Document:

ex10-1.htm

Exhibit
    10.1

    

    
      

       

      

       

      

    

    
      

       

      XA,
        INC.

       

    

    
      SECURITIES
        PURCHASE AGREEMENT

    

    
       

      As
        of
        December 21, 2007

       

      

    

    
      

       

      

       

      

    

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    THIS
      SECURITIES PURCHASE
      AGREEMENT, dated as of this 21st day of December 2007 (this “Agreement”),
      between XA, INC., a Nevada corporation (the “Company”),
      and
      Sands Brothers Venture Capital III LLC (the “Purchaser”).

     

    W
      I T N E S S E T
      H:

     

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

     

    WHEREAS,
      the Company has
      previously entered into Securities Purchase Agreements on June 11, 2007, June
      22, 2007, and June 29, 2007 (the “Follow
      On
      Closing” and the “Follow
      On Purchase
      Agreements”), whereby it sold an aggregate of $450,000 in 11%
      Senior Secured Convertible Promissory Notes (the “Follow
      On
      Notes”) and 450,000 warrants to purchase shares of its common
      stock at an exercise price of $0.30 per share (the “Follow
      OnWarrants”),
      to
      six entities (including the Purchaser) and two individuals (the “Follow
      On
      Purchasers”) which Follow On Notes were secured by Security
      Agreements (the “Follow
      OnSecurity
      Agreements”).  The shares of common stock which the
      Prior Notes and the Follow On Notes were convertible into and the shares of
      common stock which the Prior Warrants and Follow On Warrants were convertible
      into and an aggregate of 1,000,000 additional warrants previously issued
      exercisable at $0.30 per share (collectively the “Prior
      Underlying
      Shares”), were granted registration rights pursuant to
      Registration Rights Agreements (the “Prior
      Registration
      Agreements”);

     

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

     

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

     

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

     

    1.      Sale
      and Purchase of
      Securities.

     

    1.1                      Sale
      and Purchase of
      Securities.  Subject to the terms and conditions of this
      Agreement, on the Closing Date (as defined in Section 3.1 hereof),
      the Company shall issue, sell and deliver to the Purchaser, and the Purchaser
      shall purchase from the Company for the Purchase
      Price (as defined in Section 2.1 hereof)
      (i) 11% Senior Subordinated Secured Convertible Promissory Notes in the
      aggregate principal amount of $200,000 on or about the date of this Agreement,
      which are part of a sale of an aggregate of up to $600,000 in 11% Senior
      Subordinated Convertible Promissory Notes by the Company (collectively the
      “Notes”)
      and
      warrants to purchase Two Hundred Thousand
      (200,000) shares (subject to adjustment as described therein), of the Company’s
      common stock, par value $0.001 per share (the “Common
      Stock”)
      at an exercise price of $0.30 per share (subject to adjustment as described
      therein), of the Company’s Common Stock (each a “Warrant”
and
      collectively the “Warrants”).
      The Notes and Warrants shall hereinafter sometimes be collectively referred
      to
      as the “Securities.”
      The names, addresses and principal amount of Notes purchased and Warrants
      received by the Purchaser shall be set forth on Schedule 1.1
      hereto.

     

    
      
        
        

      

      
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    2.      Purchase
      Price.

     

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

     

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

     

    3.      Closing.

     

    3.1                      Closing
      Date.  The closing of the sale and purchase of the Securities
      (the “First
      Closing”) shall take place on December 21, 2007, in connection
      with the sale of $200,000 of the Notes the “Closing”),
      or
      at such other time, date or place as the parties hereto may mutually agree;
      provided, that
      all conditions to the Closing set forth in this Agreement have been satisfied
      or
      waived by such date.  The date on which the Closing is held is
      referred to in this Agreement as the “Closing
      Date.”  At the Closing (i) the Company shall deliver, or
      cause to be delivered, the Notes, each executed by the Company and (ii) the
      documents referred to in Section 8
      hereof.

     

    3.2                      Mastodon
      Warrants.
      The Company shall issue Mastodon Ventures, Inc. an aggregate of 350,000 warrants
      to purchase shares of the Company’s common stock at an exercise price of $0.30
      per share, in connection with the First Closing (the “Mastodon
      Warrants”).  The Company has previously issued 1,000,000
      warrants to Mastodon Ventures, Inc., which warrants have an exercise price
      of
      $0.30 per share.  Additionally, the Company has learned that a portion
      of such Warrants have been assigned to various parties by Mastodon.

    

    3.3                      PriorWarrants
      and Follow On
      Warrants Amendments.  The expiration date of the Prior Warrants
      and the Follow On Warrants will automatically be amended to the date five years
      from the date of the First Closing Date.

    

    3.4                     
      Management Shares
      and
      Warrants.  The Company, and the Company’s Chief
      Executive Officer, Joseph Wagner (“Wagner”),
      agrees that a condition to the Closing is that Wagner put all of the shares
      of
      the Company’s common stock, and all warrants to purchase shares of the Company’s
      common stock which he beneficially owns (the “Wagner
      Securities”) into a lock-bock, and that Wagner shall not be able
      to sell any of the Wagner Securities until the earlier of (a) the date the
      Notes
      are repaid in full; (b) the date all of the Underlying Shares have been
      registered with the Securities and Exchange Commission; or (c) the date such
      Underlying Shares can be sold without restriction pursuant to Rule 144, or
      otherwise.   The Company will inform the Company’s transfer agent
      by letter, of the placement of the Wagner Securities in the lock-box and the
      restrictions thereon after the parties entry into this
      Agreement.

    
      
        
        

      

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

     

    4.1                      Organization
      and Good
      Standing; Capitalization.

     

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

     

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

     

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

     

    
      
        
        

      

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

     

    4.4                      Subsidiaries,
      Joint
      Ventures, Partnerships, Etc.

     

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

     

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

     

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

     

    4.6                      Authorization
      of
      Securities.

     

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

     

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

     

    4.7           Rule
      144 Holding Period.  The Company agrees and confirms that the
      Purchaser’s holding period for the purposes of Rule 144 relates back to August
      8, 2006 in connection with the Prior Notes purchased by the Purchaser and June
      22, 2007 in connection with the Follow On Notes purchased by the
      Purchaser.  The Company also agrees and confirms, that in the event of
      a cashless exercise of the Prior Warrants issued to the Purchaser in connection
      with Purchaser’s subscription for the Prior Notes, the applicable Rule 144
      holding period will relate back to August 8, 2006, and in the event of a
      cashless exercise of the Follow On Warrants issued to the Purchaser in
      connection with Purchaser’s subscription for the Follow On
      Notes,
      the applicable Rule 144 holding period will relate back to June 22,
      2007.
 

    
      
        
        

      

      
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    4.8                      Capitalization
      and Increase in Authorized Shares.

     

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

     

    (b)
Increase
      in Authorized
      Shares.  The Company agrees to use its best efforts to file a
      Form 14a Proxy Statement with the Securities and Exchange Commission on or
      prior
      to February 15, 2008, to request shareholder approval to increase the Company’s
      authorized shares of Common Stock, $0.001 par value per share to 50,000,000
      shares, and to re-authorize the Company’s preferred stock, $0.001 par value per
      share.

    

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

     

    
      
        
        

      

      
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    4.10                   
      Material
      Changes. Since December 31, 2006,  other than as disclosed in
      the SEC Reports, (i) there has been no event, occurrence or development
      that has had or that could reasonably be expected to result in a Material
      Adverse Effect, (ii) the Company has not incurred any material liabilities
      (contingent or otherwise) other than (A) trade payables and accrued expenses
      incurred in the ordinary course of business consistent with past practice and
      (B) liabilities not required to be reflected in the Company's financial
      statements pursuant to GAAP or required to be disclosed in filings made with
      the
      Commission, (iii) the Company has not altered its method of accounting or
      the identity of its auditors, (iv) the Company has not declared or made
      payment or distribution of any dividend or distribution of cash or other
      property to its holders of Common Stock or purchased, redeemed or made any
      agreements to purchase or redeem any shares of its capital stock and
      (v) the Company has not issued any equity securities to any officer,
      director or Affiliate, except pursuant to existing Company stock option
      plans.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

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

     

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

     

    4.17                   
      Material
      Contracts.

     

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

     

    
      
        
        

      

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

     

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

     

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

     

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

     

    4.19                    Employees.

     

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

     

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

     

    
      
        
        

      

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

     

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

     

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

     

    
      
        
        

      

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

     

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

     

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

    

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

     

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

     

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

     

    
      
        
        

      

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

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

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

    

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

    

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

     

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

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

    

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

    

    6.      Further
      Agreements of the Parties.

     

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

     

    
      
        
        

      

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

     

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

     

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

     

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

     

    
      
        
        

      

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

     

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

     

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

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

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

     

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

    

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

    

    6.7                      [Internationally
      removed].

    

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

    

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

    

    6.10                   
      Fees and
      Expenses.  Each party shall pay the fees and expenses of its
      advisors, counsel, accountants and other experts, if any, and all other
      expenses, incurred by such party incident to the negotiation, preparation,
      execution, delivery and performance of this Agreement.  Notwithstanding
      the foregoing sentence, the Company shall pay to The Loev Law Firm, PC, thousand
      dollars ($10,000), which amount may be withheld from the Purchase Price paid
      upon closing.

    
      
        
        

      

      
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    7.      Other
      Obligations of the Parties.

     

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

     

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

     

    7.3                      
      Transfer
      Restrictions.

     

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

     

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

     

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

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

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

     

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

    

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

     

    7.6                     
      Use of
      Proceeds. The Company covenants and agrees that the net proceeds that it
      receives from the sale of the Notes pursuant to this Agreement, shall be used
      as
      follows: $200,000 to pay LaSalle and $400,000 for working capital.

     

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

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

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

     

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

     

    8.      Conditions
      to Closing.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

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

     

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

     

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

     

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

     

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

     

    (v)         this
      Agreement duly executed by the Company;

     

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

     

    (vii)       Legal
      Opinion;

    

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

    

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

    

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

    

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

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

    

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

     

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

     

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

     

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

     

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

     

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

     

    (i)
      this Agreement duly executed by
      the Purchaser;

     

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

     

    (iii)
      the
      Security Agreement executed by the Purchaser.

    

    8.3                      
      Post Closing
      Obligations. Following the Closing Date:

    

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

    

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

    

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

    9.      Miscellaneous.

     

    9.1                      
      Certain
      Definitions.

     

     

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

     

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

    

     

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

     

     

    “Closing”
means
      the closing of the purchase and sale of the Notes and the Warrants pursuant
      to
Section 3.1 on
      December 21, 2007, or such other date as mutually agreed to by the
      parties.

     

     

    “Closing
      Date”
means the date of the Closing.

     

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

     

     

    “Commission”
      means the Securities and Exchange Commission.

     

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

     

     

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

     

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

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

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

     

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

     

     

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

     

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

    

    Exhibit
      A–                                Registration
      Rights Agreement

    Exhibit
      B–                                Form
      of Warrants

    Exhibit
      C–                                Form
      of Note

    Exhibit
      D–                                Security
      Agreement

    

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

    

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

     

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

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

     

     

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

     

     

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

     

     

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

     

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

     

     

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

     

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

     

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

     

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

     

     

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

     

     

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

     

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

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

     

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

     

    9.4                      Construction.  The
      headings herein are for convenience only, do not constitute a part of this
      Agreement and shall not be deemed to limit or affect any of the provisions
      hereof. The language used in this Agreement will be deemed to be the language
      chosen by the parties to express their mutual intent, and no rules of strict
      construction will be applied against any party.

     

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

     

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

     

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

     

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

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

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

     

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

     

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

     

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

     

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

     

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

     

    
      	
               

            	
              If
                to the Company:

            

    

    

    
      	
               

            	
              XA,
                Inc.

            

    

    875
      North
      Michigan Avenue, Suite 2626,

    Chicago,
      IL 60611

    Attention:  Joseph
      Wagner, President

    Telephone:  312-397-9100

    

    
      	
               

            	
              With
                a copy to:

            

    

    

    David
      M.
      Loev

    The
      Loev
      Law Firm, PC

    6300
      West
      Loop South, Suite 280

    Bellaire,
      Texas 77401

    Telephone:
      713-524-4110

    

    
      	
               

            	
              If
                to the Purchaser:

            

    

    

    ______________________

    ______________________

    ______________________

    ______________________

    ______________________

    

    
      	
               

            	
              With
                a copy to:

            

    

    

    
      	
               

            	
              ______________________

            

    

    ______________________

    ______________________

    ______________________

    ______________________

    ______________________

    

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

    

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

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

    

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

    

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

     

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

    

    

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

     

    

     

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

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

     

    

    XA,
      INC.

    

    

    

    By:           /s/
      Joseph
      Wagner                                                     

    Joseph
      Wagner

    Chief
      Executive Officer

    

    

    
 

    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    

    PURCHASER’S
      SIGNATURE PAGE TO
      SECURITIES PURCHASE AGREEMENT

    

    

    Sands
      Brothers Venture
      Capital III LLC

    

    By:          /s/
      Scott
      Baily                                                      

    Name:
      Scott Baily

    Title:
      COO

    

    

    Address:
      90 Park Ave. 31st Fl. New York, NY 10016

    

    

    Facsimile
      Number: 212-953-4978

    

    $200,000

    

    

    

    

    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    

    Schedule
      1.1

    

    Purchaser

    

    

    
      	
              NAME
                AND
                ADDRESS

              OF
                EACH
                PURCHASER

            	
              PRINCIPAL
                NOTE

              AMOUNT
                PURCHASED

            
	 	
              Sands
                Brothers

              Venture
                Capital III LLC

            	
              $200,000

            	 

    

    

    
      
        
        

      

      
        32ex10-2.htm

    Exhibit
      10.2

     

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

    

    

    XA,
      INC.

    

    11%
      Senior Secured Convertible
      Promissory Note

    

    

    Bridge
      Note No.: 1 December 21, 2007

    

    

    

    FOR
      VALUE
      RECEIVED, XA, Inc., a Nevada corporation (collectively with all of its
      Subsidiaries, as defined in the SPA (as defined below), the “Company”)
      with
      its principal executive office at 875 North Michigan Avenue, Suite 2626,
      Chicago, IL 60611, promises to pay to the order of  Sands Brothers
      Venture Capital III LLC (the “Payee”
or
      the
“Holder
      of this
      Note”) or registered assigns on the earlier of (i) December
      21, 2008; or (ii)  if so elected by the Payee, upon consummation by
      the Company of a merger, combination or sale of substantially all of its assets
      or the purchase by a single entity or person or group of affiliated entities
      or
      persons of more than fifty (50%) percent of the voting stock of the Company
      (the
“Maturity
      Date”), the principal amount of Two Hundred
      Thousand
      ($200,000)  (the “Principal
      Amount”) in such coin or currency of the United States of America
      as at the time of payment shall be legal tender for the payment of public and
      private debts. Interest on this Note shall accrue on the Principal Amount
      outstanding from time to time at a rate per annum computed in accordance with
      Section 3
      hereof and shall be payable on the Maturity Date, or earlier upon conversion
      of
      this Note in accordance with the provisions of Section 6 hereof
      (or as may otherwise be provided in this Note). Nothing in item (ii) of
      this paragraph shall be construed as the consent by the holder of this Note
      to
      any action otherwise prohibited by the terms of this Note or as a waiver of
      any
      such prohibition.

    

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

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

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

    

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

    

    This
      Note, and Prior Notes on substantially similar terms issued in August, September
      and October 2006 in the aggregate amount of $2,700,000 (the “Prior
      Notes”)
      and other identical Notes in the aggregate principal amount of $450,000, issued
      in June 2007 (the “Follow
      On
      Notes”) and other identical Notes in the aggregate principal
      amount of $400,000(the “Second
      Follow On
      Notes” and collectively with the Prior Notes and the Follow On
      Notes, the “Notes”)
      are
      (were) issued by the Company in connection with a private placement (the “Bridge
      Financing”) by the Company of its of Notes  pursuant and
      in accordance with (x) a Securities Purchase Agreement dated the date hereof
      by
      and among the Company and the Payee (the “SPA”),
      and (y)
      a prior Securities Purchase Agreement relating to the Prior Notes, copies of
      which are available for inspection at the Company’s principal office.
      Notwithstanding any provision to the contrary contained herein, this Note is
      subject and entitled to certain terms, conditions, covenants and agreements
      contained in the SPA. Any transferee of this Note, by its acceptance hereof,
      assumes the obligations of the Payee in the SPA with respect to the conditions
      and procedures for transfer of this Note. Reference to the SPA shall in no
      way
      impair the absolute and unconditional obligation of the Company to pay both
      principal hereof and interest hereon as provided herein.

    

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

    

    2.           Investment
      Warrants. In consideration for the loan evidenced by this Note, the Company
      shall issue to the holder of the Note five-year Investment
      Warrants  to purchase in the aggregate 200,000 shares of the Company’s
      common stock, $.001 par value per share (the “Common Stock”) at an exercise
      price of $.30  per share (the “Investment Warrants”). The
      Holder of this Note may at any time that this Note remains outstanding present
      this Note to the Company in payment of the exercise price of all or any portion
      of the Investment Warrants.   The Holder of this Note is
      purchasing $200,000 in Follow On Notes (which represents a portion of the full
      amount of the Second Follow On Notes being offered) and is being granted an
      aggregate of 200,000 five-year Investment Warrants in connection with such
      investment.

    

    3.           Computation
      of
      Interest.

    

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

    

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

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    

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

    

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

    

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

    

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

    

    (ii)           Maintenance
      of
      Existence. The Company will do or cause to be done all things reasonably
      necessary to preserve and keep in full force and effect its corporate existence,
      rights and franchises and comply with all laws applicable to the Company, except
      where the failure to comply could not reasonably be expected to have a material
      adverse effect on the Company, and the Company will timely file any and all
      periodic report filings pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”), which are required to
      maintain current public information about the Company;

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    

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

    
 

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    

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

    

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

    

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

    

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

    

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

    

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

    

    (b)
      finished goods inventories.

    

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

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    (iv)           Indebtedness.  Without
      the express consent of the Holder, so long as this Note is outstanding, the
      Company shall not, and the Company shall not permit any of its Subsidiaries
      to,
      directly or indirectly, incur or guarantee, assume or suffer to exist any
      indebtedness, other than the (i) indebtedness evidenced by this Note and the
      other Notes, (ii) the Permitted Senior Indebtedness (as defined in the Security
      Agreement), (iii) indebtedness incurred through a Private Offering, and (iv)
      any
      Subsequent Financing in which the holders of the Rights Option shall
      invest.

    

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

    

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

    

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

    

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

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    

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

    

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

    

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

    

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

    

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

    

    5.           Events
      of
      Default.

    

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

    

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

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    6.           Conversions.

    

    A.           [Intentionally
      removed].

    

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

    

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

    

    D.           Conversion
      Mechanics.

    

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

     

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

     

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

    

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

     

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

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

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

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    E.           Sale
      of Shares Below
      Conversion Price:

     

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

     

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

     

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

     

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

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

     

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

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

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

    

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

    

    C.           To
      the extent that the Company makes a payment or payments to the Payee, and such
      payment or payments or any part thereof are subsequently for any reason
      invalidated, set aside and/or required to be repaid to a trustee, receiver
      or
      any other party under any bankruptcy law, state or federal law, common law
      or
      equitable cause, then to the extent of such recovery, the obligation or part
      thereof originally intended to be satisfied, and all rights and remedies
      therefor, shall be revived and continued in full force and effect as if such
      payment had not been made or such enforcement or setoff had not
      occurred.

    

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

    

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

     

    

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    10.           Miscellaneous.

    

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

    

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

    

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

    

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

    

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

    

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

    

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

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

    

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

    

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

    

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

    

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT
      BLANK]

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

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

     

    

    

    XA,
      INC.

    

    

    

    By:         
      /s/ Joseph Wagner

    Name:
      Joseph
Wagner

    Title:
      President & CEO

    

    

    

    $200,000

    

    

    

    

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

    EXHIBIT
      A

    

    Optional
      Conversion Election
      Form

    

    

    ____________,
      200_

    

    XA,
      Inc.

    875
      North
      Michigan Avenue, Suite 2626

    Chicago,
      IL 60611

    

    Re:           Optional
      Conversion of
      Promissory Note

    Gentlemen:

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

    

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

    

    

    Very
      truly yours,

    

    

    ___________________________

    Name:

    

    

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

    

    ______________________________________________

    Name

    

    ______________________________________________

    Address

    

    ______________________________________________

    Social
      Security No. of
      Shareholder

    

    
      
        
        

      

      
        19

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