Document:

Unassociated Document

    SUBSCRIPTION
      AGREEMENT

    

    THIS
      SUBSCRIPTION AGREEMENT
      (this
“Agreement”), is made as of October_____, 2006, by and among American Dairy,
      Inc., a Utah corporation (the “Company”), and the subscribers identified on the
      signature page hereto (each, a “Subscriber” and collectively the
“Subscribers”).

    

    WHEREAS,
      the
      Company and the Subscribers are executing and delivering this Agreement in
      reliance upon an exemption from securities registration afforded by the
      provisions of Section 4(2)
      and/or
      Regulation D (“Regulation D”) as promulgated under the Securities Act of 1933,
      as amended (the “1933 Act”).

    

    WHEREAS,
      the
      parties desire that, upon the terms and subject to the conditions contained
      herein, the Company shall issue and sell to the Subscribers, and the Subscribers
      shall purchase, (a) a minimum, in the aggregate, of $10,000,000 (the “Purchase
      Price”) of 7.75% convertible notes of the Company, convertible into shares (the
“Conversion Shares”) of the Company’s common stock, $.001 par value per share
      (“Common Stock”) at a conversion price of $14.50 per share,
      subject
      to adjustment
      (the
“Conversion Price”), in substantially the form attached hereto as Exhibit A
      (“Note” or “Notes”), and (b) warrants to purchase shares of the Company’s Common
      Stock (the “Warrant Shares”), at an exercise price of $14.50 per
      share,
      subject
      to adjustment
      (the
“Exercise Price”), in substantially the form attached hereto as Exhibit B (the
“Investor Warrants”) (all
      such
      transactions, collectively, the
      “Offering”). The Notes, the Conversion Shares, the Investor Warrants and the
      Warrant Shares are collectively referred to herein as the
“Securities.”

    

    WHEREAS,
      contemporaneously with the execution and delivery of this Agreement, the parties
      hereto are executing and delivering a registration rights agreement,
      in
      the form
      attached hereto as Exhibit C (the “Registration Rights Agreement”), pursuant to
      which the Company has agreed to provide certain registration rights under the
      1933 Act and the rules and regulations promulgated thereunder,
      and
      applicable state securities laws.

    

    NOW,
      THEREFORE,
      in
      consideration of the mutual covenants and other agreements contained in this
      Agreement the Company and the Subscribers hereby agree as follows: 

    

    1. Conditions
      to Closing.
      Subject
      to the satisfaction or waiver of the terms and conditions of this Agreement,
      on
      the Closing Date (as defined in Section 2 below), each Subscriber shall
      purchase, and the Company shall sell to each Subscriber (a) a Note in the
      principal amount set forth beside such Subscribers name on the signature page
      hereto, and (b) the amount of Investor Warrants determined pursuant to Section
      3
      below. The aggregate principal amount of the Notes to be purchased by the
      Subscribers on the Closing Date shall, in the aggregate, be equal to the
      Purchase Price.

    

    2. Closing.
      The
      consummation of the transactions contemplated herein (the “Closing”) shall take
      place at the offices of Hodgson Russ LLP, 60 East 42nd
      Street,
      37th
      Floor,
      New York, NY 10165, upon the satisfaction of all conditions to Closing set
      forth
      in this Agreement, at a date and time acceptable to the parties (the date on
      which the actual Closing takes place shall be referred to as the “Closing
      Date”). At the Closing, the Company shall deliver to each Subscriber this
      Agreement, the
      Registration Rights Agreement, a Note in a principal amount equal to
the
      principal amount subscribed to by such
      Subscriber,
      and
      Investor Warrants, all duly executed by the Company, as well as a legal opinion
      from counsel to the Company, in the
      form
      attached hereto as Exhibit E
      (the
“Opinion”).
      At the
      Closing, each Subscriber shall deliver to the Company its respective
      portion of the Purchase Price (based on the proportion of principal amount
      of
      Notes to be purchased by such Investor to the aggregate principal amount of
      Notes issued pursuant hereto)
      in
      immediately available funds.

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    3. Subscriber’s
      Representations and Warranties.
      Each
      Subscriber hereby represents and warrants to and agrees with the
      Company,
      severally and not jointly,
      only as
      to such Subscriber that:

    

    (a) Organization
      and Standing of the Subscribers. If the Subscriber is an entity, such Subscriber
      is a corporation, partnership or other entity duly incorporated or organized,
      validly existing and in good standing under the laws of the jurisdiction of
      its
      incorporation or organization.

    

    (b)
       Authorization
      and Power. Such
      Subscriber has the requisite power and authority to enter into and perform
      this
      Agreement and to purchase the Securities being sold to it hereunder. The
      execution, delivery and performance of this Agreement by such Subscriber and
      the
      consummation by it of the transactions contemplated hereby and thereby have
      been
      duly authorized by all necessary corporate or partnership action, and no further
      consent or authorization of such Subscriber or its Board of Directors,
      stockholders, partners, members
      or
      managers,
      as the
      case may be, is required.

    

    (c) No
      Conflicts. The execution, delivery and performance of this Agreement and the
      consummation by such Subscriber of the transactions contemplated hereby do
      not
      (i) conflict with such Subscriber’s charter documents or bylaws or other
      organizational documents, or (ii) violate a law, rule, or regulation, or any
      order, judgment or decree of any court or governmental agency applicable to
      such
      Subscriber or its properties, except for such conflicts and violations as would
      not, individually or in the aggregate, have a material adverse effect on such
      Subscriber. Such Subscriber is not required to obtain any consent, authorization
      or order of, or make any filing or registration with, any court or governmental
      agency in order for it to execute, deliver or perform any of its obligations
      under this Agreement or to purchase the Notes or acquire the Investor Warrants
      in accordance with the terms hereof, provided that for purposes of the
      representation made in this sentence, such Subscriber is assuming and relying
      upon the accuracy of the relevant representations and agreements of the Company
      herein.

    

    (d) Information
      on Company. Such Subscriber has reviewed the “SEC Documents” (as defined in
      Section 5(h) hereof) and has been afforded (i) the opportunity to ask such
      questions as it has deemed necessary of, and to receive answers from,
      representatives of the Company concerning the terms and conditions of the
      offering of the Securities and the merits and risks of investing in the
      Securities; (ii) access to information about the Company and the “Subsidiaries”
(as defined in Section 5(w) hereof) and their respective financial condition,
      results of operations, business, properties, management and prospects sufficient
      to enable it to evaluate the investment in the Securities; and (iii) the
      opportunity to obtain such additional information that the Company possesses
      or
      can acquire without unreasonable effort or expense that is necessary to make
      an
      informed investment decision with respect to the investment. Neither such
      inquiries nor any other investigation conducted by or on behalf of such
      Subscriber or its representatives or counsel shall modify, amend or affect
      such
      Subscriber’s right to rely on the truth, accuracy and completeness of the SEC
      Documents and the Company’s representations and warranties contained in this
      Agreement. Such Subscriber understands that its investment in the Securities
      involves a high degree of risk. Such
      Subscriber is able to bear the risk of an investment in the Securities
      including, without limitation, the risk of total loss of its investment. Such
      Subscriber has sought such accounting, legal and tax advice as it has considered
      necessary to make an informed investment decision with respect to its
      acquisition of the Securities.

    

    (e) Information
      on Subscriber. The Subscriber is, and will at the time of the conversion of
      the
      Notes and the exercise of the Warrants be, an “accredited investor”, as such
      term is defined in Regulation D promulgated under the 1933 Act, is experienced
      in investments and business matters, and,
      with
      its representatives, has such knowledge and experience in financial, tax and
      other business matters as to enable the Subscriber to utilize the information
      made available by the Company to evaluate the merits and risks of and to make
      an
      informed investment decision with respect to the proposed purchase of the
      Securities.
      The
      information set forth on the signature page hereto regarding the Subscriber
      is
      accurate. Such Subscriber is not a registered broker-dealer under Section 15
      of
      the Securities Exchange Act of 1934, as amended (the “1934 Act”). Such
      Subscriber does not have any agreement or understanding, directly or indirectly,
      with any Person to distribute any of the Securities.

    

    
      
         

      

      
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    (f) Investment
      Intent. Such Subscriber is acquiring the Securities as principal for its own
      account for investment purposes only and not with a view to or for distributing
      or reselling such Securities or any part thereof, without prejudice, however,
      to
      such Subscriber’s right at all times to sell or otherwise dispose of all or any
      part of such Securities in compliance with applicable federal and state
      securities laws. Subject to the immediately preceding sentence, nothing
      contained herein shall be deemed a representation or warranty by such Subscriber
      to hold the Securities for any period of time. 

    

    (g) Legends.
      The Subscribers understand that the certificates or other instruments
      representing the Securities shall bear a restrictive legend in substantially
      the
      following form:

    

    THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
      SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A
      VIEW
      TOWARD RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
      IN
      THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
      THE
      SECURITIES ACT OF 1933, AS AMENDED, AND
      APPLICABLE STATE SECURITIES LAWS, OR AN
      OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
      REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS. 

     

    The
      legend set forth above shall be removed and the Company shall,
      within
      five (5) business days,
      issue a
      certificate without such legend to the holder of the Securities
      upon
      which it is stamped, if, unless otherwise required by state securities laws,
      (i)
      in connection with a sale transaction, provided the Securities are registered
      under the 1933 Act or (ii) in connection with a sale transaction, after such
      holder provides the Company 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 a public sale, assignment or transfer of the
      Securities may be made without registration under the 1933 Act.

    

    (h) Communication
      of Offer. The offer to sell the Securities was directly communicated to such
      Subscriber by the Company and/or its agents. At no time was such Subscriber
      presented with or solicited by any leaflet, newspaper or magazine article,
      radio
      or television advertisement, or any other form of general advertising or
      solicited or invited to attend a promotional meeting otherwise than in
      connection and concurrently with such communicated offer.
      Notwithstanding anything to the contrary contained in this Agreement,
the
      Company acknowledges and agrees that such
      Subscriber may transfer the Securities to its Affiliates (as defined below)
      provided that each such Affiliate is an “accredited investor” under Regulation D
      and such Affiliate agrees to be bound by the terms and conditions of this
      Agreement.
      For the
      purposes of this Agreement, an “Affiliate” of any person or entity means any
      other person or entity directly or indirectly controlling, controlled by or
      under direct or indirect common control with such person or entity. For purposes
      of this definition, “control” means the power to direct the management and
      policies of such person or firm, directly or indirectly, whether through the
      ownership of voting securities, by contract or otherwise.

    

    
      
         

      

      
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    (i) Enforceability.
      This Agreement has been duly authorized and executed by such Subscriber and,
      when delivered by the Subscriber, will become Subscriber’s valid and binding
      agreement enforceable against Subscriber in accordance with its
      terms,
      subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
      moratorium and similar laws of general applicability relating to or affecting
      creditors’ rights generally and to general principles of equity.

    

    (j) No
      Governmental Review. Each Subscriber understands that no United States federal
      or state agency or any other governmental or state agency has passed on or
      made
      recommendations or endorsements of the Securities or the suitability of the
      investment in the Securities nor have such authorities passed upon or endorsed
      the merits of the offering of the Securities.

    

    (k) Correctness
      of Representations. The foregoing representations and warranties of such
      Subscriber are true and correct as of the date hereof and, unless such
      Subscriber otherwise notifies the Company prior to the Closing Date shall be
      true and correct as of the Closing Date. The Company acknowledges and agrees
      that no Subscriber has made or makes any representations or warranties with
      respect to the transactions contemplated hereby other than those specifically
      set forth in this Section 3.

    

    4. Company
      Representations and Warranties.
      Except
      as set forth in the Schedule of Exceptions attached hereto as Exhibit D (the
      “Schedule of Exceptions”), the Company represents and warrants to and agrees
      with each Subscriber that:

    

    (a) Due
      Incorporation. The Company is a corporation duly organized, validly existing
      and
      in good standing under the laws of the State of Utah, and has the requisite
      corporate power to own its properties and to carry on its business as disclosed
      in the Latest SEC Documents (as defined in Section 4(h)). The Company is duly
      qualified as a foreign corporation to do business and is in good standing in
      each jurisdiction where the nature of the business conducted or property owned
      by it makes such qualification necessary, other than those jurisdictions in
      which the failure to so qualify would not
      have or
      be reasonably likely to
      have a
      Material Adverse Effect. For purpose of this Agreement, a “Material Adverse
      Effect” shall mean any of (i) a material and adverse effect on the legality,
      validity or enforceability of any of this Agreement, any Note, Investor
      Warrant, the
      Registration Rights Agreement, or any related document, agreement or instrument
      (collectively, the “Transaction Documents”), (ii) a material and adverse effect
      on the results of operations, assets, prospects, business or condition
      (financial or otherwise) of the Company and the Subsidiaries, taken as a whole,
      or (iii) an adverse impairment to the Company’s ability to perform on a timely
      basis its obligations under any Transaction Document.

    

    (b) Capitalization.
      The authorized capital stock of the Company consists of fifty
      million (50,000,000) shares of Common Stock, par value $.001 per share, of
      which
      14,928,245 shares are issued and outstanding as of the date hereof. Except
      as
      disclosed in the Latest SEC Documents (as defined in Section 4(h)), no shares
      of
      Common Stock are subject to preemptive rights or any other similar rights or
      any
      liens or encumbrances suffered or permitted by the Company. Except as
disclosed
      in the SEC Documents,
      as of
      the date of this Agreement, (i) there are no outstanding options, warrants,
      scrip, rights to subscribe to, calls or commitments of any character whatsoever
      relating to, or securities or rights convertible into, any shares of capital
      stock of the Company or any of its Subsidiaries, or contracts, commitments,
      understandings or arrangements by which the Company or any of its Subsidiaries
      is or may become bound to issue additional shares of capital stock of the
      Company or any of its Subsidiaries or options, warrants, scrip, rights to
      subscribe to, calls or commitments of any character whatsoever relating to,
      or
      securities or rights convertible into, any shares of capital stock of the
      Company or any of its Subsidiaries, (ii) there are no outstanding debt
      securities and (iii) there are no agreements or arrangements under which the
      Company or any of its Subsidiaries is obligated to register the sale of any
      of
      their securities under the 1933 Act (except pursuant to the Registration Rights
      Agreement) and (iv) except
      as
      set forth on Schedule 4(b), there
      are
      no outstanding registration statements and there are no outstanding comment
      letters from the Securities
      and Exchange Commission (the “Commission”)
      or any
      other regulatory agency. There are no securities or instruments containing
      anti-dilution or similar provisions that will be triggered by the issuance
      of
      any of the Securities as described in this Agreement. The Company has furnished
      to the Subscribers true and correct copies of the Company’s Certificate of
      Incorporation, as amended and as in effect on the date hereof (the “Certificate
      of Incorporation”), and the Company’s Bylaws, as in effect on the date hereof
      (the “Bylaws”), and the terms of all securities convertible into or exercisable
      for Common Stock and the material rights of the holders thereof in respect
      thereto other than stock options issued to employees and
      consultants.

    

    
      
         

      

      
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    (c) Authorization,
      Enforcement, Compliance with Other Instruments. (i) The Company has the
      requisite corporate power and authority to enter into and perform the
      Transaction Documents and to issue the Notes, the Investor Warrants, the Warrant
      Shares and the Conversion Shares in accordance with the terms hereof and
      thereof, (ii) the execution and delivery of the Transaction Documents by the
      Company and the consummation by it of the transactions contemplated hereby
      and
      thereby, including, without limitation, the issuance of the Notes, the Investor
      Warrants, the Conversion Shares and the Warrant Shares and the reservation
      for
      issuance and the issuance of the Conversion Shares and Warrant Shares issuable
      upon conversion or exercise thereof, have been duly authorized by the Company’s
      Board of Directors and no further consent or authorization is required by the
      Company, its Board of Directors or its stockholders, (iii) on or before the
      Closing Date, the Transaction Documents will have been duly executed and
      delivered by the Company, (iv) the Transaction Documents will when executed
      and
      delivered constitute the valid and binding obligations of the Company
      enforceable against the Company in accordance with their terms, except as such
      enforceability may be limited by general principles of equity or applicable
      bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
      laws
      relating to, or affecting generally, the enforcement of creditors’ rights and
      remedies. The Company
      knows of
      no reason why the Company cannot file any
      registration statement required
      under the Registration Rights Agreement or perform any of the Company’s other
      obligations under the
      Transaction Documents.

    

    (d) Consents.
      No consent, approval, authorization or order of any court, governmental agency
      or body or arbitrator having jurisdiction over the Company, or any of its
      Affiliates, or the NYSE Archipelago Exchange (“ArcaEx”),
      or the
      Company’s stockholders,
      is
      required for the execution by the Company of the Transaction Documents and
      compliance and performance by the Company of its obligations under the
      Transaction Documents, including, without limitation, the issuance and sale
      of
      the Securities.

    

    (e) No
      Violation or Conflict. Assuming the representations and warranties of the
      Subscribers in Section 43
      are true
      and correct
      (except
      with respect to Section 3(c)),
      neither
      the issuance and sale of the Securities nor the performance of the Company’s
      obligations under this Agreement and all other Transaction Documents entered
      into by the Company relating thereto by the Company will: (i) violate, conflict
      with, result in a breach of, or constitute a default (or an event which with
      the
      giving of notice or the lapse of time or both would be reasonably likely to
      constitute a default) under (A) the Certificate of Incorporation, Bylaws or
      other organizational documents of the Company, (B) any
      decree, judgment, order, law, treaty, rule, regulation or determination
      applicable to the Company of any court, governmental agency or body, or
      arbitrator having jurisdiction over the Company or over the properties or assets
      of the Company or any of its Affiliates, (C) the terms of any bond, debenture,
      note or any other evidence of indebtedness, or any agreement, stock option
      or
      other similar plan, indenture, lease, mortgage, deed of trust or other
      instrument to which the Company or any of its Affiliates is a party, by which
      the Company or any of its Affiliates is bound, or to which any of the properties
      of the Company or any of its Affiliates is subject, or (D) the terms of any
      “lock-up” or similar provision of any underwriting or similar agreement to which
      the Company, or any of its Affiliates is a party except the violation, conflict,
      breach, or default of which would not
      have or
      be reasonably likely to
      have a
      Material Adverse Effect; or (ii) result in the creation or imposition of any
      lien, charge or encumbrance upon the Securities or any of the assets of the
      Company or any of its Affiliates; or (iii) result in the activation of any
      anti-dilution rights or a reset or repricing of any debt or security instrument
      of any other creditor or equity holder of the Company, nor result in the
      acceleration of the due date of any obligation of the Company; or (iv) result
      in
      the activation of any piggy-back registration rights of any person or entity
      holding securities of the Company or having the right to receive securities
      of
      the Company.

    

    
      
         

      

      
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    (f) Issuance
      of the Securities. The Securities upon issuance: (i) are free
      and
      clear of any security interests, liens, claims or other encumbrances, subject
      to
      restrictions upon transfer under the 1933 Act and any applicable state
      securities laws; (ii) have been
      duly and
      validly authorized and on the date of conversion of the Notes and upon exercise
      of the Investor Warrants, the Conversion Shares and Warrant Shares will be
      duly
      and validly issued, fully paid and non-assessable or if registered pursuant
      to
      the 1933 Act, and if resold pursuant to an effective registration
      statement,
      will be
      freely tradable without any restriction whatsoever; (iii) will not have been
      issued or sold in violation of any pre-emptive or other similar rights of the
      holders of any securities of the Company; and (iv) will not subject the holders
      thereof to personal liability by reason of being such holders.

    

    (g) Litigation.
      There is no pending or, to the best knowledge of the Company, threatened action,
      suit, proceeding or investigation before any court, governmental agency or
      body,
      or arbitrator having jurisdiction over the Company, or any of its Affiliates
      that would affect the execution by the Company or the performance by the Company
      of its obligations under the Transaction Documents. Except as disclosed
Schedule
      4(g) to
      the
      Schedule of Exceptions or in the Latest SEC Documents
      (as
      defined in Section 4(h)),
      there
      is no pending or, to the best knowledge of the Company, basis for or threatened
      action, suit, proceeding or investigation before any court, governmental agency
      or body, or arbitrator having jurisdiction over the Company, or any of its
      Affiliates which litigation if adversely determined would have or
      be
      reasonably likely to have a
      Material Adverse Effect.

    

    (h) SEC
      Documents: Financial Statements. Since June 30, 2004, the Company has filed
      all
      reports, schedules, forms, statements and other documents required to be filed
      by it with the Securities and Exchange Commission (the “Commission”) under the
      1934 Act (all of the foregoing filed prior to the date hereof or amended after
      the date hereof and all exhibits included therein and financial statements
      and
      schedules thereto and documents incorporated by reference therein, being
      hereinafter referred to as the “SEC Documents” and any of the foregoing filed
      prior to the date hereof for periods ending on or after December 31, 2005 or
      amended after the date hereof and all exhibits included therein and financial
      statements and schedules thereto and documents incorporated by reference
      therein, being hereinafter referred to as the “Latest SEC Documents”). The
      Company has delivered to the Subscribers,
      or their
      representatives, true and complete copies of the SEC Documents. As of their
      respective dates, the financial statements of the Company disclosed in the
      SEC
      Documents (the “Financial Statements”) complied as to form and substance with
      applicable accounting requirements and the published rules and regulations
      of
      the Commission with respect thereto. Such Financial Statements have been
      prepared in accordance with generally accepted accounting principles,
      consistently applied, during the periods involved (except (i) as may be
      otherwise indicated in such Financial Statements or the notes thereto, or (ii)
      in the case of unaudited interim statements, to the extent they may exclude
      footnotes or may be condensed or summary statements) and fairly present in
      all
material
      respects the financial position of the Company as of the dates thereof and
      the
      results of its operations and cash flows for the periods then ended (subject,
      in
      the case of unaudited statements, to normal year-end audit adjustments). No
      other information provided by or on behalf of the Company to the Subscribers
      which is not included in the SEC Documents, including, without limitation,
      information referred to in this Agreement, contains any untrue statement of
      a
      material fact or omits to state any material fact necessary in order to make
      the
      statements therein, in the light of the circumstances under which they were
      made, not misleading.

    

    
      
         

      

      
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    (i) Rule
      10(b)-5. The SEC Documents do not include any untrue statements of material
      fact, nor do they omit to state any material fact required to be stated therein
      necessary to make the statements made, in light of the circumstances under
      which
      they were made, not misleading.

    

    (j) No
      Market
      Manipulation. The Company has not taken, and will not take, directly or
      indirectly, any action designed to, or that might reasonably be expected to,
      cause or result in stabilization or manipulation of the price of the Common
      Stock to facilitate the sale or resale of the Securities or affect the price
      at
      which the Securities may be issued or resold.

    

    (k) Information
      Concerning Company. The Subscribers have not been provided with any material
      non-public information concerning the Company, except (i) as the terms and
      conditions of the transactions contemplated hereby may constitute such
      information, or (ii) pursuant to non-disclosure agreements or documents of
      similar purpose. The Company understands and confirms that the Subscribers
      will
      rely on the representations and covenants herein effecting transactions in
      securities of the Company. All disclosure provided to the Subscribers regarding
      the Company, its business and the transactions contemplated hereby, furnished
      by
      or on behalf of the Company (including the Company’s representations and
      warranties set forth in this Agreement) are true and correct as of the date
      thereof
      and do
      not contain any untrue statement of a material fact or omit to state any
      material fact necessary in order to make the statements made therein, in light
      of the circumstances under which they were made, not misleading. The SEC
      Documents contain all material information relating to the Company and its
      operations and financial condition as of their respective dates which
      information is required to be disclosed therein. Since the
      date
      of the financial statements included in the SEC Documents, and except as
      modified in other SEC Documents filed prior to the date of this
      Agreement,
      there
      has been no event or occurrence that may have or result in or
      be
      reasonably likely to have or result in a
      Material Adverse Effect.

    

    (l) Stop
      Transfer. The Securities, when issued, will be restricted securities. The
      Company will not issue any stop transfer order or other order impeding the
      sale,
      resale or delivery of any of the Securities, except as may be required by any
      applicable federal or state securities laws and unless contemporaneous notice
      of
      such instruction is given to the Subscriber.

    

    (m) Defaults.
      The Company is not in violation of its Certificate of Incorporation or Bylaws.
      The Company is (i) not in default under or in violation of any agreement or
      instrument to which it is a party or by which it or any of its properties are
      bound or affected, which default or violation would have or
      be
      reasonably likely to have a
      Material Adverse Effect, (ii) not in default with respect to any order of any
      court, arbitrator or governmental body or subject to or party to any order
      of
      any court or governmental authority arising out of any action, suit or
      proceeding under any statute or other law respecting antitrust, monopoly,
      restraint of trade, unfair competition or similar matters, or (iii) not in
      violation of any statute, rule or regulation of any governmental authority
      which
      violation would
      have or
      be reasonably likely to
      have a
      Material Adverse Effect. 

    

    (n) No
      Integrated Offering. Neither the Company, nor any of its Affiliates, nor any
      person acting on its or their behalf, has directly or indirectly made any offers
      or sales of any security or solicited any offers to buy any security under
      circumstances that would cause the offer of the Securities pursuant to this
      Agreement to be integrated with prior offerings by the Company for purposes
      of
      the 1933 Act or any applicable stockholder approval provisions. Neither the
      Company nor any of its Affiliates will take any action or steps that would
      cause
      the offer or issuance of the Securities to be integrated with other offerings.
      The Company will not conduct any offering other than the transactions
      contemplated hereby that will be integrated with the offer or issuance of the
      Securities. 

    

    (o) No
      General Solicitation; Private Placement. Neither the Company, nor any of its
      Affiliates, nor to its knowledge, any person acting on its or their behalf,
      has
      engaged in any form of general solicitation or general advertising (within
      the
      meaning of Regulation D under the 1933 Act) in connection with the offer or
      sale
      of the Securities. Assuming the accuracy of the Subscribers’ representations and
      warranties set forth in Sections 4(d)-(f), no registration under the 1933 Act
      is
      required for the offer and sale of the Securities by the Company to the
      Subscribers under the Transaction Documents.

    

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    (p) Listing.
      The Company’s Common Stock is listed on the ArcaEx.
      The
      Company has not received any oral or written notice that its Common Stock is
      not
      eligible or will become ineligible for quotation on the ArcaEx or
      that its
      Common Stock does not meet all requirements for the continuation of such
      quotation,
      and the
      Company satisfies all the requirements for the continued listing of its Common
      Stock on the ArcaEx.

    

    (q) No
      Undisclosed Liabilities. The Company has no liabilities or obligations which
      are
      material, individually or in the aggregate, which are not disclosed as of the
      respective dates as of which the information is given in the SEC
      Documents, other than those incurred in the ordinary course of the Company’s
      businesses since June 30, 2006 and which, individually or in the aggregate,
      would not
      reasonably
      be expected
      to have
      or be reasonably likely
      to have
      a Material Adverse Effect. 

    

    (r) No
      Undisclosed Events or Circumstances. Since
      June 30, 2006, no event
      or
      circumstance has occurred or exists with respect to the Company or its
      businesses, properties, operations or financial condition, that, under
      applicable law, rule or regulation, requires public disclosure or announcement
      prior to the date hereof by the Company but which has not been so publicly
      announced or disclosed in the SEC Documents.

    

    (s) Acknowledgment
      Regarding Subscribers’ Purchase of the Securities. The Company acknowledges and
      agrees that the Subscribers are acting solely in the capacity of an arm’s length
      purchaser with respect to this Agreement, the Transaction Documents and the
      transactions contemplated hereby and thereby. The Company further acknowledges
      that the Subscribers are not acting as a financial advisor or fiduciary of
      the
      Company (or in any similar capacity) with respect to this Agreement, the
      Transaction Documents and the transactions contemplated hereby and thereby
      and
      any advice given by the Subscribers or any of their respective representatives
      or agents in connection with this Agreement, the Transaction Documents and
      the
      transactions contemplated hereby and thereby is merely incidental to such
      Subscribers’ purchase of the Securities. The Company further represents to the
      Subscribers that the Company’s decision to enter into this Agreement has been
      based solely on the independent evaluation by the Company and its
      representatives.

    

    (t) Dilution;
      Hedging. The Company acknowledges and agrees that the issuance of the Securities
      will have a potential dilutive effect on the equity holdings of other holders
      of
      the Company’s equity or rights to receive equity of the Company. The board of
      directors of the Company has concluded, in its good faith business judgment,
      that the issuance of the Securities is in the best interests of the Company.
      The
      Company specifically acknowledges that its obligation to issue the Conversion
      Shares upon conversion of the Notes, and the Warrant Shares upon exercise of
      the
      Investor Warrants, is absolute regardless of the dilution such issuance may
      have
      on the ownership interests of other stockholders
      of the
      Company or parties entitled to receive equity securities or equity-linked
      securities of the Company. Subject to compliance with applicable securities
      laws, the Subscribers may enter into lawful hedging transactions with third
      parties, which may in turn engage in short sales of the Securities in the course
      of hedging the position they assume and the Subscribers may also enter into
      short positions or other derivative transactions relating to the Securities,
      or
      interests in the Securities, and deliver the Securities, or interests in the
      Securities, to close out their short or other positions or otherwise settle
      short sales or other transactions, or loan or pledge the Securities, or
      interests in the Securities, to third parties that in turn may dispose of these
      Securities.

    

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

    (u) No
      Disagreements with Accountants and Lawyers. There are no disagreements of any
      kind presently existing, or reasonably anticipated by the Company to arise,
      between the Company and the accountants and lawyers formerly or presently
      employed by the Company, including but not limited to disputes or conflicts
      over
      payment owed to such accountants and lawyers. 

    

    (v) Investment
      Company. The Company is not, nor is any of its Affiliates, an “investment
      company” within the meaning of the Investment Company Act of 1940, as
      amended.

    

    (w) Subsidiary Representations.
      Except
      as set forth in Schedule 4(w), the Company makes each of the representations
      contained in
      Sections 4(a) through 4(v) and Section 4(cc)
      as the
      same relate to each Subsidiary of the Company .
      For
      purposes of this Agreement, “Subsidiary” means, with respect to any entity at
      any date, any corporation, limited or general partnership, limited liability
      company, trust, estate, association, joint venture or other business entity)
      of
      which more than 50% of (i) the outstanding capital stock having (in the absence
      of contingencies) ordinary voting power to elect a majority of the board of
      directors or other managing body of such entity, (ii) in the case of a
      partnership or limited liability company, the interest in the capital or profits
      of such partnership or limited liability company or (iii) in the case of a
      trust, estate, association, joint venture or other entity, the beneficial
      interest in such trust, estate, association or other entity business is, at
      the
      time of determination, owned or controlled directly or indirectly through one
      or
      more intermediaries, by such entity.
      Set
      forth on Schedule 3(w) to the Schedule of Exceptions is a list of all
      Subsidiaries of the Company. 

    

    (x) Employee
      Relations. Neither the Company nor any of its Subsidiaries is involved in any
      labor dispute nor, to the knowledge of the Company or any of its Subsidiaries,
      is any such dispute threatened. None of the Company’s or its Subsidiaries’
employees is a member of a union and the Company and its Subsidiaries believe
      that their relations with their employees are good.

    

    (y) Title
      to
      Assets. The Company and its Subsidiaries have good and marketable title in
      fee
      simple to all real property owned by them that is material to their respective
      businesses and good and marketable title in all personal property owned by
      them
      that is material to their respective businesses, in each case free and clear
      of
      all liens, except for liens as do not materially affect the value of such
      property and do not materially interfere with the use made and proposed to
      be
      made of such property by the Company and its Subsidiaries. Any real property
      and
      facilities held under lease by the Company and its Subsidiaries are held by
      them
      under valid, subsisting and enforceable leases of which the Company and its
      Subsidiaries are in compliance, except as could not, individually or in the
      aggregate, have or be
      reasonably
      likely
      to
have
      a
      Material Adverse Effect.

    

    (z) Patents
      and Trademarks. The Company and its Subsidiaries have, or have rights to use,
      in
      accordance with applicable Chinese laws, all patents, patent applications,
      trademarks, trademark applications, service marks, trade names, copyrights,
      licenses and other similar rights that are necessary or material for use in
      connection with their respective businesses as described in the Latest SEC
      Documents and which the failure to so have could, individually or in the
      aggregate, have or be
      reasonably
      likely
      to
have
      a
      Material Adverse Effect (collectively, the “Intellectual Property Rights”).
      Neither the Company nor any Subsidiary has received a written notice that the
      Intellectual Property Rights used by the Company or any Subsidiary violates
      or
      infringes upon the rights of any person. All such
      Intellectual Property Rights are enforceable in accordance with Chinese laws
      and,
      to the
      knowledge of the Company,
      there is
      no existing infringement by another person of any of the Intellectual Property
      Rights.

    

    (aa) Insurance.
      The Company and its Subsidiaries are insured by insurers of recognized financial
      responsibility against such losses and risks and in such amounts as are prudent
      and customary in the businesses in which the Company and its Subsidiaries are
      engaged. The Company has no reason to believe that it will not be able to renew
      its and its Subsidiaries’ existing insurance coverage as and when such coverage
      expires or to obtain similar coverage from similar insurers as may be necessary
      to continue its business on terms consistent with market for the Company’s and
      such Subsidiaries’ respective lines of business.

    

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

    (bb) Controls.
      Except as set forth in the SEC Documents and to the extent required by
      applicable law, the Company and its Subsidiaries maintain a system of internal
      control
      over financial reporting (as defined in 1934 Act Rules 13a-15(f) and
      15d-15(f))
      sufficient to provide reasonable assurance that (i) transactions are executed
      in
      accordance with management’s general or specific authorizations, (ii)
      transactions are recorded as necessary to permit preparation of financial
      statements in conformity with United States generally accepted accounting
      principles and to maintain asset accountability, (iii) access to assets is
      permitted only in accordance with management’s general or specific
      authorization, and (iv) the recorded accountability for assets is compared
      with
      the existing assets at reasonable intervals and appropriate action is taken
      with
      respect to any differences. The Company has established disclosure controls
      and
      procedures (as defined in 1934 Act Rules 13a-15(e) and 15d-15(e)) for the
      Company and designed such disclosure controls and procedures to ensure that
      material information relating to the Company, including its Subsidiaries, is
      made known to the certifying officers by others within those entities,
      particularly during the period in which the Company’s Form 10-K, 10-KSB, 10-Q,
      or 10-QSB, as the case may be, is being prepared. The Company’s certifying
      officers have evaluated the effectiveness of the Company’s controls and
      procedures in accordance with Item 307 of Regulation S-B under the 1934 Act
      for
      the Company’s most recently ended fiscal quarter or fiscal year-end (such date,
      the “Evaluation Date”). The Company presented in its most recently filed Form
      10-KSB or Form 10-QSB the conclusions of the certifying officers about the
      effectiveness of the disclosure controls and procedures based on their
      evaluations as of the Evaluation Date. Since the Evaluation Date, there have
      been no significant changes in the Company’s internal controls (as such term is
      defined in Item 308(c) of Regulation S-B under the 1934 Act) or, to the
      Company’s knowledge, in other factors that could significantly affect the
      Company’s internal controls. 

    

    (cc) Solvency.
      Based on the financial condition of the Company as of the Closing Date (and
      assuming that the Closing shall have occurred), (i) the Company’s fair saleable
      value of its assets exceeds the amount that will be required to be paid on
      or in
      respect of the Company’s existing debts and other liabilities (including known
      contingent liabilities) as they mature, (ii) 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, and (iii) the current cash flow of the Company,
      together with the proceeds the Company would receive, were it to liquidate
      all
      of its assets, after taking into account all anticipated uses of the cash,
      would
      be sufficient to pay all amounts on or in respect of its debt when such amounts
      are required to be paid. The Company will
      not
      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 of its
      debt).

    

    (dd) Compliance
      with Law. The Company and its Subsidiaries are conducting business in all
      material respects in compliance with all applicable laws and orders. The Company
      and the Subsidiaries hold all permits of all governmental authorities that
      by
      the nature of the operations of the business conducted by it or the ownership
      of
      the assets owned by it are permits required to conduct the operation and
      ownership thereof in the manner currently conducted or to use such assets in
      the
      manner currently utilized in the business, except for such permits, if any,
      as
      to which the failure to hold are not reasonably likely to have a Material
      Adverse Effect. None of the Company or any Subsidiary, nor to the Company’s
      knowledge, any officer, director, employee, trustee, or agent thereof, nor
      any
      person acting on behalf of any of the foregoing, has given or agreed to give
      any
      (i) individual gift or similar benefit to any customer, supplier, governmental
      authority (including any governmental employee or official) or any other person
      who is or may be in a position to help, hinder or assist the Company, any
      Subsidiary, or the person giving such gift or benefit in connection with any
      actual or proposed transaction relating to the Company’s business, which gifts
      or similar benefits could individually or in the aggregate subject the Company,
      any Subsidiary, or any officer, director, employee or agent of any of the
      foregoing to any fine, penalty, cost or expense or to any criminal proceeding,
      (ii) receipts from or payments to any governmental officials or employees,
      (iii)
      commercial bribes or kick-backs, (iv) political contributions, or (v) any
      receipts or disbursements in connection with any unlawful boycott. No such
      gift
      or benefit is required in connection with the operations of the Company and
      its
      Subsidiaries to avoid any fine, penalty, cost, expense or material adverse
      change in its condition (financial or otherwise), results of operations,
      properties, assets, liabilities, business or prospects.

    

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

    (ee) Environmental
      Laws. The Company and its Subsidiaries are (i) in compliance with any and all
      applicable foreign, federal, state and local laws and regulations relating
      to
      the protection of human health and safety, the environment or hazardous or
      toxic
      substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii)
      have received all permits, licenses or other approvals required of them under
      applicable Environmental Laws to conduct their respective businesses and (iii)
      are in compliance with all terms and conditions of any such permit, license
      or
      approval.
      The
      Company and its Subsidiaries have not been notified by any governmental
      authority that any such environmental permits will be modified, suspended or
      revoked or cannot be renewed
      in the
      ordinary course of business
      consistent with past practice. There are no present or past environmental
      conditions at any property owned, leased or used by the Company or any
      Subsidiary. There is no pending or, to the best knowledge of the Company,
      threatened environmental claim against the Company or any Subsidiary relating
      to
      their business or the properties owned, leased or used thereby, or against
      any
      entity relating to the business of the Company or such properties, for which
      the
      Company or any Subsidiary may have any liability. There are no hazardous
      materials or other conditions at, under or emanating from, and there has been
      no
      release at, on or adjoining, any real property currently or formerly owned,
      operated or leased by the Company or any Subsidiary or their respective
      predecessors in interest that would reasonably be expected to give rise to
      an
      environmental claim against or liability of any of the foregoing under any
      Environmental Law. Neither the Company nor any Subsidiary has assumed,
      contractually or by operation of applicable law, any liabilities of any third
      party under any Environmental Law.

    

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

    

    (gg) Tax
      Status. Except
      as
      set forth in the SEC Documents, the
      Company
      and each of its Subsidiaries has made and filed through December 31, 2004 (and
      has valid extensions for all applicable periods thereafter) all federal and
      state income and all other tax returns, reports and declarations required by
      any
      jurisdiction to which it is subject and (unless and only to the extent that
      the
      Company and each of its Subsidiaries has set aside on its books provisions
      reasonably adequate for the payment of all unpaid and unreported taxes) has
      paid
      all taxes and other governmental assessments and charges that are material
      in
      amount, shown or determined to be due on such returns, reports and declarations,
      except those being contested in good faith and has set aside on its books
      provision reasonably adequate for the payment of all taxes for periods
      subsequent to the periods to which such returns, reports or declarations apply,
      in each case, except where the failure to make such filing or payment or set
      aside such amount would not, individually or in the aggregate, have or be
      reasonably likely to have a Material Adverse Effect. There are no unpaid taxes
      claimed
      to be due by the taxing authority of any jurisdiction, and the officers of
      the
      Company know of no basis for any such claim.

    

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

    (hh) Certain
      Transactions. Except as set forth in the Latest SEC Documents, and except for
      arm’s length transactions pursuant to which the Company makes payments in the
      ordinary course of business upon terms no less favorable than the Company could
      obtain from third parties and other than the grant of stock options disclosed
      in
      the Latest SEC Documents, none of the officers, directors, or employees of
      the
      Company or
      any
      Subsidiary is
      presently a party to any transaction with the Company or
      any
      Subsidiary (other
      than for services as employees, officers and directors), including any contract,
      agreement or other arrangement providing for the furnishing of services to
      or
      by, providing for rental of real or personal property to or from, or otherwise
      requiring payments to or from any officer, director or such employee or, to
      the
      knowledge of the Company, any corporation, partnership, trust or other entity
      in
      which any officer, director, or any such employee has a substantial interest
      or
      is an officer, director trustee or partner.

    

    (ii) Rights
      of
      First Refusal. The Company is not obligated to offer the securities offered
      hereunder on a right of first refusal basis or otherwise to any third parties
      including, but not limited to, current or former stockholders
      of the
      Company, underwriters, brokers, agents or other third parties.

    

    (jj) Correctness
      of Representations. The Company represents that the foregoing representations
      and warranties are true and correct as of the date hereof in all material
      respects, and shall be true and correct in all material respects as of each
      Closing Date.

    

    (kk)
       Survival.
      The foregoing representations and warranties shall survive the Closing.

    

    5.  Exempt
      Offering.
      The
      offer and issuance of the Securities to the Subscribers is being made pursuant
      to the exemption from the registration provisions of the 1933 Act afforded
      by
      Section 4(2)  of
      the
      1933 Act and/or Rule 506 of Regulation D promulgated thereunder. On the Closing
      Date, the Company will provide an opinion to
      the
      Subscribers from the Company’s legal counsel in
      the
      form attached
      hereto
      as Exhibit E. The Company will provide, at the Company’s expense, such other
      legal opinions in the future as are reasonably necessary for the issuance and
      resale of the Conversion Shares issuable upon conversion of the Notes and the
      Warrant Shares issuable upon the exercise of the Investor Warrants.

    

    6. Broker/Legal
      Fees.
      The
      Company on the one hand, and each Subscriber (for itself only) on the other
      hand, agree to indemnify the other against and hold the other harmless from
      any
      and all liabilities to any persons claiming brokerage commissions or finder’s
      fees on account of services purported to have been rendered on behalf of the
      indemnifying party in connection with this Agreement or the transactions
      contemplated hereby and arising out of such party’s actions. The Company
      represents that there are no parties entitled to receive fees, commissions,
      or
      similar payments from the Company in connection with the transactions described
      in this Agreement.

    

    7. Covenants
      of the Company.
      The
      Company covenants and agrees with the Subscribers as follows:

    

    (a) Listing.
      The Company shall promptly secure the listing of its shares of Common Stock,
      including the Conversion Shares and the Warrant Shares, upon each national
      securities exchange, or automated quotation system upon which they are or become
      eligible for listing (subject to official notice of issuance) and shall maintain
      such listing so long as any Investor Warrants are outstanding. The Company
      will
      maintain the listing of its Common Stock on the ArcaEx
      or any
      other national exchange or listing system,
      whichever of the foregoing is at the time the principal trading exchange or
      market for the Common Stock (the “Principal Market”), and will comply in all
      respects with the Company’s reporting, filing and other obligations under the
      bylaws or rules of the Principal Market, as applicable. The Company will provide
      the Subscribers copies of all notices it receives notifying the Company of
      the
      threatened and actual delisting of the Common Stock from any Principal Market,
      but not any information that is material,
      non-public information unless such information is also promptly publicly
      disclosed. As of the date of this Agreement and the Closing Date, the ArcaEx
      is
      and will be the Principal Market.

    

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

    (b) Market
      Regulations. The Company shall notify the Commission, the Principal Market
      and
      applicable state authorities, in accordance with their requirements, of the
      transactions contemplated by this Agreement, and shall take all other necessary
      action and proceedings as may be required and permitted by applicable law,
      rule
      and regulation, for the legal and valid issuance of the Securities to the
      Subscribers and promptly provide copies thereof to Subscriber.

    

    (c) Reporting
      Requirements. From the date of this Agreement and until the later of (i) two
      (2)
      years after the Closing Date, or (ii) until all the Conversion Shares and
      Warrant Shares have been resold or transferred by all the Subscribers pursuant
      to the registration
      statement(s) required by the Registration
      Rights
      Agreement
      or
      pursuant to Rule 144, without regard to volume limitation, the Company will
      (A)
      cause its Common Stock to continue to be registered under Section 12(b) or
      12(g)
      of the 1934 Act, (B) comply in all respects with its reporting and filing
      obligations under the 1934 Act, (C) comply with all reporting requirements
      that
      are applicable to an issuer with a class of shares registered pursuant to
      Section 12(b) or 12(g) of the 1934 Act, as applicable, and (D) comply with
      all
      requirements related to any registration statement filed pursuant to this
      Agreement and the Registration Rights Agreement. The Company will not take
      any
      action or file any document (whether or not permitted by the 1933 Act or the
      1934 Act or the rules thereunder) to terminate or suspend such registration
      or
      to terminate or suspend its reporting and filing obligations under said acts
      until two (2) years after the Closing Date. The
      Company agrees to timely file a Form D with respect to the Offering
      and to
      provide a copy thereof to each Subscriber promptly after such
      filing.

    

    (d) Reservation.
      Prior to the Closing Date, the Company undertakes to reserve, pro rata, on
      behalf of each holder of a Note or Warrant, from its authorized but unissued
      shares of Common Stock, a number of such shares equal to 100% of the number
      of
      shares of Common Stock necessary to allow each holder of a Note to be able
      to
      convert all such outstanding Notes and interest to
      Conversion Shares and
      the
      amount of Warrant Shares issuable upon exercise of the Investor Warrants.
      Failure to have sufficient shares reserved pursuant to this Section 9(d) for
      three (3) consecutive business days or ten (10) days in the aggregate shall
      be a
      material default of the Company’s obligations under this Agreement and the Note.

    

    (e) Taxes.
      From the date of this Agreement and until the later of (i) two (2) years after
      the Closing Date, or (ii) until all the Conversion Shares and Warrant Shares
      have been resold or transferred by all the Subscribers pursuant to any
      registration statement(s) required by the
      Registration Rights
      Agreement
      or
      pursuant to Rule 144, without regard to volume limitations, the Company will
      promptly pay and discharge, or cause to be paid and discharged, when due and
      payable, all lawful taxes, assessments and governmental charges or levies
      imposed upon the income, profits, property or business of the Company; provided,
      however, that any such tax, assessment, charge or levy need not be paid if
      the
      validity thereof shall currently be contested in good faith by appropriate
      proceedings and if the Company shall have set aside on its books adequate
      reserves with respect thereto, and provided, further, that the Company will
      pay
      all such taxes, assessments, charges or levies forthwith upon the commencement
      of proceedings to foreclose any lien which may have attached as security
      therefore.

    

    (f) Insurance.
      From the date of this Agreement and until the later of (i) two (2) years after
      the Closing Date, or (ii) until all the Conversion Shares and Warrant Shares
      have been resold or transferred by all the Subscribers pursuant to any
      registration statement(s) required by the
      Registration Rights
      Agreement
      or
      pursuant to Rule 144, without regard to volume limitations, the Company will,
      to
      the extent it can do so without unreasonable difficulty, keep its assets which
      are of an insurable character insured by financially sound and reputable
      insurers against loss or damage by fire, explosion and other risks customarily
      insured against by companies in the Company’s line of business, in amounts
      sufficient to prevent the Company from becoming a co-insurer and not in any
      event less than one hundred percent (100%) of the insurable value of the
      property insured; and the Company will maintain, with financially sound and
      reputable insurers, insurance against other hazards and risks and liability
      to
      persons and property to the extent and in the manner customary for companies
      in
      similar businesses similarly situated and to the extent available on
      commercially reasonable terms.

    

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

    (g) Books
      and
      Records. From the date of this Agreement and until the later of (i) two (2)
      years after the Closing Date, or (ii) until all the Conversion Shares and
      Warrant Shares have been resold or transferred by all the Subscribers pursuant
      to any
      registration statement(s) required by the
      Registration Rights
      Agreement
      or
      pursuant to Rule 144, without regard to volume limitations, the Company will
      keep true records and books of account in which full, true and correct entries
      will be made of all dealings or transactions in relation to its business and
      affairs in accordance with generally accepted accounting principles applied
      on a
      consistent basis.

    

    (h) Governmental
      Authorities. From the date of this Agreement and until the later of (i) two
      (2)
      years after the Closing Date, or (ii) until all the Conversion Shares and
      Warrant Shares have been resold or transferred by all the Subscribers pursuant
      to any
      registration statement(s) required by the
      Registration Rights
      Agreement
      or
      pursuant to Rule 144, without regard to volume limitations, the Company shall
      duly observe and conform in all material respects to all valid requirements
      of
      governmental authorities relating to the conduct of its business or to its
      properties or assets. 

    

    (i) Intellectual
      Property. From the date of this Agreement and until the later of (i) two (2)
      years after the Closing Date, or (ii) until all the Conversion Shares and
      Warrant Shares have been resold or transferred by all the Subscribers pursuant
      to any
      registration statement(s) required by the
      Registration Rights
      Agreement
      or
      pursuant to Rule 144, without regard to volume limitations, the Company shall
      maintain in full force and effect its corporate existence, rights and franchises
      and all licenses and other rights to use intellectual property owned or
      possessed by it and reasonably deemed to be necessary to the conduct of its
      business.

    

    (j)
       Properties.
      From the date of this Agreement and until the later of (i) two (2) years after
      the Closing Date, or (ii) until all the Conversion Shares and Warrant Shares
      have been resold or transferred by all the Subscribers pursuant to any
      registration statement(s) required by the
      Registration Rights
      Agreement
      or
      pursuant to Rule 144, without regard to volume limitations, the Company will
      keep its properties in good repair, working order and condition, reasonable
      wear
      and tear excepted, and from time to time make all necessary and proper repairs,
      renewals, replacements, additions and improvements thereto; and the Company
      will
      at all times comply with each provision of all leases to which it is a party
      or
      under which it occupies property if the breach of such provision could
      reasonably be expected
      to have
      or be reasonably likely
      to have
      a Material Adverse Effect.

    

    (k) Confidentiality/Public
      Announcement. From the date of this Agreement and until the later of (i) two
      (2)
      years after the Closing Date, or (ii) until all the Conversion Shares and
      Warrant Shares have been resold or transferred by all the Subscribers pursuant
      to any
      registration statement(s) required by the
      Registration Rights
      Agreement
      or
      pursuant to Rule 144, without regard to volume limitations, the Company agrees
      that except in connection with
      such
      a
      registration statement, it will not disclose publicly or privately the identity
      of the Subscribers. In any event and subject to the foregoing, the Company
      shall
      issue a press release describing the Offering as soon as practicable following
      the Closing Date and file a Form 8-K (and attach thereto the Transaction
      Documents) within four business days following the Closing Date. In the Form
      8-K
      and press release, the Company will specifically disclose the amount of Common
      Stock outstanding immediately after the Closing. The Subscribers or their agent
      or counsel shall have the right to approve the press release prior to the
      release thereof and the Form 8-K prior to the filing thereof, which consent
      shall not be unreasonably withheld.

    

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

    (l) Non-Public
      Information. The Company covenants and agrees that neither it nor any other
      person acting on its behalf will provide any Subscriber or its agents or counsel
      with any information that the Company believes constitutes material non-public
      information, unless prior thereto such Subscriber shall have agreed in writing
      to receive such information. The Company understands and confirms that each
      Subscriber shall be relying on the foregoing representations in effecting
      transactions in securities of the Company.

    

    (m) Right
      of
      First Refusal. The Subscribers shall be given not less than ten (10) days prior
      written notice of any proposed sale (a “New Offering”) by the Company of its
      Common Stock or other securities or debt obligations, except in connection
      with
      (i) full or partial consideration in connection with a strategic merger,
      consolidation or purchase of substantially all of the securities or assets
      of a
      corporation or other entity, (ii)
      the
      Company’s issuance of securities in connection with strategic license agreements
      and other partnering arrangements so long as such issuances are not for the
      purpose of raising capital, (iii) the Company’s issuance of Common Stock or the
      issuance or grants of options to purchase Common Stock pursuant to the Company’s
      stock option plans and employee stock purchase plans as they now exist, (iv)
      the
      issuance of Investor Warrants Shares as a result of the exercise of Investor
      Warrants or the issuance of Conversion Shares as a result of the conversion
      of
      Notes granted or issued pursuant to this Agreement and (v) the payment of any
      interest on the Notes (collectively, the “Excepted Issuances”). The Subscribers
      who exercise their rights pursuant to this Section 9(m) shall have the right
      during the ten (10) business days following receipt of the notice
      to
      commit
      to
      purchase such offered Common Stock, debt or other securities in the New Offering
      in accordance with the terms and conditions set forth in the notice of sale
      in
      the same proportion to each other as their purchase of Notes in the Offering
      in
      an aggregate amount of up to 25% of the securities being offered. In the event
      such terms and conditions are modified during the notice period, the Subscribers
      shall be given prompt notice of such modification and shall have the right
      during the ten (10) days following the notice of modification to exercise such
      right.

     

    (n) Subscriber’s
      Access to Information. Until such time as all of the Notes have been repaid
      or
      converted, pursuant to the terms and conditions hereof, the Company shall (i)
      permit the Subscribers and their authorized employees, agents, accountants,
      legal counsel and other representatives to have access to the books, records,
      employees, counsel, accountants, engineers and other representatives of the
      Company at all times reasonably requested by the Subscribers for the purpose
      of
      conducting an investigation of the Company’s financial condition, corporate
      status, operations, prospects and business, and (ii) make available to the
      Subscribers for examination and reproduction all documents and data of every
      kind and character relating to the Company in possession or control of, or
      subject to reasonable access by, the Company, including all agreements,
      instruments, contracts, assignments, certificates, orders, and amendments
      thereto.

    

    (o) Reasonable
      Best Efforts. Each party shall use its reasonable best efforts timely to satisfy
      each of the conditions to be satisfied by it as provided in Sections 11 and
      12
      of this Agreement.

    

    8. Covenants
      of the Company and Subscriber Regarding Indemnification.

    

    (a) The
      Company agrees to indemnify, hold harmless, reimburse and defend the
      Subscribers, the Subscribers’ officers, directors, agents, Affiliates, control
      persons, and principal stockholders
      or equity
      holders,
      against
      any claim, cost, expense, liability, obligation, loss or damage (including
      reasonable legal fees) of any nature, incurred by or imposed upon the Subscriber
      or any such person which results, arises out of or is based upon (i) any
      material misrepresentation by Company or breach of any warranty made by the
      Company in this Agreement or in any Exhibits or Schedules attached hereto,
      or in
      any of the other Transaction Documents or (ii) after any applicable notice
      and/or cure periods, any breach or default in performance by the Company of
      any
      covenant or undertaking to be performed by the Company hereunder, or in any
      of
      the other Transaction Documents.

    

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

    (b) Each
      Subscriber agrees to indemnify, hold harmless, reimburse and defend the Company
      and each of the Company’s officers, directors, agents, Affiliates, control
      persons against any claim, cost, expense, liability, obligation, loss or damage
      (including reasonable legal fees) of any nature, incurred by or imposed upon
      the
      Company or any such person which results, arises out of or is based upon (i)
      any
      material misrepresentation by such Subscriber in this Agreement or in any
      Exhibits or Schedules attached hereto, or in any of the other Transaction
      Documents; or (ii) after any applicable notice and/or cure periods, any breach
      or default in performance by such Subscriber of any covenant or undertaking
      to
      be performed by such Subscriber hereunder, or in any of the other Transaction
      Documents.

    

    (c) In
      no
      event shall the liability of any Subscriber or permitted successor hereunder
      or
      under any Transaction Document or other agreement delivered in connection
      herewith be greater in amount than the dollar amount of the net proceeds
      actually received by such Subscriber upon the sale of Registrable Securities
      (as
      defined in
      the
      Registration Rights Agreement).

    

    (d) The
      procedures set forth in Section
      6
      of the
      Registration Rights Agreement shall apply to the indemnification set forth
      in
      Sections 10(a) and 10(b) above.

    

    9. Conditions
      to the Company’s Obligation to Sell. The
      obligation of the Company hereunder to issue and sell the Notes and
      Investor Warrants to
      the
      Subscribers at the Closing is subject to the satisfaction, on or before the
      Closing Date, of each of the following conditions, provided that these
      conditions are for the Company’s benefit and may be waived by the Company at any
      time in its sole discretion:

    

    (a) The
      Subscribers shall have executed the Transaction Documents and delivered them
      to
the Company.

    

    (b) The
      Subscribers shall have delivered to the Company the purchase price for Notes
      in
      respective amounts as set forth on the signature page hereof and by wire
      transfer of immediately available U.S. funds pursuant to the wire instructions
      provided by the Company.

    

    (c) The
      representations and warranties of the Subscribers shall be true and correct
      in
      all material respects as of the date when made and as of the Closing Date as
      though made at that time (except for representations and warranties that speak
      as of a specific date), and the Subscribers shall have performed, satisfied
      and
      complied in all material respects with the covenants, agreements and conditions
      required by this Agreement to be performed, satisfied or complied with by the
      Subscribers on or before the Closing Date.

    

    10. Conditions
      to the Subscribers’ Obligation to Purchase.
      The
      obligation of the Subscribers hereunder to purchase the Notes and
      Investor Warrants at
      the
      Closing is subject to the satisfaction, on or before the Closing Date, of each
      of the following conditions:

    

    (a) The
      Company shall have executed the Transaction Documents and delivered them to
      the
      Subscribers.

    

    (b) The
      Common Stock shall be authorized for quotation on the ArcaEx and trading in
      the
      Common Stock shall not have been suspended for any reason.

    

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

    (c) The
      representations and warranties of the Company shall be true and correct in
      all
      material respects (except to the extent that any of such representations and
      warranties is already qualified as to materiality, in which case, such
      representations and warranties shall be true and correct without further
      qualification) as of the date when made and as of the Closing Date as though
      made at that time (except for representations and warranties that speak as
      of a
      specific date) and the Company shall have performed, satisfied and complied
      in
      all material respects with the covenants, agreements and conditions required
      by
      this Agreement and the other Transaction Documents to be performed, satisfied
      or
      complied with by the Company on or prior to the Closing Date. If requested
      by
      the Subscribers, the Subscribers shall have received a certificate, executed
      by
      the President and the Treasurer of the Company, dated as of the Closing Date,
      to
      the foregoing effect and as to such other matters as may be reasonably requested
      by the Subscribers.

    

    (d) The
      Company shall have executed and delivered to the Subscribers the Notes and
      Investor Warrants in the respective amounts set forth on the signature page
      hereto.

    

    (e) The
      Company shall have reserved out of its authorized and unissued Common Stock,
      solely for the purpose of effecting the conversion of the Notes and exercise
      of
      the Investor Warrants, that number of shares of Common Stock as shall be equal
      to 100% of
      the
      number of shares of Common Stock required to effect the conversion of all of
      the
      Notes and exercise of all the Investor Warrants to be outstanding immediately
      following the Closing Date.

    

    (f) The
      Subscribers shall have received the Opinion.

    

    (g) The
      Subscribers shall have completed a due diligence review of the Company to their
      sole satisfaction.

    

    11.  Miscellaneous.

    

    (a) Notices.
      All notices, demands, requests, consents, approvals, and other communications
      required or permitted hereunder shall be in writing and, unless otherwise
      specified herein, shall be (i) personally served, (ii) deposited in the mail,
      registered or certified, return receipt requested, postage prepaid, (iii)
      delivered by reputable air courier service with charges prepaid, or (iv)
      transmitted by hand delivery, telegram, or facsimile, addressed as set forth
      below or to such other address as such party shall have specified most recently
      by written notice. Any notice or other communication required or permitted
      to be
      given hereunder shall be deemed effective (i) upon hand delivery or delivery
      by
      facsimile, with accurate confirmation generated by the transmitting facsimile
      machine, at the address or number designated below (if delivered on a business
      day during normal business hours where such notice is to be received), or the
      first business day following such delivery (if delivered other than on a
      business day during normal business hours where such notice is to be received)
      or (ii) on the second business day following the date of mailing by express
      courier service, fully prepaid, addressed to such address, or upon actual
      receipt of such mailing, whichever shall first occur. The addresses for such
      communications shall be: (i) if to the Company, to: American Dairy, Inc., C-16
      Shin Chen International Building, No. 10, Jiu-shen Road, Zho Yan Chu, Beijing,
      People’s Republic of China, Attn: Roger Liu, telephone: (213) 225-6228,
      telecopier number: (213) 225-6244, with a copy by telecopier only to: Hodgson
      Russ, LLP, 60 East 42nd
      Street,
      37th
      Floor,
      New York, NY 10165, Attn.: Jeffrey A. Rinde, Esq., telecopier number: (212)
      972-1677, and (ii) if to the Subscribers, to the one or more addresses and
      telecopier numbers indicated on the signature pages hereto.

    

    (b) Entire
      Agreement; Assignment. This Agreement and other documents delivered in
      connection herewith represent the entire agreement between the parties hereto
      with respect to the subject matter hereof. No right or obligation of the Company
      shall be assigned without prior notice to and the written consent of the
      Subscribers.

    

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

    (c) Amendments;
      Waivers; No Additional Consideration. No provision of this Agreement may be
      waived or amended except in a written instrument signed by the Company and
      the
      Subscribers
      (or
      transferees of Securities)
      holding
      a majority in interest of the Notes. No waiver of any default with respect
      to
      any provision, condition or requirement of this Agreement shall be deemed to
      be
      a continuing waiver in the future or a waiver of any subsequent default or
      a
      waiver of any other provision, condition or requirement hereof, nor shall any
      delay or omission of either party to exercise any right hereunder in any manner
      impair the exercise of any such right. No consideration shall be offered or
      paid
      to any Subscriber to amend or consent to a waiver or modification of any
      provision of any Transaction Document unless the same consideration is also
      offered to all Subscribers who then hold Notes or Conversion
      Shares.

    

    (d) Counterparts/Execution.
      This Agreement may be executed in any number of counterparts and by the
      different signatories hereto on separate counterparts, each of which, when
      so
      executed, shall be deemed an original, but all such counterparts shall
      constitute but one and the same instrument. This Agreement may be executed
      by
      facsimile signature and delivered by facsimile transmission.

    

    (e) Law
      Governing this Agreement. This Agreement shall be governed by and construed
      in
      accordance with the laws of the State of New York without regard to conflicts
      of
      laws principles that would result in the application of the substantive laws
      of
      another jurisdiction. Any action brought by either party against the other
      concerning the transactions contemplated by this Agreement shall be brought
      only
      in the state courts of New York or in the federal courts located in the state
      of
      New York. The parties and the individuals executing this Agreement and other
      agreements referred to herein or delivered in connection herewith on behalf
      of
      the Company agree to submit to the jurisdiction of such courts and waive trial
      by jury. The prevailing party shall be entitled to recover from the other party
      its reasonable attorney’s fees and costs. In the event that any provision of
      this Agreement or any other agreement delivered in connection herewith is
      invalid or unenforceable under any applicable statute or rule of law, then
      such
      provision shall be deemed inoperative to the extent that it may conflict
      therewith and shall be deemed modified to conform with such statute or rule
      of
      law. Any such provision which may prove invalid or unenforceable under any
      law
      shall not affect the validity or enforceability of any other provision of any
      agreement.

    

    (f) Specific
      Enforcement, Consent to Jurisdiction. The Company and Subscribers acknowledge
      and agree that irreparable damage would occur in the event that any of the
      provisions of this Agreement were not performed in accordance with their
      specific terms or were otherwise breached. It is accordingly agreed that the
      parties shall be entitled to one or more preliminary and final injunctions
      to
      prevent or cure breaches of the provisions of this Agreement and to enforce
      specifically the terms and provisions hereof, this being in addition to any
      other remedy to which any of them may be entitled by law or equity. Subject
      to
      Section 13(e) hereof, each of the Company, Subscriber and any signatory hereto
      in his personal capacity hereby waives, and agrees not to assert in any such
      suit, action or proceeding, any claim that it is not personally subject to
      the
      jurisdiction in New York of such court, that the suit, action or proceeding
      is
      brought in an inconvenient forum or that the venue of the suit, action or
      proceeding is improper. Nothing in this Section shall affect or limit any right
      to serve process in any other manner permitted by law.

    

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

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

    

    (h) Business/Calendar
      Days. Unless otherwise indicated, references to days in the Transaction
      Documents will refer to calendar days.

    

    (i)
      Termination. In
      the
      event that the Closing shall not have occurred with respect to the on or before
      seven (5) business days from the date hereof due to the Company’s or the
      Subscribers’ failure to satisfy the conditions set forth in Sections 11 and 12
      above (and the non-breaching party’s failure to waive such unsatisfied
      condition(s)), the non-breaching party shall have the option to terminate this
      Agreement with respect to such breaching party at the close of business on
      such
      date without liability of any party to any other party.

    

    

    [THE
      REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY]

    
      
        21-

         

      

      
        19

        
          

        

      

      
         

      

    

    SIGNATURE
      PAGE TO SUBSCRIPTION AGREEMENT

    

    Please
      acknowledge your acceptance of the foregoing Subscription Agreement by signing
      and returning a copy to the undersigned whereupon it shall become a binding
      agreement between us. 

     

    
      	 	 	 
	 	AMERICAN
              DAIRY, INC.,
	 	a Utah corporation
	 
 	 
 	 
 
	 	By:  	 
	 	
              
Name:
	 	Title 

      	 	 	 
	 	SUBSCRIBER:
	 
 	 
 	 
 
	 	 	 
	 	
            
	 	 

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

    LIST
      OF EXHIBITS & SCHEDULES

    

    

    Exhibits

    

    Exhibit
      A
 Form
      of
      Note

    Exhibit
      B
 Form
      of
      Warrant 

    Exhibit
      C Registration
      Rights Agreement

    Exhibit
      D Schedule
      of Exceptions

    Exhibit
      E
 Form
      of
      Legal Opinion 

    

    
      
         

      

        21Unassociated Document

    REGISTRATION
      RIGHTS AGREEMENT

    

    THIS
      REGISTRATION RIGHTS AGREEMENT
      (this
“Agreement”),
      dated
      as of October _____, 2006, by and among American Dairy, Inc., a corporation
      organized under the laws of State of Utah, with its principal executive office
      at C-16 Shin Chen International Building, No. 10, Jiu-shen Road, Zho Yan Chu,
      Beijing, People’s Republic of China (the “Company”),
      and
      the undersigned investors (individually, an “Investor”
and
      collectively, the “Investors”).
      All
      terms used but not defined herein shall have the meaning ascribed thereto in
      the
      Subscription Agreement by and among the Company and the Investors dated of
      even
      date herewith (the “Subscription
      Agreement”).

    

    WHEREAS,
      upon
      the terms and subject to the conditions of the Subscription Agreement, the
      Company has agreed to issue and sell to the Investors, and the Investors have
      agreed to purchase, (a) a minimum, in the aggregate, of $10,000,000 of 7.75%
      convertible notes of the Company (each, a “Note”
and
      collectively, the “Notes”),
      and
      (b) warrants (the “Investor
      Warrants”)
      to
      purchase shares of the Company’s common stock, $0.001 par value per share
      (“Common
      Stock”);
      and

    

    WHEREAS,
      to
      induce the Investor to execute and deliver the Subscription Agreement, the
      Company has agreed to provide certain registration rights under the Securities
      Act of 1933, as amended, and the rules and regulations thereunder, or any
      similar successor statute (collectively, the “1933
      Act”),
      and
      applicable state securities laws, with respect to the shares of the Company’s
      Common Stock issuable upon conversion of the Notes and as payment of interest
      thereon and the exercise of the Investor Warrants.

     

    NOW,
      THEREFORE,
      in
      consideration of the premises and the mutual covenants contained herein and
      other good and valuable consideration, the receipt and sufficiency of which
      are
      hereby acknowledged, the Company and each of the Investors hereby agree as
      follows:

    

    1. Definitions.

    

    As
      used
      in this Agreement, the following terms shall have the following
      meanings:

    

    (a) “Investors”
means
      the Investors and any transferee or assignee who agrees to become bound by
      the
      provisions of this Agreement in accordance with Section 9 hereof.

    

    (b) “register,”
      “registered,”
and
      “registration”
refer
      to a registration effected by preparing and filing a Registration Statement
      or
      Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
      1933 Act or any successor rule providing for offering securities on a continuous
      basis (“Rule
      415”),
      and
      the declaration or ordering of effectiveness of such Registration Statement
      by
      the United States Securities and Exchange Commission (the “SEC”).

    

    (c) “Registrable
      Securities”
means
      the shares of the Company’s Common Stock issued or issuable upon (i) conversion
      of the principal amount of the Notes (the “Principal
      Conversion Shares”),
      (ii)
      conversion of interest payable on the Notes (the “Interest
      Conversion Shares”,
      and
      together with the Principal Conversion Shares, the “Conversion
      Shares”),
      and
      (iii) exercise of the Investor Warrants (the “Warrant
      Shares”),
      and
      any shares of capital stock issued or issuable as a dividend on or in exchange
      for or otherwise with respect to any of the foregoing.

    

    (d) “Registration
      Statement”
means
      a
      registration statement of the Company under the 1933 Act.

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    2. Registration.

    

    (a) Mandatory
      and Demand Registration.
      

    

    (i) The
      Company shall prepare and, on or prior to the three-month anniversary of the
      Closing Date (the “Required
      Filing Date”),
      file
      with the SEC a Registration Statement on Form S-1 (or, if Form S-1 is not then
      available, on such form of Registration Statement as is then available to effect
      a registration of the Registrable Securities, subject to the consent of the
      Investors, which consent will not be unreasonably withheld) covering the resale
      of the Registrable Securities issued or issuable pursuant to the Subscription
      Agreement, which Registration Statement, to the extent allowable under the
      1933
      Act and the rules and regulations promulgated thereunder (including Rule 416),
      shall state that such Registration Statement also covers such indeterminate
      number of additional shares of Common Stock as may become issuable upon
      conversion of or otherwise pursuant to the Notes and exercise of the Investor
      Warrants to prevent dilution resulting from stock splits, stock dividends or
      similar transactions. The number of shares of Common Stock initially included
      in
      such Registration Statement shall be no less than an amount equal to one hundred
      percent (100%) of the number of Conversion Shares that are issuable upon
      conversion of the Notes and interest thereon and any additional Notes (based
      on
      the Conversion Price as then in effect), and the number of Warrant Shares that
      are then issuable upon exercise of the Investor Warrants, without regard to
      any
      limitation on the Investor’s ability to convert the Notes or exercise the
      Investor Warrants. The Company acknowledges that the number of shares initially
      included in the Registration Statement represents a good faith estimate of
      the
      maximum number of shares issuable upon conversion of the Notes and interest
      thereon and upon exercise of the Investor Warrants. The date on which the
      Registration Statement actually gets filed shall be referred to herein as the
      “Filing
      Date.”

    

    (ii) Notwithstanding
      the provisions of Section 2(a)(i) above, the holders of a majority of the
      principal amount of Notes outstanding (the “Majority
      Holders”)
      may,
      not later than forty-five (45) days prior to the Required Filing Date, give
      the
      Company written notice that they wish to defer the Required Filing Date (a
      “Deferral
      Notice”).
      In
      such event, the date on which the Company shall be obligated to file a
      Registration Statement to register the Registrable Securities shall be deferred
      until the three-month anniversary of the date on which the Company receives
      a
      written demand (in this case, a “Demand
      Notice”)
      from
      the Majority Holders (in this case, the “Demand
      Filing Date”).
      

    

    (iii) Subject
      to the conditions set forth herein, and prior to the fifth anniversary of the
      Closing Date, the Company, upon written demand of the Majority Holders (in
      this
      case, a “Demand
      Notice”),
      agrees to register on one occasion, any Interest Conversion Shares which have
      not been included in a Registration Statement of the Company pursuant to Section
      2(a)(i) or (ii) above, or which have been included in a Registration Statement,
      but have not been disposed of by the Investors pursuant to Section 3(b) below.
      In such event, the date on which the Company shall be obligated to file a
      Registration Statement to register the Conversion Shares shall be the
      three-month anniversary of the date on which the Company receives a Demand
      Notice with respect thereto (in this case, the “Demand
      Filing Date”)

     

    (b) Underwritten
      Offering.
      If any
      offering pursuant to a Registration Statement pursuant to Section 2(a) hereof
      involves an underwritten offering, the Majority Holders shall have the right
      to
      select one legal counsel and an investment banker or bankers and manager or
      managers to administer the offering, which investment banker or bankers or
      manager or managers shall be reasonably satisfactory to the
      Company.

    

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    (c) Payments
      by the Company.
      The
      Company shall use its best efforts to obtain effectiveness of the Registration
      Statement as soon as practicable. If (i) the Registration Statement(s) covering
      the Registrable Securities required to be filed by the Company pursuant to
      Section 2(a) hereof is not filed by the Required Filing Date or any Demand
      Filing Date, as applicable, or declared effective by the SEC one hundred and
      twenty (120) days thereafter, or (ii) after the Registration Statement has
      been
      declared effective by the SEC, sales of all of the Registrable Securities cannot
      be made pursuant to the Registration Statement, or (iii) the Common Stock is
      not
      listed or included for quotation on the Nasdaq Global Market (“Nasdaq”),
      the
      Nasdaq Capital Market (“Nasdaq
      Capital”),
      the
      New York Stock Exchange (the “NYSE”),
      the
      NYSE Archipelago Exchange (“ArcaEx”),
      or
      the American Stock Exchange (the “AMEX”)
      after
      being so listed or included for quotation, or (iv) the Common Stock ceases
      to be
      traded on the Over-the-Counter Bulletin Board (the “OTC BB”) prior to being
      listed or included for quotation on one of the aforementioned markets, then
      the
      Company will make payments to the Investors in such amounts and at such times
      as
      shall be determined pursuant to this Section 2(c) as partial relief for the
      damages to the Investors by reason of any such delay in or reduction of their
      ability to sell the Registrable Securities (which remedy shall not be exclusive
      of any other remedies available at law or in equity). The Company shall pay
      to
      each holder of the Notes or Registrable Securities an amount equal to the then
      outstanding principal amount of the Notes (and, in the case of holders of
      Registrable Securities, the principal amount of Notes from which such
      Registrable Securities were converted) (“Outstanding
      Principal Amount”)
      multiplied by the Applicable Percentage (as defined below) times the sum of:
      (i)
      the number of months (prorated for partial months) after the Required Filing
      Date or Demand Filing Date, as applicable, or the end of the aforementioned
      ninety-day period and prior to the date the Registration Statement is declared
      effective by the SEC; provided,
      however,
      that
      there shall be excluded from such period any delays which are solely
      attributable to changes required by the Investors in the Registration Statement
      with respect to information relating to the Investors, including, without
      limitation, changes to the plan of distribution, or to the failure of the
      Investors to conduct their review of the Registration Statement pursuant to
      Section 3(h) below in a reasonably prompt manner; and (ii) the number of months
      (prorated for partial months) that sales of all of the Registrable Securities
      cannot be made pursuant to the Registration Statement after the Registration
      Statement has been declared effective (including, without limitation, when
      sales
      cannot be made by reason of the Company’s failure to properly supplement or
      amend the prospectus included therein in accordance with the terms of this
      Agreement, but excluding any days during an Allowed Delay (as defined in Section
      3(f)). The term “Applicable
      Percentage”
means
      two hundredths (.02) with respect to the first thirty (30) days of any
      calculation under clause (i) of the sentence in which the term is used, and
      two
      hundredths (.02) for any other purpose. (For example, if the Registration
      Statement becomes effective one (1) month after the end of such thirty-day
      period, the Company would pay $5,000 for each $250,000 of Outstanding Principal
      Amount. If thereafter, sales could not be made pursuant to the Registration
      Statement for an additional period of one (1) month, the Company would pay
      an
      additional $5,000 for each $250,000 of Outstanding Principal Amount.) Such
      amounts shall be paid in cash in U.S. dollars and in immediately available
      funds
      or, at each Investors’ option, in shares of Common Stock priced at the
      Conversion Rate of the Notes, at the end of each month during which any such
      amounts are incurred hereunder.

     

    (d) Piggy-Back
      Registrations.
      Subject
      to the last sentence of this Section 2(d), if at any time prior to the
      expiration of the Registration Period (as hereinafter defined) the Company
      shall, if permitted to do so under the Subscription Agreement, determine to
      file
      with the SEC a registration statement relating to an offering for its own
      account or the account of others under the 1933 Act of any of its equity
      securities (other than on Form S-4 or Form S-8 or their then equivalents
      relating to equity securities to be issued solely in connection with any
      acquisition of any entity or business or equity securities issuable in
      connection with stock option or other bona fide,
      employee benefit plans), it will give at least thirty (30) calendar days prior
      written notice to the record holders of the Investor Warrants (the “Warrantholders”)
      of its
      intention so to do and, if within thirty (30) calendar days after the effective
      date of such notice, such Warrantholders shall so request in writing, the
      Company shall include in such Registration Statement all or any part of the
      Warrant Shares such Warrantholder requests to be registered, except that if,
      in
      connection with any underwritten public offering for the account of the Company
      the managing underwriter(s) thereof shall impose a limitation on the number
      of
      shares of Common Stock which may be included in the Registration Statement
      because, in such underwriter(s)’ judgment, marketing or other factors dictate
      such limitation is necessary to facilitate public distribution, then the Company
      shall be obligated to include in such Registration Statement only such limited
      portion of the Warrant Shares with respect to which such Warrantholder has
      requested inclusion hereunder as the underwriter shall permit; provided,
      however,
      that
      the Company shall notify each of the Warrantholders in writing of any such
      reduction. Any exclusion of Warrant Shares shall be made pro rata among the
      Warrantholders seeking to include Warrant Shares in proportion to the number
      of
      Warrant Shares sought to be included by such Warrantholders; provided,
      however,
      that
      the Company shall not exclude any Warrant Shares unless the Company has first
      excluded all securities offered other than by the Company. No right to
      registration of Warrant Shares under this Section 2(d) shall be construed to
      limit any registration required under Section 2(a) hereof. 

    

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    (e) Eligibility
      for Form S-3, SB-2 or S-1; Conversion to Form S-3.
      The
      Company represents and warrants that it meets the requirements for the use
      of
      Form S-3, SB-2 or S-1 for registration of the sale by the Investors of the
      Registrable Securities. The Company agrees to file all reports required to
      be
      filed by the Company with the SEC in a timely manner so as to remain eligible
      or
      become eligible, as the case may be, and thereafter to maintain its eligibility,
      for the use of Form S-3. If the Company is not currently eligible to use Form
      S-3, not later than five (5) business days after the Company first meets the
      registration eligibility and transaction requirements for the use of Form S-3
      (or any successor form) for registration of the offer and sale by the Investors
      of Registrable Securities, the Company shall file a Registration Statement
      on
      Form S-3 (or such successor form) with respect to the Registrable Securities
      covered by the Registration Statement on Form SB-2 or Form S-1, whichever is
      applicable, filed pursuant to Section 2(a) (and include in such Registration
      Statement on Form S-3 the information required by Rule 429 under the 1933 Act)
      or convert the Registration Statement on Form SB-2 or Form S-1, whichever is
      applicable, filed pursuant to Section 2(a) to a Form S-3 pursuant to Rule 429
      under the 1933 Act and cause such Registration Statement (or such amendment)
      to
      be declared effective no later than thirty (30) days after filing. In the event
      of a breach by the Company of the provisions of this Section 2(e), the Company
      will be required to make payments pursuant to Section 2(c) hereof.

    

    3. Obligations
      of the Company.
      

    

    In
      connection with the registration of the Registrable Securities, the Company
      shall have the following obligations:

    

    (a) The
      Company shall prepare promptly and file with the SEC not later than the Required
      Filing Date or any Demand Filing Date, as applicable, a Registration Statement
      with respect to the number of Registrable Securities provided in Section 2(a),
      and thereafter use its best efforts to cause such Registration Statement
      relating to Registrable Securities to become effective as soon as possible
      after
      such filing but in no event later than one hundred twenty (120) days from the
      Required Filing Date or Demand Filing Date, as applicable), and keep the
      Registration Statement effective pursuant to Rule 415 at all times until such
      date as is the earlier of (i) the date on which all of the Registrable
      Securities have been sold and (ii) the date on which the Registrable Securities
      (in the opinion of counsel to the Initial Investors) may be immediately sold
      to
      the public without registration or restriction (including, without limitation,
      as to volume by each holder thereof) under the 1933 Act (the “Registration
      Period”),
      which
      Registration Statement (including any amendments or supplements thereto and
      prospectuses contained therein) shall not contain any untrue statement of a
      material fact or omit to state a material fact required to be stated therein,
      or
      necessary to make the statements therein not misleading.

    

    (b) The
      Company shall prepare and file with the SEC such amendments (including
      post-effective amendments) and supplements to the Registration Statements and
      the prospectus used in connection with the Registration Statements as may be
      necessary to keep the Registration Statements effective at all times during
      the
      Registration Period, and, during such period, comply with the provisions of
      the
      1933 Act with respect to the disposition of all Registrable Securities of the
      Company covered by the Registration Statements until such time as all of such
      Registrable Securities have been disposed of in accordance with the intended
      methods of disposition by the seller or sellers thereof as set forth in the
      Registration Statements. In the event the number of shares available under
      a
      Registration Statement filed pursuant to this Agreement is insufficient to
      cover
      all of the Registrable Securities issued or issuable upon conversion of the
      Notes and interest thereon and exercise of the Investor Warrants, the Company
      shall amend the Registration Statement, or file a new Registration Statement
      (on
      the short form available therefor, if applicable), or both, so as to cover
      all
      of the Registrable Securities, in each case, as soon as practicable, but in
      any
      event within fifteen (15) days after the necessity therefor arises (based on
      the
      market price of the Common Stock and other relevant factors on which the Company
      reasonably elects to rely). The Company shall use its best efforts to cause
      such
      amendment and/or new Registration Statement to become effective as soon as
      practicable following the filing thereof, but in any event within thirty (30)
      days after the date on which the Company reasonably first determines (or
      reasonably should have determined) the need therefor. The provisions of Section
      2(c) above shall be applicable with respect to such obligation, with the thirty
      (30) days running from the day the Company reasonably first determines (or
      reasonably should have determined) the need therefor.

    

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    (c) The
      Company shall furnish to each Investor whose Registrable Securities are included
      in a registration statement and its legal counsel (i) promptly (but in no
      event more than five (5) business days) after the same is prepared and publicly
      distributed, filed with the SEC, or received by the Company, one copy of each
      registration statement and any amendment thereto, each preliminary prospectus
      and prospectus and each amendment or supplement thereto, and, in the case of
      the
      Registration Statement referred to in Section 2(a), each letter written by
      or on
      behalf of the Company to the SEC or the staff of the SEC, and each item of
      correspondence from the SEC or the staff of the SEC, in each case relating
      to
      such Registration Statement (other than any portion of any thereof which
      contains information for which the Company has sought confidential treatment),
      and (ii) promptly (but in no event more than two (2) business days) after
      the Registration Statement is declared effective by the SEC, such number of
      copies of a prospectus, including a preliminary prospectus, and all amendments
      and supplements thereto and such other documents as such Investor may reasonably
      request in order to facilitate the disposition of the Registrable Securities
      owned by such Investor. The Company will immediately notify each Investor by
      facsimile of the effectiveness of each Registration Statement or any
      post-effective amendment. The Company will promptly respond to any and all
      comments received from the SEC (which comments shall promptly be made available
      to the Investors upon request), with a view towards causing each Registration
      Statement or any amendment thereto to be declared effective by the SEC as soon
      as practicable, shall promptly file an acceleration request as soon as
      practicable (but in no event more than five (5) business days) following the
      resolution or clearance of all SEC comments or, if applicable, following
      notification by the SEC that any such Registration Statement or any amendment
      thereto will not be subject to review and shall, if required by SEC Rules,
      promptly file with the SEC a final prospectus as soon as practicable (but in
      no
      event more than two (2) business days) following receipt by the Company from
      the
      SEC of an order declaring the Registration Statement effective. In the event
      of
      a breach by the Company of the provisions of this Section 3(c), the Company
      will
      be required to make payments pursuant to Section 2(c) hereof.

    

    (d) The
      Company shall (i) register and qualify the Registrable Securities covered by
      the
      Registration Statements under such other securities or “blue sky” laws of such
      jurisdictions in the United States as any of the Investors may reasonably
      request, (ii) prepare and file in those jurisdictions such amendments
      (including post-effective amendments) and supplements to such registrations
      and
      qualifications as may be necessary to maintain the effectiveness thereof during
      the Registration Period, (iii) take such other actions as may be necessary
      to
      maintain such registrations and qualifications in effect at all times during
      the
      Registration Period, and (iv) take all other actions reasonably necessary
      or advisable to qualify the Registrable Securities for sale in such
      jurisdictions; provided,
      however,
      that
      the Company shall not be required in connection therewith or as a condition
      thereto to (A) qualify to do business in any jurisdiction where it would
      not otherwise be required to qualify but for this Section 3(d), or
      (B) subject itself to general taxation in any such
      jurisdiction.

    

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    (e) In
      the
      event the Majority Holders of the Registrable Securities select underwriters
      for
      the offering, the Company shall enter into and perform its obligations under
      an
      underwriting agreement, in usual and customary form, including, without
      limitation, customary indemnification and contribution obligations, with the
      underwriters of such offering.

    

    (f) As
      promptly as practicable after becoming aware of such event, the Company shall
      notify each Investor of the happening of any event, of which the Company has
      knowledge, as a result of which the prospectus included in any Registration
      Statement, as then in effect, includes an untrue statement of a material fact
      or
      omission to state a material fact required to be stated therein or necessary
      to
      make the statements therein not misleading, and promptly to prepare a supplement
      or amendment to any Registration Statement to correct such untrue statement
      or
      omission, and deliver such number of copies of such supplement or amendment
      to
      each Investor as such Investor may reasonably request; provided that, for not
      more than fifteen (15) days in any twelve (12) month period, the Company may
      delay the disclosure of material non-public information concerning the Company
      (as well as prospectus or Registration Statement updating) if a majority of
      any
      independent directors (as such term is defined in the rules of the primary
      securities exchange or automated inter-dealer quotation system on which the
      Company’s equity securities are listed) on the Board of Directors of the Company
      or any committee of the Board of Directors comprised solely of such independent
      directors determines in good faith (provided, that in the event there are not
      two or more such independent directors, a majority of the Board of Directors
      shall make such determination) that it would be materially detrimental to the
      Company and its equity holders for such registration statement to become
      effective or to remain effective as long as such registration statement would
      otherwise be required to remain effective because such action (i) would
      materially interfere with a significant acquisition, corporate reorganization
      or
      other similar transaction involving the Company, (ii) would require premature
      disclosure of material information that the Company has a bona fide business
      purpose for preserving as confidential or (iii) would render the Company unable
      to comply with requirements under the 1933 Act or 1934 Act (an “Allowed
      Delay”);
      provided, further, that the Company shall promptly (x) notify the Investors
      in writing of the existence of (but in no event, without the prior written
      consent of an Investor, shall the Company disclose to such Investor any of
      the
      facts or circumstances regarding) material non-public information giving rise
      to
      an Allowed Delay and (y) advise the Investors in writing to cease all sales
      under such Registration Statement until the end of the Allowed Delay. Upon
      expiration of the Allowed Delay, the Company shall again be bound by the first
      sentence of this Section 3(f) with respect to the information giving rise
      thereto.

    

    (g) The
      Company shall use its best efforts to prevent the issuance of any stop order
      or
      other suspension of effectiveness of any Registration Statement, and, if such
      an
      order is issued, to obtain the withdrawal of such order at the earliest possible
      moment and to notify each Investor who holds Registrable Securities being sold
      (or, in the event of an underwritten offering, the managing underwriters) of
      the
      issuance of such order and the resolution thereof.

    

    (h) The
      Company shall permit a single firm of counsel designated by the Majority Holders
      to review such Registration Statement and all amendments and supplements thereto
      (as well as all requests for acceleration or effectiveness thereof) a reasonable
      period of time prior to their filing with the SEC, and not file any document
      in
      a form to which such counsel reasonably objects and will not request
      acceleration of such Registration Statement without prior notice to such
      counsel. The sections of such Registration Statement covering information with
      respect to the Investors, the Investor’s beneficial ownership of securities of
      the Company or the Investors intended method of disposition of Registrable
      Securities shall conform to the information provided to the Company by each
      of
      the Investors.

    

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    (i) At
      the
      request of any Investor, the Company shall furnish, on the date that Registrable
      Securities are delivered to an underwriter, if any, for sale in connection
      with
      any Registration Statement or, if such securities are not being sold by an
      underwriter, on the date of effectiveness thereof (i) an opinion, dated as
      of such date, from counsel representing the Company for purposes of such
      Registration Statement, in form, scope and substance as is customarily given
      in
      an underwritten public offering, addressed to the underwriters, if any, and
      the
      Investors and (ii) a letter, dated such date, from the Company’s
      independent certified public accountants in form and substance as is customarily
      given by independent certified public accountants to underwriters in an
      underwritten public offering, addressed to the underwriters, if any, and the
      Investors.

    

    (j) The
      Company shall hold in confidence and not make any disclosure of information
      concerning an Investor provided to the Company unless (i) disclosure of
      such information is necessary to comply with federal or state securities laws,
      (ii) the disclosure of such information is necessary to avoid or correct a
      misstatement or omission in any Registration Statement, (iii) the release
      of such information is ordered pursuant to a subpoena or other order from a
      court or governmental body of competent jurisdiction, or (iv) such
      information has been made generally available to the public other than by
      disclosure in violation of this or any other agreement. The Company agrees
      that
      it shall, upon learning that disclosure of such information concerning an
      Investor is sought in or by a court or governmental body of competent
      jurisdiction or through other means, give prompt notice to such Investor prior
      to making such disclosure, and allow the Investor, at its expense, to undertake
      appropriate action to prevent disclosure of, or to obtain a protective order
      for, such information.

    

    (k) The
      Company shall (i) cause all the Registrable Securities covered by the
      Registration Statement to be listed on each national securities exchange on
      which securities of the same class or series issued by the Company are then
      listed, if any, if the listing of such Registrable Securities is then permitted
      under the rules of such exchange, or (ii) to the extent the securities of the
      same class or series are not then listed on a national securities exchange,
      secure the designation and quotation, of all the Registrable Securities covered
      by the Registration Statement on the ArcaEx or Nasdaq or, if not eligible for
      Nasdaq, on Nasdaq Capital or, if not eligible for Nasdaq or Nasdaq Capital,
      on
      OTC BB and, without limiting the generality of the foregoing, to arrange for
      at
      least two market makers to register with the National Association of Securities
      Dealers, Inc. (“NASD”)
      as
      such with respect to such Registrable Securities.

    

    (l) The
      Company shall provide a transfer agent and registrar, which may be a single
      entity, for the Registrable Securities not later than the Closing Date of the
      Offering.

    

    (m) The
      Company shall cooperate with the Investors who hold Registrable Securities
      being
      offered and the managing underwriter or underwriters, if any, to facilitate
      the
      timely preparation and delivery of certificates (not bearing any restrictive
      legends) representing Registrable Securities to be offered pursuant to a
      Registration Statement and enable such certificates to be in such denominations
      or amounts, as the case may be, as the managing underwriter or underwriters,
      if
      any, or the Investors may reasonably request, and registered in such names
      as
      the managing underwriter or underwriters, if any, or the Investors may request,
      and, within three (3) business days after a Registration Statement which
      includes Registrable Securities is ordered effective by the SEC, the Company
      shall deliver, and shall cause legal counsel selected by the Company to deliver,
      to the transfer agent for the Registrable Securities (with copies to the
      Investors whose Registrable Securities are included in such Registration
      Statement) an instruction in such form attached hereto as Exhibit
      A
      and an
      opinion of such counsel in the form attached hereto as Exhibit 
      A.

    

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    (n) At
      the
      request of any holder of the Registrable Securities, the Company shall at its
      own expense prepare and file with the SEC such amendments (including
      post-effective amendments) and supplements to a Registration Statement and
      any
      prospectus used in connection with the Registration Statement as may be
      necessary in order to change the plan of distribution set forth in such
      Registration Statement.

    

    (o) The
      Company shall take all other reasonable actions necessary to expedite and
      facilitate disposition by the Investors of Registrable Securities pursuant
      to a
      Registration Statement.

    

    (p) The
      Company shall not grant any registration rights to third parties that are
      superior to the rights granted herein.

    

    4. Obligations
      of the Investors.

    

    In
      connection with the registration of the Registrable Securities, the Investors
      shall have the following obligations:

    

    (a) It
      shall
      be a condition precedent to the obligations of the Company to complete the
      registration pursuant to this Agreement with respect to the Registrable
      Securities of a particular Investor that such Investor shall furnish to the
      Company such information regarding itself and the Registrable Securities held
      by
      it as shall be reasonably required to effect the registration of such
      Registrable Securities and shall execute such documents in connection with
      such
      registration as the Company may reasonably request. Each of the Investors shall
      be required to complete and deliver to the Company, within ten (10) calendar
      days of the Closing date, the questionnaire attached hereto as Exhibit
      B.
      

    

    (b) Each
      Investor, by such Investor’s acceptance of the Registrable Securities, agrees to
      cooperate with the Company as reasonably requested by the Company in connection
      with the preparation and filing of the Registration Statements hereunder, unless
      such Investor has notified the Company in writing of such Investor’s election to
      exclude all of such Investor’s Registrable Securities from the Registration
      Statements.

    

    (c) If
      the
      Majority Holders determine to engage the services of an underwriter, each
      Investor agrees to enter into and perform such Investor’s obligations under an
      underwriting agreement, in usual and customary form, including, without
      limitation, customary indemnification and contribution obligations, with the
      managing underwriter of such offering and take such other actions as are
      reasonably required in order to expedite or facilitate the disposition of the
      Registrable Securities, unless such Investor has notified the Company in writing
      of such Investor’s election to exclude all of such Investor’s Registrable
      Securities from such Registration Statement.

    

    (d) Each
      Investor agrees that, upon receipt of any notice from the Company of the
      happening of any event of the kind described in Section 3(f) or 3(g), such
      Investor will use its best efforts to immediately discontinue disposition of
      Registrable Securities pursuant to the Registration Statement covering such
      Registrable Securities until such Investor’s receipt of the copies of the
      supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and,
      if
      so directed by the Company, such Investor shall deliver to the Company (at
      the
      expense of the Company) or destroy (and deliver to the Company a certificate
      of
      destruction) all copies in such Investor’s possession, of the prospectus
      covering such Registrable Securities current at the time of receipt of such
      notice.

    

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

    (e) No
      Investor may participate in any underwritten registration hereunder unless
      such
      Investor(i) agrees to sell such Investor’s Registrable Securities on the basis
      provided in any underwriting arrangements in usual and customary form entered
      into by the Company, (ii) completes and executes all questionnaires, powers
      of attorney, indemnities, underwriting agreements and other documents reasonably
      required under the terms of such underwriting arrangements, and
      (iii) agrees to pay its pro rata share of all underwriting discounts and
      commissions and any expenses in excess of those payable by the Company pursuant
      to Section 5 below.

    

    5. Expenses
      of Registration.

    

    All
      reasonable expenses, other than underwriting discounts and commissions, incurred
      in connection with registrations, filings or qualifications pursuant to Sections
      2 and 3, including, without limitation, all registration, listing and
      qualification fees, printers and accounting fees, and the fees and disbursements
      of counsel for the Company and a single counsel for the Investors shall be
      borne
      by the Company.

    

    6. Indemnification.
      

    

    In
      the
      event any Registrable Securities are included in a Registration Statement under
      this Agreement:

    

    (a) To
      the
      extent permitted by law, the Company will indemnify, hold harmless and defend
      (i) each Investor who holds such Registrable Securities, (ii) directors,
      officers, partners, employees, agents and each person who controls any Investor
      within the meaning of the 1933 Act or the Securities Exchange Act of 1934,
      as
      amended (the “1934
      Act”),
      if
      any, (iii) any underwriter (as defined in the 1933 Act), and (iv) the
      directors, officers, partners, employees and each person who controls any such
      underwriter within the meaning of the 1933 Act or the 1934 Act, if any (each,
      an
“Indemnified
      Person”),
      against any joint or several losses, claims, damages, liabilities or expenses
      (collectively, together with actions, proceedings or inquiries by any regulatory
      or self-regulatory organization, whether commenced or threatened, in respect
      thereof, “Claims”)
      to
      which any of them may become subject insofar as such Claims arise out of or
      are
      based upon: (A) any untrue statement or alleged untrue statement of a material
      fact in a Registration Statement or the omission or alleged omission to state
      therein a material fact required to be stated or necessary to make the
      statements therein not misleading; (B) any untrue statement or alleged untrue
      statement of a material fact contained in any preliminary prospectus if used
      prior to the effective date of such Registration Statement, or contained in
      the
      final prospectus (as amended or supplemented, if the Company files any amendment
      thereof or supplement thereto with the SEC) or the omission or alleged omission
      to state therein any material fact necessary to make the statements made
      therein, in light of the circumstances under which the statements therein were
      made, not misleading; or (C) any violation or alleged violation by the Company
      of the 1933 Act, the 1934 Act, any other law, including, without limitation,
      any
      state securities law, or any rule or regulation thereunder relating to the
      offer
      or sale of the Registrable Securities (the matters in the foregoing clauses
      (A)
      through (C) being, collectively, “Violations”).
      Subject to the restrictions set forth in Section 6(c) with respect to the number
      of legal counsel, the Company shall reimburse the Indemnified Person, promptly
      as such expenses are incurred and are due and payable, for any reasonable legal
      fees or other reasonable expenses incurred by them in connection with
      investigating or defending any such Claim. Notwithstanding anything to the
      contrary contained herein, the indemnification agreement contained in this
      Section 6(a): (i) shall not apply to a Claim arising out of or based upon a
      Violation which occurs in reliance upon and in conformity with information
      furnished in writing to the Company by any Indemnified Person or underwriter
      for
      such Indemnified Person expressly for use in connection with the preparation
      of
      such Registration Statement or any such amendment thereof or supplement thereto,
      if such prospectus was timely made available by the Company pursuant to Section
      3(c) hereof; (ii) shall not apply to amounts paid in settlement of any Claim
      if
      such settlement is effected without the prior written consent of the Company,
      which consent shall not be unreasonably withheld; and (iii) with respect to
      any
      preliminary prospectus, shall not inure to the benefit of any Indemnified Person
      if the untrue statement or omission of material fact contained in the
      preliminary prospectus was corrected on a timely basis in the prospectus, as
      then amended or supplemented, such corrected prospectus was timely made
      available by the Company pursuant to Section 3(c) hereof, and the Indemnified
      Person was promptly advised in writing not to use the incorrect prospectus
      prior
      to the use giving rise to a Violation and such Indemnified Person,
      notwithstanding such advice, used it. Such indemnity shall remain in full force
      and effect regardless of any investigation made by or on behalf of the
      Indemnified Person and shall survive the transfer of the Registrable Securities
      by the Investors pursuant to Section 9.

    

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

    (b) In
      connection with any Registration Statement in which an Investor is
      participating, each such Investor agrees severally and not jointly to indemnify,
      hold harmless and defend, to the same extent and in the same manner set forth
      in
      Section 6(a), the Company, each of its directors, each of its officers who
      signs
      the Registration Statement, each person, if any, who controls the Company within
      the meaning of the 1933 Act or the 1934 Act, any underwriter and any other
      shareholder selling securities pursuant to the Registration Statement or any
      of
      its directors or officers or any person who controls such shareholder or
      underwriter within the meaning of the 1933 Act or the 1934 Act (collectively
      an
“Indemnified
      Party”),
      against any Claim to which any of them may become subject, under the 1933 Act,
      the 1934 Act or otherwise, insofar as such Claim arises out of or is based
      upon
      any Violation by such Investor, in each case to the extent (and only to the
      extent) that such Violation occurs in reliance upon and in conformity with
      written information furnished to the Company by such Investor expressly for
      use
      in connection with such Registration Statement; and subject to Section 6(c)
      such
      Investor will reimburse any legal or other expenses (promptly as such expenses
      are incurred and are due and payable) reasonably incurred by them in connection
      with investigating or defending any such Claim; provided,
      however,
      that
      the indemnity agreement contained in this Section 6(b) shall not apply to
      amounts paid in settlement of any Claim if such settlement is effected without
      the prior written consent of such Investor, which consent shall not be
      unreasonably withheld; provided,
      further,
      however,
      that
      the Investor shall be liable under this Agreement (including this Section 6(b)
      and Section 7) for only that amount as does not exceed the net proceeds to
      such
      Investor as a result of the sale of Registrable Securities pursuant to such
      Registration Statement. Such indemnity shall remain in full force and effect
      regardless of any investigation made by or on behalf of such Indemnified Party
      and shall survive the transfer of the Registrable Securities by the Investors
      pursuant to Section 9. Notwithstanding anything to the contrary contained
      herein, the indemnification agreement contained in this Section 6(b) with
      respect to any preliminary prospectus shall not inure to the benefit of any
      Indemnified Party if the untrue statement or omission of material fact contained
      in the preliminary prospectus was corrected on a timely basis in the prospectus,
      as then amended or supplemented.

    

    (c) Promptly
      after receipt by an Indemnified Person or Indemnified Party under this Section
      6
      of notice of the commencement of any action (including any governmental action),
      such Indemnified Person or Indemnified Party shall, if a Claim in respect
      thereof is to be made against any indemnifying party under this Section 6,
      deliver to the indemnifying party a written notice of the commencement thereof,
      and the indemnifying party shall have the right to participate in, and, to
      the
      extent the indemnifying party so desires, jointly with any other indemnifying
      party similarly noticed, to assume control of the defense thereof with counsel
      mutually satisfactory to the indemnifying party and the Indemnified Person
      or
      the Indemnified Party, as the case may be; provided,
      however,
      that an
      Indemnified Person or Indemnified Party shall have the right to retain its
      own
      counsel with the fees and expenses to be paid by the indemnifying party, if,
      in
      the reasonable opinion of counsel retained by the indemnifying party, the
      representation by such counsel of the Indemnified Person or Indemnified Party
      and the indemnifying party would be inappropriate due to actual or potential
      differing interests between such Indemnified Person or Indemnified Party and
      any
      other party represented by such counsel in such proceeding. The indemnifying
      party shall pay for only one separate legal counsel for the Indemnified Persons
      or the Indemnified Parties, as applicable, and such legal counsel shall be
      selected by Investors holding a majority-in-interest of the Registrable
      Securities included in the Registration Statement to which the Claim relates,
      if
      the Investors are entitled to indemnification hereunder, or the Company, if
      the
      Company is entitled to indemnification hereunder, as applicable. The failure
      to
      deliver written notice to the indemnifying party within a reasonable time of
      the
      commencement of any such action shall not relieve such indemnifying party of
      any
      liability to the Indemnified Person or Indemnified Party under this Section
      6,
      except to the extent that the indemnifying party is actually prejudiced in
      its
      ability to defend such action. The indemnification required by this Section
      6
      shall be made by periodic payments of the amount thereof during the course
      of
      the investigation or defense, as such expense, loss, damage or liability is
      incurred and is due and payable.

    

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

    7. Contribution.

    

    To
      the
      extent any indemnification by an indemnifying party is prohibited or limited
      by
      law, the indemnifying party agrees to make the maximum contribution with respect
      to any amounts for which it would otherwise be liable under Section 6 to the
      fullest extent permitted by law; provided,
      however,
      that
      (i) no contribution shall be made under circumstances where the maker would
      not have been liable for indemnification under the fault standards set forth
      in
      Section 6(a), (ii) no seller of Registrable Securities guilty of fraudulent
      misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall
      be
      entitled to contribution from any seller of Registrable Securities who was
      not
      guilty of such fraudulent misrepresentation, and (iii) contribution (together
      with any indemnification or other obligations under this Agreement) by any
      seller of Registrable Securities shall be limited in amount to the net amount
      of
      proceeds received by such seller from the sale of such Registrable
      Securities.

    

    8. Reports
      Under the 1934 Act.

    

    With
      a
      view to making available to the Investors the benefits of Rule 144 promulgated
      under the 1933 Act or any other similar rule or regulation of the SEC that
      may
      at any time permit the Investors to sell securities of the Company to the public
      without registration (“Rule
      144”),
      the
      Company agrees to:

    

    (a) make
      and
      keep public information available, as those terms are understood and defined
      in
      Rule 144;

    

    (b) file
      with
      the SEC in a timely manner all reports and other documents required of the
      Company under the 1933 Act and the 1934 Act so long as the Company remains
      subject to such requirements and the filing of such reports and other documents
      is required for the applicable provisions of Rule 144; and

    

    (c) furnish
      to each Investor so long as such Investor owns Registrable Securities, promptly
      upon request, (i) a written statement by the Company that it has complied
      with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act,
      (ii) a copy of the most recent annual or quarterly report of the Company
      and such other reports and documents so filed by the Company, and (iii) such
      other information as may be reasonably requested to permit the Investors to
      sell
      such securities pursuant to Rule 144 without registration.

    

    9. Assignment
      of Registration Rights.

    

    The
      rights under this Agreement shall be automatically assignable by the Investors
      to any transferee of all or any portion of Registrable Securities if:
      (a) the Investor agrees in writing with the transferee or assignee to
      assign such rights, and a copy of such agreement is furnished to the Company
      within a reasonable time after such assignment, (b) the Company is, within
      a reasonable time after such transfer or assignment, furnished with written
      notice of (i) the name and address of such transferee or assignee, and
      (ii) the securities with respect to which such registration rights are
      being transferred or assigned, (c) following such transfer or assignment, the
      further disposition of such securities by the transferee or assignee is
      restricted under the 1933 Act and applicable state securities laws, (d) at
      or
      before the time the Company receives the written notice contemplated by clause
      (b) of this sentence, the transferee or assignee agrees in writing with the
      Company to be bound by all of the provisions contained herein, (e) such transfer
      shall have been made in accordance with the applicable requirements of the
      Subscription Agreement, and (f) such transferee shall be an “accredited
      investor” as that term defined in Rule 501 of Regulation D promulgated under the
      1933 Act.

    

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

    10. Amendment
      of Registration Rights.
      

    

    Provisions
      of this Agreement may be amended and the observance thereof may be waived
      (either generally or in a particular instance and either retroactively or
      prospectively), only with written consent of the Company and Investors who
      hold
      a majority in interest of the Registrable Securities. Any amendment or waiver
      effected in accordance with this Section 10 shall be binding upon each Investor
      and the Company.

    

    11. Miscellaneous.

    

    (a) A
      person
      or entity is deemed to be a holder of Registrable Securities whenever such
      person or entity owns of record such Registrable Securities. If the Company
      receives conflicting instructions, notices or elections from two or more persons
      or entities with respect to the same Registrable Securities, the Company shall
      act upon the basis of instructions, notice or election received from the
      registered owner of such Registrable Securities.

    

    (b) Any
      notices required or permitted to be given under the terms hereof shall be sent
      by certified or registered mail (return receipt requested) or delivered
      personally or by courier (including a recognized overnight delivery service)
      or
      by facsimile and shall be effective five days after being placed in the mail,
      if
      mailed by regular United States mail, or upon receipt, if delivered personally
      or by courier (including a recognized overnight delivery service) or by
      facsimile, in each case addressed to a party. The addresses for such
      communications shall be:

    

    If
      to the
      Company:

    

    American
      Dairy, Inc.

    C-16
      Shin
      Chen International Building, No. 10

    Jiu-shen
      Road, Zho Yan Chu, Beijing

    People’s
      Republic of China

    Attention:
      Roger Liu

    Telephone:
      (213)
      225-6228  

    Facsimile:
      (213)
      225-6244

    

    With
      a
      copy to:

    

    Hodgson
      Russ, LLP

    60
      East
      42nd Street, 37th
      Floor

    New
      York,
      New York 10165

    Attention:
      Jeffery Rinde, Esq.

    Telephone:
      (212) 661-3535

    Facsimile:
      (212) 972-1677

    

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

    If
      to an
      Investor: to the address set forth immediately below such Investor’s name on the
      signature pages to the Subscription Agreement. 

    

    (c) Failure
      of any party to exercise any right or remedy under this Agreement or otherwise,
      or delay by a party in exercising such right or remedy, shall not operate as
      a
      waiver thereof.

    

    (d) THIS
      AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
      LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
      ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF
      LAWS. THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE
      UNITED STATES FEDERAL COURTS LOCATED NEW YORK, NEW YORK WITH RESPECT TO ANY
      DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN CONNECTION
      HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES
      IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF
      SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS
      UPON
      A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE
      SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN
      SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
      BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH
      SUIT
      OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS
      BY
      SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT
      PREVAIL IN ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR
      ALL
      FEES AND EXPENSES, INCLUDING ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY
      IN CONNECTION WITH SUCH DISPUTE.

    

    (e) In
      the
      event that any provision of this Agreement is invalid or unenforceable under
      any
      applicable statute or rule of law, then such provision shall be deemed
      inoperative to the extent that it may conflict therewith and shall be deemed
      modified to conform with such statute or rule of law. Any provision hereof
      which
      may prove invalid or unenforceable under any law shall not affect the validity
      or enforceability of any other provision hereof.

    

    (f) This
      Agreement, the Notes, the Investor Warrants and the Subscription Agreement
      and
      the other Transaction Documents (including all schedules and exhibits thereto)
      constitute the entire agreement among the parties hereto with respect to the
      subject matter hereof and thereof. There are no restrictions, promises,
      warranties or undertakings, other than those set forth or referred to herein
      and
      therein. This Agreement and the Subscription Agreement supersede all prior
      agreements and understandings among the parties hereto with respect to the
      subject matter hereof and thereof. In the event of a conflict between this
      Agreement and the Subscription Agreement, the terms of the Subscription
      Agreement shall be controlling.

    

    (g) Subject
      to the requirements of Section 9 hereof, this Agreement shall be binding upon
      and inure to the benefit of the parties and their successors and
      assigns.

    

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

    

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

    (i) This
      Agreement may be executed in two or more counterparts, each of which shall
      be
      deemed an original but all of which shall constitute one and the same agreement
      and shall become effective when counterparts have been signed by each party
      and
      delivered to the other party. This Agreement, once executed by a party, may
      be
      delivered to the other party hereto by facsimile transmission of a copy of
      this
      Agreement bearing the signature of the party so delivering this
      Agreement.

    

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

    

    (k) Except
      as
      otherwise provided herein, all consents and other determinations to be made
      by
      the Investors pursuant to this Agreement shall be made by Investors holding
      a
      majority of the Registrable Securities, determined as if the all of the Notes
      and Investor Warrants then outstanding have been converted into Registrable
      Securities.

    

    (l) The
      Company acknowledges that a breach by it of its obligations hereunder will
      cause
      irreparable harm to each Investor by vitiating the intent and purpose of the
      transactions contemplated hereby. Accordingly, the Company acknowledges that
      the
      remedy at law for breach of its obligations under this Agreement will be
      inadequate and agrees, in the event of a breach or threatened breach by the
      Company of any of the provisions under this Agreement, that each Investor shall
      be entitled, in addition to all other available remedies in law or in equity,
      and in addition to the penalties assessable herein, to an injunction or
      injunctions restraining, preventing or curing any breach of this Agreement
      and
      to enforce specifically the terms and provisions hereof, without the necessity
      of showing economic loss and without any bond or other security being
      required.

    

    (m) 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.

    

    

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF,
      the
      Company and the undersigned Investors have caused this Agreement to be duly
      executed as of the date first above written.

     

    
      	 	 	 
	 	AMERICAN
              DAIRY, INC.
	 
 	 
 	 
 
	 	By:  	 
	 	
              
Name:

	 	Title 
	 	 
	 	INVESTORS: 

     

    
      
         

      

        15

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