Document:

NOTE
      PURCHASE AGREEMENT

     

    This
      Note
      Purchase Agreement (“Agreement”) is made and entered into as of October 6, 2006
      by and among Small World Kids, Inc., a Nevada corporation (the “Parent”), SMALL
      WORLD TOYS, a California corporation (“Subsidiary”) (the Parent and the
      Subsidiary, each a “Company” and collectively the “Companies”), HONG KONG LEAGUE
      CENTRAL CREDIT UNION, a Hong Kong Credit Union (“HKLCCU”), KERSHAW MACKIE &
COMPANY, a sole proprietorship (“KM & Co.”) (SBI and KM & Co., each a
“Purchaser” and collectively the “Purchasers”), and SBI ADVISORS, LLC, a
      California limited liability company, in its capacity as administrative agent
      for the Purchasers (in such capacity, the “Administrative Agent”).

     

    RECITALS

     

    A. Companies
      are willing to sell to HKLCCU a note (the “HKLCCU Note”) in the face amount of
      $302,500 (the “HKLCCU Face Amount”) with an investment amount of $275,000 (the
“HKLCCU Investment Amount”), upon the terms and subject to the conditions set
      forth in this Agreement.

     

    B. The
      Companies are willing to sell to KM & Co. a note (the “KM & Co. Note”)
      in the face amount of $27,500 (the “KM & Co. Face Amount”) with an
      investment amount of $25,000 (the “KM & Co. Investment Amount”), upon the
      terms and subject to the conditions set forth in this Agreement.

     

    C. For
      purposes of this Agreement, the term “Notes” refers collectively to the HKLCCU
      Note and the KM & Co. Note, the term “Face Amount” means the aggregate of
      the HKLCCU Face Amount and the KM & Co. Face Amount, and the term
“Investment Amount” means the aggregate of the HKLCCU Investment Amount and the
      KM & Co. Investment Amount.

     

    D. Purchasers
      desire to purchase the Notes from the Companies upon the terms and subject
      to
      the conditions set forth in this Agreement.

     

    E. The
      capitalized terms used in this Agreement shall have the meanings assigned to
      them in Annex
      A.

     

    TERMS
      AND CONDITIONS

     

    NOW,
      THEREFORE, in consideration of their respective promises contained herein and
      other good and valuable consideration, the receipt and sufficiency of which
      are
      hereby acknowledged by the parties, the Companies, Purchasers and the
      Administrative Agent hereby agree as follows:

     

    1. Issuance
      of the Notes.

     

    1.1 Note
      Terms.
      Subject
      to the terms and conditions set forth in this Agreement, and in reliance upon
      the representations and warranties contained herein, the Companies, in
      consideration for the receipt of the Investment Amount, agrees to issue to
      Purchasers, and each Purchaser, severally and not jointly, agrees to purchase
      and accept from the Companies its Note. Interest on the Face Amount shall accrue
      and be payable monthly in arrears until March 31, 2008, at which time all
      accrued and unpaid interest, and the unpaid Face Amount, shall become
      immediately due and payable. The Notes will be convertible into shares of the
      Common Stock of the Parent (the “Note Shares”) at $1.10 per share (subject to
      adjustment). The Notes shall be substantially in the form of Exhibit
      A.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    1.2 Stock
      Purchase Warrants.
      Concurrently
      with the issuance of the Notes, the Companies hereby agree to issue Common
      Stock
      Purchase Warrants (each a “Warrant” and collectively, the “Warrants”) as
      follows:

     

    (a) To
      Administrative Agent, a Warrant covering 137,500 shares of Parent’s Common Stock
      with an exercise price of $1.10 per share, and 

     

    (b) To
      KM
& Co., a Warrant covering 12,500 shares of Parent’s Common Stock with an
      exercise price of $1.10 per share.

     

    The
      Common Stock Purchase Warrants shall be substantially in the form of
Exhibit
      B.

     

    1.3 Closing.
      The
      closing of the issuance of the Notes and the Warrants (the “Closing”) shall be
      held at the offices of Troy & Gould in Los Angeles, California, or at such
      other location as shall be agreed upon by the parties hereto on or before
      September 29, 2006. At the Closing, the Companies shall deliver the Notes
      and the Warrants to Purchasers, and Purchasers shall pay to the Companies their
      respective Investment Amounts. The date of the Closing is referred to herein
      as
      the Closing Date.

     

    2. Security
      Interest.

     

    2.1 Grant
      of Security Interest.
      To
      secure
      prompt payment to Purchasers of the Obligations, each Company hereby assigns,
      pledges and grants to Administrative Agent, for the benefit of Purchasers to
      the
      extent of their interests, a continuing security interest in and Lien upon
      all
      of the Collateral.

     

    2.2 Perfection
      of Security Interest.
      Each
      Company hereby authorizes Administrative Agent, for the benefit of Purchasers
      to
      the extent of their interests, to file any financing statements, continuation
      statements or amendments thereto that (a) indicate the Collateral (i) as all
      assets and personal property of such Company or words of similar effect,
      regardless of whether any particular asset comprised in the Collateral falls
      within the scope of Article 9 of the UCC of such jurisdiction, or (ii) as being
      of an equal or lesser scope or with greater detail, and (b) contain any other
      information required by Part 5 of Article 9 of the UCC for the sufficiency
      or
      filing office acceptance of any financing statement, continuation statement
      or
      amendment.

     

    2.3 Non-Exclusive
      License.
      Each
      Company hereby grants to Administrative Agent, for the benefit of Purchasers
      to
      the extent of their interests, an irrevocable, non-exclusive license
      (exercisable upon the termination of this Agreement due to an occurrence and
      during the continuance of an Event of Default without payment of royalty or
      other compensation to such Company) to use, transfer, license or sublicense
      any
      Intellectual Property now owned, licensed to, or hereafter acquired by such
      Company, and wherever the same may be located, and including in such license
      access to all media in which any of the licensed items may be
      recorded.

     

    
      
        
        

      

      
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    3. Purchaser’s
      Representations and Warranties.
      Each
      Purchaser, severally but not jointly, hereby represents and warrants to the
      Companies as follows:

     

    3.1 Investment
      Purposes; Compliance With Securities Act.
      Purchaser
      is acquiring its Note, and upon conversion thereof, the Note Shares, and the
      Warrants, and upon exercise thereof, the shares of Common Stock issuable upon
      such exercise (the “Warrant Shares”) (collectively, the “Securities”) for its
      own account, for investment only and not with a view towards, or in connection
      with, the public sale or distribution thereof, except pursuant to sales
      registered under or exempt from the Securities Act of 1933, as amended (the
      “Securities Act”).

     

    3.2 Accredited
      Purchaser Status.
      Purchaser
      is an “accredited investor” as that term is defined in Rule 501(a) of Regulation
      D. Purchaser is a sophisticated purchaser and has such knowledge and experience
      in financial and business matters that Purchaser is capable of evaluating the
      merits and risks of an investment made pursuant to this Agreement.

     

    3.3 Reliance
      on Exemptions.
      Purchaser
      understands the Securities are being offered and sold to in reliance on specific
      exemptions from the registration requirements of the applicable United States
      federal and state securities laws and that the Companies are relying upon the
      truth and accuracy of, and each Purchaser’s compliance with, the
      representations, warranties, acknowledgments, understandings, agreements and
      covenants of Purchasers set forth herein in order to determine the availability
      of such exemptions and the eligibility of Purchasers to acquire the
      Securities.

     

    3.4 Information.
      Purchaser
      and the advisors of the Purchaser, if any, have been furnished with all material
      information relating to the business, finances and operations of the Company
      and
      material information relating to the offer and sale of the Securities that
      have
      been requested by the Purchaser. Purchaser and Purchaser’s advisors, if any,
      have been afforded the opportunity to ask all questions of the Companies as
      they
      have in their discretion deemed advisable.

     

    3.5 Transfer
      or Resale.
      Purchaser
      understands that: (i) none of the Securities has been registered under the
      Securities Act or any state securities laws, and may not be offered for sale,
      sold, assigned or transferred unless either (a) subsequently registered
      thereunder or (b) Purchaser shall have delivered to the Parent an opinion by
      counsel reasonably satisfactory to the Parent, in form, scope and substance
      reasonably satisfactory to the Parent, to the effect that the Note, the Note
      Shares, the Warrant or the Warrants Shares, as the case may be, to be sold,
      assigned or transferred may be sold, assigned or transferred pursuant to an
      exemption from such registration, and (ii) except as expressly provided herein,
      neither the Companies nor any other person is under any obligation to register
      the Securities under the Securities Act or any state securities laws or to
      comply with the terms and conditions of any exemption thereunder.

     

    3.6 Authority,
      Validity and Enforceability.
      This
      Agreement has been duly and validly authorized, executed and delivered by
      Purchaser and is the valid and binding agreement of Purchaser enforceable in
      accordance with its terms, except as enforceability may be limited by
      bankruptcy, insolvency, moratorium, liquidation, or similar laws relating to,
      or
      affecting, generally the enforcement of creditors’ rights and remedies or by
      other equitable principles of general application.

     

    
      
        
        

      

      
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    4. Representations
      and Warranties of the Company.
      Each
      Company, jointly and severally, hereby represents and warrants to Purchasers
      as
      follows:

     

    4.1 Organization
      and Qualification.
      It
      is a
      corporation, duly organized, validly existing and in good standing under the
      laws of its jurisdictions or organization. It has the corporate power and
      authority to own and operate its properties and assets and, insofar as it is
      or
      shall be a party thereto, (i) to execute and deliver this Agreement and the
      Ancillary Agreements, (ii) to issue and sell the Notes and the Notes Shares
      upon
      conversion of the Notes, (iii) to issue and sell the Warrants and the Warrant
      Shares upon exercise of the Warrants, and (iv) to carry out the provisions
      of
      this Agreement and the Ancillary Agreements and to carry on its business as
      presently conducted. It is duly qualified and is authorized to do business
      and
      is in good standing as a foreign corporation in all jurisdictions in which
      the
      nature or location of its activities and of its properties (both owned and
      leased) makes such qualification necessary, except for those jurisdictions
      in
      which failure to do so has not had, or could not reasonably be expected to
      have,
      individually or in the aggregate, a Material Adverse Effect.

     

    4.2 Capitalization.

     

    (a) The
      authorized capital stock of the Parent, as of the date hereof, consists of
      115,000,000 shares, of which 100,000,000 are share of Common Stock, par value
      $0.001 per shares, 5,410,575 shares of which are issued and outstand, and
      15,000,000 are shares of preferred stock, par value $0.01 per share of which
      10,312,703 shares of Class A-1 Preferred Stock are issued and
      outstanding.

     

    (b) Except
      as
      disclosed on Schedule
      4.2,
      other
      than: (i) the shares reserved for issuance upon the Parent’s stock option plans;
      and (ii) shares which may be issued pursuant to this Agreement and the Ancillary
      Agreements, there are no outstanding options, warrants, rights (including
      conversion or preemptive rights and rights of first refusal), proxy or
      stockholder agreements, or arrangements or agreements of any kind for the
      purchase or acquisition from the Companies of any of its securities. Except
      as
      disclosed on Schedule
      4.2,
      neither
      the offer, issuance or sale of any of the Notes or Warrants or the issuance
      of
      any of the Note Shares or Warrant Shares, nor the consummation of any
      transaction contemplated hereby will result in a change in the price or number
      of any securities of the Companies outstanding, under anti-dilution or other
      similar provisions contained in or affecting any such securities.

     

    (c) All
      issued and outstanding shares of the Companies’ Common Stock and Preferred
      Stock: (i) have been duly authorized and validly issued and are fully paid
      and
      non-assessable; and (ii) were issued in compliance with all applicable state
      and
      federal laws concerning the issuance of securities.

     

    (d) The
      rights, preferences, privileges and restrictions of the shares of Common Stock
      and Preferred Stock are as stated in the Certificate of Incorporation (the
      “Charter”) of the Companies. The Note Shares and the Warrant Shares have been
      duly and validly reserved for issuance. When issued in compliance with the
      provisions of this Agreement and the Parent’s Charter, the Note Shares and the
      Warrant Shares will be validly issued, fully paid and non-assessable and will
      be
      free of any liens or encumbrances; provided, however, that such Note Shares
      and
      Warrant Shares may be subject to restrictions on transfer under state and/or
      federal securities laws as set forth herein or as otherwise required by such
      laws at the time a transfer is proposed.

     

    
      
        
        

      

      
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    4.3 Authorization;
      Binding Obligations.
      All
      corporate action on its part (including its officers and directors) necessary
      for the authorization of this Agreement and the Ancillary Agreements, the
      performance of all of its obligations hereunder and under the Ancillary
      Agreement on the Closing Date and, the authorization, issuance and delivery
      of
      the Notes and the Warrants have been taken or will be taken prior to the Closing
      Date. This Agreement and the Ancillary Agreements, when executed and delivered
      and to the extent it is a party there, will be its valid and binding obligations
      enforceable against it in accordance with its terms, except (i) as limited
      by
      applicable bankruptcy, insolvency, reorganization, moratorium or other laws
      of
      general application affecting the enforcement of creditors’ rights; and (ii)
      general principals of equity that restrict the availability of equitable or
      legal remedies. The issuance of the Notes and the subsequent conversion of
      the
      Notes for the Note Shares is not and will not be subject to any preemptive
      rights or rights of first refusal that have not been properly waived or complied
      with. The issuance of the Warrants and the subsequent exercise of the Warrants
      for the Warrant Shares is not and will not be subject to any preemptive rights
      or rights of first refusal that have not been properly waived or complied
      with.

     

    4.4 Liabilities.
      Neither
      it nor any of its Subsidiaries has any liability, except current liabilities
      incurred in the ordinary course of business and liabilities disclosed in any
      Exchange Act Filings.

     

    4.5 Agreements.
      Except
      as
      set forth on Schedule
      4.5
      or as
      disclosed in any Exchange Act Filings:

     

    (a) There
      are
      no agreements, understandings, instruments, contracts, proposed transactions,
      judgments, orders, writs or decrees to which it or any of its Subsidiaries
      is a
      party or to its knowledge by which it is bound which may involve: (i)
      obligations (contingent or otherwise) of, or payments to, it or any of its
      Subsidiaries in excess of $50,000 (other than obligations of, or payments to,
      it
      or any of its Subsidiaries arising from purchase or sale agreements entered
      into
      in the ordinary course of business); or (ii) the transfer or license of any
      patent, copyright, trade secret or other proprietary right to or from it (other
      than licenses arising from the purchase of “off the shelf” or other standard
      products); or (iii) provisions restricting the development, manufacture or
      distribution or its or any of its Subsidiaries’ products or services; or (iv)
      indemnification by it or any of its Subsidiaries with respect to infringements
      of proprietary rights.

     

    (b) Since
      June 30, 2006 (the “Balance Sheet Date”) neither it nor any of its Subsidiaries
      has: (i) declared or paid any dividend or authorized or made any distribution
      upon or with respect to any class or series of its capital stock; (ii) incurred
      any indebtedness for money borrowed or other liabilities (other than ordinary
      course obligations) individually in excess of $50,000 or, in the case of
      indebtedness and/or liabilities individually less than $50,000, in excess of
      $100,000 in the aggregate; (iii) made any loans or advances to any Person not
      in
      excess, individually or in the aggregate, of $100,000, other than ordinary
      course advances for travel expenses; or (iv) sold, exchanged or otherwise
      disposed or any of its assets or rights, other than the sale of its inventory
      in
      the ordinary course of business.

     

    
      
        
        

      

      
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    4.6 Title
      to Properties and Assets; Liens, Etc.
      Except
      as
      set forth on Schedule
      4.6,
      it and
      each of its Subsidiaries has good and marketable title to its and their
      respective properties and assets, and good title to its and their leasehold
      interests, in each case subject to no Liens. All facilities, Equipment,
      Fixtures, vehicles and other properties owned, leased or used by it or any
      of
      its Subsidiaries are in good operating condition and repair and are reasonably
      fit and usable for the purposes for which they are being used. Except as set
      forth on Schedule
      4.6,
      it and
      each of its Subsidiaries is in compliance with al material terms of each lease
      to which it is a party or otherwise bound.

     

    4.7 Intellectual
      Property.

     

    (a) It
      and
      each of its Subsidiaries owns or possesses sufficient legal rights to all
      Intellectual Property necessary for their respective businesses as now conducted
      and, to its knowledge as presently proposed to be conducted, without any known
      infringement of the right of others. There are no outstanding options, licenses
      or agreements of any kind relating to its or any of its Subsidiaries’
Intellectual Property, nor is it or any of its Subsidiaries bound by or a party
      to any options, licenses or agreements of any kind with respect to the
      Intellectual Property of any other Person other than such licenses or agreements
      arising from the purchase of “of the shelf” or standard products.

     

    (b) Neither
      it nor any of its Subsidiaries has received any communication alleging that
      it
      or any of its Subsidiaries has violated the Intellectual Property or other
      proprietary rights or any other Person, nor is it or any of its Subsidiaries
      aware of any basis therefore.

     

    (c) Neither
      it nor any of its Subsidiaries believes it is or will be necessary to utilize
      any inventions, trade secrets or proprietary information of any of its employees
      made prior to their employment by it or any of its Subsidiaries, except for
      inventions, trade secrets or proprietary information that have been rightfully
      assigned to it or any of its Subsidiaries.

     

    4.8 Compliance
      with Other Instruments.
      Neither
      it nor any of its Subsidiaries is in violation or default of (i) any term of
      its
      Charter or Bylaws, or (ii) any provisions of any indebtedness, mortgage,
      indenture, contract, agreement, or instrument to which it is a party or by
      which
      it is bound or any judgment, decree, order or writ, which violation or default,
      in the cause of this clause (ii) has had, or could reasonably be expected to
      have, either individually or in the aggregate, a Material Adverse Effect. The
      execution, delivery and performance of and compliance with this Agreement and
      the Ancillary Agreements to which it is a party, and the issuance of the Notes
      and the Warrants and the other Securities each pursuant hereto and thereto,
      will
      not, with or without the passage of time or giving of notice, result in any
      such
      material violation, or be in conflict with or constitute a default under any
      such term or provision, or result in the creation of any Lien upon any of its
      or
      any of its Subsidiary’s properties or assets or the suspension, revocation,
      impairment, forfeiture or non-renewal of any permit, license, authorization
      or
      approval applicable to it or any of its Subsidiaries, their businesses or
      operations or any of their assets or properties.

     

    
      
        
        

      

      
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    4.9 Compliance
      with Laws; Permits.
      Neither
      it nor any of its Subsidiaries is in violation of the Sarbanes-Oxley Act of
      2002
      or any regulation or rule promulgated thereunder or any rule or regulation
      related thereto adopted at any time by the Securities and Exchange Commission
      (the “SEC”) or any other applicable statute, rule, regulation, order or
      restriction of any domestic or foreign government or any instrumentality or
      agency thereof in respect of the conduct of its business or the ownership of
      its
      properties which has had, or could reasonably be expected to have, either
      individually or in the aggregate, a Material Adverse Effect. No governmental
      orders, permissions, consents, approvals or authorizations are required to
      be
      obtained and no registration or declarations are required to be filed in
      connection with the execution and delivery of this Agreement and any Ancillary
      Agreement and with the issuance of any of the Securities, except as such as
      have
      been duly and validly obtained or file, or with respect to any filings that
      must
      be made after the Closing Date, as will be filed in a timely manner. It and
      each
      of its Subsidiaries has all material franchises, permits, licenses and any
      similar authority necessary for the conduct of its business as now being
      conducted by it, the lack of which could, either individually or in the
      aggregate, reasonably be expected to have a Material Adverse
      Effect.

     

    4.10 SEC
      Reports.
      Except
      as
      set forth on Schedule
      4.10,
      the
      Companies have filed all proxy statements, reports and other documents required
      to be filed by it under the Securities Exchange Act of 1934 as amended (the
      “Exchange Act”). The Companies have furnished Purchasers with copies of: (i) its
      Annual Report on Form 10-K for the fiscal year ended December 31, 2005, (ii)
      its
      Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006,
      and
      (iii) its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
      2006 (collectively, the “SEC Reports”). Except as set forth on Schedule
      4.10,
      each
      SEC Report was, at the time of its filing, in substantial compliance with the
      requirements of its respective form and none of the SEC Reports, nor the
      financial statements (and the notes thereto) included in the SEC Reports, as
      of
      their respective filing dates, contained any untrue statement of a material
      fact
      or omitted to state a material fact required to be stated therein or necessary
      to make the statements therein, in light of the circumstances under which they
      were made, not misleading. Such financial statements have been prepared in
      accordance with GAAP applied on a consistent basis during the periods involved
      (except (i) as may be otherwise indicated in such financial statements or the
      notes thereto or (ii) in the case of unaudited interim statements, to the extent
      they may not include footnotes or may be condensed) and fairly present in all
      material respects the financial condition, the results of operations and cash
      flows of the Companies and Subsidiaries, or a consolidated basis, as of, and
      for, the periods presented in each such SEC Report.

     

    4.11 Absence
      of Certain Changes.
      Since
      June 30, 2006, there has been no material adverse change in the business,
      properties, operation, financial condition, results of operations or prospects
      of the Companies.

     

    
      
        
        

      

      
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    4.12 Absence
      of Litigation.
      Except
      as
      set forth on Schedule
      4.12,
      there
      is no action, suit, proceeding, inquiry or investigation before or by any court,
      public board or body pending or, to the knowledge of the Company, threatened
      against or affecting the Company, wherein an unfavorable decision, ruling or
      finding would have a Material Adverse Effect or which would adversely affect
      the
      validity or enforceability of, or the authority or ability of the Company to
      perform its obligations under, this Agreement or any of the documents
      contemplated herein.

     

    4.13 Registration
      Rights.
      Except
      as
      set forth on Schedule
      4.13,
      and
      except as disclosed in Exchange Act Filings, neither it nor any of its
      Subsidiaries is presently under any obligation, and neither it nor any of its
      Subsidiaries has granted any rights, to register any of its or any of its
      Subsidiaries’ presently outstanding securities or any of its securities that may
      hereafter be issued.
      

     

    4.14 Valid
      Offering.
      Assuming
      the accuracy of the representations and warranties of Purchasers contained
      in
      this Agreement, the offer and issuance of the Notes and the Warrants, the offer
      and issuance of the Note Shares upon the conversion of the Notes, and the offer
      issuance of the Warrant Shares upon exercise of the Warrants, will be exempt
      for
      the registration requirements of the Securities Act, and will have been
      registered or qualified (or exempt from registration and qualification) under
      the registration, permit or qualification requirement of all applicable state
      securities laws.

     

    4.15 No
      Integrated Offering.
      Neither
      it nor any of its subsidiaries or Affiliates, nor any Person acting on its
      or
      their behalf, has directly or indirectly made ay offers or sales of any security
      or solicited any offers to buy any security under circumstances that would
      cause
      the offering of the Securities pursuant to this Agreement or any Ancillary
      Agreement to be integrated with prior offerings by it for purposes of the
      Securities Act which would prevent it from issuing such Securities, or any
      of
      them, pursuant to Rule 506 under the Securities Act, or any applicable
      exchange-related stockholder approval provisions, nor will it or any of its
      Affiliates or Subsidiaries take any action or steps that would cause the
      offering of the Securities to be integrated with other offerings.

     

    4.16 Stop
      Transfer.
      The
      Securities are restricted securities as of the date of this Agreement. Neither
      Company will issue any stop transfer order or other order impeding the sale
      and
      delivery of any of the Securities at such time as the Securities are registered
      for public sale or an exemption form registration is available, except as
      required by state and federal securities laws.

     

    4.17 Dilution.
      It
      specifically acknowledges that the Parent’s obligation to issue the Note Shares
      upon conversion of the Notes and the Warrant Shares upon exercise of the
      Warrants is binding upon the Parent and enforceable regardless of the dilution
      such issuances may have on the ownership interests of other shareholders of
      the
      Parent.

     

    4.18 Patriot
      Act.
      It
      certifies that, to the best of its knowledge, neither it nor any of its
      Subsidiaries, has been designated, nor is or shall be owned or controlled,
      by a
“suspected terrorist” as defined in Executive Order 13224. It hereby
      acknowledges that Purchasers seek to comply with all applicable laws concerning
      money laundering and related activities. In furtherance of those efforts, it
      hereby represents and warrants and covenants that: (i) none of the cash or
      property that it or any of its Subsidiaries will pay or will contribute to
      Purchasers has been or shall be derived from, or related to, any activity that
      is deemed criminal under United States law; and (ii) no contribution or payment
      by it or any of its Subsidiaries to Purchasers, to the extent that they are
      within its or any such Subsidiary’s control shall cause Purchasers to be in
      violation of the United States Bank Secrecy Act, the United States International
      Money Laundering Control Act of 1986 or the United States International Money
      Laundering Abatement and Anti-Terrorist Financing Act of 2001. It shall promptly
      notify Purchasers if any of these representations, warranties and covenants
      cease to be true and accurate regarding it or any of its Subsidiaries. It shall
      provide Purchasers with any additional information regarding it and each
      Subsidiary thereof that Purchasers deem necessary or convenient to ensure
      compliance with all applicable laws concerning money laundering and similar
      activities. It understands and agrees that if at any time it is discovered
      that
      any of the foregoing representations, warranties and covenants are incorrect,
      or
      if otherwise required by applicable law or regulation related to money
      laundering or similar activities, Purchasers may undertake appropriate action
      to
      ensure compliance with applicable law and regulation, including, but not limited
      to, segregation and/or redemption of Purchasers’ investment in it. It further
      understands that Purchasers may release confidential information about it and
      its Subsidiaries and, if applicable, any underlying beneficial owners, to proper
      authorities if Purchasers, in their sole discretion, determine that it is in
      their best interests in light of relevant rules and regulations under the laws
      set for in subsection (ii) above.

     

    
      
        
        

      

      
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    4.19 Company
      Name; Location of Offices.
      Schedule
      4.19
      sets
      forth each Company’s name as its appears in official filings in the state of its
      organization, the type of entity of each Company, the organizational
      identification number issued by each Company’s state of organization or a
      statement that no such number has been issued, each Company’s state of
      organization, and the location of each Company’s chief executive office,
      corporate offices, warehouses, other locations of Collateral and locations
      where
      records with respect to Collateral are kept (including in each case the county
      of such locations) and, except as set forth on Schedule
      4.19,
      such
      locations have not changed during the preceding twelve months. As of the Closing
      Date, during the prior five years, except as set forth on Schedule
      4.19,
      no
      company has been known as or conducted business in any other name (including
      trade names). Each Company has only one state of organization.

     

    4.20 Full
      Disclosure.
      Neither
      this Agreement or the Ancillary Agreements nor the exhibits or schedules hereto
      or thereto nor any other document delivered by it to Purchasers or their
      attorneys or agents in connection herewith or therewith or with the transactions
      contemplated hereby or thereby, contain any untrue statement of a material
      fact
      not omit to state a material fact necessary in order to make the statements
      contained herein or therein, in light of the circumstances in which they are
      made, not misleading.
      

     

    5. Negative
      Covenants.
      So
      long
      as any Obligations are owed under the Notes, without the prior written consent
      of the Administrative Agent, neither of the Companies shall:

     

    5.1 Incur
      Indebtedness.
      Incur
      any
      debt for borrowed money except for indebtedness owing to Laurus Master Fund,
      Ltd. (“Laurus”) and St. Cloud Capital Partners, L.P. (“St. Cloud”) as
      such facilities may exist from time to time, including any extensions or
      modifications thereto;

     

    
      
        
        

      

      
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    5.2 Distributions.
      Make
      any
      cash payments in respect of its capital stock whether by dividends, redemption
      or otherwise;

     

    5.3 Sell
      or Encumber Assets.
      Sell,
      transfer, mortgage, assign, pledge, lease, exchange, grant a security interest
      in, or encumber any such Company’s assets, except to Purchasers, Laurus,
      St. Cloud or otherwise in the ordinary course of business;

     

    5.4 Change
      of Business.
      Engage
      in
      any business activities substantially different than those in which such Company
      is presently engaged, or cease operations, liquidate, merge, transfer, acquire,
      or consolidate with any other entity or dissolve;

     

    5.5 Change
      Name or Location.
      Change
      its legal name or trade name or any location of it chief executive offices,
      corporate offices, warehouses or other locations of Collateral.

     

    6. Conditions
      to Issuance and Acceptance of the Notes.

     

    6.1 Conditions
      to Companies’ Obligations to Issue the Notes.
      The
      obligations of the Companies hereunder are subject to the satisfaction, on
      or
      before the Closing, unless otherwise specified, of each of the following
      conditions, provided that these conditions are for the Companies’ sole benefit
      and may be waived by the Companies at any time in its sole
      discretion:

     

    (a) Each
      Company and Purchaser shall have executed this Agreement and all of the
      Ancillary Agreements as to which it is a party.

     

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

     

    (c) No
      statute, rule, regulation, executive order, decree, ruling or injunction shall
      have been enacted, entered, promulgated or endorsed by any court or governmental
      authority of competent jurisdiction or any self regulatory organization having
      authority over the matters contemplated hereby which restricts or prohibits
      the
      consummation of any of the transactions contemplated herein.

     

    (d) All
      consents, approval, authorizations and orders required to be obtained and all
      registrations, filings and notices required to be made with or given to any
      regulatory authority or person as provided herein shall have been
      made.

     

    (e) Purchasers
      shall execute such reasonable subordination agreements with Laurus,
      St. Cloud and the Goldwassers necessary to affirm that the Obligations of
      the Company under the Notes are and will continue to be subordinated to existing
      indebtedness owed to Laurus, St. Cloud and the Goldwassers.

     

    
      
        
        

      

      
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    6.2 Conditions
      to Purchasers’ Obligation to Accept the Notes.
      The
      obligations of Purchasers are subject to the satisfaction, on or before the
      Closing, unless otherwise specified, of each of the following conditions,
      provided that these conditions are for the sole benefit of Purchasers and may
      be
      waived by Purchasers at any time in their sole discretion:

     

    (a) Each
      Company and Purchaser shall have executed this Agreement and all Ancillary
      Agreements as to which it is a party.

     

    (b) The
      representations and warranties of the Companies shall be true and correct in
      all
      material respects as of the Closing (except for representations and warranties
      that speak as of a specific date). The Companies shall have performed, satisfied
      and complied in all material respects with the covenants, agreements and
      conditions required by this Agreement and the Ancillary Agreements to be
      performed, satisfied or complied with by the Companies at or prior to the
      Closing. The Purchaser may require a certificate, executed by the Chief
      Executive Officer of each of the Companies, dated as of the Closing, to the
      foregoing effect and as to such other matters as may be reasonably requested
      by
      Purchasers.

     

    (c) No
      statute, rule, regulation, executive order, decree, ruling or injunction shall
      have been enacted, entered, promulgated or endorsed by any court or governmental
      authority of competent jurisdiction or any self regulatory organization having
      authority over the matters contemplated hereby which restricts or prohibits
      the
      consummation of any of the transactions contemplated herein.

     

    (d) All
      consents, approval, authorizations and orders required to be obtained and all
      registrations, filings and notices required to be made with or given to any
      regulatory authority or person as provided herein shall have been
      made.

     

    (e) The
      Companies and KM & Co. shall have entered into a consulting services
      agreement acceptable to Administrative Agent.

     

    (f) Laurus
      shall have provided to the Company net proceeds of at least $1,500,000 as an
      over-advance under its existing credit facility, or under a new credit facility,
      on terms acceptable to Purchasers.

     

    (g) The
      Company shall have received net proceeds of at least $200,000 from the sale
      of
      shares of Common Stock.

     

    (h) The
      Company shall have executed and delivered to the Purchasers a Registration
      Rights Agreement substantially in the form of Exhibit
      C.

     

    7. Expenses.
      The
      Companies shall jointly and severally pay all of Purchasers’ out-of-pocket costs
      and expenses, including reasonable fees and disbursements of in-house or outside
      counsel and appraisers, in connection with (i) the preparation, execution and
      delivery of this Agreement and the Ancillary Agreements; (ii) any amendments
      hereto or thereto or consents proposed or executed in connection with the
      transactions contemplated by this Agreement or the Ancillary Agreements; (iii)
      the prosecution or defense of any action, contest, dispute, suit or proceeding
      concerning any matters in nay way arising out of, related to or connected with
      this Agreement or any Ancillary Agreement; and (iv) any attempts to inspect,
      verify, protect, collect, sell, liquidate or otherwise dispose of any
      Collateral.

     

    
      
        
        

      

      
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    8. Event
      of Default.
      Any
      one
      or more of the following events shall constitute an “Event of Default” by the
      Companies under this Agreement:

     

    8.1 Payment
      Default.
      If
      the
      Companies fails to pay, within three days after the date such payment is due,
      any of the Obligations;

     

    8.2 Covenant
      Default.

     

    (a) If
      either
      of the Companies fails to perform any obligation (other than payment
      obligations) under this Agreement or any of the Ancillary Agreements within
      thirty days after the Companies have been given notice thereof, provided,
      however, that if the default cannot by its nature be cured within such thirty
      period or cannot after diligent attempts by the Companies be cured within such
      thirty day period, and such default is likely to be cured within a reasonable
      time, then the Companies shall have an additional reasonable period (which
      shall
      not in any case exceed an additional thirty days so that the total duration
      of
      the cure period will not exceed sixty days) to attempt to cure such default,
      and
      within such reasonable time period the failure to have cured such default shall
      not be deemed an Event of Default; or

     

    (b) If
      there
      occurs any circumstance or circumstances that would reasonably be expected
      to
      have a Material Adverse Effect;

     

    (c) If
      any
      portion of either of the Companies’ assets is attached, seized, subjected to a
      writ or distress warrant, or is levied upon, or comes into the possession of
      any
      trustee, receiver or person acting in a similar capacity and such attachment,
      seizure, writ or distress warrant or levy has not been removed, discharged
      or
      rescinded within thirty days, or if either of the Companies is enjoined,
      restrained, or in any way prevented by court order from continuing to conduct
      all or any material part of its business affairs, or if a judgment or other
      claim becomes a lien or encumbrance upon any material portion of either of
      the
      Companies’ assets, or if a notice of lien, levy, or assessment is filed of
      record with respect to any of either Company’s assets by the United States
      Government, or any department, agency, or instrumentality thereof, or by any
      state, county, municipal, or governmental agency, and the same is not paid
      within thirty days after notice thereof; provided that none of the foregoing
      shall constitute an Event of Default where such action or event is stayed or
      an
      adequate bond has been posted pending a good faith contest by the
      Companies;

     

    (d) If
      either
      Company becomes Insolvent, or if an Insolvency Proceeding is commenced by
      Borrower, or if an Insolvency Proceeding is commenced against Borrower and
      is
      not dismissed or stayed within thirty days;

     

    (e) If
      there
      is any Event of Default under any agreement with or obligation owed by either
      Company to Laurus, St. Cloud or Goldwasser; or

     

    
      
        
        

      

      
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    (f) If
      any
      material misrepresentation or material misstatement exists now or hereafter
      in
      any warranty or representation set forth herein or in any Ancillary Agreement
      or
      in any exhibit hereto or thereto or any certificate delivered to Purchasers
      or
      the Administrative Agent pursuant to this Agreement or any Ancillary
      Agreements.

     

    8.3 Change
      of Control.
      If
      there
      is a Change of Control to which the Purchasers do not approve.

     

    9. Purchasers’
      Rights and Remedies.

     

    9.1 Rights
      and Remedies.
      Upon
      the
      occurrence of an Event of Default and the giving of any notice required pursuant
      to Section 8, the Administrative Agent may without further notice of his
      election and without demand, do any one or more of the following, all of which
      are authorized by the Companies:

     

    (a) Declare
      all Obligations, whether evidenced by this Agreement or any of the Ancillary
      Agreements, or otherwise, immediately due and payable;

     

    (b) Settle
      or
      adjust disputes and claims directly with account debtors for amounts, upon
      terms
      and in whatever order that the Administrative Agent reasonably considers
      advisable;

     

    (c) Make
      such
      payments and do such acts as the Administrative Agent considers necessary or
      reasonable to protect its security interest in the Collateral. The Companies
      agree to assemble the Collateral if the Administrative Agent so requires, and
      to
      make the Collateral available to the Administrative Agent as the Administrative
      Agent may designate. The Companies authorize the Administrative Agent to enter
      the premises where the Collateral is located, to take and maintain possession
      of
      the Collateral, or any part of it, and to pay, purchase, contest, or compromise
      any encumbrance, charge, or lien which in the Administrative Agent’s
      determination appears to be prior or superior to its security interest and
      to
      pay all expenses incurred in connection therewith. With respect to any of the
      Companies’ owned premises, the Companies hereby grant the Administrative Agent a
      license to enter into possession of such premises and to occupy the same,
      without charge, in order to exercise any of the Administrative Agent’s rights or
      remedies provided herein, at law, in equity, or otherwise;

     

    (d) Ship,
      reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise
      for sale, and sell (in the manner provided for herein) the Collateral. The
      Administrative Agent is hereby granted a license or other right to use, without
      charge, the Companies’ labels, patents, copyrights, rights of use of any name,
      trade secrets, trade names, trademarks, service marks, and advertising matter,
      or any property of a similar nature, as it pertains to the Collateral, in
      completing production of, advertising for sale, and selling any Collateral
      and,
      in connection with the Administrative Agent’s exercise of its rights hereunder,
      the Companies’ rights under all licenses and all franchise agreements shall
      inure to the Administrative Agent’s benefit;

     

    (e) Dispose
      of the Collateral by way of one or more contracts or transactions, for cash
      or
      on terms, in such manner and at such places (including the Companies’ premises)
      as the Administrative Agent determines is commercially reasonable, and apply
      any
      proceeds to the Obligations in whatever manner or order the Administrative
      Agent
      deems appropriate;

     

    
      
        
        

      

      
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    (f) The
      Administrative Agent may credit bid and purchase at any public sale;
      and

     

    (g) Any
      deficiency that exists after disposition of the Collateral as provided above
      will be paid immediately by the Companies.

     

    9.2 Power
      of Attorney.
      Effective
      only upon the occurrence and during the continuance of an Event of Default,
      the
      Companies hereby irrevocably appoints the Administrative Agent as the Companies’
true and lawful attorney to: (i) send requests for verification of Accounts
      or
      notify account debtors of the Administrative Agent’s security interest in the
      Accounts; (ii) endorse the Companies’ names on any checks or other forms of
      payment or security that may come into the Administrative Agent’s possession;
      (iii) sign Companies’ names on any invoice or bill of lading relating to any
      Account, drafts against account debtors, schedules and assignments of Accounts,
      verifications of Accounts, and notices to account debtors; (iv) dispose of
      any
      Collateral; (v) make, settle, and adjust all claims under and decisions with
      respect to the Companies’ policies of insurance; (vi) settle and adjust disputes
      and claims respecting the Accounts directly with account debtors, for amounts
      and upon terms which the Administrative Agent determines to be reasonable;
      (vii)
      to file, in its sole discretion, one or more financing or continuation
      statements and amendments thereto, relative to any of the Collateral; and (viii)
      to transfer the Intellectual Property Collateral into the name of the
      Administrative Agent or a third party to the extent permitted under the UCC.
      The
      appointment of the Administrative Agent as the Companies’ attorney in fact, and
      each and every one of the Administrative Agent’s rights and powers, being
      coupled with an interest, is irrevocable until all of the Obligations have
      been
      fully repaid and performed.

     

    9.3 Accounts
      Collection.
      At
      any
      time upon the occurrence and during the continuance of an Event of Default,
      the
      Administrative Agent may notify any Person owing funds to any of the Companies
      of the Administrative Agent’s security interest in such funds and verify the
      amount of such Account. The Companies shall collect all amounts owing to the
      Companies for the Administrative Agent, receive in trust all payments as the
      Administrative Agent’s trustee, and immediately deliver such payments to the
      Administrative Agent in their original form as received from the account debtor,
      with proper endorsements for deposit.

     

    9.4 Purchasers’
      Expenses.
      If
      the
      Companies fail to pay any amounts or furnish any required proof of payment
      due
      to third persons or entities, as required under the terms of this Agreement
      or
      any Ancillary Agreements, then the Administrative Agent may do any or all of
      the
      following after reasonable notice to the Companies: (i) make payment of the
      same
      or any part thereof; or (ii) obtain and maintain insurance policies of the
      type
      typically carried by the Companies, and take any action with respect to such
      policies as the Administrative Agent deems prudent. Any amounts so paid or
      deposited by the Administrative Agent shall be immediately due and payable,
      and
      shall bear interest at the then applicable default rate under the Notes, and
      shall be secured by the Collateral. Any payments made by the Administrative
      Agent shall not constitute an agreement by the Administrative Agent to make
      similar payments in the future or a waiver by the Administrative Agent or
      Purchasers of any Event of Default under this Agreement or any Ancillary
      Agreements.

     

    
      
        
        

      

      
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    9.5 Liability
      for Collateral.
      So
      long
      as the Administrative Agent is not grossly negligent and does not engage in
      willful misconduct, the Administrative Agent shall not in any way or manner
      be
      liable or responsible for: (i) the safekeeping of the Collateral; (ii) any
      loss
      or damage thereto occurring or arising in any manner or fashion from any cause;
      (iii) any diminution in the value thereof; or (iv) any act or default of any
      carrier, warehouseman, bailee, forwarding agency, or other person whomsoever.
      All risk of loss, damage or destruction of the Collateral shall be borne by
      the
      Companies.

     

    9.6 Remedies
      Cumulative.
      The
      Administrative Agent’s rights and remedies under this Agreement and any
      Ancillary Agreements shall be cumulative. The Administrative Agent shall have
      all other rights and remedies not inconsistent herewith as provided under the
      UCC, by law, or in equity. No exercise by the Administrative Agent of one right
      or remedy shall be deemed an election, and no waiver by the Administrative
      Agent
      of any Event of Default on the Companies’ part shall be deemed a continuing
      waiver. No delay by the Administrative Agent shall constitute a waiver,
      election, or acquiescence by it. No waiver by the Administrative Agent shall
      be
      effective unless made in a written document signed on behalf of the
      Administrative Agent and then shall be effective only in the specific instance
      and for the specific purpose for which it was given.

     

    9.7 Demand;
      Protest.
      Each
      Company hereby waives demand, protest, notice of protest, notice of default
      or
      dishonor, notice of payment and nonpayment, notice of any default, nonpayment
      at
      maturity, release, compromise, settlement, extension, or renewal of accounts,
      documents, instruments, chattel paper, and guarantees at any time held by the
      Administrative Agent on which such Company may in any way be liable.
      

     

    10. Administrative
      Agent.

     

    10.1 Appointment.
      Each
      Purchaser hereby irrevocably designates and appoints the Administrative Agent
      as
      its agent under this Agreement and the Ancillary Agreements, and each Purchaser
      irrevocably authorizes the Administrative Agent, in such capacity, to take
      such
      action on its behalf under the provisions of this Agreement and the Ancillary
      Agreements and to exercise such powers and perform such duties as are expressly
      delegated to the Administrative Agent by the terms of this Agreement and the
      Ancillary Agreements, together with such other powers as are reasonably
      incidental thereto. Notwithstanding any provision to the contrary elsewhere
      in
      this Agreement, the Administrative Agent shall not have any duties or
      responsibilities, except those expressly set forth herein, or any fiduciary
      relationship with any Purchaser, and no implied covenants, functions,
      responsibilities, duties, obligations or liabilities shall be read into this
      Agreement or any of the Ancillary Agreements or otherwise exist against the
      Administrative Agent.

     

    10.2 Time
      Spent on Administrative Agent Services.
      The
      Administrative Agent is not under any obligation to spend any specific amount
      of
      time in providing his services as Administrative Agent under this Agreement
      and
      the Ancillary Agreements.

     

    
      
        
        

      

      
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    10.3 Delegation
      of Duties.
      The
      Administrative Agent may execute any of his duties under this Agreement and
      the
      Ancillary Agreements by or through agents or attorneys-in-fact and shall be
      entitled to advice of counsel concerning all matters pertaining to such duties.
      The Administrative Agent shall not be responsible for the negligence or
      misconduct of any agents or attorneys-in-fact selected by it with reasonable
      care.

     

    10.4 Exculpatory
      Provisions.
      The
      Administrative Agent shall not be (i) liable for any action lawfully taken
      or
      omitted to be taken by it or any of its agents or attorneys-in-fact under or
      in
      connection with this Agreement or any of the Ancillary Agreements (except for
      its or its agents’ or attorneys’-in-fact own gross negligence or willful
      misconduct) or (ii) responsible in any manner to any of Purchasers for any
      recitals, statements, representations or warranties made by the Companies or
      any
      officer thereof contained in this Agreement or any of the Ancillary Agreements
      or in any certificate, report, statement or other document referred to or
      provided for in, or received by the Administrative Agent under or in connection
      with, this Agreement or any of the Ancillary Agreements or for the value,
      validity, effectiveness, genuineness, enforceability or sufficiency of this
      Agreement or the Ancillary Agreements or for any failure of the Companies to
      perform its obligations hereunder or thereunder. The Administrative Agent shall
      not be under any obligation to any Purchaser to ascertain or to inquire as
      to
      the observance or performance of any of the agreements contained in, or
      conditions of, this Agreement or the Ancillary Agreements, or to inspect the
      assets and properties, including the Collateral, or books or records of the
      Companies.

     

    10.5 Reliance
      by Administrative Agent.
      The
      Administrative Agent shall be entitled to rely, and shall be fully protected
      in
      relying, upon any writing, resolution, notice, consent, certificate, affidavit,
      letter, telecopy, telex or teletype message, statement, order or other document
      or conversation believed by it to be genuine and correct and to have been
      signed, sent or made by the proper person(s) and upon advice and statements
      of
      legal counsel, independent accountants and other experts selected by the
      Administrative Agent. The Administrative Agent may treat the payee of any Note
      as the owner thereof for all purposes unless a written notice of assignment,
      negotiation or transfer thereof has been delivered to the Administrative Agent.
      The Administrative Agent shall be fully justified in failing or refusing to
      take
      any action under this Agreement or any Ancillary Agreements unless it shall
      first receive such advice or concurrence of SBI or it shall first be indemnified
      to its satisfaction by Purchasers against any and all liability and expense
      which may be incurred by it by reason of taking or continuing to take any such
      action. The Administrative Agent shall in all cases be fully protected in
      acting, or in refraining from acting, under this Agreement and the Ancillary
      Agreements in accordance with a request of SBI, and such request and any action
      taken or failure to act pursuant thereto shall be binding upon all Purchasers
      and all future holders of any Note.

     

    10.6 Notice
      of Default.
      The
      Administrative Agent shall not be deemed to have knowledge or notice of the
      occurrence of any Event of Default hereunder unless the Administrative Agent
      has
      received notice from a Purchaser or any of the Companies referring to this
      Agreement, describing such Event of Default and stating that such notice is
      a
“notice of default” or otherwise has actual knowledge of such Event of Default.
      In the event that the Administrative Agent receives such a notice, the
      Administrative Agent shall give notice thereof to Purchasers. The Administrative
      Agent shall take such action with respect to such Event of Default as shall
      be
      reasonably directed by SBI; provided that unless and until the Administrative
      Agent shall have received such directions, the Administrative Agent may (but
      shall not be obligated to) take such action, or refrain from taking such action,
      with respect to such Event of Default as it shall deem advisable in the best
      interests of Purchasers. Nothing in this Section limits the rights of the
      Purchasers to elect remedies otherwise available to them.

     

    
      
        
        

      

      
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    10.7 Non-Reliance
      on Administrative Agent and Other Purchasers.
      Each
      Purchaser expressly acknowledges that neither the Administrative Agent nor
      any
      of its agents or attorneys-in-fact has made any representations or warranties
      to
      it and that no act by the Administrative Agent hereinafter taken, including
      any
      review of the affairs of the Companies, shall be deemed to constitute any
      representation or warranty by the Administrative Agent to any Purchaser. Each
      Purchaser represents to the Administrative Agent that it has, independently
      and
      without reliance upon the Administrative Agent or any other Purchaser, and
      based
      on such documents and information as it has deemed appropriate, made its own
      appraisal of and investigation into the business, operations, property,
      financial and other condition and creditworthiness of the Companies and made
      its
      own decision to purchase its Note and enter into this Agreement and the
      Ancillary Agreements. Each Purchaser also represents that it will, independently
      and without reliance upon the Administrative Agent or any other Purchaser,
      and
      based on such documents and information as it shall deem appropriate at the
      time, continue to make its own credit analysis, appraisals and decisions in
      taking or not taking action under this Agreement and the Ancillary Agreements,
      and to make such investigation as it deems necessary to inform itself as to
      the
      business, operations, property, financial and other condition and
      creditworthiness of the Companies. Except for notices, reports and other
      documents expressly required to be furnished to Purchasers by the Administrative
      Agent hereunder, the Administrative Agent shall not have any duty or
      responsibility to provide any Purchaser with any credit or other information
      concerning the business, operations, property, condition (financial or
      otherwise), prospects or creditworthiness of the Companies which may come into
      the possession of the Administrative Agent or any of its agents or
      attorneys-in-fact.

     

    10.8 Indemnification.
      Purchasers
      agree to indemnify the Administrative Agent in its capacity as such (to the
      extent not reimbursed by the Companies and without limiting the obligation
      of
      the Companies to do so), ratably according to their respective Face Amounts,
      from and against any and all liabilities, obligations, losses, damages,
      penalties, actions, judgments, suits, costs, expenses or disbursements of any
      kind whatsoever which may at any time (including, without limitation, at any
      time following the payment of the amounts owing hereunder and the Notes) be
      imposed on, incurred by or asserted against the Administrative Agent in any
      way
      relating to or arising out of this Agreement, the Ancillary Agreements, or
      any
      documents contemplated by or referred to herein or therein or the transactions
      contemplated hereby or thereby or any action taken or omitted by the
      Administrative Agent under or in connection with any of the foregoing; provided
      that no Purchaser shall be liable for the payment of any portion of such
      liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
      costs, expenses or disbursements resulting solely from the Administrative
      Agent’s gross negligence or willful misconduct. The indemnifications in this
      Section shall survive the payment of the Notes and all other Obligations
      hereunder.

     

    10.9 Administrative
      Agent in Its Individual Capacity.
      The
      Administrative Agent may make loans to, accept deposits from and generally
      engage in any kind of business with the Company as though the Administrative
      Agent were not the Administrative Agent under this Agreement and the Ancillary
      Agreements.

     

    
      
        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    

     

    10.10 Successor
      Administrative Agent.
      The
      Administrative Agent may resign as Administrative Agent upon thirty days’ notice
      to Purchasers. If the Administrative Agent resigns under this Agreement and
      the
      Ancillary Agreements, then SBI shall appoint a successor agent for Purchasers,
      whereupon such successor agent shall succeed to the rights, powers and duties
      of
      the Administrative Agent, and the term “Administrative Agent” shall mean such
      successor agent effective upon such appointment and approval, and the former
      Administrative Agent’s rights, powers and duties as Administrative Agent shall
      be terminated, without any other or further act or deed on the part of such
      former Administrative Agent or any of the parties to this Agreement or any
      holders of the Notes. After any retiring Administrative Agent’s resignation as
      Administrative Agent, the provisions of this Section shall inure to its benefit
      as to any actions taken or omitted to be taken by it while it was Administrative
      Agent under this Agreement and any of the Ancillary Agreements.

     

    11. Legends.
      The
      Securities, when issued, shall bear the following legend, or a substantially
      similar legend:

     

    THE
      SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
      ACT
      OF 1933, AS AMENDED (THE “SECURITIES
      ACT”),
      OR ANY
      STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD ,PLEDGED, ASSIGNED, OR
      OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO
      IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS,
      OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THE
      SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE
      COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR
      OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE
      REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES
      LAWS.

     

    12. Waiver
      of Jury Trial; Alternative Proceedings.

     

    12.1 Waiver
      of Jury Trial.
      TO
      THE
      FULLEST EXTENT PERMITTED BY LAW, THE COMPANIES AND PURCHASERS EACH HEREBY WAIVE
      THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
      UPON OR ARISING OUT OF ANY OF THIS AGREEMENT AND THE ANCILLARY AGREEMENTS OR
      ANY
      OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, INCLUDING CONTRACT CLAIMS,
      TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY
      CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES
      A
      MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS
      AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT
      IT
      KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
      WITH LEGAL COUNSEL.

     

    
      
        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    

     

    12.2 Judicial
      Reference.
      If
      and
      only if the jury trial waiver set forth in Section 12.1 of this Agreement is
      invalidated for any reason by a court of law, statute or otherwise, the
      reference provisions set forth below shall be substituted in place of the jury
      trial waiver. So long as the jury trial waiver remains valid, the reference
      provisions set forth in this Section shall be inapplicable.

     

    (a) Each
      controversy, dispute or claim (each, a “Claim”) between the parties arising out
      of or relating to this Agreement or any Ancillary Agreement, other than (i)
      all
      matters in connection with nonjudicial foreclosure of security interests in
      real
      or personal property; or (ii) the appointment of a receiver or the exercise
      of
      other provisional remedies (any of which may be initiated pursuant to applicable
      law) that are not settled in writing within fifteen days after the date on
      which
      a party to this Agreement or any of the Ancillary Agreements gives written
      notice to all other parties that a Claim exists (the “Claim Date”) shall be
      resolved by a reference proceeding in California in accordance with the
      provisions of Section 638 et seq. of the California Code of Civil Procedure,
      or
      their successor sections (“CCP”), which shall constitute the exclusive remedy
      for the resolution of any Claim concerning this Agreement or any of the
      Ancillary Agreements, including whether such Claim is subject to the reference
      proceeding. Except as set forth in this section, the parties waive the right
      to
      initiate legal proceedings against each other concerning each such Claim. Venue
      for these proceedings shall be in the Superior Court in Los Angeles County
      (the
“Court”). By mutual agreement, the parties shall select a retired Judge of the
      Court to serve as referee, and if they cannot so agree within fifteen days
      after
      the Claim Date, the parties shall request that the Presiding Judge of the Court
      (or his or her representative) promptly select the referee. A request for
      appointment of a referee may be heard on an ex parte or expedited basis. The
      referee shall be appointed to sit as a temporary judge, with all the powers
      for
      a temporary judge, as authorized by law, and upon selection should take and
      subscribe to the oath of office as provided for in Rule 244 of the California
      Rules of Court (or any subsequently enacted Rule). Purchasers (acting together))
      and the Companies (acting together) shall each have one peremptory challenge
      pursuant to CCP § 170.6. Upon being selected, the referee shall (a) be
      requested to set the matter for a status and trial-setting conference within
      fifteen days after the date of selection and (b) if practicable, try any and
      all
      issues of law or fact and report a statement of decision upon them within ninety
      days of the date of selection. The referee will have power to expand or limit
      the amount of discovery the parties may employ. Any decision rendered by the
      referee will be final, binding and conclusive, and judgment shall be entered
      pursuant to CCP § 644 in any court in the State of California having
      jurisdiction. The parties shall complete all discovery no later than fifteen
      days before the first trial date established by the referee. The referee may
      extend such period in the event of a party’s refusal to provide requested
      discovery for any reason whatsoever, including, without limitation, legal
      objections raised to such discovery or unavailability of a witness due to
      absence or illness. No party shall be entitled to “priority” in conducting
      discovery. The parties may take depositions upon seven days written notice,
      and
      shall respond to requests for production or inspection of documents within
      ten
      days after service. All disputes relating to discovery which cannot be resolved
      by the parties shall be submitted to the referee whose decision shall be final
      and binding upon the parties. Pending appointment of the referee as provided
      herein, the Court is empowered to issue temporary and/or provisional remedies,
      as appropriate.

     

    
      
        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    

     

    (b) Except
      as
      expressly set forth herein, the referee shall determine the manner in which
      the
      reference proceeding is conducted including the time and place of all hearings,
      the order of presentation of evidence, and all other questions that arise with
      respect to the course of the reference proceeding. Except for trial, all
      proceedings and hearings conducted before the referee shall be conducted without
      a court reporter unless a party requests a court reporter. The party making
      such
      a request shall have the obligation to arrange for and pay for the court
      reporter. Subject to the referee’s power to award costs to the prevailing party,
      the parties shall equally bear the costs of the court reporter at the trial
      and
      the referee’s expenses.

     

    (c) The
      referee shall determine all issues in accordance with existing California case
      and statutory law. California rules of evidence applicable to proceedings at
      law
      will apply to the reference proceeding. The referee shall be empowered to enter
      equitable as well as legal relief, to provide all temporary and/or provisional
      remedies and to enter equitable orders that shall be binding upon the parties.
      At the close of the reference proceeding, the referee shall issue a single
      judgment at disposing of all the claims of the parties that are the subject
      of
      the reference. The parties reserve the right (i) to contest or appeal from
      the
      final judgment or any appealable order or appealable judgment entered by the
      referee and (ii) to obtain findings of fact, conclusions of laws, a written
      statement of decision, and (iii) to move for a new trial or a different
      judgment, which new trial, if granted, shall be a reference proceeding under
      this provision.

     

    (d) If
      the
      enabling legislation which provides for appointment of a referee is repealed
      (and no successor statute is enacted), any dispute between the parties that
      would otherwise be determined by the reference procedure herein described will
      be resolved and determined by arbitration conducted by a retired judge of the
      Court, in accordance with the California Arbitration Act §§  1280
      through 1294.2 of the CCP as amended from time to time. The limitations with
      respect to discovery as set forth in this Section shall apply to any such
      arbitration proceeding.

     

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

     

    14. Governing
      Law and Venue.
      This
      Agreement shall be governed by and interpreted in accordance with the laws
      of
      the State of California without regard to the principles of conflict of laws.
      In
      the event of any litigation regarding the interpretation or application of
      this
      Agreement, the parties irrevocably consent to jurisdiction in any of the state
      or federal courts located in the City of Los Angeles, State of California and
      waive their rights to object to venue in any such court, regardless of the
      convenience or inconvenience thereof to any party. Service of process in any
      civil action relating to or arising out of this Agreement (including also all
      Exhibits or Schedules hereto) or the transaction(s) contemplated herein may
      be
      accomplished in any manner provided by law. The parties hereto 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.

     

    
      
        
        

      

      
        -20-

        
          

        

      

      
        
        

      

    

     

    15. Notices.
      Any
      notices required or permitted to be given under the terms of this Amendment
      shall be sent by U.S. Mail or delivered personally or by courier or via
      facsimile (if via facsimile, to be followed within three business days by an
      original of the notice document via U.S. Mail or courier) and shall be effective
      five days after being placed in the mail, if mailed, certified or registered,
      return receipt requested, or upon receipt, if delivered personally or by courier
      or by facsimile, in each case properly addressed to the party to receive the
      same. The addresses for such communications shall be:

     

    

    
      	
              If
                to any Company:

            	
              Small
                World Kids, Inc.

              5711
                Buckingham Parkway

              Culver
                City, California 90230

              Attention:
                Debra Fine

              Fax
                Number: 310-258-1194

            
	 	 
	
              With
                a copy to:

            	
              Troy
                & Gould

              1801
                Century Park East, 16th Floor

              Los
                Angeles, California 90067

              Attention:
                David L. Ficksman

              Fax
                Number: 310-789-1490

            
	 	 
	
              If
                to Purchasers:

            	
              Hong
                Kong League Central Credit Union

              c/o
                SBI Advisors, LLC

              610
                Newport Center Drive, Suite 1205

              Newport
                Beach, California 92660

              Attention:
                David Wang

              Fax
                Number: 949-679-7280

            
	 	
               

              Kershaw
                Mackie & Company

              2405
                South Broadway

              Santa
                Ana, California 92707

              Attention:
                David S. Kershaw

              Fax
                Number: 949-709-1842

            
	 	 
	
              With
                a copy to:

            	
              Allen
                Matkins Leck Gamble Mallory & Natsis, LLP

              1900
                Main Street, 5th Floor

              Irvine,
                California 92614

              Attention:
                James E. McCormick III

              Fax
                Number: 949-553-8354

            
	 	 
	
              If
                to Administrative Agent:

            	
              SBI
                Advisors, LLC

              610
                Newport Center Drive, Suite 1205

              Newport
                Beach, California 92660

              Attention:
                Shelly Singhal

              Fax
                Number: 949-679-7280

            

    

     

    Each
      party shall provide written notice to the other party of any change in
      address.

     

    
      
        
        

      

      
        -21-

        
          

        

      

      
        
        

      

    

     

    16. Headings;
      Gender, Etc.
      The
      headings of this Agreement are for convenience of reference and shall not form
      a
      part of, or affect the interpretation of this Agreement. As used herein, the
      masculine shall refer to the feminine and neuter, the feminine to the masculine
      and neuter, and the neuter to the masculine and feminine, as the context may
      require. As used herein, unless the context clearly requires otherwise, the
      words “herein,” “hereunder” and “hereby,” shall refer to this entire Agreement
      and not only to the Section or paragraph in which such word appears. If any
      date
      specified herein falls upon a Saturday, Sunday or public or legal holidays,
      the
      date shall be construed to mean the next business day following such Saturday,
      Sunday or public or legal holiday. For purposes of this Agreement, a “business
      day” is any day other than a Saturday, Sunday or public or legal
      holiday.

     

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

     

    18. Survival.
      The
      representations and warranties of the Companies and Purchasers contained in
      Sections 3 and 4 and the agreements and covenants set forth in herein and in
      the
      Ancillary Agreements- shall survive the Closing of the purchase and sale of
      the
      Notes and the Warrants.

     

    19. Remedies.
      No
      provision of this Agreement providing for any specific remedy to a party shall
      be construed to limit such party to the specific remedy described, and any
      other
      remedy that would otherwise be available to such party at law or in equity
      shall
      be so available. Nothing in this Agreement shall limit any rights a party may
      have with any applicable federal or state securities laws with respect to the
      transactions contemplated hereby.

     

    20. Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their respective successors and assigns. Neither the Companies nor Purchasers
      shall assign this Agreement or any rights or obligations hereunder without
      the
      prior written consent of the other (which consent shall not be unreasonably
      withheld), and in any event any assignee of Purchasers shall be an “accredited
      investor” (as defined in Regulation D), in the written opinion of counsel who is
      reasonably satisfactory to the Parent, and such assignment shall be in form,
      substance and scope reasonably satisfactory to the Parent. Notwithstanding
      anything herein to the contrary, Purchasers may pledge their Notes as collateral
      for a bona fide loan with a third party lender, and such pledge shall not be
      considered an assignment in violation of this Agreement so long as it is made
      in
      compliance with all applicable law.

     

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

     

    22. Counterparts.
      This
      Agreement may be executed in two or more identical counterparts, all of which
      shall be considered one and the same agreement and shall become effective when
      counterparts have been signed by each party and signature pages from such
      counterparts have been delivered.

     

    
      
        
        

      

      
        -22-

        
          

        

      

      
        
        

      

    

     

    23. Entire
      Agreement; Amendments.
      This
      Agreement, the Ancillary Agreements, and any exhibits hereto or thereto and
      any
      certificates required to be delivered by this Agreement or the Ancillary
      Agreements, contain the entire understanding of the parties with respect to
      the
      matters covered herein and therein and, except as specifically set forth herein
      or therein, neither the Companies nor Purchasers or the Administrative Agent
      makes any representation, warranty, covenant or undertaking with respect to
      such
      matters. No provision of this Agreement or the Ancillary Agreements may be
      waived or amended other than by an instrument in writing signed by the party
      to
      be charged with enforcement.

     

    IN
      WITNESS WHEREOF, the Companies, Purchasers and the Administrative Agent have
      caused this Agreement to be duly executed as of the date first written
      above.

     

    
      	 	 	 
	 	THE
              COMPANIES:
	 	 
	 	SMALL WORLD KIDS, INC.
	 
 	 
 	 
 
	 	By:  	 
	 	
              
                

              

              Name:
                Debra Fine

              Title:
                Chief Executive Officer

            
	 	 

    

    
      
        	 	 	 
	 	SMALL WORLD TOYS
	 
 	 
 	 
 
	 	By:  	 
	 	
                
                  

                

                
                  Name:
                    Debra Fine

                  Title:
                    Chief Executive Officer

                

              
	 	 

      

    

    
      	
            	 	 
	 	PURCHASERS:
	 	 
	 	HONG KONG LEAGUE CENTRAL CREDIT
              UNION
	 
 	 
 	 
 
	 	By:  	 
	 	
              
                

              

              Name:
                

              
                

              

              Title:
                

              
                

              

            
	 

    

    
      	
            	 	 
	 	 
	 	KERSHAW MACKIE & COMPANY
	 
 	 
 	 
 
	 	By:  	 
	 	
              
                

              

              Name:

              
                

              

              
              

              Title:

              
                
 

            
	 

    

     

    
      
        
        

      

      
        -23-

        
          

        

      

      
        
        

      

    

     

    
      	
            	 	 
	 	ADMINISTRATIVE
              AGENT:
	 	 
	 	SBI ADVISORS, LLC
	 
 	 
 	 
 
	 	By:  	 
	 	
              
                

              

              Name:
                

              
                

              

              Title:
                

              
                
 

            
	 

    

     

    
      
        
        

      

      
        -24-

        
          

        

      

      
        
        

      

    

    ANNEX
      A

     

    DEFINITIONS

     

     

    “Accounts”
      means all “accounts”, as such term is defined in the UCC, now owned or hereafter
      acquired by any Person.

     

    “Administrative
      Agent” has the meaning given such term in the Preamble.

     

    “Affiliate”
      means, with respect to any Person, (a) any other Person (other than one of
      the
      Subsidiaries) which, directly or indirectly, is in control of, is controlled
      by,
      or is under common control with such Person or (b) any Person who is a director
      or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii)
      of
      any Person described in clause (a) above. For the purposes of this definition,
      control of a Person shall mean the power (direct or indirect) to direct or
      cause
      the direction of the management and policies of such Person whether by contract
      or otherwise.

     

    “Agreement”
      has the meaning given such term in the Preamble.

     

    “Ancillary
      Agreements” means, the Notes, the Warrants, the Registration Rights Agreement,
      the Subordination Agreements, and all other agreements, instruments, documents,
      mortgages, pledges, powers of attorney, consents, assignments, contracts,
      notices, security agreements, trust agreements and guarantees whether
      heretofore, concurrently, or hereafter executed by or on behalf of any Company,
      any of its Subsidiaries or any other Person or delivered to either Purchaser,
      relating to this Agreement or to the transaction contemplated by this Agreement
      or otherwise relating to the relationship between or among any Company and
      the
      Purchasers, as the same may be amended, supplemented, rested or otherwise
      modified from time to time.

     

    “Assets”
      has the meaning given such term in Section 4.13.

     

    “Balance
      Sheet Date” has the meaning given such term in Section 4.5(b).

     

    “Books
      and Records” means all books, records, board minutes, contracts, licenses,
      insurance policies, environmental audits, business plans, files, computer files,
      computer discs and other data and software storage and media devices, accounting
      books and records, financial statements (actual and pro forma), filings with
      Governmental Authorities and any and all records and instruments relating to
      the
      Collateral or otherwise necessary or helpful in the collection thereof or the
      realization thereupon.

     

    “CCP”
has
      the meaning given such term in Section 12.2(a).

     

    “Change
      of Control” means a change in ownership or control of the Corporation effected
      through any of the following transactions: (i) a stockholder-approved merger,
      consolidation or other reorganization in which securities representing more
      than
      50% of the total combined voting power of the Parent’s outstanding securities
      become beneficially owned, directly or indirectly, by a person or related group
      of persons (other than a person or related group of persons that, immediately
      prior to such transaction, directly or indirectly controlled, was controlled
      by,
      or was under common control with, the Parent; (ii) a
      stockholder-approved sale, transfer or other disposition of all or substantially
      all of either or both of the Companies’ assets to any person or related group of
      persons (other than a person or related group of persons that, immediately
      prior
      to such transaction, directly or indirectly controlled, was controlled by,
      or
      was under common control with, the Parent); or (iii) the acquisition, directly
      or indirectly, by any person or related group of persons (other than either
      Company or a person that directly or indirectly controls, is controlled by,
      or
      is under common control with, the Parent), of beneficial ownership (within
      the
      meaning of Rule 13-d3 of the Exchange Act) of securities possessing more than
      50% of the total combined voting power of the Parent’s outstanding securities
      from a person or persons other than the Parent.

     

    
      
        ANNEX
          A

        
        

      

      
        -1-

        
          

        

      

      
        
        

      

    

     

    “Charter”
      has the meaning given such term in Section 4.2(e).

     

    “Claim”
      has the meaning given such term in Section 12.2(a).

     

    “Claim
      Date” has the meaning given such terms defined in Section 12.2(a).

     

    “Closing”
      has the meaning given such terms defined in Section 1.3.

     

    “Closing
      Date” has the meaning given such terms defined in Section 1.3.

     

    “Collateral”
      means all of each Company’s property and assets, whether real or personal,
      tangible or intangible, and whether now owned or hereafter acquired, or in
      which
      it now has or at any time in the future may acquire any right, title or
      interests including all of the following property in which it now has or at
      any
      time in the future may acquire any right, title or interest: (a) all Inventory;
      (b) all Equipment; (c) all Fixtures; (d) all Goods; (e) all General Intangibles;
      (f) all Accounts; (g) all Deposit Accounts, other bank accounts and all funds
      on
      deposit therein; (h) all Investment Property; (i) all Stock; (j) all Chattel
      Paper; (k) all Letter-of-Credit Rights; (l) all Instruments; (m) all commercial
      tort claims; (n) all Books and Records; (o) all Intellectual Property
      (including, without limitation, all Patents and Trademarks); (p) all Supporting
      Obligations, including letters of credit and guarantees issued in support of
      Accounts, Chattel Paper, General Intangibles and Investment Property; (q) (i)
      all money, cash and cash equivalents and (ii) all cash held as cash collateral
      to the extent not otherwise constituting Collateral, all other cash or property
      at any time on deposit with or held by Purchasers for the account of any Company
      (whether for safekeeping, custody, pledge, transmission or otherwise); and
® all
      products and Proceeds of all or any of the foregoing, tort claims and all claims
      and other rights to payment (i) including insurance claims against third parties
      for loss of, damage to, or destruction or, the foregoing Collateral and (ii)
      payments due or to become due under leases, rentals and hires of any or all
      of
      the foregoing and Proceeds payable thereunder, or unearned premiums with respect
      to policies of insurance in whatever form. 

     

    “Common
      Stock” means the shares of stock representing the Parent’s common equity
      interests.

     

    “Company”
      and “Companies” have the meanings given such terms in the Preamble.

     

    “Equipment”
      means all “equipment” as such term is defined in the UCC, now owned or hereafter
      acquired by any Person, wherever located, including any and all machinery,
      apparatus, equipment, fittings, furniture, Fixtures, motor vehicles and other
      tangible personal property (other than Inventory) of every kind and description
      that may be now or hereafter used in such Person’s operations or that are owned
      by such Person or in which such Person may have an inters, and all parts,
      accessories and accessions thereto and substitutions and replacements
      therefor.

     

    
      
        DEFINITIONS

        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

     

    “Event
      of
      Default” means the occurrence of any of the events set forth in Section
      8.

     

    “Exchange
      Act” has the meaning given such term in Section 4.10.

     

    “Exchange
      Act Filings” means the Parent’s filings under the Exchange Act made prior to the
      date of this Agreement.

     

    “Face
      Amount” has the meaning given such term in Recital C.

     

    “Fixtures”
      means all fixtures” as such term is defined in the UCC, now owned or hereafter
      acquired by any Person.

     

    “GAAP”
      means generally accepted accounting principles, practices and procedures in
      effect from time to time in the United States of America.

     

    “General
      Intangibles” means all “general intangibles” as such term is defined in the UCC,
      now owned or hereafter acquired by any Person, including all right, title and
      interest that such Person may now or hereafter have in or under any contract,
      all Payment Intangibles, customer lists, Licenses, Intellectual Property,
      interests in partnerships, joint ventures and other business associations,
      permits, proprietary or confidential information, inventions (whether or not
      patented or patentable), technical information, procedures, designs, knowledge,
      know-how, Software, data bases, data, skill, expertise, experience, processes,
      models, drawings, materials, Books and Records, Goodwill (including the Goodwill
      associated with any Intellectual Property), all rights and claims in or under
      insurance polices (including insurance for fire, damage, loss, and casualty,
      whether covering personal property, real property, tangible rights or intangible
      rights, all liability, life, key-person, and business interruption insurance,
      and all unearned premiums), uncertificated securities, choses in action, deposit
      accounts, rights to receive tax refunds and other payments, rights to receive
      dividends, distributions, cash, instruments and other property in respect of
      or
      in exchange for pledged Stock and Investment Property, and rights of
      indemnification.

     

    “Goldwasser”
      means Eddy Goldwasser and Gail S. Goldwasser, Trustee of the Gail S. Goldwasser
      and Mark Chatinsky Family Trust.

     

    “Goodwill”
      means all goodwill, trade secrets, proprietary or confidential information,
      technical information, procedures, formulae, quality control standards, designs,
      operating and training manuals, customer lists, and distribution agreements
      now
      owned or hereafter acquired by any Person.

     

    “HKLCCU”
      has the meaning given such term in the Preamble.

     

    “HKLCCU
      Face Amount” has the meaning given such term in Recital A.

     

    
      
        DEFINITIONS

        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

     

    “HKLCCU
      Investment Amount” has the meaning given such term in Recital A.

     

    “HKLCCU
      Note” has the meaning given such term in Recital A.

     

    “Instruments”
      means all “instruments”, a such term is defined in the UCC, now or hereafter
      acquired by any Person, wherever located, including all certificated securities
      and all promissory notes and other evidences of indebtedness, other than
      instruments that constitute, or are a part of a group of writings that
      constitute, Chattel Paper.

     

    “Intellectual
      Property” means any and all patents, trademarks, service marks, trade names,
      copyrights, trade secrets, Licenses, information and other proprietary rights
      and processes.

     

    “Inventory”
      means all “inventory” as such term is defined in the UCC, now owned or hereafter
      acquired by any Person, wherever located, including all inventory, merchandise,
      goods and other personal property that are held by or on behalf of such Person
      for sale or lease or are furnished or at to be finished under a contract of
      service or that constitute raw materials, work in process, finished goods,
      returned goods, or materials or supplies of any kind, nature or description
      used
      or consumed or to be used or consumed in such Person’s business or in the
      processing, production, packaging, promotion, delivery or shipping of the same,
      including all supplies and embedded software.

     

    “Investment
      Amount” has the meaning given such term in Recital C.

     

    KM
&
      Co. has the meaning given such term in the Preamble.

     

    “KM
&
      Co. Face Amount” has the meaning given such term in Recital B.

     

    “KM
&
      Co. Investment Amount” has the meaning given such term in Recital
      B.

     

    “KM
&
      Co. Note” has the meaning given such term in Recital B.

     

    “Laurus”
      has the meaning given such term in Section 5.1.

     

    “License”
      means any rights under any written agreement now or hereafter acquired by any
      Person to sue any trademark, trademark registration, copyright, copyright
      registration or invention for which a patent is in existence or other license
      of
      rights or interests now held or hereafter acquired by any Person.

     

    “Liens”
      means any mortgage, deed of trust, pledge, security interest, assignment, charge
      or encumbrance, lien, or other type of preferential arrangement.

     

    “Material
      Adverse Effect” means a material adverse effect on (a) the business, assets,
      liabilities, condition (financial or otherwise), properties, operations or
      prospects of any Company or any of its Subsidiaries (taken individually or
      as a
      whole), (b) any Company’s or any of its Subsidiary’s inability to pay or perform
      Obligations in accordance with there terms of the Agreement or any Ancillary
      Agreement, (c) the value of the Collateral, the Liens on the Collateral or
      the
      priority of any such Lien, or (d) the practical realization of the benefits
      of
      Purchasers’ rights and remedies under this Agreement and the Ancillary
      Agreements.

     

    
      
        DEFINITIONS

        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    

     

    “Notes”
      has the meaning given such term in Recital C.

     

    “Note
      Shares” has the meaning given such term in Section 1.1.

     

    “Obligations”
      means all loans, liabilities, obligations, covenants and duties owning by each
      Company and each of its Subsidiaries to the Purchasers of every kind and
      description (whether or nor evidenced by the Notes or other instrument and
      whether or not for the payment of money or the performance or non-performance
      of
      any act), direct or indirect, absolute or contingent, due or to become due,
      contractual or tortuous, liquidated or unliquidated, whether existing by
      operation of law or otherwise now existing or hereafter arising including any
      debt, liability or obligation owing from any Company and/or each of its
      Subsidiaries to other which Purchasers have obtained by assignment or otherwise
      and further including all interest (including interest accruing at the then
      applicable rate provided in the Notes after the filing of any petition in
      bankruptcy, or the commencement of any insolvency, reorganization or like
      proceeding, whether or not a claim for post-filing or post-petition interest
      is
      allowed or allowable in such proceeding), charges or other payments each Company
      and each of its Subsidiaries is required to make by law or otherwise arising
      under or as a result of this Agreement, the Ancillary Agreements or otherwise,
      together with all reasonable expenses and reasonable attorneys’ fees chargeable
      to the Companies” or any of their Subsidiaries’ accounts or incurred by the
      Purchasers in connection therewith.

     

    “Patents”
      means all registered and pending applications and those patents which are
      hereafter adopted or acquired by a Company or any of its Subsidiaries, and
      all
      right, title and interest therein and thereto, and all
      registrations.

     

    “Parent”
      has the meaning given such term in the Preamble.

     

    “Person”
      means any individual, sole proprietorship, partnership, limited liability
      partnership, joint venture, trust, unincorporated organization, association,
      corporation, limited liability company, institution, public benefic corporation,
      entity or government (whether federal, state, county, city, municipal or other
      wide, including any instrumentality, division, agency, body or department
      thereof) and shall include such Person’s successors and assigns.

     

    “Purchaser”
      and “Purchasers” have the meanings given such terms in the
      Preamble.

     

    “SEC”
has
      the meaning given such term in Section 4.9.

     

    “SEC
      Reports” has the meaning given such term in Section 4.10.

     

    “Securities”
      has the meaning given such term in Section 3.1.

     

    “Securities
      Act” has the meaning given such term in Section 3.1.

     

    “Software”
      means all “software” as such term is defined in the UCC, now owned or hereafter
      acquired by an Person, including all computer programs and all supporting
      information provided in connection with a transaction related to any
      program.

     

    “St. Cloud”
      has the meaning given such term in Section 5.1.

     

    
      
        DEFINITIONS

        
        

      

      
        -5-

        
          

        

      

      
        
        

      

    

     

    “Subsidiary”
      has the meaning given such term in the Preamble and also includes, with respect
      to any Person, (i) any other Person whose shares of stock or other ownership
      interests having ordinary voting power (other than stock or other ownership
      interests having such power only by reason of the happening of a contingency)
      to
      elect a majority of the directors or other governing body of such other Person,
      are owned, directly or indirectly, by such Person or (ii) any other Person
      in
      which such Person owns, directly or indirectly, more than 50% of the equity
      interests at such time.

     

    “Subsidiaries”
      is the plural of Subsidiary.

     

    “Trademarks”
      mean the registered trademarks and pending applications of a Company or any
      of
      its Subsidiaries (whether on an intent to use basis or otherwise) and those
      trademarks which are hereafter adopted or acquired by a Company or any of its
      Subsidiaries, and all right, title and interest therein and thereto, and all
      registrations, applications, and recordings thereof, including, without
      limitation, applications, registrations and recordings in the United States
      Patent and Trademark Office or in any similar office or agency of the United
      States, any State thereof, or any foreign country, all whether now owned or
      hereafter acquired by a Company or its Subsidiaries.

     

    “UCC”
      means the Uniform Commercial Code as the same may, from time to time be in
      effect in the State of California; provided, that in the event that, buy reason
      of mandatory provisions of law, any or all of the attachment, perfection or
      priority of, or remedies with respect to, the Purchasers Lien on any Collateral
      is governed by the Uniform Commercial Code as in effect in a jurisdiction other
      than the State of California, the term “UCC” shall mean the Uniform Commercial
      Code as in effect in such other jurisdiction for purposes of the provisions
      of
      this Agreement relating to such attachment, perfection, priority or remedies
      and
      for purposes of definitions related o such provisions; provided, further, that
      to the extent that UCC is used to define any term herein or in any Ancillary
      Agreement and such term is defined differently in different Articles or
      Divisions of the UCC, the definition of such term contained in Article or
      Divisions 9 shall govern.

     

    “Warrant”
      and “Warrants” have the meanings given such terms in Section 1.2.

     

    “Warrant
      Shares” has the meaning given such term in Section 3.1.

     

    Any
      accounting terms used in this Agreement that are not specifically defined shall
      have the meanings customarily given to them in accordance with GAAP and all
      financial computations shall be computed, unless specifically provided herein,
      in accordance with GAAP consistently applied. All other terms used in this
      Agreement and defined in the UCC shall have the meaning given therein unless
      otherwise defined herein.

     

    
      
        DEFINITIONS

        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    

     

    SCHEDULE
      4.2

     

    Capitalization
      Table and Beneficial Ownership

     

    
      
        	
                 

              	
                 

              	
                Shares

              	
                 

              	
                 

              	
                 

              	
                Fully

                Diluted

              	
                 

              	
                 

              	
                 

              
	
                 

              	
                 

              	
                Outstanding

              	
                 

              	
                
                  %

                

              	
                 

              	
                Shares

              	
                 

              	
                %

              	
                 

              
	
                Russell
                  and Debra Fine, as trustees of FFT

              	 	 	
                1,721,543

              	 	 	
                31.8

              	
                %

              	 	
                3,243,850

              	 	 	
                15.8

              	
                %

              
	
                SWT
                  Investments, LLC / Shelly Singal

              	 	 	
                1,641,160

              	 	 	
                30.3

              	
                %

              	 	
                5,557,105

              	 	 	
                27.0

              	
                %

              
	
                Phoenix
                  Capital Opportunity, LLC

              	 	 	
                70,000

              	 	 	
                1.3

              	
                %

              	 	
                70,000

              	 	 	
                0.3

              	
                %

              
	
                David
                  Marshall, Inc.

              	 	 	
                1,146,718

              	 	 	
                21.2

              	
                %

              	 	
                1,167,280

              	 	 	
                5.7

              	
                %

              
	
                Sid
                  Marshall Enterprises

              	 	 	
                206,500

              	 	 	
                3.8

              	
                %

              	 	
                391,818

              	 	 	
                1.9

              	
                %

              
	
                Sid
                  Marshall as trustee of Memorial Gift Trust

              	 	 	
              	 	 	
              	 	 	
                869,081

              	 	 	
                4.2

              	
                %

              
	
                David L.
                  Ficksman and Maxine B. Ficksman, as trustees of the Ficksman Family
                  Trust

              	 	 	
                37,726

              	 	 	
                0.7

              	
                %

              	 	
                37,726

              	 	 	
                0.2

              	
                %

              
	
                Michael
                  Rubin

              	 	 	
                65,000

              	 	 	
                1.2

              	
                %

              	 	
                65,000

              	 	 	
                0.3

              	
                %

              
	
                Other
                  Holders

              	 	 	
                97,700

              	 	 	
                1.8

              	
                %

              	 	
                97,700

              	 	 	
                0.5

              	
                %

              
	
                St.
                  Cloud

              	 	 	
                81,250

              	 	 	
                1.5

              	
                %

              	 	
                802,500

              	 	 	
                3.9

              	
                %

              
	
                Strome

              	 	 	
              	 	 	
              	 	 	
                134,400

              	 	 	
                0.7

              	
                %

              
	
                John
                  Nelson

              	 	 	
              	 	 	
              	 	 	
                101,818

              	 	 	
                0.5

              	
                %

              
	
                Bob
                  Rankin

              	 	 	
              	 	 	
              	 	 	
                52,000

              	 	 	
                0.3

              	
                %

              
	
                Alex
                  Gerstenzang

              	 	 	
              	 	 	
              	 	 	
                44,000

              	 	 	
                0.2

              	
                %

              
	
                David
                  Swartz

              	 	 	
              	 	 	
              	 	 	
                44,000

              	 	 	
                0.2

              	
                %

              
	
                Gary
                  Adelson

              	 	 	
              	 	 	
              	 	 	
                44,000

              	 	 	
                0.2

              	
                %

              
	
                Lane
                  Nemeth

              	 	 	
              	 	 	
              	 	 	
                44,000

              	 	 	
                0.2

              	
                %

              
	
                John
                  Matise

              	 	 	
              	 	 	
              	 	 	
                35,818

              	 	 	
                0.2

              	
                %

              
	
                All
                  other employees

              	 	 	
              	 	 	
              	 	 	
                146,000

              	 	 	
                0.7

              	
                %

              
	
                Consultants

              	 	 	
                16,000

              	 	 	
                0.3

              	
                %

              	 	
                66,000

              	 	 	
                0.3

              	
                %

              
	
                $5M
                  Note/ Preferred - Other

              	 	 	
                210,463

              	 	 	
                3.9

              	
                %

              	 	
                595,080

              	 	 	
                2.9

              	
                %

              
	
                $.5
                  Bridge Note

              	 	 	
                2,438

              	 	 	
                0.0

              	
                %

              	 	
                117,387

              	 	 	
                0.6

              	
                %

              
	
                Imagiix
                  Purchase

              	 	 	
                50,000

              	 	 	
                0.9

              	
                %

              	 	
                50,000

              	 	 	
                0.2

              	
                %

              
	
                Bushido
                  Capital Partners LTD

              	 	 	
              	 	 	
              	 	 	
                1,758,242

              	 	 	
                8.5

              	
                %

              
	
                Gamma
                  Opportunity Partners LP

              	 	 	
                —

              	 	 	
              	 	 	
                1,530,969

              	 	 	
                7.4

              	
                %

              
	
                Cambria
                  Funds - warrants

              	 	 	
              	 	 	
              	 	 	
                196,591

              	 	 	
                1.0

              	
                %

              
	
                Laurus
                  Funds

              	 	 	 	 	 	 	 	 	
                1,036,000

              	 	 	
                4.9

              	
                %

              
	
                C.E.Unterberg
                  Towbin

              	 	 	 	 	 	 	 	 	
                554,545

              	 	 	
                2.7

              	
                %

              
	
                Frontera
                  Group, LLC

              	 	 	
                64,077

              	 	 	
                1.2

              	
                %

              	 	
                661,743

              	 	 	
                3.2

              	
                %

              
	
                Trinad
                  Capital

              	 	 	 	 	 	 	 	 	
                454,545

              	 	 	
                2.2

              	
                %

              
	
                Other
                  New Equity Investors

              	 	 	 	 	 	 	 	 	
                622,727

              	 	 	
                3.0

              	
                %

              
	
                Total
                  Shares

              	 	 	
                5,410,575

              	 	 	
                100.0

              	
                %

              	 	
                20,591,926

              	 	 	
                100.0

              	
                %

              

      

       

    

    
 

    
      
        SCHEDULE
          4.2

      

      
        Page
          1 of
          2

        
          

        

      

      
        
        

      

    

     

    136,364
      shares of Class A-1 Preferred Stock have been allocated to Frontera Group,
      LLC
      but payment has not been received by the Parent. Payment is expected in or
      about
      November 2006.

     

    Vintage
      Filings has paid the Parent $50,000 but has not yet received its shares of
      Class
      A-1 Preferred Stock.

    
      
        SCHEDULE
          4.2

      

      
        Page 2
          of 2

        
          

        

      

      
        
        

        
          

        

      

    

    SCHEDULE
      4.5

    
       

      List
        of Agreements

       

    

    
      Laurus
        has given the Companies an over-advance of $750,000 and has committed to
        over-advance an additional $750,000 subject to: (1) conclusion of the loan
        transactions contemplated by this Agreement; and (2) receipt by the Companies
        of
        net proceeds of at least $200,000 from the sale of shares of Common
        Stock.

    

     

    
      
        SCHEDULE
          4.5

      

      
        Page 1

        
          

        

      

      
        
        

      

    

     

    SCHEDULE
      4.6

     

    Pledged
      Assets

     

    
      	 	
              ·

            	
              Credit
                Facility between Small World Toys, as Borrower and Laurus
                Master Fund, Ltd. as
                Lender is secured by all of the assets of Small World Kids, Inc.
                and its
                Subsidiaries.

            

    

     

    
      	 	
              ·

            	
              Note
                Purchase Agreement, as amended, with St. Cloud Capital Partners, L.P.
                as Purchaser is secured by all of the assets of Small World
                Toys.

            

    

     

    
      	 	
              ·

            	
              1,667
                shares of Small World Toys have been pledged to Eddy Goldwasser to
                secure
                one promissory note dated May 20, 2004 to
                Mr. Goldwasser.

            

    

     

    
      	 	
              ·

            	
              Purchase
                Order Revolving Credit Line from Horizon Financial Services Group
                USA that
                is collaterialized by a security interest, junior in position to
                that of
                senior lender, Laurus Master Fund, Ltd., to the assets related to
                the PO
                Credit Line transactions.

            

    

     

    
      
        SCHEDULE
          4.6

      

      
        Page 1

        
          

        

      

      
        
        

      

    

     

    SCHEDULE
      4.7

     

    Intellectual
      Property

     

    The
      Companies have received notice that the collapsible soccer net it had been
      selling may infringe the patent rights of a third-party. The Companies intend
      to
      discontinue the sale of this item.

     

    
      
        SCHEDULE
          4.7

      

      
        Page 1

        
          

        

      

      
        
        

      

    

    SCHEDULE
      4.10

     

    SEC
      Reports Exceptions

     

    None.

     

    
      
        SCHEDULE
          4.10

      

      
        Page 1

        
          

        

      

      
        
        

      

    

    SCHEDULE
      4.11

     

    Litigation

     

    
      	 	
              ·

            	
              The
                Company’s former controller has filed a complaint with the US Department
                of Labor alleging violation of Section 806 of the Sarbanes-Oxley
                Act
                protecting whistle-blowers.

            

    

     

    
      	 	
              ·

            	
              See
                also disclosure on Schedule 4.7.

            

    

     

    
      
        SCHEDULE
          4.11

      

      
        Page 1

        
          

        

      

      
        
        

      

    

     

    SCHEDULE
      4.13

     

    Outstanding
      List Of Registration Rights

     

    
      	 	
              ·

            	
              The
                Company filed a Registration Statement on Form S-1 on June 15, 2006
                with
                the SEC complying with all registration rights obligations through
                the
                date of filing.

            

    

     

    
      	 	
              ·

            	
              Subsequent
                to June 15, 2006, the Company sold $50,000 of Class A-1 Preferred
                Stock
                that has piggy-back registration
                rights.

            

    

     

    
      
        SCHEDULE
          4.13

      

      
        Page 1

        
          

        

      

      
        
        

      

    

     

    SCHEDULE
      4.19

     

    List
      of Names and Locations

     

    Small
      World Kinds, Inc.,
      a
      Nevada corporation, EIN 86-0678911

     

    Corporate
      location: 5711
      Buckingham Parkway, Culver City, CA 90230

     

    Small
      World Toys,
      a
      California corporation

     

    Office
      headquarters: 5711
      Buckingham Parkway, Culver City, CA 90230

     

    Warehouse
      location: 24640
      S.
      Main Street, Carson, CA 90745

     

    Third
      party warehouse (Target) location: 13204
      Philadelphia Avenue, Fontana, CA 92337

     

    Fine
      Ventures, LLC,
      a
      Delaware LLC—no locations nor operating assets

     

    Fashion
      Angels Enterprises, Inc.,
      a
      Wisconsin corporation—no locations nor operating assets

     

    
      
        SCHEDULE
          4.19

      

      
        Page 1

        
          

        

      

      
        
        

      

    

     

    NOTE
      PURCHASE AGREEMENT

     

    by
      and
      among

     

    SMALL
      WORLD KIDS, INC.,

     

    SMALL
      WORLD TOYS

     

    HONG
      KONG
      LEAGUE CENTRAL CREDIT UNION

     

    KERSHAW
      MACKIE & CO.

     

    AND

     

    SBI
      ADVISORS, LLC

     

    Dated:

     

    As
      of
      September 29, 006

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    

      TABLE
        OF CONTENTS

    

    
      	
            	 	
            	
              Page

            
	
              1.

            	 	Issuance
              of the Notes	
              1

            
	 	 	
              1.1

            	 	
              Note
                Terms

            	
              1

            
	 	 	
              1.2

            	 	
              Stock
                Purchase Warrants

            	
              2

            
	 	 	
              1.3

            	 	
              Closing

            	
              2

            
	 	 	 	 
	
              2.

            	 	Security
              Interest	
              2

            
	 	 	
              2.1

            	 	
              Grant
                of Security Interest

            	
              2

            
	 	 	
              2.2

            	 	
              Perfection
                of Security Interest

            	
              2

            
	 	 	
              2.3

            	 	
              Non-Exclusive
                License

            	
              2

            
	
            	 	
            	
              
              

            
	
              3.

            	 	Purchaser’s
              Representations and Warranties	
              3

            
	 	 	
              3.1

            	 	
              Investment
                Purposes; Compliance With Securities Act

            	
              3

            
	 	 	
              3.2

            	 	
              Accredited
                Purchaser Status

            	
              3

            
	 	 	
              3.3

            	 	
              Reliance
                on Exemptions

            	
              3

            
	 	 	
              3.4

            	 	
              Information

            	
              3

            
	 	 	
              3.5

            	 	
              Transfer
                or Resale

            	
              3

            
	 	 	
              3.6

            	 	
              Authority,
                Validity and Enforceability

            	
              3

            
	
            	 	
            	
              
              

            
	
              4.

            	 	Representations
              and Warranties of the Company	
              4

            
	 	 	
              4.1

            	 	
              Organization
                and Qualification

            	
              4

            
	 	 	
              4.2

            	 	
              Capitalization

            	
              4

            
	 	 	
              4.3

            	 	
              Authorization;
                Binding Obligations

            	
              5

            
	 	 	
              4.4

            	 	
              Liabilities

            	
              5

            
	 	 	
              4.5

            	 	
              Agreements

            	
              5

            
	 	 	
              4.6

            	 	
              Title
                to Properties and Assets; Liens, Etc

            	
              6

            
	 	 	
              4.7

            	 	
              Intellectual
                Property

            	
              6

            
	 	 	
              4.8

            	 	
              Compliance
                with Other Instruments

            	
              6

            
	 	 	
              4.9

            	 	
              Compliance
                with Laws; Permits

            	
              7

            
	 	 	
              4.10

            	 	
              SEC
                Reports

            	
              7

            
	 	 	
              4.11

            	 	
              Absence
                of Certain Changes

            	
              7

            
	 	 	
              4.12

            	 	
              Absence
                of Litigation

            	
              8

            
	 	 	
              4.13

            	 	
              Registration
                Rights

            	
              8

            
	 	 	
              4.14

            	 	
              Valid
                Offering

            	
              8

            

    

    
      	 	 	
              4.15

            	 	
              No
                Integrated Offering

            	
              8

            

    

     

    
      
        
        

      

      
        (i)

        
          

        

      

      
        
        

      

    

     

    
      	 	 	 	 	 	
              Page

            
	 	 	
              4.16

            	 	
              Stop
                Transfer

            	
              8

            
	 	 	
              4.17

            	 	
              Dilution

            	
              8

            
	 	 	
              4.18

            	 	
              Patriot
                Act

            	
              8

            
	 	 	
              4.19

            	 	
              Company
                Name; Location of Offices

            	
              9

            
	 	 	
              4.20

            	 	
              Full
                Disclosure

            	
              9

            
	 	 	 	
               

            
	
              5.

            	 	Negative
              Covenants	
              
                9

              

            
	 	 	
              5.1

            	 	
              Incur
                Indebtedness

            	
              9

            
	 	 	
              5.2

            	 	
              Distributions

            	
              10

            
	 	 	
              5.3

            	 	
              Sell
                or Encumber Assets

            	
              10

            
	 	 	
              5.4

            	 	
              Change
                of Business

            	
              10

            
	 	 	
              5.5

            	 	
              Change
                Name or Location

            	
              10

            
	 	 	 	
               

            
	
              6.

            	 	Conditions
              to Issuance and Acceptance of the Notes	
              10

            
	 	 	
              6.1

            	 	
              Conditions
                to Companies’ Obligations to Issue the Notes

            	
              10

            
	 	 	
              6.2

            	 	
              Conditions
                to Purchasers’ Obligation to Accept the Notes

            	
              11

            
	 	 	 	
               

            
	
              7.

            	 	Expenses	
              11

            
	 	 	 	
               

            
	
              8.

            	 	Event
              of Default	
              12

            
	 	 	
              8.1

            	 	
              Payment
                Default

            	
              12

            
	 	 	
              8.2

            	 	
              Covenant
                Default

            	
              12

            
	 	 	
              8.3

            	 	
              Change
                of Control

            	
              13

            
	 	 	 	
               

            
	
              9.

            	 	Purchasers’
              Rights and Remedies	
              13

            
	 	 	
              9.1

            	 	
              Rights
                and Remedies

            	
              13

            
	 	 	
              9.2

            	 	
              Power
                of Attorney

            	
              14

            
	 	 	
              9.3

            	 	
              Accounts
                Collection

            	
              14

            
	 	 	
              9.4

            	 	
              Purchasers’
                Expenses

            	
              14

            
	 	 	
              9.5

            	 	
              Liability
                for Collateral

            	
              15

            
	 	 	
              9.6

            	 	
              Remedies
                Cumulative

            	
              15

            
	 	 	
              9.7

            	 	
              Demand;
                Protest

            	
              15

            
	 	 	 	
               

            
	
              10.

            	 	Administrative
              Agent	
              15

            
	 	 	
              10.1

            	 	
              Appointment

            	
              15

            
	 	 	
              10.2

            	 	
              Time
                Spent on Administrative Agent Services

            	
              15

            
	 	 	
              10.3

            	 	
              Delegation
                of Duties

            	
              16

            
	 	 	
              10.4

            	 	
              Exculpatory
                Provisions

            	
              16

            

    

     

    
      
        
        

      

      
        (ii)

        
          

        

      

      
        
        

      

    

     

    
      	
               

            	 	 	 	 	
              Page

            
	 	
               

            	
              10.5

            	 	
              Reliance
                by Administrative Agent

            	
              16

            
	 	 	
              10.6

            	 	
              Notice
                of Default

            	
              16

            
	 	 	
              10.7

            	 	
              Non-Reliance
                on Administrative Agent and Other Purchasers

            	
              17

            
	 	 	
              10.8

            	 	
              Indemnification

            	
              17

            
	 	 	
              10.9

            	 	
              Administrative
                Agent in Its Individual Capacity

            	
              17

            
	 	 	
              10.10

            	 	
              Successor
                Administrative Agent

            	
              18

            
	 	 	 	
               

            
	
              11.

            	 	Legends	
              18

            
	 	 	 	
               

            
	
              12.

            	 	Waiver
              of Jury Trial; Alternative Proceedings	
              18

            
	 	 	
              12.1

            	 	
              Waiver
                of Jury Trial

            	
              18

            
	 	 	
              12.2

            	 	
              Judicial
                Reference

            	
              19

            
	 	 	 	
               

            
	
              13.

            	 	Further
              Assurance	
              20

            
	 	 	 	
               

            
	
              14.

            	 	Governing
              Law and Venue	
              20

            
	 	 	 	 
	
              15.

            	 	Notices	
              21

            
	 	 	 	
               

            
	
              16.

            	 	Headings;
              Gender, Etc	
              22

            
	 	 	 	
               

            
	
              17.

            	 	Severability	
              22

            
	 	 	 	
               

            
	
              18.

            	 	Survival	
              22

            
	 	 	 	
               

            
	
              19.

            	 	Remedies	
              22

            
	 	 	 	
               

            
	
              20.

            	 	Successors
              and Assigns	
              22

            
	 	 	 	
               

            
	
              21.

            	 	No
              Third Party Beneficiaries	
              22

            
	 	 	 	
               

            
	
              22.

            	 	Counterparts	
              22

            
	 	 	 	
               

            
	
              23.

            	 	Entire
              Agreement; Amendments	
              23

            

    

     

    
      
        
        

      

      
        (iii)THIS
      NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE
      NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR, IF
      APPLICABLE, STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE,
      PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
      AS
      TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY
      TO
      SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT
      REQUIRED.

     

    PROMISSORY
      NOTE

     

    FOR
      VALUE
      RECEIVED, Small World Kids, Inc. a Nevada corporation ("Parent"), and Small
      World Toys, a California corporation ("Subsidiary") (Parent and Subsidiary,
      each
      a "Borrower" and collectively the "Borrowers"), with principal offices located
      at 5711 Buckingham Parkway, Culver City, California 90230, hereby jointly and
      severally promise to pay to HONG KONG LEAGUE CENTRAL CREDIT UNION, in care
      of
      SBI ADVISORS, LLC, 610 Newport Center Drive, Suite 1205, Newport Beach,
      California 92660 (the "Holder") or order, without demand, the sum of THREE
      HUNDRED TWO THOUSAND FIVE HUNDRED DOLLARS ($302,500.00) (the "Face Amount")
      with
      interest on the Face Amount at the rate of 10% per annum. The Face Amount of
      the
      Note shall be due and payable on the Maturity Date (as hereinafter defined).
      Capitalized terms used herein but not otherwise defined shall have the meaning
      assigned to those terms in 

     

    This
      Note
      is one of a series of Notes being issued concurrently by Borrowers pursuant
      to
      the terms of that certain Note Purchase Agreement dated as of September 29,
      2006, between the Borrowers, the Holder and others (the "Agreement").
      Capitalized terms used herein but not otherwise defined shall have the meaning
      assigned to those terms in the Agreement.

     

    The
      following terms shall apply to this Note:

     

    ARTICLE
      I

    PAYMENT

     

    1.1 Payment.
      Interest hereunder shall accrue and is payable monthly in arrears on the last
      day of each month until the Maturity Date. During the occurrence and
      continuation of an Event of Default the interest rate shall be increased by
      two
      percent (2%) per annum commencing on the date when the Event of Default was
      declared by Holder, and the applicable payments shall be increased
      accordingly.

     

    1.2 Maturity
      Date.
      On the
      Maturity Date, the entire Face Amount and any accrued and unpaid interest shall
      be paid to the Holder without offset or deduction of any kind. The Maturity
      Date
      shall be March 31, 2008.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    1.3 Prepayment.
      The
      Note may be prepaid in whole or in part. If paid in part, such prepayment shall
      be applied first against the accrued but unpaid interest with the balance
      applied to the unpaid Face Amount.

     

    1.4 Priority.
      The
      Note shall be subordinated to Laurus Master Funds, Ltd. pursuant to that certain
      Subordination Agreement of even date herewith and to St. Cloud Capital Partners
      L.P. pursuant to those certain Subordination Agreements of even date
      herewith.

     

    ARTICLE
      II

    CONVERSION
      RIGHTS

     

    The
      Holder shall have the right to convert this Note into shares of the Parent’s
      Common Stock as set forth below.

     

    2.1 Conversion
      into the Borrower’s Common Stock.

     

    (a) The
      Holder shall have the right from and after the issuance of this Note and then
      at
      any time until this Note is fully paid, to convert the Face Amount of this
      Note
      by Parent Notice of Conversion substantially in the form of Exhibit
      A
      (the
      date of giving of such notice of conversion being a "Conversion Date") into
      fully paid and nonassessable shares of Common Stock of the Parent as such stock
      exists on the date of issuance of this Note, or any shares of capital stock
      of
      the Parent into which such stock shall hereafter be changed or reclassified
      (the
      "Common Stock") at the conversion price as defined in Section 2.1(b) hereof
      (the
      "Conversion Price"), determined as provided herein. Upon delivery to Parent
      of a
      Notice of Conversion, Borrowers shall issue and deliver to the Holder within
      three business days from the Conversion Date that number of shares of Common
      Stock for the portion of the Note converted in accordance with the foregoing
      together with all accrued and unpaid interest. The number of shares of Common
      Stock to be issued upon such conversion of this Note shall be determined by
      dividing that portion of the Face Amount of the Note to be converted, by the
      Conversion Price.

     

    (b) Subject
      to adjustment as provided in Section 2.1(c) hereof, the Conversion Price per
      share shall be $1.10.

     

    (c) The
      Conversion Price described in Section 2.1(b) above and the number and kind
      of
      shares or other securities to be issued upon conversion determined pursuant
      to
      Section 2.1(a) shall be subject to adjustment from time to time upon the
      happening of certain events while this conversion right remains outstanding,
      as
      follows:

     

    (i) If
      Parent
      at any time shall consolidate with or merge into or sell or convey all or
      substantially all its assets to any other corporation, this Note, as to the
      unpaid Face Amount thereof, shall thereafter be deemed to evidence the right
      to
      purchase such number and kind of shares or other securities and property as
      would have been issuable or distributable on account of such consolidation,
      merger, sale or conveyance, upon or with respect to the securities subject
      to
      the conversion or purchase right immediately prior to such consolidation,
      merger, sale or conveyance. The foregoing provision shall similarly apply to
      successive transactions of a similar nature by any such successor or purchaser.
      Without limiting the generality of the foregoing, the anti-dilution provisions
      of this Section shall apply to such securities of such successor or purchaser
      after any such consolidation, merger, sale or conveyance.

     

    
      
         

      

      
        -2-

        
          

        

      

      
         

      

    

     

    (ii) If
      Parent
      at any time shall, by reclassification or otherwise, changes the Common Stock
      into the same or a different number of securities of any class or classes,
      this
      Note, as to the unpaid Face Amount thereof, shall thereafter be deemed to
      evidence the right to purchase an adjusted number of such securities and kind
      of
      securities as would have been issuable as the result of such change with respect
      to the Common Stock immediately prior to such reclassification or other
      change.

     

    (iii) If
      the
      shares of Common Stock are subdivided or combined into a greater or smaller
      number of shares of Common Stock, or if a dividend is paid on the Common Stock
      in shares of Common Stock, the Conversion Price shall be proportionately reduced
      in case of subdivision of shares or stock dividend or proportionately increased
      in the case of combination of shares, in each such case by the ratio which
      the
      total number of shares of Common Stock outstanding immediately after such event
      bears to the total number of shares of Common Stock outstanding immediately
      prior to such event.

     

    (iv) Parent
      will reserve from its authorized and unissued Common Stock a sufficient number
      of shares to provide for the issuance of Common Stock upon the full conversion
      of this Note. Parent represents that upon issuance, such shares will be duly
      and
      validly issued, fully paid and non-assessable. Borrowers agree that their
      issuance of this Note shall constitute full authority to its officers, agents,
      and transfer agents who are charged with the duty of executing and issuing
      stock
      certificates to execute and issue the necessary certificates for shares of
      Common Stock upon the conversion of this Note.

     

    2.2 Method
      of Conversion.
      This
      Note may be converted by the Holder in whole or in part as described in Section
      2.1(a) hereof. Upon partial conversion of this Note, a new Note containing
      the
      same date and provisions of this Note shall, at the request of the Holder,
      be
      issued by the Borrowers to the Holder for the principal balance of this Note
      which shall not have been converted or paid.

     

    ARTICLE
      III

    EVENTS
      OF DEFAULT

     

    3.1 Events
      of Default.
      The
      occurrence of any of the following events ("Event of Default") shall, at the
      option of the Holder hereof, make the then unpaid Face Amount hereon, and all
      other amounts payable hereunder, immediately due and payable:

     

    (a) Failure
      to Pay Principal and/or Interest.
      The
      Borrowers fail to pay any installment of principal or interest hereon when
      due
      and such failure continues for a period of three days after the due
      date.

     

    (b) Event
      of Default.
      The
      occurrence of any "Event of Default" under the Agreement or any Ancillary
      Agreement.

     

    (c) Receiver
      or Trustee.
      Either
      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-

        
          

        

      

      
         

      

    

     

    (d) Bankruptcy.
      Bankruptcy, insolvency, reorganization or liquidation proceedings or other
      proceedings or relief under any bankruptcy law or any law for the relief of
      debtors shall be instituted by for against either Borrower and, if instituted,
      are not dismissed within sixty days of initiation.

     

    (e) Cross-Default.
      Any
      Event of Default, or other similar event which constitutes a breach or default
      or requires any waiver consent or approval, under any credit facility or loan
      provided to the Borrowers by Laurus, St. Cloud or Goldwasser.

     

    (f) Termination
      of Interim Manager.
      If the
      consulting agreement with Kershaw Mackie & Co. ("KM & Co.") dated
      September 16, 2006, is terminated without cause prior to March 31,
      2007.

     

    3.2 Enforcement.
      Upon
      the occurrence of any Event of Default, the Holder may thereupon proceed to
      protect and enforce its rights either by suit in equity and/or by action at
      law
      or by other appropriate proceedings whether for the specific performance (to
      the
      extent permitted by law) of any covenant or agreement contained in this Note
      or
      in aid of the exercise of any power granted in this Note, and proceed to enforce
      the payment of this Note held by it, and to enforce any other legal or equitable
      right of the Holder.

     

    ARTICLE
      IV

    MISCELLANEOUS

     

    4.1 Failure
      or Indulgence Not Waiver.
      No
      failure or delay on the part of the Holder hereof 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 privilege. 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 sent by fax transmission (with copy sent by certified
      or
      registered mail or by overnight courier). For the purposes hereof, the address
      and fax number of the Borrowers is 5711 Bunkingham Parkway, Culver City,
      California 90230, facsimile (310) 258-1194. The Borrowers may change their
      address and fax number as provided in the Agreement.

     

    4.3 Amendment
      Provision.
      The
      term "Note" and all reference thereto, as used throughout this instrument,
      shall
      mean this instrument 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 Borrowers and their successors and assigns,
      and
      shall inure to the benefit of the Holder and its successors and assigns, and
      may
      be assigned by the Holder.

     

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

     

    
      
         

      

      
        -4-

        
          

        

      

      
         

      

    

     

    4.6 Maximum
      Payments.
      Nothing
      contained herein shall be deemed to establish or require the payment of a rate
      of interest or other charges in excess of the maximum permitted by applicable
      law. In the event that the rate of interest required to be paid or other charges
      hereunder exceed the maximum permitted by such law, any payments in excess
      of
      such maximum shall be credited against amounts owed by the Borrowers to the
      Holder and thus refunded to the Borrowers.

     

    4.7 Governing
      Law and Venue.
      This
      Note shall be governed by and interpreted in accordance with the laws of the
      State of California without regard to the principles of conflict of laws. In
      the
      event of any litigation regarding the interpretation or application of this
      Note, the parties irrevocably consent to jurisdiction in any of the state or
      federal courts located in the City of Los Angeles, State of California and
      waive
      their rights to object to venue in any such court, regardless of the convenience
      or inconvenience thereof to any party. Service of process in any civil action
      relating to or arising out of this Note may be accomplished in any manner
      provided by law. The parties hereto 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.

     

    IN
      WITNESS WHEREOF, the Borrowers have caused this Note to be signed in its name
      on
      this 6thth
      day of
      October 2006.

    
      	 	 	 
	 	
              SMALL
                WORLD KIDS, INC.

            
	 
 	 
 	 
 
	
            	By:  	
            
	 	
              

              Name:
                Debra Fine

            
	 	
              Title:
                Chief Executive officer

            
	 	 

    

    
      	 	 	 
	 	SMALL
              WORLD
              TOYS
	 
 	 
 	 
 
	
            	By:  	
            
	 	
              
Name:
              Debra Fine
	 	
              Title:
                Chief Executive officer

            

    

     

    
      
         

      

      
        -5-

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