      Company shall mail to the holders of the Notes a copy thereof.

    
      
         

        

        

        
        

      

      
        -16-

        
          

        

      

      
        
        

      

    

    9. Ownership
      Cap and Certain Conversion Restriction.
      Notwithstanding
      anything to the contrary set forth in Section 9 of this Note, at no time may
      the
      Holder convert all or a portion of this Note if the number of shares of Common
      Stock to be issued pursuant to such conversion would exceed, when aggregated
      with all other shares of Common Stock owned by the Holder at such time, the
      number of shares of Common Stock which would result in the Holder beneficially
      owning (as determined in accordance with Section 13(d) of the Exchange Act
      and
      the rules thereunder) more than 9.9% of all of the Common Stock outstanding
      at
      such time; provided, however, that upon the Holder providing the Maker with
      sixty-one (61) days notice (the "Waiver Notice") that the Holder would like
      to
      waive this Section 9 with regard to any or all shares of Common Stock issuable
      upon conversion of this Note, this Section 9 will be of no force or effect
      with
      regard to all or a portion of the Note referenced in the Waiver Notice.

     

    10. Miscellaneous.

    

    A. Parties
      in Interest.
      All
      covenants, agreements and undertakings in this Note binding upon the Company
      or
      the Payee shall bind and inure to the benefit of the successors and permitted
      assigns of the Company and the Payee, respectively, whether so expressed or
      not.

    

    B. Governing
      Law.
      This
      Note shall be governed by and construed exclusively in accordance with the
      laws
      of the State of New York without regard to the conflicts of laws principles
      thereof. The parties hereto hereby agree that any suit or proceeding arising
      directly and/or indirectly pursuant to or under this instrument or the
      consummation of the transactions contemplated hereby, shall be brought solely
      in
      a federal or state court located in the City, County and State of New York.
      By
      its execution hereof, the parties hereby covenant and irrevocably submit to
      the
in personam
      jurisdiction of the federal and state courts located in the City, County and
      State of New York and agrees that any process in any such action may be served
      upon any of them personally, or by certified mail or registered mail upon them
      or their agent, return receipt requested, with the same full force and effect
      as
      if personally served upon them in New York City. The parties hereto waive any
      claim that any such jurisdiction is not a convenient forum for any such suit
      or
      proceeding and any defense or lack of in personam
      jurisdiction with respect thereto. In the event of any such action or
      proceeding, the party prevailing therein shall be entitled to payment from
      the
      other party hereto of its reasonable and documented counsel fees and
      disbursements in an amount judicially determined.

    

    C. Notices.
      All
      notices and other communications from the Company to the Holder of this Note
      shall be mailed by first class, registered or certified mail, postage prepaid,
      and/or a nationally recognized overnight courier service to the address
      furnished to the Company in writing by the Holder.

     

    
      
        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    

    

    D. Notice
      of Certain Transactions.
      In case
      at any time:

    

    (i) The
      Company shall declare any dividend upon, or other distribution in respect of,
      its Common Stock; or

    

    (ii) The
      Company shall offer for subscription to the holders of its Common Stock any
      additional shares of stock of any class or any other securities convertible
      into
      shares of stock or any rights to subscribe thereto; or

    

    (iii) There
      shall be any capital reorganization or reclassification of the capital stock
      of
      the Company, or a sale of all or substantially all of the assets of the Company,
      or a consolidation or merger of the Company with another corporation (other
      than
      a merger with a subsidiary in which merger the Company is the continuing
      corporation and which does not result in any reclassification); or

    

    (iv) There
      shall be a voluntary or involuntary dissolution; liquidation or winding-up
      of
      the Company;

    

    then,
      in
      any one or more of said cases, the Company shall cause to be mailed to the
      Payee
      at the earliest practicable time (and, in any event not less than twenty (20)
      days before any record date or other date set for definitive action), written
      notice of the date on which the books of the Company shall close or a record
      shall be taken for such dividend, distribution or subscription rights or such
      reorganization, reclassification, sale, consolidation, merger or dissolution,
      liquidation or winding-up shall take place, as the case may be. Such notice
      shall also set forth such facts as shall indicate the effect of such action
      (to
      the extent such effect may be known at the date of such notice) on the
      Conversion Price and the kind and amount of the shares of stock and other
      securities and property deliverable upon the conversion of this Note. Such
      notice shall also specify the date as of which the holders of the Common Stock
      of record shall participate in said dividend, distribution or subscription
      rights or shall be entitled to exchange their Common Stock for securities or
      other property deliverable upon such reorganization, reclassification, sale,
      consolidation, merger or dissolution, liquidation or winding-up, as the case
      may
      be.

    

    Nothing
      herein shall be construed as the consent of the holder of this Note to any
      action otherwise prohibited by the terms of this Note or as a waiver of any
      such
      prohibition.

    

    E. Reservation
      of Shares.
      The
      Company covenants and agrees that it will at all times have authorized and
      reserved, solely for the purpose of such possible conversion, out of its
      authorized but unissued shares, a sufficient number of shares of its Common
      Stock to provide for the exercise in full of the conversion rights contained
      in
      this Note.

    

    F. Validity
      of Stock.
      All
      shares of Common Stock which may be issued upon conversion of this Note will,
      upon issuance by the Company in accordance with the terms of this Note, be
      validly issued, free from all taxes and liens with respect to the issuance
      thereof (other than those created by the holders), free from all pre-emptive
      or
      similar rights and fully paid and non-assessable. 

     

    
      
        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    

    

    G. Cash
      Payments.
      No
      fractional shares (or scrip representing fractional shares) of Common Stock
      shall be issued upon conversion of this Note. In the event that the conversion
      of this Note would result in the issuance of a fractional share of Common Stock,
      the Company shall pay a cash adjustment in lieu of such fractional share to
      the
      holder of this Note based upon the Conversion Price. 

    

    H. Stamp
      Taxes, etc.
      The
      Company shall pay all documentary, stamp or other transactional taxes
      attributable to the issuance or delivery of shares of Common Stock, upon
      conversion of this Note; provided,
      however,
      that
      the Company shall not be required to pay any taxes which may be payable in
      respect of any transfer involved in the issuance or delivery of any certificate
      for such shares in a name other than that of the holder of this Note, and the
      Company shall not be required to issue or deliver any such certificate unless
      and until the person requesting the issuance thereof shall have paid to the
      Company the amount of such tax or shall have established to the Company’s
      satisfaction that such tax has been paid.

    

    I. Waiver
      of Jury Trial.
      THE
      PAYEE AND THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE
      ANY
      RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
      HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS NOTE OR ANY OTHER
      DOCUMENT OR INSTRUMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH, OR ANY
      COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN),
      OR
      ACTIONS OF THE PAYEE OR THE COMPANY. THIS PROVISION IS A MATERIAL INDUCEMENT
      FOR
      THE PAYEE’S PURCHASING THIS NOTE.

    

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

    
      
         

        

        

        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF,
      this
      Note has been executed and delivered on the date specified above by the duly
      authorized representative of the Company.

     

    

    

    XA,
      INC.

    

    

    

    By:
      /s/ Joseph Wagner

    Name:
      Joseph Wagner

    Title:
      President & CEO 

    

    

    

    

    

    
 

    

    

    

    

    $4,000

     

    
      
        
           

          

          

        

        
        

      

      
        -20-

        
          

        

      

      
        
        

        
        

      

    

    EXHIBIT
      A

    

    Optional
      Conversion Election Form

    

    

    ____________,
      200_

    

    XA,
      Inc.

    875
      North
      Michigan Avenue, Suite 2626

    Chicago,
      IL 60611

    

    Re: Optional
      Conversion of Promissory Note

    Gentlemen:

    You
      are
      hereby notified that, pursuant to, and upon the terms and conditions of that
      certain Senior Secured Convertible Promissory Note of XA, Inc. (the
“Company”),
      in
      the principal amount of $_______________ (the “Note”),
      held
      by me, I hereby elect to exercise my right of Optional Conversion (as such
      term
      in defined in the Note), effective as of the date of this writing.

    

    Please
      provide me with all applicable instructions for the Optional Conversion of
      the
      Note, and issue certificate(s) for the applicable shares of the Company’s Common
      Stock issuable upon the Optional Conversion, in the name of the person provided
      below.

    

    

    Very
      truly yours,

    

    

    ___________________________

    Name:

    

    

    Please
      issue certificate(s) for Common Stock as follows:

    

    ______________________________________________
      

    Name

    

    ______________________________________________
      

    Address

    

    ______________________________________________
      

    Social
      Security No. of Shareholder

     

     

    
      
        
        

      

      
        -21-

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00126-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00126-of-00352.parquet"}]]