Document:

THIS
SECURED CONVERTIBLE REDEEMABLE DEBENTURE AND THE SECURITIES INTO WHICH IT IS
CONVERTIBLE (COLLECTIVELY, THE “SECURITIES”), HAVE
NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE.  THE SECURITIES ARE BEING
OFFERED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION D
PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”).  THE
SECURITIES ARE “RESTRICTED” AND MAY
NOT BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT, OR
ELIGIBLE TO BE OFFERED OR SOLD PURSUANT TO AVAILABLE EXEMPTIONS FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND THE COMPANY WILL BE PROVIDED WITH
OPINION OF COUNSEL OR OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO
CONFIRM THAT SUCH EXEMPTIONS ARE AVAILABLE.  FURTHER HEDGING
TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE MADE EXCEPT IN COMPLIANCE WITH
THE ACT.

     

    SECURED
CONVERTIBLE REDEEMABLE DEBENTURE

     

    NEW
MEDIA LOTTERY SERVICES, INC.

     

    Effective
August 24, 2009

    

    
      	
              No.  2

            	
              US$275,000.00

            

    

    

    This
Secured Convertible Redeemable Debenture (this “Debenture”) is issued
by New Media Lottery Services, Inc., a Delaware corporation (the “Company”), to
Trafalgar Capital Specialized Investment Fund, FIS (together with its permitted
successors and assigns, the “Holder”) pursuant to
exemptions from registration under Section 4(2) and/or Regulation D as
promulgated by the U.S. Securities and Exchange Commission (the “SEC”) under the
Securities Act of 1933, as amended, in the amount of Two-Hundred Seventy Five
Thousand United States Dollars (US$275,000) as follows:

     

    Section
1.01         Principal
and Interest.  For value
received, the Company hereby promises to pay to the order of the Holder in
lawful money of the United States of America and in immediately available funds
the principal sum of Two-Hundred Seventy Five Thousand United States
Dollars (US$275,000) together with interest on the unpaid principal of this
Debenture at ten percent (10%) per annum compounded monthly from the date hereof
(the “Settlement
Date”) until paid.  Interest shall be computed on the basis of
a 365-day year and the actual days elapsed and the Holder shall deduct no
interest payments at Settlement (as defined in that certain Securities Purchase
Agreement, dated effective as of July 20, 2009, by and between the Company and
the Holder (the “Purchase
Agreement”).  The entire principal amount outstanding and all
accrued but unpaid interest hereon and the associated redemption premium shall
be paid to the Holder on the twenty-fourth (24th) month
anniversary from the Closing Date (the “Maturity Date”).
Capitalized terms used but not defined in this Debenture shall have the meaning
ascribed to them in the Purchase Agreement.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    Section
1.02         Optional
Conversion.  The Holder is
entitled, at its option, to convert, and sell on the same day or at any
subsequent time, at any time and from time to time, until payment in full of
this Debenture, all or any part of the principal amount of the Debenture, plus
accrued interest, into shares (the “Conversion Shares”)
of common stock of the Company, par value $0.001 per share (“Common
Stock”).  The number of shares of Common Stock issuable upon a
conversion hereunder equals the quotient obtained by dividing (a) the
outstanding amount of this Debenture to be converted by (y) the Conversion
Price.  The “Conversion Price”
shall mean the lower of (a) 100% of the Volume Weighted Average Price
(“VWAP”) of the
Common Stock as reported by Bloomberg, LP on the day prior to the Closing Date
(as defined in the Purchase Agreement) the (“Fixed Conversion
Price”) and (b) a fifteen percent (15%) discount to the lowest daily
closing VWAP of the Common Stock during the five (5) trading days after the
Conversion Date (as defined below).  No fraction of shares or scrip
representing fractions of shares will be issued on conversion, but the number of
shares issuable shall be rounded to the nearest whole share.  To
convert this Debenture, the Holder hereof shall deliver written notice thereof,
substantially in the form of Exhibit A to
this Debenture, with appropriate insertions (the “Conversion Notice”),
to the Company at its address as set forth herein.  The date upon
which the conversion shall be effective (the “Conversion Date”)
shall be deemed to be the date set forth in the Conversion Notice.

     

    Section
1.03         Limitations
on Conversion.  The Holder shall not have the right to convert
more than Fifty Thousand United States Dollars ($50,000) of the principal amount
of the Debenture plus accrued interest per week.  If the Holder has
delivered a Conversion Notice for an outstanding amount of this Debenture that,
without regard to any other shares that the Holder or its affiliates may
beneficially own, would result in the issuance in excess of the permitted amount
hereunder, the Company shall notify the Holder of this fact and shall honor the
conversion for the maximum principal amount permitted to be converted on such
Conversion Date in accordance with the terms of this Debenture and, any
principal amount tendered for conversion in excess of the permitted amount
hereunder shall remain outstanding under this Debenture.

     

    Section
1.04         Reservation
of Common Stock.  The Company shall
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of this Debenture,
such number of shares of Common Stock as shall from time to time be sufficient
to effect such conversion, based upon the Conversion Price.  If at any
time the Company does not have a sufficient number of Conversion Shares
authorized and available, then the Company shall take any and all actions
required by Section 5(e) of the Purchase Agreement.

     

    Section
1.05         Optional
Redemption. The Company may redeem
this Debenture, in whole or in part, at any time after the Settlement Date by
providing the Holder with three (3) days advance notice (the “Redemption Notice”)
and by paying unpaid principal and interest accrued to the date of such
redemption and a twelve and one-half percent (12.5%) redemption premium (the
“Redemption
Premium”) on the principal amount redeemed so long as the Common Stock is
trading below the Fixed Conversion Price at the time the Redemption Notice is
received.  The date upon which a redemption or payment of principal
and/or interest is made shall be a “Repayment
Date”).

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    Section
1.06         Mandatory
Redemption. Commencing on October
30, 2009 and each month thereafter through the Maturity Date, the Company shall
make payments of (i) US$12,056.16 of outstanding principal, plus (ii) applicable
accrued interest on the outstanding balance as of such payment date, plus (iii)
the Redemption Premium on the principal amount redeemed.  In addition,
upon the Company’s successful completion of any capital raise in excess of One
Million United States Dollars (US$1,000,000), all unpaid principal and accrued
but unpaid interest hereunder plus a Redemption Premium on the amount redeemed
shall be immediately due and payable.

     

    Section
1.07         Paying
Agent and Registrar.  Initially, the Company will act as paying
agent and registrar.  The Company may change any paying agent,
registrar, or Company-registrar by giving the Holder not less than ten (10)
business days’ written notice of its election to do so, specifying the name,
address, telephone number and facsimile number of the paying agent or
registrar.  The Company may act in any such capacity.

     

    Section
1.08          Secured
Nature of Debenture.  This Debenture is secured by those
certain Security Instruments defined in Section 5(o) of the Purchase
Agreement.

     

    Section
1.09          Currency
Exchange Rate Protections.

     

    (a)           “Closing Date Exchange
Rate” means the Euro to US dollar spot exchange rate as determined by the
Holder’s custodian bank on the date of funds transfer to the Escrow Agent’s
account .

     

    (b)           “Repayment Exchange
Rate” means
in relation to each date of a Conversion Notice or date of a Redemption Notice,
the Euro to US
dollar spot exchange rate as quoted by the Holder’s custodian bank on such date
or other such similar source.

     

    (c)           If
on the date of any Conversion Notice or Redemption Notice, the Repayment
Exchange Rate is less than the Closing Date Exchange Rate then the number of
Shares to be issued shall be increased by the same percentage as results from
dividing the Closing Date Exchange Rate by the relevant Repayment Exchange
Rate.  By way of example, if the number of Shares to be issued in
respect of a particular Conversion Notice or Redemption Notice would, but for
this Section 1.08, be 1,000 and if the Closing Date Exchange Rate is 1.80 and
the relevant Repayment Exchange Rate is 1.75, then 1,029 shares of Common Stock
will be issued in relation to that Conversion Notice or Redemption Notice, as
the case may be.  For the avoidance of doubt, the formula for such
calculation, by way of example for this Section, equals ((1.80 /1.75)-1)*1000 =
29 additional shares.

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    (d)           If
on any Repayment Date, the Cash Payment Date Exchange Rate, as defined below is
less than the Closing Date Exchange Rate then the amount of cash required to
satisfy the amounts due at such time shall be increased by the same percentage
as results from dividing the Closing Date Exchange Rate by the relevant Cash
Payment Date Exchange Rate. “Cash Payment Date Exchange
Rate” means in relation to each
Repayment Date the Euro to US dollar spot
exchange rate as quoted in the London edition of the Financial Times on such
date.  By way of example, if the amount of cash required to repay all
amounts due on such date would, but for this Section 1.08, be US$1,000 and if
the Closing Date Exchange Rate is 1.80 and the relevant Repayment Exchange Rate
is 1.75 then the amount of cash from the cash payment required to repay all
amounts due on such date will be US$1,028.57. For the avoidance of doubt, the
formula for such calculation, by way of example for this Section, equals
((1.80/1.75)-1)*US$1000 = US$28.57 additional dollars.

     

    ARTICLE
II.

     

    Section
2.01          Amendments
and Waiver of Default.  The Debenture may
not be amended without the written consent of the Holder.

     

    ARTICLE
III.

     

    Section
3.01         Events of
Default.  An Event of
Default is defined as follows: (a) failure by the Company to pay amounts
due hereunder within two (2) calendar days of the required payment date;
(b) failure by the Company’s transfer agent to issue Common Stock (which
shall be freely tradable, if permitted by applicable laws) to the Holder within
five (5) calendar days from the Conversion Date; (c) failure by the
Company for ten (10) calendar days after notice to it to comply with any of
its other agreements in this Debenture; (d) events of bankruptcy or
insolvency of the Company; (e) a breach by the Company of its obligations
under any of the Transaction Documents (as such term is defined in the Purchase
Agreement) which is not cured by the Company within ten (10) calendar days after
receipt of written notice thereof.  Upon the occurrence of an Event of
Default, the Holder may, in its sole discretion, accelerate full repayment of
all debentures (including, without limitation, this Debenture) outstanding and
accrued interest thereon or may, notwithstanding any limitations contained in
this Debenture, the Purchase Agreement or any other Transaction Document,
convert all debentures (including, without limitation, this Debenture)
outstanding and accrued interest thereon into shares of Common Stock pursuant to
Section 1.02 herein.

     

    Section
3.02         Failure
to Issue Common Stock.
As indicated in Article III Section 3.01, a breach by the
Company of its obligations under the Purchase Agreement shall be deemed an Event
of Default, which if not cured within ten (10) days, shall entitle the
Holder to accelerate full repayment of all debentures (including, without
limitation, this Debenture) outstanding and accrued interest thereon or,
notwithstanding any limitations contained in this Debenture, the Purchase
Agreement or any other Transaction Document, to convert all debentures
(including, without limitation, this Debenture) outstanding and accrued interest
thereon into shares of Common Stock pursuant to Section 1.02
herein.  The Company acknowledges that failure to honor a Notice of
Conversion shall cause irreparable harm to the Holder.

     

    ARTICLE
IV.

     

    Section
4.01         Rights
and Terms of Conversion.  Subject to
Section 1.03, this Debenture, in whole or in part, may be converted at any time
following the Closing Date, into shares of Common Stock at a price equal to the
Conversion Price as described in Section 1.02 above.

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    Section
4.02         Re-issuance
of Debenture.  When the Holder
elects to convert a part of the Debenture or the Company redeems a part of the
Debenture, then the Company shall reissue a new Debenture in the same form as
this Debenture to reflect the new principal amount.

     

    ARTICLE
V.

     

    Section
5.01 Restriction
on Issuance of the Capital Stock, Incurring Debt or Granting of Security
Interests. So long as any of the
principal of or interest on any debentures (including, without limitation, this
Debenture) remain unpaid, the Company shall  (i) not enter into any
security instrument granting the holder a security interest in any and all
assets of the Company or any subsidiary of the Company (whether now owned or
acquired in the future while any debentures (including, without limitation, this
Debenture) are outstanding without the prior written consent of the Holder, (ii)
not permit any subsidiary of the Company (whether now owned or acquired in the
future while any debentures (including, without limitation, this Debenture) to
enter into any security instrument granting the holder a security interest in
any and all assets of such subsidiary without the prior written consent of the
Holder or (iii) not incur any additional debt or permit any subsidiary of the
Company to incur any additional debt without the prior written consent of the
Holder.

     

    ARTICLE
VI.

     

    Section
6.01          Notice.  Notices regarding
this Debenture shall be sent to the parties at the following addresses, unless a
party notifies the other parties, in writing, of a change of
address:

     

    
      
        	
                If
      to the Company, to:

              	 
      	
                New
      Media Lottery Services, Inc.

              
	 
      	 
      	
                1400
      Technology Drive

              
	 
      	 
      	
                Harrisonburg,
      VA 22802

              
	 
      	 
      	
                Attention:  John
      Carson, President & CEO

              
	 
      	 
      	
                Facsimile:  (540)
      437-1688

              
	 
      	 
      	 
      
	
                With
      a copy to:

              	 
      	
                William
      P. Ruffa, Esq.

                110
      East 59th
      Street

                New
      York, NY 10022

                Telephone:
      (212) 355-0606

                Facsimile:
      1-877-FAX-RUFF

              
	 
      	 
      	 
      
	
                If
      to the Holder:

              	 
      	
                Trafalgar
      Capital Specialized Investment Fund, FIS

              
	 
      	 
      	
                The
      Dickens, Kirk Street

                16
      Northington Street

                London
      WC1N 2DG

              
	 
      	 
      	
                Attention:
      Andrew Garai, Chairman of the Board of

              
	 
      	 
      	
                Trafalgar
      Capital Sarl, General Partner

              
	 
      	 
      	
                Facsimile:      011-44-207-405-0161
      and

                                       001-786-323-1651

              

      

    

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    

    
      
        	
                With
      a copy to:

              	 
      	
                K&L
      Gates LLP

              
	 
      	 
      	
                200
      South Biscayne Blvd., Suite 3900

              
	 
      	 
      	
                Miami,
      FL 33131

              
	 
      	 
      	
                Attention:  Clayton
      Parker, Esq.

              
	 
      	 
      	
                Telephone:
      305-539-3306

              
	 
      	 
      	
                Facsimile:
      305-358-7095

              

      

    

    

    Section
6.02         Governing
Law.  This Debenture
shall be deemed to be made under and shall be construed in accordance with the
laws of the State of Delaware without giving effect to the principals of
conflict of laws thereof.  Each of the parties consents to the
jurisdiction of the U.S. District Court sitting in the Southern District of
the State of Florida or the state courts of the State of Florida sitting in
Miami-Dade County, Florida in connection with any dispute arising under this
Debenture and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens to the
bringing of any such proceeding in such jurisdictions.

     

    Section
6.03         Severability.  The invalidity of
any of the provisions of this Debenture shall not invalidate or otherwise affect
any of the other provisions of this Debenture, which shall remain in full force
and effect.

     

    Section
6.04         Entire
Agreement and Amendments.  This Debenture
represents the entire agreement between the parties hereto with respect to the
subject matter hereof and there are no representations, warranties or
commitments, except as set forth herein.  This Debenture may be
amended only by an instrument in writing executed by the parties
hereto.

     

    Section
6.05          Counterparts.  This Debenture
may be executed in multiple counterparts, each of which shall be an original,
but all of which shall be deemed to constitute on instrument.

    

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    

    IN WITNESS WHEREOF, with the
intent to be legally bound hereby, the Company as executed this Debenture as of
the date first written above.

     

    
      
        
          
            	
                    NEW
      MEDIA LOTTERY SERVICES, INC.

                  
	 
      
	
                    By:

                  	 
      
	
                    Name:

                  	 
      
	
                    Title:

                  	 
      

          

        

      

    

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

     

    EXHIBIT
A

     

    NOTICE OF
CONVERSION

     

    (To
be executed by the Holder in order to Convert the Debenture)

     

    TO:

    

    The
undersigned hereby irrevocably elects to convert US$_________________ of the
principal amount of the above Debenture into Shares of Common Stock of New Media
Lottery Services, Inc., according to the conditions stated therein, as of the
Conversion Date written below.

     

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              
                                                
                                                  
                                                    
                                                      
                                                        
                                                          
                                                            
                                                              
                                                                
                                                                  
                                                                    
                                                                      
                                                                        
                                                                          
                                                                            
                                                                              
                                                                                
                                                                                  	
                                                                                          Conversion
      Date:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Applicable
      Conversion Price:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Signature:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Name:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Address:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Amount
      to be converted:

                                                                                        	
                                                                                          US$

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Amount
      of Debenture unconverted:

                                                                                        	
                                                                                          US$

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Conversion
      Price per share:

                                                                                        	
                                                                                          US$

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Number
      of shares of Common Stock to be issued:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Please
      issue the shares of Common Stock in the following name and to the
      following address:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Issue
      to:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Authorized
      Signature:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Name:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Title:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Phone
      Number:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Broker
      DTC Participant Code:

                                                                                        	 
      
	 
      	 
      	 
      
	
                                                                                          Account
      Number:

                                                                                        	 
      

                                                                                

                                                                              

                                                                            

                                                                          

                                                                        

                                                                      

                                                                    

                                                                  

                                                                

                                                              

                                                            

                                                          

                                                        

                                                      

                                                    

                                                  

                                                

                                              

                                            

                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

     

    
      
         

      

      
        A-1SECURITIES PURCHASE
AGREEMENT

     

    THIS SECURITIES PURCHASE AGREEMENT
(this “Agreement”) executed
this [___] day of August 2009 effective as of July 20, 2009, by and among New Media Lottery Services,
Inc., a Delaware corporation, with headquarters located at 1400
Technology Drive, Harrisonburg, VA  22802 (the “Company”) and Trafalgar Capital Specialized
Investment Fund, FIS (the “Buyer”).

     

    RECITALS:

     

    WHEREAS, the Company and the
Buyer are executing and delivering this Agreement in reliance upon an exemption
from securities registration pursuant to Section 4(2) and/or Rule 506 of
Regulation D (“Regulation D”) as
promulgated by the U.S. Securities and Exchange Commission (the “SEC”) under the
Securities Act of 1933, as amended (the “1933 Act”);
and

     

    WHEREAS, the parties hereto
desire that, upon the terms and subject to the conditions contained herein, the
Company shall issue and sell to the Buyer, and the Buyer shall purchase from the
Company, up to One Million United States Dollars (US$1,000,000) of secured
convertible redeemable debentures (the “Debentures”) from
time to time as provided herein, such Debentures to be in the form of Exhibit A attached hereto;
and

     

    WHEREAS, in connection with
the sale of the Debentures, the Company has agreed to issue 2,000,000 shares of
its convertible preferred stock (the “Preferred Shares”) to
the Buyer in accordance with the terms set forth in that certain letter
agreement dated July 20, 2009 (the “Letter Agreement”)
entered into by and between the Company and the Buyer; and

     

    WHEREAS, contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Security Agreement (the “Security Agreement”)
pursuant to which the Company has agreed to provide the Buyer with a security
interest in the Pledged Collateral (as defined in the Security Agreement) to
secure the Company’s obligations under this Agreement, the Debentures and any
other obligations of the Company to the Buyer; and

     

    WHEREAS, this Agreement, the
Debentures, the Letter Agreement, the Settlement Escrow Agreement (once
executed) and each additional Security Instrument (as defined in Section 5(o)
herein below) and any other instrument executed in connection with the
transactions contemplated herein and therein are collectively referred to herein
as the “Transaction
Documents”).

     

    AGREEMENT:

     

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

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    1.      PURCHASE AND SALE OF
DEBENTURES.

     

    (a)           Purchase of
Debentures.  Subject to the satisfaction (or waiver) of the
terms and conditions of this Agreement, at the sole option of the Company, the
Company hereby agrees to sell and issue to the Buyer and the Buyer hereby agrees
to purchase from the Company, up to One Million United States Dollars
(US$1,000,000) of Debentures, based upon Draw Downs (as set forth in Section
2(c) hereof) that may be delivered by the Company and accepted by the Buyer, in
the Buyer’s sole and absolute discretion, from time to time during the
Commitment Period until the aggregate amount of Debentures purchased under this
Agreement and the Letter Agreement equals One Million United States Dollars
(US$1,000,000).  The parties acknowledge and agree that the Buyer has
already made an initial Draw Down of Three Hundred Thousand United States
Dollars (US$300,000) (the “Commitment Amount”)
pursuant to the terms of the Letter Agreement in exchange for which the Company
will issue Three Hundred Thousand United States Dollars (US$300,000) of
Debentures as of the Closing Date (the “Original
Debentures”).  The Debentures shall have a maturity date of
twenty-four (24) months from the Closing Date (the “Commitment
Period”).

     

    (b)           Closing
Date.  The closing of the purchase and sale of the Original
Debentures (the “Closing”) shall be
effective as of July 20, 2009 (the “Closing
Date”).

     

    (c)           Draw
Downs.  Upon the terms and conditions set forth herein, on any
Trading Day during the Commitment Period on with the conditions set forth in
Section 6(b) and 6(c) hereof have been satisfied, the Company may exercise a
Draw Down by the delivery of a Draw Down Notice to the Buyer.  Each
Draw Down Notice shall be subject to acceptance by Buyer as set forth in Section
2(c) hereof.  A “Trading Day” shall
mean any day during which the New York Stock Exchange shall be open for
business.

     

    (d)           Currency
Adjustment.  The Debentures shall contain provisions that
provide that in the event the Euro strengthens against the U.S. Dollar during
the life of the Debentures, the Buyer shall be afforded an adjustment to
compensate for any such movement in either conversions or
redemptions.

     

    2.           MECHANICS OF DRAW
DOWNS.

     

    (a)           Draw Down
Notice.  On any Trading Day during the Commitment Period, the
Company may deliver a Draw Down Notice to the Buyer, subject to the satisfaction
of the conditions set forth in Section 6(b), specifying the aggregate dollar
amount of Debentures the Company is requesting be purchased by Buyer with
respect to a given Draw Down (the “Investment
Amount”).

     

    (b)           Date of Delivery of Draw
Down Notice.  A Draw Down Notice shall be deemed delivered on
(i) the Trading Day it is received by facsimile or otherwise by the Buyer if
such notice is received prior to 3:00 p.m., Eastern Standard time, or (ii) the
immediately succeeding Trading Day if it is received by facsimile or otherwise
after 3:00 p.m., Eastern Standard time, on a Trading Day or at any time on a day
which is not a Trading Day.  No Draw Down Notice may be deemed
delivered on a day that is not a Trading Day.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    (c)          Acceptance of Draw Down
Debentures Issuable.  Buyer shall accept or reject, in its sole
and absolute discretion, each Draw Down Notice by delivering written notice of
such acceptance or rejection with five (5) calendar days of receiving the Draw
Down Notice (the “Acceptance
Period”).  If Buyer fails to accept or reject a Draw Down
Notice within the above Acceptance Period, such Draw Down Notice shall be deemed
rejected.

     

    (d)          Settlement Escrow
Agreement.  If a Draw Down Notice is accepted by Buyer pursuant
to Section 2(c) above, the Company, the Buyer and K&L Gates LLP (or another
third party to be selected by the Buyer) (the “Escrow Agent”) shall
enter into an Escrow Agreement with respect to the applicable Settlement
(defined below) in substantially the same the form as that attached hereto as
Exhibit B (the “Escrow Agreement”)
pursuant to which the Escrow Agent shall accept, hold and disburse funds
deposited with it in accordance with the terms of the Escrow
Agreement.

     

    (e)          Settlements;
Issuance of Original Debentures.

     

    (i)           On
the date hereof, the Company shall issue the Original Debentures in the
principal sum of Three Hundred Thousand United States Dollars
(US$300,000).

     

    (ii)           Subject
to the provisions of Section 6(c), within five (5) calendar days of Buyer
accepting a Draw Down Notice (each such date, a “Settlement Date”) the
Company shall, unless otherwise instructed by the Buyer, issue Debentures in the
principal sum of the applicable Investment Amount to be purchased by the Buyer
on such Settlement Date (the “Draw Down
Debentures”) and, upon receipt of such Draw Down Debentures, the Buyer
shall deliver the applicable Investment Amount representing the Draw Down
Debentures to be purchased on such Settlement Date by wire transfer of
immediately available funds to the Escrow Agent on or before the Settlement Date
for disbursement pursuant to the Escrow Agreement (each closing with respect to
Draw Down Debentures shall be referred to as, a “Settlement”).  In
addition, on or prior to each such Settlement Date, each of the Company and the
Buyer shall deliver all documents, instruments and writings required to be
delivered by either of them pursuant to this Agreement in order to implement and
effect the transactions contemplated herein.

     

    (f)           Liquidated
Damages.  In the event the
applicable Debentures are not timely delivered by the Company on any Settlement
Date, the Company will pay the Buyer, as liquidated damages for such failure to
deliver and not as a penalty, two percent (2%) of the aggregate Investment
Amount for such Debentures for each seven (7) calendar day period, or part
thereof, following such failure, in cash, until such Debentures have been
delivered.  Such amount may be subtracted by the Buyer from the
portion of the Investment Amount otherwise payable by the Buyer with respect to
such Debentures.

     

    3.      BUYER’S REPRESENTATIONS AND
WARRANTIES.

     

    The Buyer
represents and warrants that:

     

    (a)           Investment
Purpose.  As of the date hereof, the Buyer is acquiring the
Debentures for its own account for investment only and not with a view towards,
or for resale in connection with, the public sale or distribution thereof,
except pursuant to sales registered or exempted under the 1933 Act; provided,
however, that by making the representations herein, the Buyer reserves the right
to dispose of the Debentures at any time in accordance with or pursuant to an
available exemption under the 1933 Act.

     

    
      
        
        

      

      
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    (b)           Accredited Investor
Status.  The Buyer is an “Accredited Investor”
as that term is defined in Rule 501(a) of Regulation D.

     

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

     

    (d)           Information.  The
Buyer and its advisors (and its counsel), if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
information it deemed material to making an informed investment decision
regarding its purchase of the Debentures, which have been requested by the
Buyer.  The Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company and its
management.  Neither such inquiries nor any other due diligence
investigations conducted by the Buyer or its advisors, if any, or its
representatives shall modify, amend or affect the Buyer’s right to rely on the
Company’s representations and warranties contained in Section 4
below.  The Buyer understands that its investment in the Debentures
involves a high degree of risk.  The Buyer has sought such accounting,
legal and tax advice, as it has considered necessary to make an informed
investment decision with respect to its acquisition of the
Debentures.

     

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

     

    (f)           Transfer or
Resale.  The Buyer understands that: (A) the Debentures have
not been and are not being registered under the 1933 Act or any state securities
laws, and may not be offered for sale, sold, assigned or transferred unless (i)
subsequently registered thereunder, (ii) such Buyer shall have delivered to the
Company an opinion of counsel, in generally acceptable form and substance, to
the effect that such securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration
requirements or (iii) the Buyer provides the Company with reasonable assurances
(in the form of seller and broker representation letters) that the Debentures
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the 1933 Act (or a successor rule thereto) (collectively,
“Rule 144”), in
each case following the applicable holding period set forth therein; (B) any
sale of such securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of such securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (C) neither the Company nor any other person is under any
obligation to register such securities under the 1933 Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder.

     

    
      
        
        

      

      
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    (g)           Legends.  The
Buyer understands that the certificates or other instruments representing the
Debentures, the Common Stock underlying the Debentures and all securities issued
by the Company shall bear a restrictive legend in substantially the following
form (and a stop transfer order may be placed against transfer of such
certificates):

     

    “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, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, GENERALLY ACCEPTABLE
TO COMPANY’S COUNSEL, 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 issue a
certificate without such legend within three (3) business days to the holder of
the security 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 reasonably acceptable to
counsel for the Company, to the effect that a public sale, assignment or
transfer of the securities may be made without registration under the 1933
Act.

     

    (h)           Authorization,
Enforcement.  This Agreement has been duly and validly
authorized, executed and delivered on behalf of the Buyer and is a valid and
binding agreement of the Buyer enforceable in accordance with its terms, except
as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.

     

    (i)           Receipt of
Documents.  The Buyer and its counsel have received and read in
their entirety:  (A) this Agreement and each representation, warranty
and covenant set forth herein and the other Transaction Documents; (B) all due
diligence and other information necessary to verify the accuracy and
completeness of such representations, warranties and covenants; and (C) answers
to all questions the Buyer submitted to the Company regarding an investment in
the Company; and the Buyer has relied on the information contained therein and
has not been furnished any other documents, literature, memorandum or
prospectus.

     

    
      
        
        

      

      
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    (j)           Due Formation of the
Buyer.  The Buyer has been formed and validly exists and has
not been organized for the specific purpose of purchasing the Debentures and is
not prohibited from doing so.

     

    (k)           No Legal Advice from the
Company.  The Buyer acknowledges that it had the opportunity to
review this Agreement, the Transaction Documents and the transactions
contemplated by the Transaction Documents with its own legal counsel and
investment and tax advisors.  The Buyer is relying solely on such
counsel and advisors and not on any statements or representations of the Company
or any of its representatives or agents for legal, tax or investment advice with
respect to this investment, the transactions contemplated by this Agreement or
the securities laws of any jurisdiction.

     

    4.      REPRESENTATIONS AND
WARRANTIES OF THE COMPANY.

     

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

     

    (a)           Organization and
Qualification; Subsidiaries.  The Company and its subsidiaries
are corporations duly organized and validly existing in good standing under the
laws of the jurisdiction in which they are incorporated, and have the requisite
corporate power to own their properties and to carry on their business as now
being conducted.  Each of the Company and its subsidiaries is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted by it makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries taken as a whole.  Other than as set
forth in Schedule 4(a),
the Company owns, directly or indirectly, all of the capital stock or other
equity interests of each subsidiary free and clear or any liens (other than
liens in favor of the Buyer), and all the issued and outstanding shares of
capital stock of each subsidiary are validly issued and are fully paid,
non-assessable and free of preemptive and similar rights to subscribe for or
purchase securities.  Schedule 4(a) attached hereto
sets forth a list of each of the Company’s subsidiaries and the percentage of
stock it owns in each.

     

    (b)           Authorization, Enforcement,
Compliance with Other Instruments.  (A) The Company has
the requisite corporate power and authority to enter into and perform this
Agreement, the other Transaction Documents, and any related agreements, and to
issue the Debentures in accordance with the terms hereof and thereof, (B) the
execution and delivery of this Agreement, the other Transaction Documents and
any related agreements by the Company and the consummation by it of the
transactions contemplated hereby and thereby, including, without limitation, the
issuance of the Debentures and the reservation for issuance and the issuance of
shares of Common Stock underlying the Debentures and the Preferred Shares 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, (C) this Agreement, the other Transaction Documents and any
related agreements have been duly executed and delivered by the Company, (D)
this Agreement, the other Transaction Documents and any related agreements
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
perform any of the Company’s obligations under this Agreement, the Transaction
Documents or any related agreements.

     

    
      
        
        

      

      
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    (c)           Capitalization.  The
authorized capital stock of the Company consists of One Hundred Fifty Million
(150,000,000) shares of common stock, par value $0.001 per share (“Common Stock”) and
Five Million (5,000,000) shares of preferred stock, par value $.001 per
share.  The Company has 31,247,843 shares of Common Stock issued and
outstanding and no shares of preferred stock issued and outstanding. All of the
outstanding shares of capital stock of the Company are validly issued, fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws and none of such outstanding shares were issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities.  As of the date of this Agreement and except as
disclosed in Schedule
4(c), (i) no shares of the Company’s capital stock are subject to
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company, (ii) there are no outstanding 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, (iii) there are no outstanding debt
securities, (iv) there are no agreements or arrangements under which the Company
or any of its subsidiaries is obligated to register the sale of any of their
securities under the 1933 Act and (v) there are no outstanding registration
statements and there are no outstanding comment letters from the SEC 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 the Debentures as described in this Agreement.  The
Company has furnished to the Buyer true and correct copies of the Company’s
Certificate of Incorporation, as amended and as in effect on the date hereof
(the “Certificate of
Incorporation”), and the Company’s 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.

     

    (d)           Issuance of
Securities.  The issuances of the Debentures are duly
authorized and free from all taxes, liens and charges with respect to the issue
thereof and are fully paid and nonassessable and the issuance of Common Stock
underlying the Debentures upon conversion will be duly authorized and free from
all taxes, liens and charges with respect to the issue thereof and will be fully
paid and nonassessable.

     

    
      
        
        

      

      
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    (e)           No
Conflicts.  The execution, delivery and performance of this
Agreement, the other Transaction Documents and any related agreements by the
Company and the consummation by the Company of the transactions contemplated
hereby (including, without limitation, the issuance of the Debentures and the
reservation of and issuance of the shares of Common Stock underlying the
Debentures upon conversion) and thereby will not (A) result in a violation of
the Certificate of Incorporation or the Bylaws or (B), to the best knowledge of
the Company, conflict with or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or result in a violation of any law, rule, regulation,
order, judgment or decree (including United States federal and state securities
laws and regulations)  applicable to the Company or any of its
subsidiaries or by which any property or asset of the Company or any of its
subsidiaries is bound or affected.  To the best knowledge of the
Company, neither the Company nor its subsidiaries is in violation of any term of
or in default under its Certificate of Incorporation or Bylaws or their
organizational charter or bylaws, respectively, or, any material contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
subsidiaries.  The business of the Company and its subsidiaries is not
being conducted, and shall not be conducted in violation of any material law,
ordinance, or regulation of any governmental entity.  Except as
specifically contemplated by this Agreement and as required under the 1933 Act
and any applicable state securities laws, the Company is not required to obtain
any consent, authorization or order of, or make any filing or registration with,
any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under or contemplated by this Agreement in accordance
with the terms hereof.  All consents, authorizations, orders, filings
and registrations which the Company is required to obtain pursuant to the
preceding sentence have been obtained or effected on or prior to the date
hereof, except for any required post-Closing notice filings under applicable
United States federal or state securities laws, if any.

     

    (f)           Absence of
Litigation.  There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body pending against or affecting the Company,
the Company’s capital stock or any of the Company’s subsidiaries, wherein an
unfavorable decision, ruling or finding would (A) have a material adverse effect
on the transactions contemplated hereby or by the Transaction Documents, (B)
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement or the
Transaction Documents or (C) have a material adverse effect on the business,
operations, properties, financial condition or results of  operations
of the Company and its subsidiaries taken as a whole.

     

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

     

    
      
        
        

      

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

     

    (i)           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 require registration of the Debentures or shares
of Common Stock underlying the Debentures under the 1933 Act or cause this
offering of the Debentures to be integrated with prior offerings by the Company
for purposes of the 1933 Act.

     

    (j)           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.

     

    (k)          Intellectual Property
Rights.  The Company and its subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks,
service mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, trade secrets and
rights necessary to conduct their respective businesses as now
conducted.  The Company and its subsidiaries do not have any knowledge
of any infringement by the Company or its subsidiaries of trademark, trade name
rights, patents, patent rights, copyrights, inventions, licenses, service names,
service marks, service mark registrations, trade secret or other similar rights
of others, and, to the knowledge of the Company there is no claim, action or
proceeding being made or brought against, or to the Company’s knowledge, being
threatened against, the Company or its subsidiaries regarding trademark, trade
name, patents, patent rights, invention, copyright, license, service names,
service marks, service mark registrations, trade secret or other infringement;
and the Company and its subsidiaries are unaware of any facts or circumstances
which might give rise to any of the foregoing.

     

    (l)           Environmental
Laws.  The Company and its subsidiaries are (A) 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”),
(B) have received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective businesses and
(C) are in compliance with all terms and conditions of any such permit, license
or approval.

     

    (m)         Title.  (i)
Any real property and facilities held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries.

     

    
      
        
        

      

      
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    (ii)           The
Company and its subsidiaries have good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, in each case free and clear of all liens and encumbrances, other
than those in favor of the Buyer.

     

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

     

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

     

    (p)           Internal Accounting
Controls.  The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, and (iii)
the recorded amounts for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

     

    (q)           No Material Adverse
Breaches, etc.  Neither the Company nor any of its subsidiaries
is subject to any charter, corporate or other legal restriction, or any
judgment, decree, order, rule or regulation which in the judgment of the
Company’s officers has or is expected in the future to have a material adverse
effect on the business, properties, operations, financial condition, results of
operations or prospects of the Company or its subsidiaries.  Neither
the Company nor any of its subsidiaries is in breach of any contract or
agreement which breach, in the reasonable judgment of the Company’s officers,
has or is expected to have a material adverse effect on the business,
properties, operations, financial condition, results of operations or prospects
of the Company or its subsidiaries.

     

    (r)           Tax
Status.  The Company and each of its subsidiaries has made and
filed 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.  There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the
officers of the Company know of no basis for any such claim.

     

    
      
        
        

      

      
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    (s)           Certain
Transactions.  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 or stock grants previously disclosed in writing
to the Buyer, none of the officers, directors, or employees of the Company is
presently a party to any transaction with the Company (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.

     

    (t)           Fees and 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 shareholders of the
Company, underwriters, brokers, agents or other third parties.

     

    (u)           Investment
Company.  The Company is not, and is not an affiliate of, and
immediately after receipt of payment for the Debentures, will not be or be an
affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended.  The Company shall conduct its
business in a manner so that it will not become subject to the Investment
Company Act.

     

    (v)           Registration
Rights.  No person has any right to cause the Company to effect
the registration under the 1933 Act of any securities of the
Company.  There are no outstanding registration statements not yet
declared effective and there are no outstanding comment letters from the SEC or
any other regulatory agency.

     

    (w)           Private
Placement.  Assuming the accuracy of the Buyer’s
representations and warranties set forth in Section 3 herein above, no
registration under the 1933 Act is required for the offer and sale of the
Debentures or the Common Stock underlying the Debentures by the Company to the
Buyer as contemplated hereby and by the Transaction Documents.

     

    
      
        
        

      

      
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    (x)           SEC Documents; Financial
Statements.  The Company has filed all reports, schedules,
forms, statements and other documents required to be filed by it with the SEC
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
except as provided on Schedule
4(x), for the two years preceding the date hereof (or such shorter period
as the Company was required by law or regulation to file such material) (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”) on timely basis or has received a valid extension of such
time of filing and has filed any such SEC Document prior to the expiration of
any such extension.  The Company has delivered to the Buyer or its
representatives, or made available through the SEC’s website at
http://www.sec.gov., true and complete copies of the SEC
Documents.  As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the Exchange Act and the rules
and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.  As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto.  Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).  No other information provided by or on behalf of the
Company to the Buyer which is not included in the SEC Documents, including,
without limitation, information referred to in Section 3(i) of 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
circumstance under which they are or were made and not misleading.

     

    (y)           Listing and Maintenance
Requirements.  The Company’s Common Stock is registered
pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has
taken no action designed to terminate, or which to its knowledge is likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act nor has the Company received any notification that the SEC is
contemplating terminating such registration.  Except as provided on
Schedule 4(y), the
Company has not, in the twelve (12) months preceding the date hereof, received
notice from any Primary Market (as defined herein below) on which the Common
Stock is or has been listed or quoted to the effect that the Company is not in
compliance with the listing or maintenance requirements of such Primary
Market.  The Company is, and has no reason to believe that it will not
in the foreseeable future continue to be, in compliance with all such listing
and maintenance requirements.

     

    (z)           Reporting
Status.  With a view to making available to the Buyer the benefits
of Rule 144 or any similar rule or regulation of the SEC that may at any time
permit the Buyer to sell securities of the Company to the public without
registration, and as a material inducement to the Buyer’s purchase of the
Securities, the Company represents and warrants to the following: (i) the
Company is, and has been for a period of at least 90 days immediately preceding
the date hereof, subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act (ii) the Company has filed all required reports under Section
13 or 15(d) of the Exchange, as applicable, during the 12 months preceding the
date hereof (or for such shorter period that the Company was required to file
such reports), (iii) the Company is not an issuer defined as a “Shell Company”
and (iv) if the Company has, at any time, been an issuer defined as a “Shell
Company,” the Company has (A) not been an issuer defined as a Shell Company for
at least six (6) months prior to the Closing Date, and (B) has satisfied the
requirements of Rule 144(i) (including, without limitation, the proper filing of
“Form 10 information” at least six (6) months prior to the Closing Date). For
the purposes hereof, the term “Shell Company” shall mean an issuer that meets
the description defined under Rule 144.

     

    
      
        
        

      

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

     

    (bb)        Dilutive
Effect.  The Company understands and acknowledges that the
number of shares of Common Stock issuable upon conversion of the Debentures or
the Preferred Shares will increase in certain circumstances.  The
Company further acknowledges that its obligation to issue shares of Common Stock
upon conversion of the Debentures in accordance with this Agreement and the
Debentures and upon the Preferred Shares that will be issued pursuant to the
Letter Agreement is absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interests of other stockholders of
the Company.

     

    (cc)         No Material Misstatement or
Omission.  None of the materials provided to the Buyer by the
Company and none of the representation and warranties made in this Agreement or
the Transaction Documents include any untrue statements of material fact, and
none of the representations and warranties made in this Agreement or any of the
other Transaction Documents 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.

     

    5.      COVENANTS.

     

    (a)           Best
Efforts.  Upon the acceptance by the Buyer of a Draw Down
Notice pursuant to Section 2(c) hereof, each party shall use its best efforts
timely to satisfy each of the conditions to be satisfied by it as provided in
Section 6 of this Agreement.

     

    (b)           Form
D.  The Company agrees to be solely responsible to file a Form
D with respect to the Debentures (including the Original Debentures and the Draw
Down Debentures, if any) as required under Regulation D and to provide a copy
thereof to the Buyer promptly after such filing.  The Company shall
also, on or before applicable Settlement, take such action as the Company shall
determine is necessary to qualify the Debentures and the shares of Common Stock
underlying the Debentures, or obtain an exemption for the Debentures and the
shares of Common Stock underlying the Debentures for sale to the Buyer at the
applicable Settlement, pursuant to the Transaction Documents under applicable
securities or “Blue Sky” laws of the states of the United States, and shall
provide evidence of any such action so taken to the Buyer on or prior to the
Closing Date or Settlement Date, as applicable.

     

    
      
        
        

      

      
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    (c)          Reporting
Status.  With a view to making available to the Buyer the
benefits of Rule 144 or any similar rule or regulation of the SEC that may at
any time permit the Buyer to sell securities of the Company to the public
without registration, and as a material inducement to the Buyer’s purchase of
the Debentures and the Common Stock underlying the Debentures, the Company
represents, warrants, and covenants to the following:

     

    (i)           The
Company is subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act and has filed all required reports under Section 13 or 15(d) of the
Exchange Act during the 12 months prior to the date hereof (or for such shorter
period that the issuer was required to file such reports), other than Current
Reports on Form 8-K;

     

    (ii)           From
the date hereof until the Debentures or the Common Stock underlying the
Debentures have been sold by the Buyer, or may permanently be sold by the Buyer
without any restrictions pursuant to Rule 144 (the “Registration Period”)
the Company shall file with the SEC in a timely manner all required reports
under Section 13 or 15(d) of the Exchange Act and such reports shall conform to
the requirement of the Exchange Act and the SEC for filing
thereunder;

     

    (iii)           The
Company shall furnish to the Buyer so long as the Buyer owns the Debentures and
the Common Stock underlying the Debentures, promptly upon request, (i) a written
statement by the Company that it has complied with the reporting requirements of
Rule 144, (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 Buyer to
sell such securities pursuant to Rule 144 without registration; and

     

    (iv)           During
the Registration Period the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would otherwise permit such
termination.

     

    (d)          Use of
Proceeds.  The Company will use the net proceeds from the sale
of the Debentures for working capital purposes.

     

    (e)          Reservation of
Shares.  The Company shall take all action reasonably necessary
to at all times have authorized, and reserved for the purpose of issuance, such
number of shares of Common Stock as shall be necessary to effect the full
conversion of the Debentures that have been issued hereunder and the Preferred
Shares the Company intends to issue pursuant to the terms of the Letter
Agreement (the “Share
Reserve”).  If at any time the Share Reserve is insufficient to
effect the full conversion of the Debentures or Preferred Shares then
outstanding, the Company shall increase the Share Reserve
accordingly.  If the Company does not have sufficient authorized and
unissued shares of Common Stock available to increase the Share Reserve, the
Company shall call and hold a special meeting of the shareholders within thirty
(30) days of such occurrence, or take action by the written consent of the
holders of a majority of the outstanding shares of Common Stock, if possible,
for the sole purpose of increasing the number of shares
authorized.  The Company’s management shall recommend to the
shareholders to vote in favor of increasing the number of shares of Common Stock
authorized.  Management and Buyer shall also vote all of their
respective shares in favor of increasing the number of authorized shares of
Common Stock.

     

    
      
        
        

      

      
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    (f)          Issuance of Draw Down
Debentures.  The sale and issuance of Debentures issued
pursuant to a Draw Down Notice shall be made in accordance with the provisions
and requirements of Regulation D and any applicable state law.

     

    (g)          Fees and
Expenses.  In addition to the facility fee and commitment fee
paid to the Buyer in connection with the funding of the Original
Debentures:

     

    (i)           With
the exception of the Ten Thousand United States Dollars (US$10,000) legal
document review allowance paid by the Company pursuant to the Letter Agreement,
each of the Company and the Buyer shall pay all costs and expenses incurred by
such party in connection with the negotiation, investigation, preparation,
execution and delivery of this Agreement, the Transaction Documents and any
other documents relating to this transaction;

     

    (ii)           The
Company shall issue to the Buyer the Preferred Shares pursuant to the terms set
forth in the Letter Agreement; and

     

    (iii)           The
Sixty-Thousand United States Dollars (US$60,000) deducted from the Company’s
gross proceeds arising from the sale of the Original Debentures previously paid
by the Buyer with the consent of the Company.

     

    (h)          Corporate Existence.
So long as any of the Debentures remain outstanding, the Company shall not
directly or indirectly consummate any merger, reorganization, restructuring,
reverse stock split consolidation, sale of all or substantially all of the
Company’s assets or any similar transaction or related transactions (each such
transaction, an “Organizational
Change”) unless, prior to the consummation an Organizational Change, the
Company obtains the written consent of the Buyer.  In the case of any
Organizational Change, the Company will make appropriate provision with respect
to such holders’ rights and interests to insure that the provisions of this
Section 5(g) will thereafter be applicable to the Debentures.

     

    (i)           Transactions With
Affiliates. So long as any Debentures are outstanding, the Company shall
not, and shall cause each of its subsidiaries not to, enter into, amend, modify
or supplement, or permit any subsidiary to enter into, amend, modify or
supplement any agreement, transaction, commitment, or arrangement with any of
its or any subsidiary’s officers, directors, persons who were officers or
directors at any time during the previous two (2) years, stockholders who
beneficially own five percent (5%) or more of the Common Stock, or Affiliates
(as defined below) or with any individual related by blood, marriage, or
adoption to any such individual or with any entity in which any such entity or
individual owns a five percent (5%) or more beneficial interest (each a “Related Party”),
except for (A) customary employment arrangements and benefit programs on
reasonable terms, (B) any investment in an Affiliate of the
Company,  (C) any agreement, transaction, commitment, or arrangement
on an arms-length basis on terms no less favorable than terms which would have
been obtainable from a person other than such Related Party, and (D) any
agreement transaction, commitment, or arrangement which is approved by a
majority of the disinterested directors of the Company, for purposes hereof, any
director who is also an officer of the Company or any subsidiary of the Company
shall not be a disinterested director with respect to any such agreement,
transaction, commitment, or arrangement.  “Affiliate” for
purposes hereof means, with respect to any person or entity, another person or
entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
interest in that person or entity, (ii) has ten percent (10%) or more common
ownership with that person or entity, (iii) controls that person or entity, or
(iv) shares common control with that person or entity.  “Control” or “controls” for
purposes hereof means that a person or entity has the power, direct or indirect,
to conduct or govern the policies of another person or entity.

     

    
      
        
        

      

      
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    (j)           Restriction on Issuance of
the Capital Stock. So long as any of the principal of or interest on the
Debentures remains unpaid, the Company shall not, without the prior written
consent of the Buyer, (A) issue or sell shares of any of its capital stock,
other than shares of capital stock issuable upon the conversion or exercise of
outstanding securities as listed on Schedule 4(c), (B) issue or
sell any warrant, option, right, contract, call, or other security instrument
granting the holder thereof, the right to acquire Common Stock, (C) enter into
any security instrument granting the holder a security interest in any and all
assets of the Company or any subsidiary of the Company (whether now owned or
acquired in the future while the Debentures are outstanding), (iv) permit any
subsidiary of the Company (whether now owned or acquired in the future while the
Debentures are outstanding) to enter into any security instrument granting the
holder a security interest in any and all assets of such subsidiary or (v) file
any registration statement on Form S-8.

     

    (k)         
Restriction on “Short”
Position.  Neither the Buyer nor any of its affiliates have an
open short position in the Common Stock of the Company, and the Buyer agrees
that it shall not, and that it will cause its affiliates not to, engage in any
short sales with respect to the Common Stock as long as any Debentures shall
remain outstanding.

     

    (l) 
         Restriction on Incurring
Additional Secured Debt.  The Company shall not incur any
additional debt or permit any subsidiary of the Company to incur any additional
debt other than in the ordinary course of business without the Buyer’s prior
written consent.

     

    (m)  
      Transfer of
Assets.  The Company shall not transfer, move or otherwise
dispose of any of its assets not in the ordinary course of business without the
prior written consent of the Buyer.

     

    (n)          Legal
Opinion.  The Company shall deliver to the Buyer an opinion of
counsel from counsel to the Company in a form satisfactory to the Buyer and its
counsel (i) within thirty-one (31) days from the Closing Date, and (ii) on each
applicable Settlement Date; unless otherwise agreed to by the parties hereto in
writing.

     

    (o)        
 Security
Instruments.  On the date hereof, the Company shall execute and
deliver (i) a Security Agreement in a form satisfactory to the Buyer (the “Security Agreement”)
pursuant to which the Company shall provide to the Buyer a security interest in
the pledged property and collateral set forth therein to secure the Company’s
obligations under the Transaction Documents or any other obligations of the
Company to the Buyer and (ii) any other security instrument which the Buyer may
request of the Company and/or the Company’s officers and directors in order to
secure the Company’s obligations under the Transaction Documents or any other
obligations of the Company to the Buyer.  Any such Security Agreement
will be subject to the laws of the jurisdiction in which the respective
collateral is located. The Security Agreement and any other security instrument
contemplated by this Section 5(o) are collectively referred to herein as the
“Security
Instruments”).

     

    
      
        
        

      

      
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    (p)          Financing
Statements.  Within four (4) business days following the
execution of any Security Instrument, the Buyer shall file a form UCC-1 or such
other forms as may be required to perfect the Buyer’s interest in the pledged
property and collateral set forth in such Security Instrument collectively
providing to the Buyer a senior lien on all of the Company’s assets (real and
personal) and intellectual property.

     

    (q)          Primary
Market.  The Common Stock shall be listed or quoted for trading
on any of (a) the American Stock Exchange, (b) New York Stock Exchange, (c) the
Nasdaq Global Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC
Bulletin Board (which does not include the Pink Sheets LLC) (“OTCBB”) (each, a
“Primary
Market”).

     

    6.      CONDITIONS
TO DELIVERY OF DRAW DOWN NOTICES
AND CONDITIONS TO SETTLEMENT.

     

    (a)          Conditions
Precedent to the Obligation of the Company to Issue and Sell
Debentures.  The obligation
hereunder of the Company to issue and sell the Draw Down Debentures to the Buyer
incident to each Settlement is subject to the satisfaction, at or before each
such Settlement, of each of the conditions set forth below.

     

    (i)           The
representations and warranties of the Buyer shall be true and correct in all
material respects as of the date when made and as of the applicable Settlement
Date as though made at each such time (except for representations and warranties
specifically made as of a particular date which shall be true and correct in all
material respects as of the date when made).

     

    (ii)           The
Buyer shall have performed, satisfied and complied in all respects with all
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the Buyer at or prior to such
Settlement.

     

    (iii)           The
Buyer shall have executed this Agreement and the other Transaction Documents and
delivered the same to the Company.

     

    (iv)           The
Buyer shall have delivered to the Escrow Agent the applicable Investment Amount
for the Draw Down Debentures to be purchased at the Settlement in accordance
with the terms herein and in the Escrow Agreement.

     

    (b)          Conditions
Precedent to the Right of the Company to Deliver a Draw Down Notice.  The right of the
Company to deliver a Draw Down Notice hereunder is subject to the satisfaction
or waiver by the Buyer at its sole discretion, on the date of delivery of such
Draw Down Notice, of each of the following conditions:

     

    
      
        
        

      

      
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    (i)           The
representations and warranties of the Company shall be true and correct in all
material respects as of the date when made and as of the applicable date of
delivery of the Draw Down Notice as though made at such time (except for
representations and warranties specifically made as of a particular date which
shall be true and correct in all material respects as of the date when
made).

     

    (ii)          The
Company shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Company at or prior
to such date.

     

    (iii)         No
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction or any self-regulatory organization having
authority over the matters contemplated hereby that prohibits or directly and
adversely affects any of the transactions contemplated by this Agreement, and no
proceeding shall have been commenced that may have the effect of prohibiting or
adversely affecting any of the transactions contemplated by this
Agreement.

     

    (iv)         Since
the Closing Date, no event that had or is reasonably likely to have a material
adverse effect shall have occurred.

     

    (v)          The
Company shall not be in default of a material term, covenant, warranty or
undertaking of the Company contained in the Transaction Documents.

     

    (vi)         The
Common Stock shall be authorized for quotation or trading on the Primary Market,
trading in the Common Stock shall not have been suspended for any reason, and
all the shares of Common Stock issuable upon the conversion of the Draw Down
Debentures shall be approved for listing (if applicable) or trading on the
Primary Market.

     

    (vii)        The
Buyer shall have executed such other documents as are reasonably required by the
Company.

     

    (c)          Conditions
Precedent to Buyer’s Obligations To Purchase Debentures. The obligation
of the Buyer to direct the Escrow Agent to disburse to the Company the net
proceeds of the applicable Investment Amount of the Draw Down Debentures at a
Settlement Date is subject to the satisfaction of each of the following
conditions on or before the applicable Settlement Date, provided that these
conditions are for the Buyer’s sole benefit and may be waived by the Buyer at
any time in its sole discretion:

     

    (i)           The
Company shall have executed this Agreement, the Transaction Documents and any
other documents relating to this transaction and delivered the same to the
Buyer.

     

    
      
        
        

      

      
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    (ii)           The
representations and warranties of the Company in this Agreement, the Debentures
and the Transaction Documents shall be true and correct in all material respects
(except to the extent that any of such representations and warranties is already
qualified as to materiality in Section 4 above, in which case, such
representations and warranties shall be true and correct without further
qualification) as of the date when made and as of the applicable Settlement
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 to be performed, satisfied or complied
with by the Company at or prior to the applicable Settlement
Date.  With respect to the purchase of Draw Down Debentures, the Buyer
shall have received a certificate, executed by the President of the Company,
dated as of the applicable Settlement Date, to the foregoing effect and as to
such other matters as may be reasonably requested by the Buyer.

     

    (iii)         The
Company shall have executed and delivered to the Buyer the Debentures required
to be delivered pursuant to Section 2(e) hereof.

     

    (iv)         The
Company shall have provided to the Buyer a certificate of good standing from the
secretary of state from the State of Delaware.

     

    (v)          There
shall not have been any change or disruption or any development involving a
prospective change or disruption in the financial or capital markets the effect
of which is, in the Buyer’s sole judgment, so material and adverse as to make it
impractical or inadvisable to proceed with the purchase of the
Debentures.

     

    (vi)         There
shall have been no change which the Buyer, in its sole and absolute discretion,
deems to be materially adverse in respect of the business, results of
operations, condition (financial or otherwise), value, prospects, liabilities or
assets of the Company.

     

    (vii)        The
Company’s management incentive and employment agreements shall be acceptable to
the Buyer and its counsel.

     

    (viii)       The
Company shall be insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts in all material respects as
are customary in the businesses in which they are engaged or propose to engage
after giving effect to the transactions contemplated hereby. All policies of
insurance and fidelity or surety bonds insuring the Company or any of its
subsidiaries or the Company’s or its subsidiaries’ respective businesses,
assets, employees, officers and directors shall be in full force and effect
except where the failure of such insurance policies and fidelity or surety bonds
to be in full force and effect would not in the Buyer’s sole judgment be so
material and adverse as to make it impractical or inadvisable to proceed with
the purchase of the Debentures.

     

    (ix)          The
completion of satisfactory legal, accounting and financial due
diligence.

     

    (x)           The
Company has received all approvals (governmental and otherwise) and third party
consents of all requisite parties necessary in order for the Company to
consummate the transactions contemplated by the Transaction
Documents.

     

    (xi)          The
Company has demonstrated to the Buyer’s satisfaction that there are no material
environmental issues with respect to the Company’s business.

     

    
      
        
        

      

      
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    (xii)         The
Company has not defaulted in any material contracts, which defaults have not
been remedied, and there is no material litigation, as determined by the Buyer
as of the applicable Settlement.

     

    7.      INDEMNIFICATION BY
COMPANY.

     

    In
consideration of the Buyer’s execution and delivery of this Agreement and the
other Transaction Documents and for acquiring the Debentures and the Common
Stock underlying the Debentures upon conversion hereunder, and in addition to
all of the Company’s other obligations under this Agreement and the other
Transaction Documents, the Company shall defend, protect, indemnify and hold
harmless the Buyer and each other holder of the Debentures, and all of their
officers, directors, employees and agents (including, without limitation,
those retained in connection with the transactions contemplated by this
Agreement) (collectively, the “Buyer Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Buyer Indemnitee is a party to the
action for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and all costs and disbursements (the “Indemnified
Liabilities”), incurred by the Buyer Indemnitees or any of them as a
result of, or arising out of, or relating to (A) any misrepresentation or breach
of any representation or warranty made by the Company in this Agreement, the
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (B) any breach of any covenant, agreement or
obligation of the Company contained in this Agreement, the Transaction Documents
or any other certificate, instrument or document contemplated hereby or thereby
or (C) any cause of action, suit or claim brought or made against such Buyer
Indemnitee by a third party and arising out of or resulting from a material
misrepresentations by the Company under this Agreement or due to a material
breach by the Company of its obligations under the Transaction Documents and the
execution, delivery, performance or enforcement of this Agreement or any other
instrument, document or agreement executed pursuant hereto by any of the Buyer
Indemnities, any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance of the Debentures or
the status of the Buyer or holder of the Debentures, as a purchaser of the
Debentures and the Common Stock underlying the Debentures of the
Company.  To the extent that the foregoing undertaking by the Company
may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities, which is permissible under applicable law.

     

    8.      RELEASE.  In
consideration of the mutual promises and covenants made herein, and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, and intending to be legally bound hereby, the Company hereby
agrees to fully, finally and forever release and forever discharge and covenant
not to sue the Buyer, and/or and its parent companies, subsidiaries, affiliates,
divisions, and their respective attorneys, officers, directors, agents,
shareholders, members, employees, predecessors, successors, assigns, personal
representatives, partners, heirs and executors from any and all debts, fees,
attorneys’ fees, liens, costs, expenses, damages, sums of money, accounts,
bonds, bills, covenants, promises, judgments, charges, demands, claims, causes
of action, suits, liabilities, expenses, obligations or contracts of any kind
whatsoever, whether in law or in equity, whether asserted or unasserted, whether
known or unknown, fixed or contingent, under statute or otherwise, from the
beginning of time through the Closing Date and through each Settlement Date, if
any, including, without  limiting the generality of the foregoing, any and
all claims relating to or arising out of any financing transactions, credit
facilities, debentures, security agreements, and other agreements including,
without limitation, each of the Transaction Documents, entered into by  the
Company with the Buyer and any and all claims that the Company  does not
know or suspect to exist, whether through ignorance, oversight, error,
negligence, or otherwise, and which, if known, would materially affect their
decision to enter into this Agreement or the related Transaction
Documents.

     

    
      
        
        

      

      
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    9.      GOVERNING LAW:
MISCELLANEOUS.

     

    (a)           Governing
Law.  This Agreement shall be deemed to be made under and shall
be construed in accordance with the laws of the State of Delaware without giving
effect to the principals of conflict of laws thereof.  Each of the
parties consents to the jurisdiction of the U.S. District Court sitting in
the Southern District of the State of Florida or the state courts of the State
of Florida sitting in Dade County, Florida in connection with any dispute
arising under this Agreement and the other Transaction Documents and hereby
waives, to the maximum extent permitted by law, any objection, including any
objection based on forum non conveniens to the
bringing of any such proceeding in such jurisdictions.

     

    (b)           Counterparts.  This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other
party.

     

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

     

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

     

    (e)           Entire Agreement;
Amendments; Conflicting Terms.  This Agreement supersedes all
other prior oral agreements between the Buyer, the Company, their affiliates and
persons acting on their behalf with respect to the matters discussed
herein.  No provision of this Agreement may be waived or amended other
than by an instrument in writing signed by the party to be charged with
enforcement.  The parties hereto agree that in the event the terms of
the Letter Agreement contradict or conflict with the terms of this Agreement,
the terms of this Agreement shall govern.

     

    (f)           Notices.  Any
notices, consents, waivers, or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered (A) upon receipt, when delivered personally; (B) upon
confirmation of receipt, when sent by facsimile; (C) three (3) days after being
sent by U.S. certified mail, return receipt requested, or (D) one (1) day after
deposit with a nationally recognized overnight delivery service, in each case
properly addressed to the party to receive the same.  The addresses
and facsimile numbers for such communications shall be:

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

     

    
      
        	
                If
      to the Company, to:

              	 
      	
                New
      Media Lottery Services, Inc.

                1400
      Technology Drive

                Harrisonburg,
      VA  22802

                Attention:  John
      Carson, President and CEO

                Facsimile:   (540)
      437-1688

              
	 
      	 
      	 
      
	
                With
      a copy to:

              	 
      	
                William
      P. Ruffa, Esq.

                110
      East 59th
      Street

                New
      York, NY 10022

                Telephone:  (212)
      355-0606

                Facsimile:   1-877-FAX-RUFF

              
	
                .

              	 
      	 
      
	
                If
      to the Buyer:

              	 
      	
                Trafalgar
      Capital Specialized Investment Fund

                The
      Dickens, Kirk Street

                16
      Northington Street

                London
      WC1N 2DG

              
	 
      	 
      	
                Attention:
      Andrew Garai, Chairman of the Board of Trafalgar

                Capital
      Sarl, General Partner

                Facsimile:       011-44-207-405-0161
      and

                                        001-786-323-1651

              
	 
      	 
      	 
      
	
                With
      Copy to:

              	 
      	
                K&L
      Gates LLP

                200
      South Biscayne Blvd., Suite 3900

                Miami,
      Florida 33131

                Attention:
      Clayton E. Parker, Esq.

                Telephone:
      (305) 539-3306

                Facsimile:  (305)
      358-7095

              

      

    

     

    Each
party shall provide five (5) days’ prior written notice to the other party of
any change in address or facsimile number.

     

    (g)           Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and
assigns.  Neither the Company nor the Buyer shall assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the other party hereto.

     

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

     

    (i)           Survival.  The
representations and warranties of the Company and the Buyer contained in
Sections 3 and 4, the agreements and covenants set forth in Sections 5, 6 and 9,
and the indemnification provisions set forth in Section 8, shall survive for a
period of two (2) years following the date on which the Debentures are redeemed
in full.  The Buyer shall be responsible only for its own
representations, warranties, agreements and covenants
hereunder.

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

     

    (j)           Publicity.  The
Company and the Buyer shall have the right to approve, before issuance any press
release or any other public statement with respect to the transactions
contemplated hereby made by any party; provided, however, that the Company shall
be entitled, without the prior approval of the Buyer, to issue any press release
or other public disclosure with respect to such transactions required under
applicable securities or other laws or regulations (the Company shall use its
best efforts to consult the Buyer in connection with any such press release or
other public disclosure prior to its release and Buyer shall be provided with a
copy thereof upon release thereof).

     

    (k)           Further
Assurances.  Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.  Furthermore, the Company agrees to
execute such other documents as are reasonably required by the Buyer and it
shall be deemed a default of this Agreement if the Company fails to execute any
such additional document within two (2) business days of the date of request by
the Buyer.

     

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

     

    (m)           Recitals.  The
Recitals herein above are hereby incorporated into this Agreement as if fully
stated herein.

     

    (n)           Opportunity to Hire Counsel;
Role of K&L Gates LLP.  The Company expressly acknowledges
that they have been advised and have been given an opportunity to hire counsel
with respect to this Agreement and the other Transaction Documents and the
transactions contemplated hereby and thereby.  The Company further
acknowledges that the law firm of K&L Gates LLP did not provide them with
any legal advice with respect to the transactions contemplated by this Agreement
and the other Transaction Documents.  The Company further acknowledges
that the law firm of K&L Gates LLP has solely represented the Buyer in
connection with this Agreement and the other Transaction Documents and the
transactions contemplated hereby and thereby and no other person.

    

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

    

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

    

    
      
        
          
            
              
                	
                        COMPANY:

                      
	 
      
	
                        NEW
      MEDIA LOTTERY SERVICES, INC.

                      
	 
      	 
      
	
                        By:

                      	 
      
	
                        Name:

                      
	
                        Title:

                      

              

            

          

        

      

    

    

    
      
        	
                BUYER:

              
	 
      
	
                TRAFALGAR
      CAPITAL SPECIALIZED

              
	
                INVESTMENT
      FUND, FIS

              
	
                By:       Trafalgar
      Capital Sarl

              
	
                Its:        General
      Partner

              

      

    

     

    
      
        
          
            
              
                
                  
                    
                      	
                              By:

                            	 
      

                    

                  

                

                
                  
                    
                      	
                              Name:

                            	 
      

                    

                  

                

                
                  
                    
                      	
                              Title:

                            	 
      

                    

                  

                

                 

              

            

          

        

      

    

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

     EXHIBIT
A

    

    [FORM
OF DEBENTURE]

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

    EXHIBIT
B

    

    [FORM
OF ESROW AGREEMENT]

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

    SCHEDULE
4(a)

    

    COMPANY
SUBSIDIARIES

    

    [TO
BE ATTACHED]

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

     

    SCHEDULE
4(c)

    

    CAPITALIZATION
DISCLOSURES

    

    Debentures
issued in the name of the Buyer

     

    The
Preferred Shares to be issued pursuant to the terms of the Letter
Agreement

    

    New Media
Lottery Services has 150,000,000 authorized shares of Common Stock at par value
$0.0001 per share.

    

     31,247,843
shares of common stock have been issued.

    

    
      
        
          
            
              
                
                  
                    
                      
                        
                          	 
      	 	
                                  Date
      of

                                	 	
                                  Expiration

                                	 	
                                  #
      of

                                	 	 	
                                  Exercise

                                	 
	
                                  Name

                                	 	
                                  Grant

                                	 	
                                  Date

                                	 	
                                  Shares

                                	 	 	
                                  Price

                                	 
	 
      	 	 
      	 	 
      	 	 	 	 	 	 
	
                                  OPTIONS:

                                	 	 
      	 	 
      	 	 	 	 	 	 
	
                                  Various
      employees

                                	 	
                                  5/29/09

                                	 	
                                  5/28/19

                                	 	 	3,475,000	 	 	$	0.10	 
	 
      	 	 
      	 	 
      	 	 	 	 	 	 	 	 
	
                                  WARRANTS:

                                	 	
                                   
      

                                	 	 
      	 	 	 	 	 	 	 	 
	
                                  Milton
      Dresner

                                	 	
                                  7/23/09

                                	 	
                                  7/22/12

                                	 	 	750,000	 	 	$	0.05	 
	 
      	 	 
      	 	 
      	 	 	 	 	 	 	 	 
	
                                  Joseph
      Dresner

                                	 	
                                  7/23/09

                                	 	
                                  7/22/12

                                	 	 	750,000	 	 	$	0.05	 
	 
      	 	 
      	 	 
      	 	 	 	 	 	 	 	 
	
                                  Lilliput
      Holdings, LTD

                                	 	
                                  5/6/05

                                	 	
                                  5/5/15

                                	 	 	200,000	 	 	$	0.25	 

                        

                      

                    

                  

                

              

            

          

        

      

    

    
      
         

      

      
        28

        
          

        

      

      
         

      

    

    SCHEDULE
4(x)

    

    SEC
Delinquent Filings

     

    10KSB for
the period ended April 30, 2008 was filed on August 14, 2008

    

    10Q for
the period ended January 31, 2009 was filed on April 3, 2009

    
      
         

      

      
        29

        
          

        

      

      
         

      

    

    SCHEDULE
4(y)

    

    Notices
from Exchange

    

    On March
24, 2009, New Media Lottery Services, Inc was notified by FINRA that it had been
delinquent with the filing of its 10-KSB for the period ended April 30, 2008 and
its 10-Q for the period ended January 31, 2009.  A third delinquent
filing within a 24 month period would result in the ineligibility for quotation
on the OTCBB for a period of one year.

    
      
         

      

      
        30

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