Document:

Exhibit 10.2

    
      

    

    

      Exhibit
        10.2

      

      

      CONTRIBUTION
        AGREEMENT

      

      dated
        as
        of January 17, 2007

      between

      

      Shree
        Associates, Kunj Associates, Devi Associates,

      Shanti
        III Associates, Trust FBO Jay H. Shah under The Hasu

      And
        Hersha Shah 2004 Trust dated August 18, 2004,

      Trust
        FBO
        Neil H. Shah under The Hasu and Hersha Shah

      2004
        Trust dated August 18, 2004, and David L. Desfor

      

      as
        Contributors,

      

      and

      

      HERSHA
        HOSPITALITY LIMITED PARTNERSHIP

      

      as
        Acquiror

      

      IN
        CONNECTION WITH THE CONTRIBUTION AND ACQUISITION

      OF
        LLC
        INTERESTS IN H. METRO DELAWARE, LLC

      

        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        

      

       

      CONTRIBUTION
        AGREEMENT

      

      

      THIS
        CONTRIBUTION AGREEMENT (the “Agreement”), dated this 17th day of January, 2007,
        between [Shree Associates, Kunj Associates, Devi Associates, Shanti III
        Associates, Trust FBO Jay H. Shah under The Hasu And Hersha Shah 2004 Trust
        dated August 18, 2004, Trust FBO Neil H. Shah under The Hasu and Hersha Shah
        2004 Trust dated August 18, 2004, and David L. Desfor, (the “Contributors”), AND
        HERSHA HOSPITALITY LIMITED PARTNERSHIP, a Virginia limited partnership (the
        “Acquiror” or “HHLP”) and provides:

       

      ARTICLE
        I

      DEFINITIONS;
        RULES OF CONSTRUCTION

      

      
        	 	
                1.1

              	
                Definitions.
                  The following terms shall have the indicated
                  meanings:

              

      

      

      "Act
        of Bankruptcy"
        shall
        mean if a party hereto or any general partner thereof shall (a) apply for
        or consent to the appointment of, or the taking of possession by, a receiver,
        custodian, trustee or liquidator of itself or of all or a substantial part
        of
        its property, (b) admit in writing its inability to pay its debts as they
        become due, (c) make a general assignment for the benefit of its creditors,
        (d) file a voluntary petition or commence a voluntary case or proceeding
        under the Federal Bankruptcy Code (as now or hereafter in effect), (e) be
        adjudicated a bankrupt or insolvent, (f) file a petition seeking to take
        advantage of any other law relating to bankruptcy, insolvency, reorganization,
        winding-up or composition or adjustment of debts, (g) fail to controvert in
        a timely and appropriate manner, or acquiesce in writing to, any petition
        filed
        against it in an involuntary case or proceeding under the Federal Bankruptcy
        Code (as now or hereafter in effect), or (h) take any corporate or
        partnership action for the purpose of effecting any of the foregoing; or
        if a
        proceeding or case shall be commenced, without the application or consent
        of a
        party hereto or any general partner thereof, in any court of competent
        jurisdiction seeking (1) the liquidation, reorganization, dissolution or
        winding-up, or the composition or readjustment of debts, of such party or
        general partner, (2) the appointment of a receiver, custodian, trustee or
        liquidator or such party or general partner or all or any substantial part
        of
        its assets, or (3) other similar relief under any law relating to
        bankruptcy, insolvency, reorganization, winding-up or composition or adjustment
        of debts, and such proceeding or case shall continue undismissed; or an order
        (including an order for relief entered in an involuntary case under the Federal
        Bankruptcy Code, as now or hereafter in effect) judgment or decree approving
        or
        ordering any of the foregoing shall be entered and continue unstayed and
        in
        effect, for a period of 60 consecutive days.

      

      “Assignment
        and Assumption Agreements”
shall
        mean those certain assignment and assumption agreements whereby the Contributors
        assign and HHLP assumes the Interests. 

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      "Authorizations"
        shall
        mean all licenses, permits and approvals required by any governmental or
        quasi-governmental agency, body or officer for the ownership, operation and
        use
        of the Property or any part thereof.

      

      "Closing"
        shall
        mean the closing of the contribution and acquisition of the Interests pursuant
        to this Agreement.

      

      "Closing
        Date"
        shall
        mean the date on which the Closing occurs.

      

      “Consideration”
        shall
        mean Seven
        Million Seven Hundred Fifty Thousand Dollars ($7,750,000.00)
        payable
        to the Contributors at Closing in the manner described in Article
        II.

      

      “Continuing
        Liabilities”
shall
        include liabilities arising under operating agreements, equipment leases,
        loan
        agreements, or proration credits at Closing, but shall exclude any liabilities
        arising from any other arrangement, agreement or pending
        litigation.

      

      "FIRPTA
        Certificates"
        shall
        mean the affidavit of each of the Contributors under Section 1445 of the
        Internal Revenue Code certifying that such Contributor is not a foreign
        corporation, foreign partnership, foreign trust, foreign estate or foreign
        person (as those terms are defined in the Internal Revenue Code and the Income
        Tax Regulations), in form and substance satisfactory to the
        Acquiror.

      

      "Governmental
        Body"
        means
        any federal, state, municipal or other governmental department, commission,
        board, bureau, agency or instrumentality, domestic or foreign.

      

      "Hotel"
        shall
        mean the hotel and related amenities located on the Land.

      

      “Interest”
shall
        mean all right, title and interest of a Contributor in the LLC.

      

      "Insurance
        Policies"
        shall
        mean those certain policies of insurance described on Exhibit C
        attached
        hereto.

      

      “Interests”
shall
        mean all right, title and interest of all of the Contributors in the
        LLC.

      

      "Inventory"
        shall
        mean all "inventories of merchandise" and "inventories of supplies", as such
        terms are defined in the Uniform System of Accounts for Hotels [9th
        Revised
        Edition] as published by the Hotel Association of New York City, Inc., as
        revised, and similar consumable supplies.

      

      "Land"
        shall
        mean that certain parcel of real estate lying and being at, more commonly
        known
        as the, as more particularly described on Exhibit A
        attached
        hereto.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      "Lease"
        shall
        mean that certain lease of real property attached hereto as Exhibit
        D.

      

      "LLC"
        shall
        mean H. METRO DELAWARE, LLC, a Delaware limited liability company.

      

      "Operating
        Agreements"
        shall
        mean the management agreements, service contracts, supply contracts, leases
        (other than the Leases) and other agreements, if any, in effect with respect
        to
        Furniture, Fixture, and Equipment existing at the Hotel. All of the Operating
        Agreements in force and effect as of the date hereof are listed on Exhibit E
        attached
        hereto.

      

      “Organizational
        Documents”
        shall
        mean the current operating agreement and certificate of organization of the
        LLC,
        true and correct copies of which are attached hereto as Exhibit
        F.
        

      

      "Permitted
        Title Exceptions"
        shall
        mean those exceptions to title to the Real Property that are satisfactory
        to the
        Acquiror. 

      

      "Property"
        shall
        mean collectively the Inventory, the Tangible Personal Property, and the
        Intangible Personal Property.

      

      "Tangible
        Personal Property"
        shall
        mean the items of tangible personal Property consisting of all furniture,
        fixtures and equipment situated on, attached to, or used in the operation
        of the
        Hotel, and all furniture, furnishings, equipment, machinery, and other personal
        property of every kind located on or used in the operation of the Hotel and
        owned by the LLC.

      

      1.2    Rules
        of Construction.
        The
        following rules shall apply to the construction and interpretation of this
        Agreement:

      

      (a)    Singular
        words shall connote the plural number as well as the singular and vice versa,
        and the masculine shall include the feminine and the neuter.

      

      (b)    All
        references herein to particular articles, sections, subsections, clauses
        or
        exhibits are references to articles, sections, subsections, clauses or exhibits
        of this Agreement.

      

      (c)    The
        headings
        contained herein are solely for convenience of reference and shall not
        constitute a part of this Agreement nor shall they affect its meaning,
        construction or effect.

      

      (d)    Each
        party hereto and its counsel have reviewed and revised (or requested revisions
        of) this Agreement, and therefore any usual rules of construction requiring
        that
        ambiguities are to be resolved against a particular party shall not be
        applicable in the construction and interpretation of this Agreement or any
        exhibits hereto.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ARTICLE
        II

      CONTRIBUTION
        OF INTERESTS IN EXCHANGE FOR PARTNERSHIP INTERESTS IN HHLP

      

      2.1    Contribution.
        Each of
        the Contributors agrees to contribute, assign and transfer its respective
        Interest to HHLP, and HHLP agrees to accept each Contributor’s Interest in
        exchange for units of HHLP, all on the terms and conditions set forth
        herein.

      

      2.2    Value
        of Interests.
        The
        total value of all Interests of the Contributors is Seven Million Seven Hundred
        Fifty Thousand Dollars ($7,750,000.00). If consideration is paid in limited
        partnership units, the price of the limited partnership units will be determined
        by utilizing the five day volume weighted average closing price for Priority
        Class A Common Stock of Hersha Hospitality Trust as of the Closing
        Date.

      

      2.3    Effect
        of Contributions.
        Upon
        completion of the capital contributions contemplated by this
        Agreement:

      

      (a)    The
        Contributors will own units in HHLP with a total value of $7,750,000.00 in
        the
        percentages as set forth in detail in Exhibit “B” attached hereto and made a
        part hereof by this reference.

      

      (b)    HHLP
        shall
        beneficially own the Interests, free and clear of any encumbrance, pledge
        or any
        other third party interests.

      

      (c)    HHLP
        shall
        have assumed and be responsible for the Continuing Liabilities.

      

      The
        parties agree that the transfer of the Interests to HHLP pursuant to this
        Agreement shall be treated for federal income tax purposes as a contribution
        of
        such Interests solely in exchange for partnership interests in HHLP that
        qualifies as a tax-free contribution under Section 721 of the Internal Revenue
        Code of 1986, as amended.

       

       

      ARTICLE
        III

      CONTRIBUTORS’
        REPRESENTATIONS, WARRANTIES AND COVENANTS

      

      To
        induce
        the Acquiror to enter into this Agreement and to acquire the Interests, the
        Contributors hereby make the following representations, warranties and covenants
        on a joint and several basis, upon each of which the Contributors acknowledge
        and agree that the Acquiror is entitled to rely and has relied:

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      3.1    Organization
        and Power.
        The
        Contributors are each individuals residing in the United States of America,
        and
        the Corporate Contributor is a corporation duly formed, validly existing
        and in
        good standing under the laws of the Commonwealth of Pennsylvania and have
        all
        requisite powers and all governmental licenses, authorizations, consents
        and
        approvals necessary to carry on its business as now conducted, to own, lease
        and
        operate its properties, to execute and deliver this Agreement and any document
        or instrument required to be executed and delivered on behalf of the
        Contributors hereunder, to perform their obligations under this Agreement
        and
        any such other documents or instruments and to consummate the transactions
        contemplated hereby.

      

      
        	 	
                3.2

              	
                Authorization,
                  No Violations and Notices. 

              

      

      

      (a)    The
        execution, delivery and performance of this Agreement by the Contributors,
        and
        the consummation of the transactions contemplated hereby have been duly
        authorized, adopted and approved by the Contributors, and the shareholders
        of
        the Corporate Contributor, to the extent required by their organizational
        documents and applicable law. No other proceedings are necessary to authorize
        this Agreement and the transactions contemplated hereby. This Agreement has
        been
        duly executed by or on behalf of each Contributor and is a valid and binding
        obligation enforceable against them in accordance with its terms.

      

      (b)    Neither
        the
        execution, delivery, or performance by the Contributors of this Agreement,
        nor
        the consummation of the transactions contemplated hereby, nor compliance
        by the
        Contributors with any of the provisions hereof, will:

      

      (i)    violate,
        conflict with, result in a breach of any provision of, constitute a default
        (or
        an event that, which, with or lapse of time or both, would constitute a default)
        under, result in the termination of, accelerate the performance required
        by, or
        result in a right of termination or acceleration, or the creation of any
        lien,
        security interest, charge, or encumbrance upon any of the properties or assets
        of the LLC, under any of the terms, conditions, or provisions of, its Operating
        Agreement, or any note, bond, mortgage, indenture, deed of trust, license,
        lease, agreement, or other instrument, or obligation to which the LLC is
        a
        party, or by which the LLC may be bound, or to which the LLC or its properties
        or assets may be subject; or

      

      (ii)    violate
        any
        judgment, ruling, order, writ, injunction, decree, statute, rule, or regulation
        applicable to the LLC or its property or assets that would not be violated
        by
        the execution, delivery or performance of this Agreement or the transactions
        contemplated hereby by the Contributors or compliance by the Contributors
        with
        any of the provisions hereof.

      

      3.3    Litigation
        with respect to Contributors.
        There is
        no action, suit, claim or proceeding pending or, to the Contributors’ knowledge,
        threatened against or affecting the Contributors or their assets in any court,
        before any arbitrator or before or by any governmental body or other regulatory
        authority (i) that would adversely affect the Interests, (ii) that seeks
        restraint, prohibition, damages or other relief in connection with this
        Agreement or the transactions contemplated hereby, or (iii) would delay the
        consummation of any of the transactions contemplated hereby. The Contributors
        are not subject to any judgment, decree, injunction, rule or order of any
        court
        relating to the Contributors’ participation in the transactions contemplated by
        this Agreement.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      
        3.4    Interests.
          The
          Interests will be free and clear of all liens and encumbrances on the Closing
          Date and the Contributors have good, merchantable title thereto and the
          right to
          convey same in accordance with the terms of this Agreement. Upon delivery
          of the
          Assignment and Assumption Agreements to the Acquiror at Closing, good valid
          and
          merchantable title to the Interests, free and clear of all liens and
          encumbrances, will pass to the Acquiror.

        

        3.5    Bankruptcy
          with Respect to Contributors.
          No Act
          of Bankruptcy has occurred with respect to the Contributors.

      

      

      3.6    Brokerage
        Commission.
        The
        Contributors have not engaged the services of, nor are they or will they
        or
        Acquiror become liable to, any real estate agent, broker, finder or any other
        person or entity for any brokerage or finder’s fee, commission or other amount
        with respect to the transactions described herein on account of any action
        by
        the Contributors.

      

      
        	 	
                3.7

              	
                The
                  LLC.

              

      

      

      (a)    The
        LLC is a
        limited liability company duly formed, validly existing and in good standing
        under the laws of the State of Delaware and has all requisite powers necessary
        to carry on its business as now conducted, to own, lease and operate its
        properties.

      

      (b)    Neither
        the
        execution, delivery, or performance by the Contributors of this Agreement,
        nor
        the consummation of the transactions contemplated hereby, nor compliance
        by the
        Contributors with any of the provisions hereof, will:

      

      (i)    violate,
        conflict with, result in a breach of any provision of, constitute a default
        (or
        an event that, with notice or lapse of time or both, would constitute a default)
        under, result in the termination of, accelerate the performance required
        by, or
        result in a right of termination or acceleration, or the creation of any
        lien,
        security interest, charge, or encumbrance upon any of the properties or assets
        of the LLC, under any of the terms, conditions, or provisions of, its
        certificate of organization, or any note, bond, mortgage, indenture, deed
        of
        trust, license, lease, agreement, or other instrument or obligation to which
        the
        LLC is a party, or by which the LLC may be bound, or to which the LLC or
        its
        properties or assets may be subject; or

      

      (ii)    violate
        any
        judgment, ruling, order, writ, injunction, decree, statute, rule, or regulation
        applicable to the LLC or any of the LLC’s properties or assets.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      (c)    Except
        for the Contributors, no party has any interest in the LLC or the right or
        option to acquire any interest in the LLC or the property or any portion
        thereof. The LLC has no subsidiaries and does not directly or indirectly
        own any
        securities of or interest in any other entity, including, without limitation,
        any partnership or joint venture.

      

      3.8    Liabilities,
        Debts and Obligations.
        Except
        for the Continuing Liabilities, the LLC has no liability, debt or
        obligation.

      

      3.9    Tax
        Matters with respect to LLC.

      

      (a)    The
        LLC has
        filed all income tax information returns on IRS Form 1065 (including K-1s
        for
        each partner) and applicable state and local income tax forms required to
        be
        filed with the United States Government and with all states and political
        subdivisions thereof where any such returns are required to be filed and
        where
        the failure to file such return or report would subject the LLC or its members
        to any material liability or penalty. All taxes (other than sale taxes, rental
        taxes or the equivalent and real property taxes) imposed by the United States,
        or by any foreign country, or by any state, municipality, subdivision, or
        instrumentality of the United States or of any foreign country or by any
        other
        taxing authority, which are due and payable by the LLC have been paid in
        full or
        adequately provided for by reserves shown in their records and books of account
        and in the LLC’s financial information. The LLC has not obtained or received any
        extension of time (beyond the Closing Date) for the assessment of deficiencies
        for any years or waived or extended the statute of limitations for the
        determination or collection of any tax. To the Contributors’ knowledge no
        unassessed tax deficiency is proposed or threatened against the
        LLC.

      

      (b)    All
        taxes,
        rental taxes or the equivalent, and all interest and penalties due thereon,
        required to be paid or collected by the LLC in connection with the operation
        of
        the Property as of the Closing Date will have been collected and/or paid
        to the
        appropriate governmental authorities, as required or such amounts shall be
        pro-rated as of the Closing Date. The LLC shall file all necessary returns
        and
        petitions required to be filed through the Closing Date. The LLC shall prepare
        and file all federal and state income tax returns for the tax period ending
        on
        the Closing Date, which shall reflect the termination for tax purposes of
        the
        LLC. If requested by the Acquiror, the Contributors shall cause the LLC to
        make
        an election under Section 754 of the Code for the period ending on the Closing
        Date.

      

      3.10    Contracts
        and Agreements.
        There is
        no loan agreement, guarantee, note, bond, indenture and other debt instrument,
        lease and other contract to which the LLC is a party or by which its assets
        are
        bound other than Permitted Title Encumbrances, the Leases, and the Operating
        Agreements. 

      

      3.11    No
        Special Taxes.
        The
        Contributors have no actual knowledge of, nor have they received any written
        notice of, any special taxes or assessments relating to the LLC or Property
        or
        any part thereof or any planned public improvements that may result in a
        special
        tax or assessment against the Property.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      3.12    Compliance
        with Existing Laws.
        The LLC
        possesses all Authorizations, each of which is valid and in full force and
        effect, and, to Contributors’ actual knowledge, no provision, condition or
        limitation of any of the Authorizations has been breached or violated. The
        LLC
        has not misrepresented or failed to disclose any relevant fact in obtaining
        all
        Authorizations, and the Contributors have no actual knowledge of any change
        in
        the circumstances under which those Authorizations were obtained that result
        in
        their termination, suspension, modification or limitation. The Contributors
        have
        no actual knowledge, nor have they received written notice within the past
        three
        years, of any existing violation of any provision of any applicable building,
        zoning, subdivision, environmental or other governmental ordinance, resolution,
        statute, rule, order or regulation, including but not limited to those of
        environmental agencies or insurance boards of underwriters, with respect
        to the
        ownership, operation, use, maintenance or condition of the Property or any
        part
        thereof, or requiring any repairs or alterations other than those that have
        been
        made prior to the date hereof.

      

      3.13    Operating
        Agreements.
        The LLC
        has performed all of its obligations under each of the Operating Agreements
        and
        no fact or circumstance has occurred which, by itself or with the passage
        of
        time or the giving of notice or both, would constitute a material default
        under
        any of the Operating Agreements. The LLC shall not enter into any new management
        agreement, maintenance or repair contract, supply contract, lease in which
        it is
        lessee or other agreements with respect to the Property, nor shall the LLC
        enter
        into any agreements modifying the Operating Agreements, unless (a) any such
        agreement or modification will not bind the Acquiror or the Property after
        the
        date of Closing or (b) the Contributors have obtained the Acquiror’s prior
        written consent to such agreement or modification, which consent shall not
        be
        unreasonably withheld or delayed. 

      

      3.14    Warranties
        and Guaranties.
        The LLC
        shall not before Closing, release or modify any warranties or guarantees,
        if
        any, of manufacturers, suppliers and installers relating to the Property
        or any
        part thereof, except with the prior written consent of the Acquiror, which
        consent shall not be unreasonably withheld or delayed. A complete list of
        all
        such warranties and guaranties in effect as of this date is attached hereto
        as
Exhibit G.

      

      3.15    Insurance.
        All of
        the LLC’s Insurance Policies are valid and in full force and effect, all
        premiums for such policies were paid when due and all future premiums for
        such
        policies (and any replacements thereof) shall be paid by the LLC on or before
        the due date therefore. The LLC shall pay all premiums on, and shall not
        cancel
        or voluntarily allow to expire, any of the LLC’s Insurance Policies prior to the
        Closing Date unless such policy is replaced, without any lapse of coverage,
        by
        another policy or policies providing coverage at least as extensive as the
        policy or policies being replaced. The LLC shall name the Acquiror as an
        additional insured on each of the LLC’s Insurance Policies.

      

      3.16    Condemnation
        Proceedings; Roadways.
        The LLC
        has received no written notice of any condemnation or eminent domain proceeding
        pending or threatened against the Property or any part thereof.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      3.17    Litigation
        with respect to LLC.
        Except
        as set forth on Exhibit
        H
        there is
        no action, suit or proceeding pending or known to be threatened against or
        affecting the LLC or its property in any court, before any arbitrator or
        before
        or by any governmental agency which (a) in any manner raises any question
        affecting the validity or enforceability of this Agreement or any other material
        agreement or instrument to which the LLC is a party or by which it is bound
        and
        that is or is to be used in connection with, or is contemplated by, this
        Agreement, (b) could materially and adversely affect the business, financial
        position or results of operations of the LLC, (c) could materially and adversely
        affect the ability of the LLC to perform its obligations hereunder, or under
        any
        document to be delivered pursuant hereto, (d) could create a lien on the
        Property, any part thereof or any interest therein, or (e) could otherwise
        materially adversely affect the Property, any part thereof or any interest
        therein or the use, operation, condition or occupancy thereof.

      

      3.18    Financial
        Information.
        To the
        best of the Contributors’ knowledge except as otherwise disclosed in writing to
        the Acquiror prior to the closing, for each of the LLC’s accounting years, when
        a given year is taken as a whole, all of the LLC’s financial information
        previously delivered or to be delivered to the Acquiror is and shall be correct
        and complete in all material respects and presents accurately the results
        of the
        operations of the Property for the periods indicated, except such statements
        do
        not have footnotes or schedules that may otherwise be required by GAAP. If
        requested by the Acquiror, Contributors will forward promptly all four-week
        period ending financial information they receive from the LLC. Contributors’
financial information is prepared based on information provided by the LLC
        based
        on books and records maintained by the LLC in accordance with the LLC’s
        accounting system. LLC financial information provided to the Acquiror has
        been
        provided to the Acquiror without any changes or alteration thereto. To the
        best
        of Contributors’ knowledge, since the date of the last financial statement
        included in the LLC’s financial information, there has been no material adverse
        change in the financial condition or in the operations of the
        Property.

      

      3.19    Organizational
        Documents.
        The
        LLC’s Organizational Documents are in full force and effect and have not been
        modified or supplemented, and no fact or circumstance has occurred that,
        by
        itself or with the giving of notice or the passage of time or both, would
        constitute a default thereunder.

      

      3.20    Bankruptcy
        with respect to Partnership.
        No Act
        of Bankruptcy has occurred with respect to the LLC.

      

      3.21    Bulk
        Sale Compliance.
        Contributors shall indemnify Acquiror against any claim, loss or liability
        arising under the bulk sales law in connection with the transaction contemplated
        herein.

      

      3.22    Leases.
        True,
        complete copy of the Lease is attached as Exhibit D hereto. The Lease is,
        and
        will at Closing be, in full force and effect and LLC, is not in default and
        will
        make good faith efforts not to be in default with respect thereto (with or
        without the giving of any notice and/or lapse of time).

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      3.23    Securities
        Law Matters.
        Contributors further represent and warrant that they have (i) received,
        reviewed, been given the opportunity to ask questions of representatives
        of the
        Operating Partnership and the REIT regarding, and understands the Acquiror’s
        Partnership Agreement, as amended, and each filing of the REIT under the
        Securities Act, and (ii) Contributors are "accredited investors" as defined
        under Regulation D promulgated under the Securities Act.

      

      3.24    Tax
        Matters with Respect to Contributors.
        The
        Contributors represent and warrant that they (and each of their partners)
        have
        obtained from their own counsel advice regarding the tax consequences of
        (i) the
        transfer of the Interests to the Acquiror and the receipt of the limited
        partnership units of Hersha Hospitality Limited Partnership as consideration
        therefore, (ii) the Contributors’ admission as partners of the Acquiror, and
        (iii) any other transaction contemplated by this Agreement. The Contributors
        further represent and warrant that they have not relied on the Acquiror or
        the
        Acquiror’s representatives or counsel for such advice.

      

      3.25    Noncontravention.
        The
        execution and delivery of, and the performance by the Contributors of their
        obligations under this Agreement do not and will not contravene, or constitute
        a
        default under, any provision of applicable law or regulation, or any agreement,
        judgment, injunction, order, decree or other instrument binding upon the
        Contributors, or result in the creation of any lien or other encumbrance
        on any
        asset of the Contributors. There are no outstanding agreements (written or
        oral)
        pursuant to which the Contributors (or any predecessor to or representative
        of
        the Contributors) have agreed to contribute or have granted an option or
        right
        of first refusal to acquire the Property or any part thereof.

      

      Each
        of
        the representations, warranties and covenants contained in this Article
        III
        and its
        various subparagraphs are intended for the benefit of the Acquiror and may
        be
        waived in whole or in part, by the Acquiror, but only by an instrument in
        writing signed by the Acquiror. Each of said representations, warranties
        and
        covenants shall survive the closing of the transaction contemplated hereby
        for
        twenty-four (24) months, and no investigation, audit, inspection, review
        or the
        like conducted by or on behalf of the Acquiror shall be deemed to terminate
        the
        effect of any such representations, warranties and covenants, it being
        understood that the Acquiror has the right to rely thereon and that each
        such
        representation, warranty and covenant constitutes a material inducement to
        the
        Acquiror to execute this Agreement and to close the transaction contemplated
        hereby and to issue the Units of HHLP to the Contributors. Acquiror acknowledges
        and agrees that, except for the representations and warranties expressly
        set
        forth herein, Acquiror is acquiring the Interests "AS-IS, WHERE-IS" with
        no
        representations or warranties by or from Contributors or any of its affiliates,
        express or implied, or any nature whatsoever.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ARTICLE
        IV

      ACQUIROR’S
        REPRESENTATIONS, WARRANTIES AND COVENANTS

      

      To
        induce
        the Contributors to enter into this Agreement and to transfer the Interests,
        the
        Acquiror hereby makes the following representations, warranties and covenants,
        upon each of which the Acquiror acknowledges and agrees that the Contributors
        are entitled to rely and have relied:

      

      4.1    Organization
        and Power.
        The
        Acquiror is a limited partnership duly organized, validly existing and in
        good
        standing under the laws of the Commonwealth of Virginia, and has all partnership
        powers and all governmental licenses, authorizations, consents and approvals
        to
        carry on its businesses as now conducted and to enter into and perform its
        obligations under this Agreement and any document or instrument required
        to be
        executed and delivered on behalf of the Acquiror hereunder. 

      

      4.2    Noncontravention.
        The
        execution and delivery of this Agreement and the performance by the Acquiror
        of
        its obligations hereunder do not and will not contravene, or constitute a
        default under, any provisions of applicable law or regulation, the Acquiror’s
        partnership agreements or any agreements, judgment, injunction, order, decree
        or
        other instrument binding upon the Acquiror or result in the creation of any
        lien
        or other encumbrance on any asset of the Acquiror.

      

      4.3    Litigation.
        There is
        no action, suit or proceeding, pending or known to be threatened, against
        or
        affecting the Acquiror in any court or before any arbitrator or before any
        Governmental Body which (a) in any manner raises any question affecting the
        validity or enforceability of this Agreement or any other agreement or
        instrument to which the Acquiror is a party or by which it is bound and that
        is
        to be used in connection with, or is contemplated by, this Agreement,
        (b) could materially and adversely affect the business, financial position
        or results of operations of the Acquiror, (c) could materially and
        adversely affect the ability of the Acquiror to perform its obligations
        hereunder, or under any document to be delivered pursuant hereto, (d) could
        create a lien on the Units, any part thereof or any interest therein or
        (e) could adversely affect the Units, any part thereof or any interest
        therein or the use, operation, condition or occupancy thereof.

      

      4.4    Bankruptcy.
        No Act
        of Bankruptcy has occurred with respect to the Acquiror.

      

      4.5    No
        Brokers.
        The
        Acquiror has not engaged the services of, nor is it or will it become liable
        to,
        any real estate agent, broker, finder or any other person or entity for any
        brokerage or finder's fee, commission or other amount with respect to the
        transaction described herein.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ARTICLE
        V

      CONDITIONS
        AND ADDITIONAL COVENANTS

      

      The
        Acquiror’s obligations hereunder are subject to the satisfaction of the
        following conditions precedent and the compliance by the Contributors with
        the
        following covenants:

      

      5.1    Contributors’
        Deliveries.
        The
        Contributors shall have delivered to the Escrow Agent or the Acquiror, as
        the
        case may be, on or before the date of Closing, all of the documents and other
        information required of Contributors pursuant to Section 6.2.

      

      5.2    Representations,
        Warranties and Covenants; Obligations of Contributors;
        Certificate.
        All of
        the Contributors’ representations and warranties made in this Agreement shall be
        true and correct as of the date hereof and as of the date of Closing as if
        then
        made, there shall have occurred no material adverse change in the financial
        condition of the LLC since the date hereof, the Contributors shall have
        performed all of their material covenants and other obligations under this
        Agreement and the Contributors shall have executed and delivered to the Acquiror
        at Closing a certificate to the foregoing effect.

      

      5.3    Condition
        of Property.
        The
        Property and the Tangible Personal Property leased by the LLC shall be in
        the
        same condition at Closing as they are as of the date hereof, reasonable wear
        and
        tear accepted. Prior to Closing, the Contributors shall not have diminished
        the
        quality or quantity of maintenance and upkeep services heretofore provided
        to
        the Property and the Tangible Personal Property and the Contributors shall
        not
        have diminished the Inventory.

       

       

      ARTICLE
        VI

      CLOSING

      

      6.1    Closing.
        Closing
        shall be held at a location that is mutually acceptable to the parties, on
        or
        before March 31, 2007. 

      

      6.2    Contributors’
        Deliveries.
        At
        Closing, the Contributors shall deliver to Acquiror all of the following
        instruments, each of which shall have been duly executed and, where applicable,
        acknowledged on behalf of the Contributors and shall be dated as of the date
        of
        Closing:

      

      (a)    The
        certificate required by Section 5.2.

      

      (b)    The
        Assignment and Assumption Agreements.

      

      (c)    Such
        agreements, affidavits or other documents as may be required by the Title
        Company to issue the Owner's Title Policy with affirmative coverage over
        mechanics' and materialmen's liens.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

      (d)    True,
        correct
        and complete copies of all warranties, if any, of manufacturers, suppliers
        and
        installers possessed by the Contributors and relating to the Property, or
        any
        part thereof.

      

      (e)    Certified
        copies of the LLC’s Organizational Documents.

      

      (f)    Appropriate
        resolutions of the partners of the Partnership Contributors, together with
        all
        other necessary approvals and consents of the Contributors, authorizing
        (A) the execution on behalf of the Contributors of this Agreement and the
        documents to be executed and delivered by the Contributors prior to, at or
        otherwise in connection with Closing, and (B) the performance by the
        Contributors of their obligations hereunder and under such
        documents.

      

      (g)    Such
        proof as
        the Acquiror may reasonably require with respect to Contributors’ compliance
        with the bulk sales laws or similar statutes.

      

      (h)    A
        written
        instrument executed by the Contributors, conveying and transferring to the
        Acquiror all of the Contributors’ right, title and interest in any telephone
        numbers and facsimile numbers relating to the Property, and, if the Contributors
        maintains a post office box, conveying to the Acquiror all of its interest
        in
        and to such post office box and the number associated therewith, so as to
        assure
        a continuity in operation and communication.

      

      (i)    All
        books,
        records, operating reports, appraisal reports, files and other materials
        in the
        Contributors’ possession or control which are necessary in the Acquiror’s
        discretion to maintain continuity of operation of the Property.

      

      (j)    An
        assignment
        of all warranties and guarantees from all contractors and subcontractors,
        manufacturers, and suppliers in effect with respect to the
        Improvements.

      

      (k)    Such
        agreements, affidavits or other documents as may be required 

      

      (l)    Any
        other
        document or instrument reasonably requested by the Acquiror or required
        hereby.

      

      6.3    Acquiror’s
        Deliveries.
        At
        Closing, HHLP shall issue or deliver to the Contributors the
        following:

       

      (a)    The
        Units of
        HHLP described in ARTICLE II.

      

      (b)    The
        Assignment and Assumption Agreements.

      

      (c)    Any
        other
        document or instrument reasonably requested by the Contributors or required
        hereby.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      6.4    Closing
        Costs.
        The
        Acquiror shall pay all legal fees and expenses. All filing fees for the
        recording or other similar taxes due with respect to the transfer of title
        and
        all charges for title insurance premiums shall be paid by the Acquiror. The
        Contributors shall pay reasonable fees for the preparation of the documents
        to
        be delivered by the Contributors hereunder. Acquiror shall pay for the releases
        of any deeds of trust, mortgages and other financing encumbering the Property
        and for any costs associated with any corrective instruments. The Acquiror
        shall
        pay all other costs, including all franchise license transfer fees, in carrying
        out the transactions contemplated hereunder.

       

       

      ARTICLE
        VII

      LIABILITY
        OF ACQUIROR; INDEMNIFICATION BY CONTRIBUTORS;

      TERMINATION
        RIGHTS

      

      7.1    Liability
        of Acquiror.
        Except
        for any obligation expressly assumed or agreed to be assumed by the Acquiror
        hereunder and in the Assignment and Assumption Agreement, the Acquiror does
        not
        assume any obligation of the Contributors or any liability for claims arising
        out of any occurrence prior to Closing.

      

      7.2    Indemnification
        by Contributors.
        The
        Contributors hereby indemnify and hold the Acquiror harmless from and against
        any and all claims, costs, penalties, damages, losses, liabilities and expenses
        (including reasonable attorneys' fees), subject to Section
        8.11
        that may
        at any time be incurred by the Acquiror, whether before or after Closing,
        as a
        result of any breach by the Contributors of any of their representations,
        warranties, covenants or obligations set forth herein or in any other document
        delivered by the Contributors pursuant hereto.

      

      7.3    Termination
        by Acquiror.
        If any
        condition set forth herein cannot or will not be satisfied prior to Closing,
        or
        upon the occurrence of any other event that would entitle the Acquiror to
        terminate this Agreement and its obligations hereunder, and the Contributors
        fail to cure any such matter within ten business days after notice thereof
        from
        the Acquiror, the Acquiror, at its option and as its sole remedy, shall elect
        either (a) to terminate this Agreement and all other rights and obligations
        of the Contributors and the Acquiror hereunder shall terminate immediately,
        or
        (b) to waive its right to terminate and, instead, to proceed to Closing.

      

      7.4    Termination
        by Contributors.
        If,
        prior to Closing, the Acquiror defaults in performing any of its obligations
        under this Agreement (including its obligation to acquire the Interests),
        and
        the Acquiror fails to cure any such default within ten business days after
        notice thereof from the Contributors, then the Contributors’ sole remedy for
        such default shall be to terminate this Agreement. 

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ARTICLE
        VIII

      MISCELLANEOUS
        PROVISIONS

      

      8.1    Completeness;
        Modification.
        This
        Agreement constitutes the entire agreement between the parties hereto with
        respect to the transactions contemplated hereby and supersedes all prior
        discussions, understandings, agreements and negotiations between the parties
        hereto. This Agreement may be modified only by a written instrument duly
        executed by the parties hereto.

      

      8.2    Assignments.
        The
        Acquiror may assign its rights hereunder to any affiliate of Acquiror without
        the consent of the Contributors. No such assignment shall relieve the Acquiror
        of any of its obligations and liabilities hereunder.

      

      8.3    Successors
        and Assigns.
        The
        benefits and burdens of this Agreement shall inure to the benefit of and
        bind
        the Acquiror and the Contributors and their respective party
        hereto.

      

      8.4    Days.
        If any
        action is required to be performed, or if any notice, consent or other
        communication is given, on a day that is a Saturday or Sunday or a legal
        holiday
        in the jurisdiction in which the action is required to be performed or in
        which
        is located the intended recipient of such notice, consent or other
        communication, such performance shall be deemed to be required, and such
        notice,
        consent or other communication shall be deemed to be given, on the first
        business day following such Saturday, Sunday or legal holiday. Unless otherwise
        specified herein, all references herein to a "day" or "days" shall refer
        to
        calendar days and not business days.

      

      8.5    Governing
        Law.
        This
        Agreement and all documents referred to herein shall be governed by and
        construed and interpreted in accordance with the laws of the Commonwealth
        of
        Pennsylvania.

      

      8.6    Counterparts.
        To
        facilitate execution, this Agreement may be executed in as many counterparts
        as
        may be required. It shall not be necessary that the signature on behalf of
        both
        parties hereto appear on each counterpart hereof. All counterparts hereof
        shall
        collectively constitute a single agreement.

      

      8.7    Severability.
        If any
        term, covenant or condition of this Agreement, or the application thereof
        to any
        person or circumstance, shall to any extent be invalid or unenforceable,
        the
        remainder of this Agreement, or the application of such term, covenant or
        condition to other persons or circumstances, shall not be affected thereby,
        and
        each term, covenant or condition of this Agreement shall be valid and
        enforceable to the fullest extent permitted by law.

      

      8.8    Costs.
        Regardless of whether Closing occurs hereunder, and except as otherwise
        expressly provided herein, each party hereto shall be responsible for its
        own
        costs in connection with this Agreement and the transactions contemplated
        hereby, including without limitation fees of attorneys, engineers and
        accountants.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      8.9    Notices.
        All
        notices, requests, demands and other communications hereunder shall be in
        writing and shall be delivered by hand, transmitted by facsimile transmission,
        sent prepaid by Federal Express (or a comparable overnight delivery service)
        or
        sent by the United States mail, certified, postage prepaid, return receipt
        requested, at the addresses and with such copies as designated below. Any
        notice, request, demand or other communication delivered or sent in the manner
        aforesaid shall be deemed given or made (as the case may be) when actually
        delivered to the intended recipient.

       

      
        
          	
                  If
                    to the Contributors:

                	 	 
	 	 	 
	 	 	 
	 	
                  Phone:

                	 	 
	 	
                  Fax:

                	 	 
	 	 	 	 
	
                  With
                    a copy to:

                	 	 
	 	 	 
	 	 	 
	 	
                  Phone:

                	 	 
	 	
                  Fax:
                    

                	 	 
	 	 	 	 
	 	 	 	 
	
                  If
                    to the Acquiror:

                	Ashish
                  R. Parikh
	 	Hersha
                  Hospitality Limited Partnership
	 	44
                  Hersha Drive
	 	Harrisburg,
                  PA 17102
	 	Phone:
                  (717) 979-4217
	 	Fax:
                  (717) 412-5518
	 	 
	
                  With
                    a copy to:

                	Paul
                  A. Lundberg, Esquire 
	 	Reilly,
                  Wolfson, Sheffey, Schrum and Lundberg LLP
	 	1601
                  Cornwall Road
	 	Lebanon,
                  PA 17042
	 	Phone:
                  (717) 273-3733
	 	Fax:
                  (717) 273-1535

        

      

      

      Or
        to
        such other address as the intended recipient may have specified in a notice
        to
        the other party. Any party hereto may change its address or designate different
        or other persons or entities to receive copies by notifying the other party
        and
        the Escrow Agent in a manner described in this Section.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      8.10    Incorporation
        by Reference.
        All of
        the exhibits attached hereto are by this reference incorporated herein and
        made
        a part hereof.

      

      8.11    Survival.
        All of
        the representations, warranties, covenants and agreements of the Contributors
        and the Acquiror made in, or pursuant to, this Agreement, including the
        confidentiality provision of Article 8.15 of this Agreement, shall survive
        for a
        period of twenty-four (24) months following Closing and shall not merge into
        any
        document or instrument executed and delivered in connection
        herewith.

      

      8.12    Further
        Assurances.
        The
        Contributors and the Acquiror each covenant and agree to sign, execute and
        deliver, or cause to be signed, executed and delivered, and to do or make,
        or
        cause to be done or made, upon the written request of the other party, any
        and
        all agreements, instruments, papers, deeds, acts or things, supplemental,
        confirmatory or otherwise, as may be reasonably required by either party
        hereto
        for the purpose of or in connection with consummating the transactions described
        herein.

      

      8.13    No
        Partnership.
        This
        Agreement does not and shall not be construed to create a partnership, joint
        venture or any other relationship between the parties hereto except the
        relationship of Contributors and Acquiror specifically established
        hereby.

      

      8.14    Time
        of Essence.
        Time is
        of the essence with respect to every provision hereof.

      

      8.15    Confidentiality.
        Except
        as hereinafter provided, from and after the execution of this Agreement,
        the
        Acquiror and the Contributors
        shall keep the terms, conditions and provisions of this Agreement confidential
        and neither shall make any public announcements hereof unless the other first
        approves of same in writing, nor shall either disclose the terms, conditions
        and
        provisions hereof, except to persons who "need to know", such as their
        respective attorneys, accountants, engineers, surveyors, financiers and bankers.
        Notwithstanding the foregoing, it is acknowledged that the Acquiror has elected
        to be a real estate investment trust ("REIT") and that the REIT has sold
        shares
        and may seek to sell additional shares to the general public and that in
        connection therewith, the Acquiror will have the absolute and unbridled right
        to
        market such securities and prepare and file all necessary or reasonably required
        registration statements, disclosure statements, and other papers, documents
        and
        instruments necessary or reasonably required in the Acquiror’s judgment and that
        of its attorneys and underwriters with respect to the REIT's shares with
        the
        U.S. Securities and Exchange Commission and/or similar state authorities
        and to
        cause same to become effective and to disclose therein and thus to its
        underwriters, to the U.S. Securities and Exchange Commission and/or to similar
        state authorities and to the public all of the terms, conditions and provisions
        of this Agreement.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      [SIGNATURE
        PAGE TO FOLLOW.]

      

        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        

      

       

      IN
        WITNESS WHEREOF, the Contributors and the Acquiror have caused this Agreement
        to
        be executed in their names by their respective duly-authorized
        representatives.

      

      CONTRIBUTORS:

      

      
        	 	 	 
	 	Shree
                Associates
	 	 	 
	 	
                By

              	 
	 	 	
                Hasu
                  P. Shah

              
	 	 	 
	 	Kunj
                Associates
	 	 	 
	 	
                By

              	 
	 	 	
                Kiran
                  P. Patel

              
	 	 	 
	 	Devi
                Associates
	 	 	 
	 	
                By

              	 
	 	 	
                Bharat
                  Mehta

              
	 	 	 
	 	Shanti
                III Associates
	 	 	 
	 	By	
                 

              
	 	 	
                K.D.
                  Patel

              
	 	 	 
	 	Trust
                FBO Jay H. Shah under The Hasu And Hersha Shah 2004 Trust dated August
                18,
                2004
	 	 	 
	 	
                By

              	 
	 	 	
                Jay
                  H. Shah

              
	 	 	 
	 	By	 
	 	 	
                Jatin
                  Desai

              

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      
        	 	Trust
                FBO Neil H. Shah under The Hasu and Hersha Shah 2004 Trust Dated
                August
                18, 2004
	 	 
	 	
                By

              	 
	 	 	
                Neil
                  H. Shah

              
	 	 	 
	 	
                By

              	 
	 	 	
                Jatin
                  Desai

              
	 	 	 
	 	 	 
	 	 	
                David
                  L. Desfor

              

      

      

      

      ACQUIROR:

      

      
        	 	HERSHA
                HOSPITALITY LIMITED PARTNERSHIP, a Virginia limited
                partnership
	 	 
	 	
                By:

              	
                HERSHA
                  HOSPITALITY TRUST, a Maryland business trust, its sole general
                  partner

              
	 	 	 
	 	
                By:

              	 	 
	 	 	 
	 	 	
                Name:

              	 	 
	 	 	 
	 	 	
                Title:THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THE SECURITIES MAY NOT BE SOLD,
      TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
      FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE
      AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT
      REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE
      144
      OR REGULATION S UNDER SAID ACT.

     

    

     

    CALLABLE
      SECURED CONVERTIBLE NOTE

     

    Addison,
      Texas

    
      
        	
                January
                  11, 2007

              	
                $__________

              

      

    

     

     

    FOR
      VALUE RECEIVED,
      DEALERADVANCE, INC.,
      a
      Nevada corporation (hereinafter called the “Borrower”),
      hereby promises to pay to the order of _______________ or registered assigns
      (the “Holder”)
      the
      sum of $______, on January 11, 2010 (the “Maturity
      Date”),
      and
      to pay interest on the unpaid principal balance hereof at the rate of eight
      percent (8%) per annum from January 11, 2007 (the “Issue
      Date”)
      until
      the same becomes due and payable, whether at maturity or upon acceleration
      or by
      prepayment or otherwise. Any amount of principal or interest on this Note which
      is not paid when due shall bear interest at the rate of fifteen percent (15%)
      per annum from the due date thereof until the same is paid (“Default
      Interest”).
      Interest shall commence accruing on the issue date, shall be computed on the
      basis of a 365-day year and the actual number of days elapsed and shall be
      payable, quarterly on March 31, June 30, September 30 and December 31
      of each year beginning on June 30, 2007. All payments due hereunder (to the
      extent not converted into common stock, $.0001 par value per share, of the
      Borrower (the “Common
      Stock”)
      in
      accordance with the terms hereof) shall be made in lawful money of the United
      States of America, or, at the option of the Borrower, in shares of Common Stock
      of the Borrower at the applicable Conversion Price. All payments shall be made
      at such address as the Holder shall hereafter give to the Borrower by written
      notice made in accordance with the provisions of this Note. Whenever any amount
      expressed to be due by the terms of this Note is due on any day which is not
      a
      business day, the same shall instead be due on the next succeeding day which
      is
      a business day and, in the case of any interest payment date which is not the
      date on which this Note is paid in full, the extension of the due date thereof
      shall not be taken into account for purposes of determining the amount of
      interest due on such date. As used in this Note, the term “business day” shall
      mean any day other than a Saturday, Sunday or a day on which commercial banks
      in
      the city of New York, New York are authorized or required by law or executive
      order to remain closed. Each capitalized term used herein, and not otherwise
      defined, shall have the meaning ascribed thereto in that certain Securities
      Purchase Agreement, dated December 15, 2006, pursuant to which this Note was
      originally issued (the “Purchase
      Agreement”).
      

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

    This
      Note
      is free from all taxes, liens, claims and encumbrances with respect to the
      issue
      thereof and shall not be subject to preemptive rights or other similar rights
      of
      stockholders of the Borrower and will not impose personal liability upon the
      holder thereof. The obligations of the Borrower under this Note shall be secured
      by that certain Security Agreement, dated December 15, 2006, by and between
      the
      Borrower and the Holder.

     

    The
      following terms shall apply to this Note:

     

     

    ARTICLE
      I. CONVERSION
      RIGHTS

     

    1.1 Conversion
      Right.
      Subject
      to the Company obtaining Stockholder Approval as defined in Section 4(n) of
      the
      Securities Purchase Agreement, the Holder shall have the right from time to
      time, and at any time on or prior to the earlier of (i) the Maturity Date and
      (ii) the date of payment of the Default Amount (as defined in Article III)
      pursuant to Section 1.6(a) or Article III, the Optional Prepayment Amount (as
      defined in Section 5.1 or any payments pursuant to Section 1.7, each in respect
      of the remaining outstanding principal amount of this Note to convert all or
      any
      part of the outstanding and unpaid principal amount of this Note into fully
      paid
      and non-assessable shares of Common Stock, as such Common Stock exists on the
      Issue Date, or any shares of capital stock or other securities of the Borrower
      into which such Common Stock shall hereafter be changed or reclassified at
      the
      conversion price (the “Conversion
      Price”)
      determined as provided herein (a “Conversion”);
      provided,
      however,
      that in
      no event shall the Holder be entitled to convert any portion of this Note in
      excess of that portion of this Note upon conversion of which the sum of (1)
      the
      number of shares of Common Stock beneficially owned by the Holder and its
      affiliates (other than shares of Common Stock which may be deemed beneficially
      owned through the ownership of the unconverted portion of the Notes or the
      unexercised or unconverted portion of any other security of the Borrower
      (including, without limitation, the warrants issued by the Borrower pursuant
      to
      the Purchase Agreement) subject to a limitation on conversion or exercise
      analogous to the limitations contained herein) and (2) the number of shares
      of
      Common Stock issuable upon the conversion of the portion of this Note with
      respect to which the determination of this proviso is being made, would result
      in beneficial ownership by the Holder and its affiliates of more than 4.9%
      of
      the outstanding shares of Common Stock. For purposes of the proviso to the
      immediately preceding sentence, beneficial ownership shall be determined in
      accordance with Section 13(d) of the Securities Exchange Act of 1934, as
      amended, and Regulations 13D-G thereunder, except as otherwise provided in
      clause (1) of such proviso. The number of shares of Common Stock to be issued
      upon each conversion of this Note shall be determined by dividing the Conversion
      Amount (as defined below) by the applicable Conversion Price then in effect
      on
      the date specified in the notice of conversion, in the form attached hereto
      as
      Exhibit A (the “Notice
      of Conversion”),
      delivered to the Borrower by the Holder in accordance with Section 1.4 below;
      provided that the Notice of Conversion is submitted by facsimile (or by other
      means resulting in, or reasonably expected to result in, notice) to the Borrower
      before 6:00 p.m., New York, New York time on such conversion date (the
“Conversion
      Date”).
      The
      term “Conversion
      Amount”
means,
      with respect to any conversion of this Note, the sum of (1) the principal amount
      of this Note to be converted in such conversion plus
      (2)
      accrued and unpaid interest, if any, on such principal amount at the interest
      rates provided in this Note to the Conversion Date plus
      (3)
      Default Interest, if any, on the amounts referred to in the immediately
      preceding clauses (1) and/or (2) plus
      (4) at
      the Holder’s option, any amounts owed to the Holder pursuant to Sections 1.3 and
      1.4(g) hereof or pursuant to Section 2(c) of that certain Registration Rights
      Agreement, dated as of December 15, 2006, executed in connection with the
      initial issuance of this Note and the other Notes issued on the Issue Date
      (the
“Registration
      Rights Agreement”).

     

    
      
         

      

      
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    1.2 Conversion
      Price.

     

    (a) Calculation
      of Conversion Price.
      The
      Conversion Price shall be the lesser of (i) the Variable Conversion Price (as
      defined herein) and (ii) the Fixed Conversion Price (as defined herein)
      (subject, in each case, to equitable adjustments for stock splits, stock
      dividends or rights offerings by the Borrower relating to the Borrower’s
      securities or the securities of any subsidiary of the Borrower, combinations,
      recapitalization, reclassifications, extraordinary distributions and similar
      events). The “Variable
      Conversion Price”
shall
      mean the Applicable Percentage (as defined herein) multiplied by the Market
      Price (as defined herein). “Market
      Price”
means
      the average of the lowest three (3) Trading Prices (as defined below) for the
      Common Stock during the twenty (20) Trading Day period ending one Trading Day
      prior to the date the Conversion Notice is sent by the Holder to the Borrower
      via facsimile (the “Conversion
      Date”).
      “Trading
      Price”
means,
      for any security as of any date, the intraday trading price on the
      Over-the-Counter Bulletin Board (the “OTCBB”)
      as
      reported by a reliable reporting service mutually acceptable to and hereafter
      designated by Holders of a majority in interest of the Notes and the Borrower
      or, if the OTCBB is not the principal trading market for such security, the
      intraday trading price of such security on the principal securities exchange
      or
      trading market where such security is listed or traded or, if no intraday
      trading price of such security is available in any of the foregoing manners,
      the
      average of the intraday trading prices of any market makers for such security
      that are listed in the “pink sheets” by the National Quotation Bureau, Inc. If
      the Trading Price cannot be calculated for such security on such date in the
      manner provided above, the Trading Price shall be the fair market value as
      mutually determined by the Borrower and the holders of a majority in interest
      of
      the Notes being converted for which the calculation of the Trading Price is
      required in order to determine the Conversion Price of such Notes. “Trading
      Day”
shall
      mean any day on which the Common Stock is traded for any period on the OTCBB,
      or
      on the principal securities exchange or other securities market on which the
      Common Stock is then being traded. “Applicable
      Percentage”
shall
      mean 25.0%. The “Fixed
      Conversion Price”
shall
      mean $.05.

     

    (b) Conversion
      Price During Major Announcements.
      Notwithstanding
      anything contained in Section 1.2(a) to the contrary, in the event the Borrower
      (i) makes a public announcement that it intends to consolidate or merge with
      any
      other corporation (other than a merger in which the Borrower is the surviving
      or
      continuing corporation and its capital stock is unchanged) or sell or transfer
      all or substantially all of the assets of the Borrower or (ii) any person,
      group
      or entity (including the Borrower) publicly announces a tender offer to purchase
      50% or more of the Borrower’s Common Stock (or any other takeover scheme) (the
      date of the announcement referred to in clause (i) or (ii) is hereinafter
      referred to as the “Announcement
      Date”),
      then
      the Conversion Price shall, effective upon the Announcement Date and continuing
      through the Adjusted Conversion Price Termination Date (as defined below),
      be
      equal to the lower of (x) the Conversion Price which would have been applicable
      for a Conversion occurring on the Announcement Date and (y) the Conversion
      Price
      that would otherwise be in effect. From and after the Adjusted Conversion Price
      Termination Date, the Conversion Price shall be determined as set forth in
      this
      Section 1.2(a). For purposes hereof, “Adjusted
      Conversion Price Termination Date”
shall
      mean, with respect to any proposed transaction or tender offer (or takeover
      scheme) for which a public announcement as contemplated by this Section 1.2(b)
      has been made, the date upon which the Borrower (in the case of clause (i)
      above) or the person, group or entity (in the case of clause (ii) above)
      consummates or publicly announces the termination or abandonment of the proposed
      transaction or tender offer (or takeover scheme) which caused this Section
      1.2(b) to become operative.

     

    
      
         

      

      
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    1.3 Authorized
      Shares.
      Subject
      to the Stockholder Approval (as defined in Section 4(n) of the Securities
      Purchase Agreement), the Borrower covenants that during the period the
      conversion right exists, the Borrower will reserve from its authorized and
      unissued Common Stock a sufficient number of shares, free from preemptive
      rights, to provide for the issuance of Common Stock upon the full conversion
      of
      this Note and the other Notes issued pursuant to the Purchase Agreement. The
      Borrower is required at all times to have authorized and reserved two (2) times
      the number of shares that is actually issuable upon full conversion of the
      Notes
      (based on the Conversion Price of the Notes or the Exercise Price of the
      Warrants in effect from time to time) (the “Reserved
      Amount”).
      The
      Reserved Amount shall be increased from time to time in accordance with the
      Borrower’s obligations pursuant to Section 4(h) of the Purchase Agreement. The
      Borrower represents that upon issuance, such shares will be duly and validly
      issued, fully paid and non-assessable. In addition, if the Borrower shall issue
      any securities or make any change to its capital structure which would change
      the number of shares of Common Stock into which the Notes shall be convertible
      at the then current Conversion Price, the Borrower shall at the same time make
      proper provision so that thereafter there shall be a sufficient number of shares
      of Common Stock authorized and reserved, free from preemptive rights, for
      conversion of the outstanding Notes. The Borrower (i) acknowledges that it
      has
      irrevocably instructed its transfer agent to issue certificates for the Common
      Stock issuable upon conversion of this Note, and (ii) agrees that its
      issuance of this Note shall constitute full authority to its officers and agents
      who are charged with the duty of executing stock certificates to execute and
      issue the necessary certificates for shares of Common Stock in accordance with
      the terms and conditions of this Note.

     

    If,
      at
      any time a Holder of this Note submits a Notice of Conversion, and the Borrower
      does not have sufficient authorized but unissued shares of Common Stock
      available to effect such conversion in accordance with the provisions of this
      Article I (a “Conversion
      Default”),
      subject to Section 4.8, the Borrower shall issue to the Holder all of the shares
      of Common Stock which are then available to effect such conversion. The portion
      of this Note which the Holder included in its Conversion Notice and which
      exceeds the amount which is then convertible into available shares of Common
      Stock (the “Excess
      Amount”)
      shall,
      notwithstanding anything to the contrary contained herein, not be convertible
      into Common Stock in accordance with the terms hereof until (and at the Holder’s
      option at any time after) the date additional shares of Common Stock are
      authorized by the Borrower to permit such conversion, at which time the
      Conversion Price in respect thereof shall be the lesser of (i) the Conversion
      Price on the Conversion Default Date (as defined below) and (ii) the Conversion
      Price on the Conversion Date thereafter elected by the Holder in respect
      thereof. In addition, the Borrower shall pay to the Holder payments
      (“Conversion
      Default Payments”)
      for a
      Conversion Default in the amount of (x) the sum
      of
      (1) the
      then outstanding principal amount of this Note plus
      (2)
      accrued and unpaid interest on the unpaid principal amount of this Note through
      the Authorization Date (as defined below) plus
      (3)
      Default Interest, if any, on the amounts referred to in clauses (1) and/or
      (2),
multiplied
      by
      (y) .24,
multiplied
      by
      (z)
      (N/365), where N = the number of days from the day the holder submits a Notice
      of Conversion giving rise to a Conversion Default (the “Conversion
      Default Date”)
      to the
      date (the “Authorization
      Date”)
      that
      the Borrower authorizes a sufficient number of shares of Common Stock to effect
      conversion of the full outstanding principal balance of this Note. The Borrower
      shall use its best efforts to authorize a sufficient number of shares of Common
      Stock as soon as practicable following the earlier of (i) such time that the
      Holder notifies the Borrower or that the Borrower otherwise becomes aware that
      there are or likely will be insufficient authorized and unissued shares to
      allow
      full conversion thereof and (ii) a Conversion Default. The Borrower shall send
      notice to the Holder of the authorization of additional shares of Common Stock,
      the Authorization Date and the amount of Holder’s accrued Conversion Default
      Payments. The accrued Conversion Default Payments for each calendar month shall
      be paid in cash or shall be convertible into Common Stock (at such time as
      there
      are sufficient authorized shares of Common Stock) at the applicable Conversion
      Price, at the Borrower’s option, as follows:

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    

     

    (a) In
      the
      event Holder elects to take such payment in cash, cash payment shall be made
      to
      Holder by the fifth (5th)
      day of
      the month following the month in which it has accrued; and

     

    (b) In
      the
      event Holder elects to take such payment in Common Stock, the Holder may convert
      such payment amount into Common Stock at the Conversion Price (as in effect
      at
      the time of conversion) at any time after the fifth day of the month following
      the month in which it has accrued in accordance with the terms of this Article
      I
      (so long as there is then a sufficient number of authorized shares of Common
      Stock).

     

    The
      Holder’s election shall be made in writing to the Borrower at any time prior to
      6:00 p.m., New York, New York time, on the third day of the month following
      the
      month in which Conversion Default payments have accrued. If no election is
      made,
      the Holder shall be deemed to have elected to receive cash. Nothing herein
      shall
      limit the Holder’s right to pursue actual damages (to the extent in excess of
      the Conversion Default Payments) for the Borrower’s failure to maintain a
      sufficient number of authorized shares of Common Stock, and each holder shall
      have the right to pursue all remedies available at law or in equity (including
      degree of specific performance and/or injunctive relief).

     

    1.4 Method
      of Conversion.

     

    (a) Mechanics
      of Conversion.
      Subject
      to Section 1.1, this Note may be converted by the Holder in whole or in part
      at
      any time from time to time after the Issue Date, by (A) submitting to the
      Borrower a Notice of Conversion (by facsimile or other reasonable means of
      communication dispatched on the Conversion Date prior to 6:00 p.m., New York,
      New York time) and (B) subject to Section 1.4(b), surrendering this Note at
      the principal office of the Borrower. 

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    

     

    (b) Surrender
      of Note Upon Conversion.
      Notwithstanding
      anything to the contrary set forth herein, upon conversion of this Note in
      accordance with the terms hereof, the Holder shall not be required to physically
      surrender this Note to the Borrower unless the entire unpaid principal amount
      of
      this Note is so converted. The Holder and the Borrower shall maintain records
      showing the principal amount so converted and the dates of such conversions
      or
      shall use such other method, reasonably satisfactory to the Holder and the
      Borrower, so as not to require physical surrender of this Note upon each such
      conversion. In the event of any dispute or discrepancy, such records of the
      Borrower shall be controlling and determinative in the absence of manifest
      error. Notwithstanding the foregoing, if any portion of this Note is converted
      as aforesaid, the Holder may not transfer this Note unless the Holder first
      physically surrenders this Note to the Borrower, whereupon the Borrower will
      forthwith issue and deliver upon the order of the Holder a new Note of like
      tenor, registered as the Holder (upon payment by the Holder of any applicable
      transfer taxes) may request, representing in the aggregate the remaining unpaid
      principal amount of this Note. The Holder and any assignee, by acceptance of
      this Note, acknowledge and agree that, by reason of the provisions of this
      paragraph, following conversion of a portion of this Note, the unpaid and
      unconverted principal amount of this Note represented by this Note may be less
      than the amount stated on the face hereof.

     

    (c) Payment
      of Taxes.
      The
      Borrower shall not be required to pay any tax which may be payable in respect
      of
      any transfer involved in the issue and delivery of shares of Common Stock or
      other securities or property on conversion of this Note in a name other than
      that of the Holder (or in street name), and the Borrower shall not be required
      to issue or deliver any such shares or other securities or property unless
      and
      until the person or persons (other than the Holder or the custodian in whose
      street name such shares are to be held for the Holder’s account) requesting the
      issuance thereof shall have paid to the Borrower the amount of any such tax
      or
      shall have established to the satisfaction of the Borrower that such tax has
      been paid.

     

    (d) Delivery
      of Common Stock Upon Conversion.
      Upon
      receipt by the Borrower from the Holder of a facsimile transmission (or other
      reasonable means of communication) of a Notice of Conversion meeting the
      requirements for conversion as provided in this Section 1.4, the Borrower shall
      issue and deliver or cause to be issued and delivered to or upon the order
      of
      the Holder certificates for the Common Stock issuable upon such conversion
      within two (2) business days after such receipt (and, solely in the case of
      conversion of the entire unpaid principal amount hereof, surrender of this
      Note)
      (such second business day being hereinafter referred to as the “Deadline”)
      in
      accordance with the terms hereof and the Purchase Agreement (including, without
      limitation, in accordance with the requirements of Section 2(g) of the Purchase
      Agreement that certificates for shares of Common Stock issued on or after the
      effective date of the Registration Statement upon conversion of this Note shall
      not bear any restrictive legend).

     

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    

     

    (e) Obligation
      of Borrower to Deliver Common Stock.
      Upon
      receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed
      to
      be the holder of record of the Common Stock issuable upon such conversion,
      the
      outstanding principal amount and the amount of accrued and unpaid interest
      on
      this Note shall be reduced to reflect such conversion, and, unless the Borrower
      defaults on its obligations under this Article I, all rights with respect to
      the
      portion of this Note being so converted shall forthwith terminate except the
      right to receive the Common Stock or other securities, cash or other assets,
      as
      herein provided, on such conversion. If the Holder shall have given a Notice
      of
      Conversion as provided herein, the Borrower’s obligation to issue and deliver
      the certificates for Common Stock shall be absolute and unconditional,
      irrespective of the absence of any action by the Holder to enforce the same,
      any
      waiver or consent with respect to any provision thereof, the recovery of any
      judgment against any person or any action to enforce the same, any failure
      or
      delay in the enforcement of any other obligation of the Borrower to the holder
      of record, or any setoff, counterclaim, recoupment, limitation or termination,
      or any breach or alleged breach by the Holder of any obligation to the Borrower,
      and irrespective of any other circumstance which might otherwise limit such
      obligation of the Borrower to the Holder in connection with such conversion.
      The
      Conversion Date specified in the Notice of Conversion shall be the Conversion
      Date so long as the Notice of Conversion is received by the Borrower before
      6:00
      p.m., New York, New York time, on such date.

     

    (f) Delivery
      of Common Stock by Electronic Transfer.
      In
      lieu
      of delivering physical certificates representing the Common Stock issuable
      upon
      conversion, provided the Borrower’s transfer agent is participating in the
      Depository Trust Company (“DTC”)
      Fast
      Automated Securities Transfer (“FAST”)
      program, upon request of the Holder and its compliance with the provisions
      contained in Section 1.1 and in this Section 1.4, the Borrower shall use its
      best efforts to cause its transfer agent to electronically transmit the Common
      Stock issuable upon conversion to the Holder by crediting the account of
      Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission
      (“DWAC”)
      system.

     

    (g) Failure
      to Deliver Common Stock Prior to Deadline.
      Without
      in any way limiting the Holder’s right to pursue other remedies, including
      actual damages and/or equitable relief, the parties agree that if delivery
      of
      the Common Stock issuable upon conversion of this Note is more than two (2)
      days
      after the Deadline (other than a failure due to the circumstances described
      in
      Section 1.3 above, which failure shall be governed by such Section) the Borrower
      shall pay to the Holder $2,000 per day in cash, for each day beyond the Deadline
      that the Borrower fails to deliver such Common Stock. Such cash amount shall
      be
      paid to Holder by the fifth day of the month following the month in which it
      has
      accrued or, at the option of the Holder (by written notice to the Borrower
      by
      the first day of the month following the month in which it has accrued), shall
      be added to the principal amount of this Note, in which event interest shall
      accrue thereon in accordance with the terms of this Note and such additional
      principal amount shall be convertible into Common Stock in accordance with
      the
      terms of this Note.

     

    1.5 Concerning
      the Shares.
      The
      shares of Common Stock issuable upon conversion of this Note may not be sold
      or
      transferred unless (i) such shares are sold pursuant to an effective
      registration statement under the Act or (ii) the Borrower 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 Borrower who agrees to sell or otherwise transfer the shares only in
      accordance with this Section 1.5 and who is an Accredited Investor (as defined
      in the Purchase Agreement). Except as otherwise provided in the Purchase
      Agreement (and subject to the removal provisions set forth below), until such
      time as the shares of Common Stock issuable upon conversion of this Note 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 shares of Common Stock issuable upon
      conversion of this Note 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:

     

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    

     

    “THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED
      OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
      SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND
      SCOPE
      CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION
      IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION
      S
      UNDER SAID ACT.”

     

    The
      legend set forth above shall be removed and the Borrower shall issue to the
      Holder a new certificate therefor free of any transfer legend if (i) the
      Borrower 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 Act and the shares are so sold or
      transferred, (ii) such Holder provides the Borrower or its transfer agent with
      reasonable assurances that the Common Stock issuable upon conversion of this
      Note (to the extent such securities are deemed to have been acquired on the
      same
      date) can be sold pursuant to Rule 144 or (iii) in the case of the Common Stock
      issuable upon conversion of this Note, such security is registered for sale
      by
      the Holder under an effective registration statement filed under the Act 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.
      Nothing in this Note shall (i) limit the Borrower’s obligation under the
      Registration Rights Agreement or (ii) affect in any way the Holder’s obligations
      to comply with applicable prospectus delivery requirements upon the resale
      of
      the securities referred to herein.

     

    1.6 Effect
      of Certain Events.

     

    (a) Effect
      of Merger, Consolidation, Etc.
      At the
      option of the Holder, the sale, conveyance or disposition of all or
      substantially all of the assets of the Borrower, the effectuation by the
      Borrower of a transaction or series of related transactions in which more than
      50% of the voting power of the Borrower is disposed of, or the consolidation,
      merger or other business combination of the Borrower with or into any other
      Person (as defined below) or Persons when the Borrower is not the survivor
      shall
      either: (i) be deemed to be an Event of Default (as defined in Article III)
      pursuant to which the Borrower shall be required to pay to the Holder upon
      the
      consummation of and as a condition to such transaction an amount equal to the
      Default Amount (as defined in Article III) or (ii) be treated pursuant to
      Section 1.6(b) hereof. “Person”
shall
      mean any individual, corporation, limited liability company, partnership,
      association, trust or other entity or organization.

     

    
      
         

      

      
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    (b) Adjustment
      Due to Merger, Consolidation, Etc.
      If,
      at
      any time when this Note is issued and outstanding and prior to conversion of
      all
      of the Notes, there shall be any merger, consolidation, exchange of shares,
      recapitalization, reorganization, or other similar event, as a result of which
      shares of Common Stock of the Borrower shall be changed into the same or a
      different number of shares of another class or classes of stock or securities
      of
      the Borrower or another entity, or in case of any sale or conveyance of all
      or
      substantially all of the assets of the Borrower other than in connection with
      a
      plan of complete liquidation of the Borrower, then the Holder of this Note
      shall
      thereafter have the right to receive upon conversion of this Note, upon the
      basis and upon the terms and conditions specified herein and in lieu of the
      shares of Common Stock immediately theretofore issuable upon conversion, such
      stock, securities or assets which the Holder would have been entitled to receive
      in such transaction had this Note been converted in full immediately prior
      to
      such transaction (without regard to any limitations on conversion set forth
      herein), and in any such case appropriate provisions shall be made with respect
      to the rights and interests of the Holder of this Note to the end that the
      provisions hereof (including, without limitation, provisions for adjustment
      of
      the Conversion Price and of the number of shares issuable upon conversion of
      the
      Note) shall thereafter be applicable, as nearly as may be practicable in
      relation to any securities or assets thereafter deliverable upon the conversion
      hereof. The Borrower shall not effect any transaction described in this Section
      1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days
      prior written notice (but in any event at least fifteen (15) days prior written
      notice) of the record date of the special meeting of shareholders to approve,
      or
      if there is no such record date, the consummation of, such merger,
      consolidation, exchange of shares, recapitalization, reorganization or other
      similar event or sale of assets (during which time the Holder shall be entitled
      to convert this Note) and (b) the resulting successor or acquiring entity (if
      not the Borrower) assumes by written instrument the obligations of this Section
      1.6(b). The above provisions shall similarly apply to successive consolidations,
      mergers, sales, transfers or share exchanges.

     

    (c) Adjustment
      Due to Distribution.
      If
      the
      Borrower shall declare or make any distribution of its assets (or rights to
      acquire its assets) to holders of Common Stock as a dividend, stock repurchase,
      by way of return of capital or otherwise (including any dividend or distribution
      to the Borrower’s shareholders in cash or shares (or rights to acquire shares)
      of capital stock of a subsidiary (i.e., a spin-off)) (a “Distribution”),
      then
      the Holder of this Note shall be entitled, upon any conversion of this Note
      after the date of record for determining shareholders entitled to such
      Distribution, to receive the amount of such assets which would have been payable
      to the Holder with respect to the shares of Common Stock issuable upon such
      conversion had such Holder been the holder of such shares of Common Stock on
      the
      record date for the determination of shareholders entitled to such
      Distribution.

     

    (d) Adjustment
      Due to Dilutive Issuance.
      If, at
      any time when any Notes are issued and outstanding, the Borrower issues or
      sells, or in accordance with this Section 1.6(d) hereof is deemed to have issued
      or sold, any shares of Common Stock for no consideration or for a consideration
      per share (before deduction of reasonable expenses or commissions or
      underwriting discounts or allowances in connection therewith) less than the
      Fixed Conversion Price in effect on the date of such issuance (or deemed
      issuance) of such shares of Common Stock (a “Dilutive
      Issuance”),
      then
      immediately upon the Dilutive Issuance, the Fixed Conversion Price will be
      reduced to the amount of the consideration per share received by the Borrower
      in
      such Dilutive Issuance; provided
      that
      only one adjustment will be made for each Dilutive Issuance; provided,
      further,
      that
      the issuance of up to an aggregate of 1,000,000 shares of Common Stock to
      consultants shall not be considered a Dilutive Issuance.

     

    
      
         

      

      
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    The
      Borrower shall be deemed to have issued or sold shares of Common Stock if the
      Borrower in any manner issues or grants any warrants, rights or options, whether
      or not immediately exercisable, to subscribe for or to purchase Common Stock
      or
      other securities convertible into or exchangeable for Common Stock
      (“Convertible
      Securities”)
      (such
      warrants, rights and options to purchase Common Stock or Convertible Securities
      are hereinafter referred to as “Options”)
      and
      the price per share for which Common Stock is issuable upon the exercise of
      such
      Options is less than the Fixed Conversion Price then in effect, then the Fixed
      Conversion Price shall be equal to such price per share. For purposes of the
      preceding sentence, the “price per share for which Common Stock is issuable upon
      the exercise of such Options” is determined by dividing (i) the total amount, if
      any, received or receivable by the Borrower as consideration for the issuance
      or
      granting of all such Options, plus the minimum aggregate amount of additional
      consideration, if any, payable to the Borrower upon the exercise of all such
      Options, plus, in the case of Convertible Securities issuable upon the exercise
      of such Options, the minimum aggregate amount of additional consideration
      payable upon the conversion or exchange thereof at the time such Convertible
      Securities first become convertible or exchangeable, by (ii) the maximum total
      number of shares of Common Stock issuable upon the exercise of all such Options
      (assuming full conversion of Convertible Securities, if applicable). No further
      adjustment to the Conversion Price will be made upon the actual issuance of
      such
      Common Stock upon the exercise of such Options or upon the conversion or
      exchange of Convertible Securities issuable upon exercise of such
      Options.

     

    Additionally,
      the Borrower shall be deemed to have issued or sold shares of Common Stock
      if
      the Borrower in any manner issues or sells any Convertible Securities, whether
      or not immediately convertible (other than where the same are issuable upon
      the
      exercise of Options), and the price per share for which Common Stock is issuable
      upon such conversion or exchange is less than the Fixed Conversion Price then
      in
      effect, then the Fixed Conversion Price shall be equal to such price per share.
      For the purposes of the preceding sentence, the “price per share for which
      Common Stock is issuable upon such conversion or exchange” is determined by
      dividing (i) the total amount, if any, received or receivable by the Borrower
      as
      consideration for the issuance or sale of all such Convertible Securities,
      plus
      the minimum aggregate amount of additional consideration, if any, payable to
      the
      Borrower upon the conversion or exchange thereof at the time such Convertible
      Securities first become convertible or exchangeable, by (ii) the maximum total
      number of shares of Common Stock issuable upon the conversion or exchange of
      all
      such Convertible Securities. No further adjustment to the Fixed Conversion
      Price
      will be made upon the actual issuance of such Common Stock upon conversion
      or
      exchange of such Convertible Securities.

     

    
      
         

      

      
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    (e) Purchase
      Rights.
      If,
      at
      any time when any Notes are issued and outstanding, the Borrower issues any
      convertible securities or rights to purchase stock, warrants, securities or
      other property (the “Purchase
      Rights”)
      pro
      rata to the record holders of any class of Common Stock, then the Holder of
      this
      Note will be entitled to acquire, upon the terms applicable to such Purchase
      Rights, the aggregate Purchase Rights which such Holder could have acquired
      if
      such Holder had held the number of shares of Common Stock acquirable upon
      complete conversion of this Note (without regard to any limitations on
      conversion contained herein) immediately before the date on which a record
      is
      taken for the grant, issuance or sale of such Purchase Rights or, if no such
      record is taken, the date as of which the record holders of Common Stock are
      to
      be determined for the grant, issue or sale of such Purchase Rights.

     

    (f) Notice
      of Adjustments.
      Upon
      the
      occurrence of each adjustment or readjustment of the Conversion Price as a
      result of the events described in this Section 1.6, the Borrower, at its
      expense, shall promptly compute such adjustment or readjustment and prepare
      and
      furnish to the Holder of a certificate setting forth such adjustment or
      readjustment and showing in detail the facts upon which such adjustment or
      readjustment is based. The Borrower shall, upon the written request at any
      time
      of the Holder, furnish to such Holder a like certificate setting forth (i)
      such
      adjustment or readjustment, (ii) the Conversion Price at the time in effect
      and
      (iii) the number of shares of Common Stock and the amount, if any, of other
      securities or property which at the time would be received upon conversion
      of
      the Note.

     

    1.7 Trading
      Market Limitations.
      Unless
      permitted by the applicable rules and regulations of the principal securities
      market on which the Common Stock is then listed or traded, in no event shall
      the
      Borrower issue upon conversion of or otherwise pursuant to this Note and the
      other Notes issued pursuant to the Purchase Agreement more than the maximum
      number of shares of Common Stock that the Borrower can issue pursuant to any
      rule of the principal United States securities market on which the Common Stock
      is then traded (the “Maximum
      Share Amount”),
      which
      shall be 19.99% of the total shares outstanding on the Closing Date (as defined
      in the Purchase Agreement), subject to equitable adjustment from time to time
      for stock splits, stock dividends, combinations, capital reorganizations and
      similar events relating to the Common Stock occurring after the date hereof.
      Once the Maximum Share Amount has been issued (the date of which is hereinafter
      referred to as the “Maximum
      Conversion Date”),
      if
      the Borrower fails to eliminate any prohibitions under applicable law or the
      rules or regulations of any stock exchange, interdealer quotation system or
      other self-regulatory organization with jurisdiction over the Borrower or any
      of
      its securities on the Borrower’s ability to issue shares of Common Stock in
      excess of the Maximum Share Amount (a “Trading
      Market Prepayment Event”),
      in
      lieu of any further right to convert this Note, and in full satisfaction of
      the
      Borrower’s obligations under this Note, the Borrower shall pay to the Holder,
      within fifteen (15) business days of the Maximum Conversion Date (the
“Trading
      Market Prepayment Date”),
      an
      amount equal to 130% times
      the
sum
      of (a)
      the then outstanding principal amount of this Note immediately following the
      Maximum Conversion Date, plus
      (b)
      accrued and unpaid interest on the unpaid principal amount of this Note to
      the
      Trading Market Prepayment Date, plus
      (c)
      Default Interest, if any, on the amounts referred to in clause (a) and/or (b)
      above, plus
      (d) any
      optional amounts that may be added thereto at the Maximum Conversion Date by
      the
      Holder in accordance with the terms hereof (the then outstanding principal
      amount of this Note immediately following the Maximum Conversion Date,
plus
      the
      amounts referred to in clauses (b), (c) and (d) above shall collectively be
      referred to as the “Remaining
      Convertible Amount”).
      With
      respect to each Holder of Notes, the Maximum Share Amount shall refer to such
      Holder’s pro rata
      share
      thereof determined in accordance with Section 4.8 below. In the event that
      the
      sum of (x) the aggregate number of shares of Common Stock issued upon conversion
      of this Note and the other Notes issued pursuant to the Purchase Agreement
      plus
      (y) the
      aggregate number of shares of Common Stock that remain issuable upon conversion
      of this Note and the other Notes issued pursuant to the Purchase Agreement,
      represents at least one hundred percent (100%) of the Maximum Share Amount
      (the
“Triggering
      Event”),
      the
      Borrower will use its best efforts to seek and obtain Shareholder Approval
      (or
      obtain such other relief as will allow conversions hereunder in excess of the
      Maximum Share Amount) as soon as practicable following the Triggering Event
      and
      before the Maximum Conversion Date. As used herein, “Shareholder
      Approval”
means
      approval by the stockholders of the Borrower to authorize the issuance of the
      full number of shares of Common Stock which would be issuable upon full
      conversion of the then outstanding Notes but for the Maximum Share
      Amount.

     

    
      
         

      

      
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    1.8 Status
      as Stockholder.
      Upon
      submission of a Notice of Conversion by a Holder, (i) the shares covered thereby
      (other than the shares, if any, which cannot be issued because their issuance
      would exceed such Holder’s allocated portion of the Reserved Amount or Maximum
      Share Amount) shall be deemed converted into shares of Common Stock and (ii)
      the
      Holder’s rights as a Holder of such converted portion of this Note shall cease
      and terminate, excepting only the right to receive certificates for such shares
      of Common Stock and to any remedies provided herein or otherwise available
      at
      law or in equity to such Holder because of a failure by the Borrower to comply
      with the terms of this Note. Notwithstanding the foregoing, if a Holder has
      not
      received certificates for all shares of Common Stock prior to the tenth (10th)
      business day after the expiration of the Deadline with respect to a conversion
      of any portion of this Note for any reason, then (unless the Holder otherwise
      elects to retain its status as a holder of Common Stock by so notifying the
      Borrower) the Holder shall regain the rights of a Holder of this Note with
      respect to such unconverted portions of this Note and the Borrower 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 (including, without limitation, (i) the right to receive
      Conversion Default Payments pursuant to Section 1.3 to the extent required
      thereby for such Conversion Default and any subsequent Conversion Default and
      (ii) the right to have the Conversion Price with respect to subsequent
      conversions determined in accordance with Section 1.3) for the Borrower’s
      failure to convert this Note.

     

    
      
         

      

      
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    ARTICLE
      II. CERTAIN
      COVENANTS

     

    2.1 Distributions
      on Capital Stock.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not without the Holder’s written consent (a) pay, declare or set apart for such
      payment, any dividend or other distribution (whether in cash, property or other
      securities) on shares of capital stock other than dividends on shares of Common
      Stock solely in the form of additional shares of Common Stock or (b) directly
      or
      indirectly or through any subsidiary make any other payment or distribution
      in
      respect of its capital stock except for distributions pursuant to any
      shareholders’ rights plan which is approved by a majority of the Borrower’s
      disinterested directors.

     

    2.2 Restriction
      on Stock Repurchases.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not without the Holder’s written consent redeem, repurchase or otherwise acquire
      (whether for cash or in exchange for property or other securities or otherwise)
      in any one transaction or series of related transactions any shares of capital
      stock of the Borrower or any warrants, rights or options to purchase or acquire
      any such shares.

     

    2.3 Borrowings.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not, without the Holder’s written consent, create, incur, assume or suffer to
      exist any liability for borrowed money, except (a) borrowings in existence
      or
      committed on the date hereof and of which the Borrower has informed Holder
      in
      writing prior to the date hereof, (b) indebtedness to trade creditors or
      financial institutions incurred in the ordinary course of business or (c)
      borrowings, the proceeds of which shall be used to repay this Note.

     

    2.4 Sale
      of Assets.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not, without the Holder’s written consent, sell, lease or otherwise dispose of
      any significant portion of its assets outside the ordinary course of business.
      Any consent to the disposition of any assets may be conditioned on a specified
      use of the proceeds of disposition.

     

    2.5 Advances
      and Loans.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not, without the Holder’s written consent, lend money, give credit or make
      advances to any person, firm, joint venture or corporation, including, without
      limitation, officers, directors, employees, subsidiaries and affiliates of
      the
      Borrower, except loans, credits or advances (a) in existence or committed on
      the
      date hereof and which the Borrower has informed Holder in writing prior to
      the
      date hereof, (b) made in the ordinary course of business or (c) not in excess
      of
      $50,000.

     

    2.6 Contingent
      Liabilities.
      So long
      as the Borrower shall have any obligation under this Note, the Borrower shall
      not, without the Holder’s written consent, assume, guarantee, endorse,
      contingently agree to purchase or otherwise become liable upon the obligation
      of
      any person, firm, partnership, joint venture or corporation, except by the
      endorsement of negotiable instruments for deposit or collection and except
      assumptions, guarantees, endorsements and contingencies (a) in existence or
      committed on the date hereof and which the Borrower has informed Holder in
      writing prior to the date hereof, and (b) similar transactions in the ordinary
      course of business. 

     

    
      
         

      

      
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    ARTICLE
      III. EVENTS
      OF DEFAULT

     

    If
      any of
      the following events of default (each, an “Event
      of Default”)
      shall
      occur:

     

    3.1 Failure
      to Pay Principal or Interest.
      The
      Borrower fails to pay the principal hereof or interest thereon when due on
      this
      Note, whether at maturity, upon a Trading Market Prepayment Event pursuant
      to
      Section 1.7, upon acceleration or otherwise;

     

    3.2 Conversion
      and the Shares.
      The
      Borrower fails to issue shares of Common Stock to the Holder (or announces
      or
      threatens that it will not honor its obligation to do so) upon exercise by
      the
      Holder of the conversion rights of the Holder in accordance with the terms
      of
      this Note (for a period of at least sixty (60) days, if such failure is solely
      as a result of the circumstances governed by Section 1.3 and the Borrower is
      using its best efforts to authorize a sufficient number of shares of Common
      Stock as soon as practicable), fails to transfer or cause its transfer agent
      to
      transfer (electronically or in certificated form) any certificate for shares
      of
      Common Stock issued to the Holder upon conversion of or otherwise pursuant
      to
      this Note as and when required by this Note or the Registration Rights
      Agreement, or fails to remove any restrictive legend (or to withdraw any stop
      transfer instructions in respect thereof) on any certificate for any shares
      of
      Common Stock issued to the Holder upon conversion of or otherwise pursuant
      to
      this Note as and when required by this Note or the Registration Rights Agreement
      (or makes any announcement, statement or threat that it does not intend to
      honor
      the obligations described in this paragraph) and any such failure shall continue
      uncured (or any announcement, statement or threat not to honor its obligations
      shall not be rescinded in writing) for ten (10) days after the Borrower shall
      have been notified thereof in writing by the Holder;

     

    3.3 Failure
      to Maintain Registration.
      The
      Registration Statement lapses in effect (or sales cannot otherwise be made
      thereunder effective, whether by reason of the Borrower’s failure to amend or
      supplement the prospectus included therein in accordance with the Registration
      Rights Agreement or otherwise) for more than twenty (20) consecutive days or
      forty (40) days in any twelve (12) month period after the Registration Statement
      becomes effective;

     

    3.4 Breach
      of Covenants.
      The
      Borrower breaches any material covenant or other material term or condition
      contained in Sections 1.3, 1.6 or 1.7 of this Note, or Sections 4(c), 4(e),
      4(h), 4(i), 4(j) or 5 of the Purchase Agreement and such breach continues for
      a
      period of ten (10) days after written notice thereof to the Borrower from the
      Holder;

     

    3.5 Breach
      of Representations and Warranties.
      Any
      representation or warranty of the Borrower made herein or in any agreement,
      statement or certificate given in writing pursuant hereto or in connection
      herewith (including, without limitation, the Purchase Agreement and the
      Registration Rights Agreement), shall be false or misleading in any material
      respect when made and the breach of which has (or with the passage of time
      will
      have) a material adverse effect on the rights of the Holder with respect to
      this
      Note, the Purchase Agreement or the Registration Rights Agreement;

     

    
      
         

      

      
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    3.6 Receiver
      or Trustee.
      The
      Borrower or any subsidiary of the Borrower shall make an assignment for the
      benefit of creditors, or apply for or consent to the appointment of a receiver
      or trustee for it or for a substantial part of its property or business, or
      such
      a receiver or trustee shall otherwise be appointed;

     

    3.7 Judgments.
      Any
      money judgment, writ or similar process shall be entered or filed against the
      Borrower or any subsidiary of the Borrower or any of its property or other
      assets for more than $50,000, and shall remain unvacated, unbonded or unstayed
      for a period of twenty (20) days unless otherwise consented to by the Holder,
      which consent will not be unreasonably withheld;

     

    3.8 Bankruptcy.
      Bankruptcy, insolvency, reorganization or liquidation proceedings or other
      proceedings for relief under any bankruptcy law or any law for the relief of
      debtors shall be instituted by or against the Borrower or any subsidiary of
      the
      Borrower;

     

    3.9 Delisting
      of Common Stock.
      The
      Borrower shall fail to maintain the listing of the Common Stock on at least
      one
      of the OTCBB or an equivalent replacement exchange, the Nasdaq National Market,
      the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock
      Exchange; or

     

    3.10 Default
      Under Other Notes.
      An Event
      of Default has occurred and is continuing under any of the other Notes issued
      pursuant to the Purchase Agreement, 

     

    then,
      upon the occurrence and during the continuation of any Event of Default
      specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or 3.10, at the option
      of the Holders of a majority of the aggregate principal amount of the
      outstanding Notes issued pursuant to the Purchase Agreement exercisable through
      the delivery of written notice to the Borrower by such Holders (the
“Default
      Notice”),
      which
      such Event of Default continues for a period of ten (10) days after receipt
      of
      the Default Notice, and upon the occurrence of an Event of Default specified
      in
      Section 3.6 or 3.8, the Notes shall become immediately due and payable and
      the
      Borrower shall pay to the Holder, in full satisfaction of its obligations
      hereunder, an amount equal to the greater of (i) 130% times
      the
sum
      of (w)
      the then outstanding principal amount of this Note plus
      (x)
      accrued and unpaid interest on the unpaid principal amount of this Note to
      the
      date of payment (the “Mandatory
      Prepayment Date”)
      plus
      (y)
      Default Interest, if any, on the amounts referred to in clauses (w) and/or
      (x)
plus
      (z) any
      amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or
      pursuant to Section 2(c) of the Registration Rights Agreement (the then
      outstanding principal amount of this Note to the date of payment plus
      the
      amounts referred to in clauses (x), (y) and (z) shall collectively be known
      as
      the “Default
      Sum”)
      or
      (ii) the “parity value” of the Default Sum to be prepaid, where parity value
      means (a) the highest number of shares of Common Stock issuable upon conversion
      of or otherwise pursuant to such Default Sum in accordance with Article I,
      treating the Trading Day immediately preceding the Mandatory Prepayment Date
      as
      the “Conversion Date” for purposes of determining the lowest applicable
      Conversion Price, unless the Default Event arises as a result of a breach in
      respect of a specific Conversion Date in which case such Conversion Date shall
      be the Conversion Date), multiplied
      by
      (b) the
      highest Closing Price for the Common Stock during the period beginning on the
      date of first occurrence of the Event of Default and ending one day prior to
      the
      Mandatory Prepayment Date (the “Default
      Amount”)
      and
      all other amounts payable hereunder shall immediately become due and payable,
      all without demand, presentment or notice, all of which hereby are expressly
      waived, together with all costs, including, without limitation, legal fees
      and
      expenses, of collection, and the Holder shall be entitled to exercise all other
      rights and remedies available at law or in equity. If the Borrower fails to
      pay
      the Default Amount within five (5) business days of written notice that such
      amount is due and payable, then the Holder shall have the right at any time,
      so
      long as the Borrower remains in default (and so long and to the extent that
      there are sufficient authorized shares), to require the Borrower, upon written
      notice, to immediately issue, in lieu of the Default Amount, the number of
      shares of Common Stock of the Borrower equal to the Default Amount divided
      by
      the Conversion Price then in effect.

     

    
      
         

      

      
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    ARTICLE
      IV.  MISCELLANEOUS

     

    4.1 Failure
      or Indulgence Not Waiver.
      No
      failure or delay on the part of the Holder in the exercise of any power, right
      or privilege hereunder shall operate as a waiver thereof, nor shall any single
      or partial exercise of any such power, right or privilege preclude other or
      further exercise thereof or of any other right, power or privileges. All rights
      and remedies existing hereunder are cumulative to, and not exclusive of, any
      rights or remedies otherwise available.

     

    4.2 Notices.
      Any
      notice herein required or permitted to be given shall be in writing and may
      be
      personally served or delivered by courier or sent by United States mail and
      shall be deemed to have been given upon receipt if personally served (which
      shall include telephone line facsimile transmission) or sent by courier or
      three
      (3) days after being deposited in the United States mail, certified, with
      postage pre-paid and properly addressed, if sent by mail. For the purposes
      hereof, the address of the Holder shall be as shown on the records of the
      Borrower; and the address of the Borrower shall be 16801 Addison Road, Suite
      310, Addison, TX 75001, facsimile number: 908-903-1197. Both the Holder and
      the
      Borrower may change the address for service by service of written notice to
      the
      other as herein provided.

     

    4.3 Amendments.
      This
      Note and any provision hereof may only be amended by an instrument in writing
      signed by the Borrower and the Holder. The term “Note” and all reference
      thereto, as used throughout this instrument, shall mean this instrument (and
      the
      other Notes issued pursuant to the Purchase Agreement) as originally executed,
      or if later amended or supplemented, then as so amended or
      supplemented.

     

    4.4 Assignability.
      This
      Note shall be binding upon the Borrower and its successors and assigns, and
      shall inure to be the benefit of the Holder and its successors and assigns.
      Each
      transferee of this Note must be an “accredited investor” (as defined in Rule
      501(a) of the 1933 Act). Notwithstanding anything in this Note to the contrary,
      this Note may be pledged as collateral in connection with a bona fide
      margin
      account or other lending arrangement.

     

    4.5 Cost
      of Collection.
      If
      default is made in the payment of this Note, the Borrower shall pay the Holder
      hereof costs of collection, including reasonable attorneys’ fees.

     

    
      
         

      

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

     

    4.7 Certain
      Amounts.
      Whenever
      pursuant to this Note the Borrower is required to pay an amount in excess of
      the
      outstanding principal amount (or the portion thereof required to be paid at
      that
      time) plus accrued and unpaid interest plus Default Interest on such interest,
      the Borrower and the Holder agree that the actual damages to the Holder from
      the
      receipt of cash payment on this Note may be difficult to determine and the
      amount to be so paid by the Borrower represents stipulated damages and not
      a
      penalty and is intended to compensate the Holder in part for loss of the
      opportunity to convert this Note and to earn a return from the sale of shares
      of
      Common Stock acquired upon conversion of this Note at a price in excess of
      the
      price paid for such shares pursuant to this Note. The Borrower and the Holder
      hereby agree that such amount of stipulated damages is not plainly
      disproportionate to the possible loss to the Holder from the receipt of a cash
      payment without the opportunity to convert this Note into shares of Common
      Stock.

     

    4.8 Allocations
      of Maximum Share Amount and Reserved Amount.
      The
      Maximum Share Amount and Reserved Amount shall be allocated pro rata among
      the
      Holders of Notes based on the principal amount of such Notes issued to each
      Holder. Each increase to the Maximum Share Amount and Reserved Amount shall
      be
      allocated pro rata among the Holders of Notes based on the principal amount
      of
      such Notes held by each Holder at the time of the increase in the Maximum Share
      Amount or Reserved Amount. In the event a Holder shall sell or otherwise
      transfer any of such Holder’s Notes, each transferee shall be allocated a pro
      rata portion of such transferor’s Maximum Share Amount and Reserved Amount. Any
      portion of the Maximum Share Amount or Reserved Amount which remains allocated
      to any person or entity which does not hold any Notes shall be allocated to
      the
      remaining Holders of Notes, pro rata based on the principal amount of such
      Notes
      then held by such Holders.

     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

    

     

    4.9 Damages
      Shares.
      The
      shares of Common Stock that may be issuable to the Holder pursuant to Sections
      1.3 and 1.4(g) hereof and pursuant to Section 2(c) of the Registration Rights
      Agreement (“Damages
      Shares”)
      shall
      be treated as Common Stock issuable upon conversion of this Note for all
      purposes hereof and shall be subject to all of the limitations and afforded
      all
      of the rights of the other shares of Common Stock issuable hereunder, including
      without limitation, the right to be included in the Registration Statement
      filed
      pursuant to the Registration Rights Agreement. For purposes of calculating
      interest payable on the outstanding principal amount hereof, except as otherwise
      provided herein, amounts convertible into Damages Shares (“Damages
      Amounts”)
      shall
      not bear interest but must be converted prior to the conversion of any
      outstanding principal amount hereof, until the outstanding Damages Amounts
      is
      zero.

     

    4.10 Denominations.
      At the
      request of the Holder, upon surrender of this Note, the Borrower shall promptly
      issue new Notes in the aggregate outstanding principal amount hereof, in the
      form hereof, in such denominations of at least $50,000 as the Holder shall
      request.

     

    4.11 Purchase
      Agreement.
      By its
      acceptance of this Note, each Holder agrees to be bound by the applicable terms
      of the Purchase Agreement.

     

    4.12 Notice
      of Corporate Events.
      Except
      as otherwise provided below, the Holder of this Note shall have no rights as
      a
      Holder of Common Stock unless and only to the extent that it converts this
      Note
      into Common Stock. The Borrower shall provide the Holder with prior notification
      of any meeting of the Borrower’s shareholders (and copies of proxy materials and
      other information sent to shareholders). In the event of any taking by the
      Borrower of a record of its shareholders for the purpose of determining
      shareholders who are entitled to receive payment of any dividend or other
      distribution, any right to subscribe for, purchase or otherwise acquire
      (including by way of merger, consolidation, reclassification or
      recapitalization) any share of any class or any other securities or property,
      or
      to receive any other right, or for the purpose of determining shareholders
      who
      are entitled to vote in connection with any proposed sale, lease or conveyance
      of all or substantially all of the assets of the Borrower or any proposed
      liquidation, dissolution or winding up of the Borrower, the Borrower shall
      mail
      a notice to the Holder, at least twenty (20) days prior to the record date
      specified therein (or thirty (30) days prior to the consummation of the
      transaction or event, whichever is earlier), of the date on which any such
      record is to be taken for the purpose of such dividend, distribution, right
      or
      other event, and a brief statement regarding the amount and character of such
      dividend, distribution, right or other event to the extent known at such time.
      The Borrower shall make a public announcement of any event requiring
      notification to the Holder hereunder substantially simultaneously with the
      notification to the Holder in accordance with the terms of this Section
      4.12.

     

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

     

    
      
         

      

      
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    ARTICLE
      V. CALL
      OPTION

     

    5.1 Call
      Option.
      Notwithstanding anything to the contrary contained in this Article V, so long
      as
(i) no
      Event of Default or Trading Market Prepayment Event shall have occurred and
      be
      continuing, (ii) the
      Borrower has a sufficient number of authorized shares of Common Stock reserved
      for issuance upon full conversion of the Notes, then at any time after the
      Issue
      Date, and (iii) the
      Common Stock is trading at or below $.08 per share, the Borrower shall have
      the
      right, exercisable on not less than ten (10) Trading Days prior written notice
      to the Holders of the Notes (which notice may not be sent to the Holders of
      the
      Notes until the Borrower is permitted to prepay the Notes pursuant to this
      Section 5.1), to prepay all of the outstanding Notes in accordance with this
      Section 5.1. Any notice of prepayment hereunder (an “Optional
      Prepayment”)
      shall
      be delivered to the Holders of the Notes at their registered addresses appearing
      on the books and records of the Borrower and shall state (1) that the Borrower
      is exercising its right to prepay all of the Notes issued on the Issue Date
      and
      (2) the date of prepayment (the “Optional
      Prepayment Notice”).
      On
      the date fixed for prepayment (the “Optional
      Prepayment Date”),
      the
      Borrower shall make payment of the Optional Prepayment Amount (as defined below)
      to or upon the order of the Holders as specified by the Holders in writing
      to
      the Borrower at least one (1) business day prior to the Optional Prepayment
      Date. If the Borrower exercises its right to prepay the Notes, the Borrower
      shall make payment to the holders of an amount in cash (the “Optional
      Prepayment Amount”)
      equal
      to either (i) 150% (for prepayments occurring within sixty (60) days of the
      Issue Date) or (ii) 160% (for prepayments occurring after the sixtieth
      (60th)
      day
      following the Issue Date), multiplied by the sum of (w) the then outstanding
      principal amount of this Note plus
      (x) accrued and unpaid interest on the unpaid principal amount of this Note
      to the Optional Prepayment Date plus
      (y)
      Default Interest, if any, on the amounts referred to in clauses (w) and (x)
      plus
      (z) any
      amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof or
      pursuant to Section 2(c) of the Registration Rights Agreement (the then
      outstanding principal amount of this Note to the date of payment plus
      the
      amounts referred to in clauses (x), (y) and (z) shall collectively be known
      as
      the “Optional
      Prepayment Sum”).
      Notwithstanding notice of an Optional Prepayment, the Holders shall at all
      times
      prior to the Optional Prepayment Date maintain the right to convert all or
      any
      portion of the Notes in accordance with Article I and any portion of Notes
      so
      converted after receipt of an Optional Prepayment Notice and prior to the
      Optional Prepayment Date set forth in such notice and payment of the aggregate
      Optional Prepayment Amount shall be deducted from the principal amount of Notes
      which are otherwise subject to prepayment pursuant to such notice. If the
      Borrower delivers an Optional Prepayment Notice and fails to pay the Optional
      Prepayment Amount due to the Holders of the Notes within two (2) business days
      following the Optional Prepayment Date, the Borrower shall forever forfeit
      its
      right to redeem the Notes pursuant to this Section 5.1.

     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

     

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

    

     

    IN
      WITNESS WHEREOF,
      Borrower has caused this Note to be signed in its name by its duly authorized
      officer this 11th
      Day of
      January, 2007.

     

    
      	 	 	 
	 	DEALERADVANCE,
              INC.
	 
 	 
 	 
 
	 	By:  	 
	 	
              

              Steven
                E. Humphries

              President
                and Chief Executive Officer

            
	 	 

    
      

      
        
           

        

        
          20

          
            

          

        

        
           

        

      

    EXHIBIT
      A

     

    NOTICE
      OF CONVERSION

     

    (To
      be
      Executed by the Registered Holder

     

    in
      order
      to Convert the Notes)

     

    The
      undersigned hereby irrevocably elects to convert $__________ principal amount
      of
      the Note (defined below) into shares of common stock, par value $.0001 per
      share
      (“Common
      Stock”),
      of
      DealerAdvance, Inc., a Nevada corporation (the “Borrower”)
      according to the conditions of the convertible Notes of the Borrower dated
      as of
      January 11, 2007 (the “Notes”), as of the date written below. If securities are
      to be issued in the name of a person other than the undersigned, the undersigned
      will pay all transfer taxes payable with respect thereto and is delivering
      herewith such certificates. No fee will be charged to the Holder for any
      conversion, except for transfer taxes, if any. A copy of each Note is attached
      hereto (or evidence of loss, theft or destruction thereof).

     

    The
      Borrower shall electronically transmit the Common Stock issuable pursuant to
      this Notice of Conversion to the account of the undersigned or its nominee
      with
      DTC through its Deposit Withdrawal Agent Commission system (“DWAC
      Transfer”).

     

    Name
      of
      DTC Prime Broker:______________________________________________

    Account
      Number:______________________________________________________

     

    In
      lieu
      of receiving shares of Common Stock issuable pursuant to this Notice of
      Conversion by way of a DWAC Transfer, the undersigned hereby requests that
      the
      Borrower issue a certificate or certificates for the number of shares of Common
      Stock set forth below (which numbers are based on the Holder’s calculation
      attached hereto) in the name(s) specified immediately below or, if additional
      space is necessary, on an attachment hereto:

     

    Name:______________________________________________________

    Address:______________________________________________________

     

    The
      undersigned represents and warrants that all offers and sales by the undersigned
      of the securities issuable to the undersigned upon conversion of the Notes
      shall
      be made pursuant to registration of the securities under the Securities Act
      of
      1933, as amended (the “Act”),
      or
      pursuant to an exemption from registration under the Act.

     

    Date
      of
      Conversion:___________________________

    Applicable
      Conversion Price:____________________

    Number
      of
      Shares of Common Stock to be Issued Pursuant to

    Conversion
      of the Notes:______________

    Signature:___________________________________

    Name:______________________________________

    Address:____________________________________

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

    The
      Borrower shall issue and deliver shares of Common Stock to an overnight courier
      not later than three business days following receipt of the original Note(s)
      to
      be converted, and shall make payments pursuant to the Notes for the number
      of
      business days such issuance and delivery is late.

     

    
      
         

      

      
        22

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