Document:

ex101.htm

    Exhibit
10.1

     

    SECURITIES
PURCHASE AGREEMENT

     

    This
SECURITIES PURCHASE
AGREEMENT (the “Agreement”), dated as of July
3, 2008, is by and among Valley Forge Composite Technologies, Inc., a Florida
corporation with offices located at 50 East River Center Blvd., Suite 820,
Covington, Kentucky 41011 (the “Company”), and the investors
listed on the Schedule of Buyers attached hereto (individually, a “Buyer” and collectively, the
“Buyers”).

     

    RECITALS

     

    A.           The
Company and each Buyer is executing and delivering this Agreement in reliance
upon the exemption from securities registration afforded by Section 4(2) of the
Securities Act of 1933, as amended (the “1933 Act”), and Rule 506 of
Regulation D (“Regulation D”) as
promulgated by the U.S. Securities and Exchange Commission (the “SEC”) under the 1933
Act.

     

    B.           The
Company has authorized senior convertible notes, in the form attached hereto as
Exhibit
A (the “Notes”),
which Notes shall be convertible into shares of the Company’s common stock, par
value $.001 per share (the “Common Stock”) (as converted,
collectively, the “Conversion
Shares”), in accordance with the terms of the Notes.

     

    C.           Each
Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, (i) the aggregate original principal amount
of the Notes set forth opposite such Buyer’s name in column (3) on the Schedule
of Buyers, and (ii) a warrant to acquire up to that number of additional shares
of Common Stock set forth opposite such Buyer’s name in column (4) on the
Schedule of Buyers, in the form attached hereto as Exhibit
B (the “Warrants”) (as exercised,
collectively, the “Warrant
Shares”).  The Notes, the Conversion Shares, the Warrants and
the Warrant Shares are collectively referred to herein as the “Securities.”

     

    AGREEMENT

     

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

     

    1.           PURCHASE
AND SALE OF NOTES AND WARRANTS.

     

    (a)           Notes and
Warrants. Subject
to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7
below, the Company shall issue and sell to each Buyer, and each Buyer severally,
but not jointly, shall purchase from the Company on the Closing Date (as defined
below), a Note in the principal amount as is set forth opposite such Buyer’s
name in column (3) on the Schedule of Buyers, along with the Warrants to acquire
up to that number of Warrant Shares as is set forth opposite such Buyer’s name
in column (4) on the Schedule of Buyers.

     

    (b)           Closing. The
closing (the “Closing”)
of the purchase of the Notes and the Warrants by the Buyers shall occur at the
offices of Greenberg Traurig, LLP, The MetLife Building, 200 Park Avenue,
15th
Floor, New York, New York 10166.  The date and time of the Closing
(the “Closing Date”)
shall be 10:00 a.m., New York time, on the first (1st)
Business Day on which the conditions to the Closing set forth in Sections 6 and
7 below are satisfied or waived (or such later date as is mutually agreed to by
the Company and each Buyer). As used herein, “Business Day” means any day
other than a Saturday, Sunday or other day on which commercial banks in New
York, New York are authorized or required by law to remain closed.

    
      
         

      

      
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    (c)           Purchase
Price. The
aggregate purchase price for the Notes and the Warrants to be purchased by each
Buyer (the “Purchase
Price”) shall be the amount set forth opposite such Buyer’s name in
column (5) on the Schedule of Buyers. Each Buyer shall pay its respective
Purchase Price for the Note and related Warrants to be purchased by such Buyer
at the Closing.

     

    (d)           Form of
Payment. On the
Closing Date, (i) each Buyer shall pay its respective Purchase Price to the
Company for the Note and the Warrants to be issued and sold to such Buyer at the
Closing, by wire transfer of immediately available funds in accordance with the
Company’s written wire instructions and (ii) the Company shall deliver to
each Buyer (A) a Note (in such amount as is set forth opposite such Buyer’s name
in column (3) of the Schedule of Buyers), and (B) a Warrant pursuant to which
such Buyer shall have the right to acquire up to such number of Warrant Shares
as is set forth opposite such Buyer’s name in column (4) of the Schedule of
Buyers, in all cases, duly executed on behalf of the Company and registered in
the name of such Buyer or its designee.

     

    2.           BUYER’S
REPRESENTATIONS AND WARRANTIES.

     

    Each
Buyer, severally and not jointly, represents and warrants to the Company with
respect to only itself that:

     

    (a)           Organization;
Authority. Such
Buyer is an entity duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization with the requisite power and
authority to enter into and to consummate the transactions contemplated by the
Transaction Documents (as defined below) to which it is a party and otherwise to
carry out its obligations hereunder and thereunder.

     

    (b)           No Public Sale or
Distribution. Such
Buyer is (i) acquiring its Note and Warrants, (ii) upon conversion of its Note
will acquire the Conversion Shares issuable upon conversion thereof, and
(iii) upon exercise of its Warrants will acquire the Warrant Shares
issuable upon exercise thereof, in each case, for its own account and not with a
view towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempted under the 1933 Act;
provided, however, that by making the representations herein, such Buyer does
not agree, or make any representation or warranty, to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act. Such Buyer is acquiring the
Securities hereunder in the ordinary course of its business. Such Buyer does not
presently have any agreement or understanding, directly or indirectly, with any
Person to distribute any of the Securities.

     

    (c)           Accredited Investor
Status.  Such
Buyer is an “accredited investor” as that term is defined in Rule 501(a) of
Regulation D.

     

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

     

    (e)           Information. Such
Buyer and its advisors, if any, have been furnished with all materials relating
to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities which have been requested by such Buyer.
Such Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company. Neither such inquiries nor any other due diligence
investigations conducted by such Buyer or its advisors, if any, or its
representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained herein or any representations
and warranties contained in any other Transaction Document or any other document
or instrument executed and/or delivered in connection with this Agreement or the
consummation of the transaction contemplated hereby. Such Buyer understands that
its investment in the Securities involves a high degree of risk. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.

    
      
         

      

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

     

    (g)           Transfer or
Resale. Such
Buyer understands that except as provided in Sections 4(h) and 4(n) hereof: (i)
the Securities have not been and are not being registered under the 1933 Act or
any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such Buyer shall
have delivered to the Company (if requested by the Company) an opinion of
counsel to such Buyer, in a form reasonably acceptable to the Company, to the
effect that such Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration, or (C)
such Buyer provides the Company with reasonable assurance that such Securities
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the 1933 Act (or a successor rule thereto) (collectively,
“Rule 144”); (ii) any
sale of the Securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the seller
(or the Person (as defined in Section 3(s)) through whom the sale is made) may
be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC promulgated thereunder; and (iii) neither the Company nor
any other Person is under any obligation to register the Securities under the
1933 Act or any state securities laws or to comply with the terms and conditions
of any exemption thereunder.

     

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

     

    (i)           No
Conflicts.  The
execution, delivery and performance by such Buyer of this Agreement and the
consummation by such Buyer of the transactions contemplated hereby will not (i)
result in a violation of the organizational documents of such Buyer or (ii)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule, regulation, order,
judgment  or decree (including federal and state securities laws)
applicable to such Buyer, except in the case of clauses (ii) and (iii) above,
for such conflicts, defaults, rights or violations which would not, individually
or in the aggregate, reasonably be expected to have a material adverse effect on
the ability of such Buyer to perform its obligations hereunder.

     

    (j)           Residency. Such
Buyer is a resident of that jurisdiction specified below its address on the
Schedule of Buyers.

     

    (k)           Certain Trading
Activities.  Such
Buyer has not directly or indirectly, nor has any Person acting on behalf of or
pursuant to any understanding with such Buyer, engaged in any transactions in
the securities of the Company (including, without limitation, any Short Sales
involving the Company’s securities) since the time that such Buyer was first
contacted by the Company regarding the investment in the Company contemplated
herein. “Short Sales” include, without limitation, all “short sales” as defined
in Rule 200 promulgated under Regulation SHO under the 1934 Act (“Regulation
SHO”) and all types of direct and indirect stock pledges, forward sale
contracts, options, puts, calls, swaps and similar arrangements (including on a
total return basis), and sales and other transactions through non-U.S. broker
dealers or foreign regulated brokers (but shall not be deemed to include the
location and/or reservation of borrowable shares of Common Stock). Such Buyer
does not as of the date hereof, and will not immediately following the Closing,
own 10% or more of the Company’s issued and outstanding shares of Common Stock
(calculated based on the assumption that all Equivalents (as defined below)
owned by such Buyer, whether or not presently exercisable or convertible, have
been fully exercised or converted (as the case may be) but taking into account
any limitations on exercise or conversion (including “blockers”) contained
therein).

     

    (l)           General
Solicitation. Such
Buyer is not purchasing the Securities as a result of any advertisement,
article, notice or other communication regarding the Securities published in any
newspaper, magazine or similar media or broadcast over television or radio or
presented at any seminar.

    
      
         

      

      
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    3.           REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.

     

    The
Company represents and warrants to each of the Buyers that:

     

    (a)           Organization and
Qualification. Each of
the Company and each of the Subsidiaries are entities duly organized and validly
existing and in good standing under the laws of the jurisdiction in which they
are formed, and have the requisite power and authorization to own their
properties and to carry on their business as now being conducted and as
presently proposed to be conducted. Each of the Company and each of the
Subsidiaries is duly qualified as a foreign entity to do business and is in good
standing in every jurisdiction in which its ownership of property or the nature
of the business conducted by it makes such qualification necessary, except to
the extent that the failure to be so qualified or be in good standing would not
have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means
any material adverse effect on (i) the business, properties, assets,
liabilities, operations (including results thereof), condition (financial or
otherwise) or prospects of the Company or any Subsidiary, individually or taken
as a whole, (ii) the transactions contemplated hereby or in the other
Transaction Documents or (iii) the authority or ability of the Company or any of
the Subsidiaries to perform their respective obligations under the Transaction
Documents (as defined below). Other than the Subsidiaries, there is no Person in
which the Company, directly or indirectly, owns capital stock or holds an equity
or similar interest. For purposes of this Agreement, Valley Forge Detection
Systems, Inc., Valley Forge Aerospace, Inc., Valley Forge Imaging, Inc. and
Valley Forge Imaging Technologies, Inc. are collectively referred to herein as
the “Subsidiaries” and
each individually as a “Subsidiary.”

     

    (b)           Authorization; Enforcement;
Validity. The
Company has the requisite power and authority to enter into and perform its
obligations under this Agreement and the other Transaction Documents to which it
is a party and to issue the Securities in accordance with the terms hereof and
thereof.  Each Subsidiary has the requisite power and authority to
enter into and perform its obligations under the Transaction Documents to which
it is a party.  The execution and delivery of this Agreement and the
other Transaction Documents by the Company and the Subsidiaries and the
consummation by the Company and the Subsidiaries of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the Notes and the reservation for issuance and issuance of the Conversion Shares
issuable upon conversion of the Notes, the issuance of the Warrants and the
reservation for issuance and issuance of the Warrant Shares issuable upon
exercise of the Warrants) have been duly authorized by the Company’s board of
directors or other governing body, as applicable, and (other than the filing
with the SEC of a Notice on Form D and one or more registration statements in
accordance with Section 4(n) hereof and any other filings as may be required by
any state securities agencies) no further filing, consent or authorization is
required by the Company, the Subsidiaries, their respective Boards of Directors
or their stockholders or other governing body. This Agreement and the other
Transaction Documents to which it is a party have been duly executed and
delivered by the Company and constitutes the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies and except as rights to
indemnification and to contribution may be limited by federal or state
securities law.  The Transaction Documents to which each Subsidiary is
a party have been duly executed and delivered by each such Subsidiary, and
constitutes the legal, valid and binding obligations of such Subsidiary in
accordance with their respective terms, except as such
enforceability  may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights and remedies and except as rights to indemnification and to
contribution may be limited by federal or state securities
law.  “Transaction
Documents” means, collectively, this Agreement, the Notes, the Warrants,
the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)) and
each of the other agreements and instruments entered into by the parties hereto
in connection with the transactions contemplated hereby and
thereby.

     

    (c)           Issuance of
Securities. The
issuance of the Notes and the Warrants are duly authorized and upon issuance in
accordance with the terms of the Transaction Documents shall be validly issued,
fully paid and non-assessable and free from all taxes, liens, charges and other
encumbrances with respect to the issue thereof. As of the Closing, the Company
shall have reserved from its duly authorized capital stock not less than 120% of
the sum of (i) the maximum number of Conversion Shares issuable upon conversion
of the Notes (assuming for purposes hereof that the Notes are convertible at the
initial Conversion Price (as defined in the Notes) and without taking into
account any limitations on the conversion of the Notes set forth therein) and
(ii) the maximum number of Warrant Shares issuable upon exercise of the Warrants
(without regard to any limitations on the exercise of the Warrants set forth
therein). Upon conversion in accordance with the Notes or exercise in accordance
with the Warrants (as the case may be), the Conversion Shares and the Warrant
Shares, respectively, when issued, will be validly issued, fully paid and
nonassessable and free from all preemptive or similar rights, taxes, liens,
charges and other encumbrances with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock.
Subject to the accuracy of the representations and warranties of the Buyers in
this Agreement, the offer and issuance by the Company of the Securities is
exempt from registration under the 1933 Act.

    
      
         

      

      
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    (d)           No
Conflicts. The
execution, delivery and performance of the Transaction Documents by the Company
and the Subsidiaries and the consummation by the Company and the Subsidiaries of
the transactions contemplated hereby and thereby (including, without limitation,
the issuance of the Notes, the Warrants, the Conversion Shares and Warrant
Shares and the reservation for issuance of the Conversion Shares and Warrant
Shares) will not (i) result in a violation of the Articles of Incorporation (as
defined in Section 3(r)) or other organizational documents of the Company or any
of the Subsidiaries, any capital stock of the Company or any of the Subsidiaries
or Bylaws (as defined in Section 3(r)) of the Company or any of the
Subsidiaries, (ii) conflict with, or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
any agreement, indenture or instrument to which the Company or any of the
Subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including foreign, federal and state
securities laws and regulations and the rules and regulations of the
Over-the-Counter Bulletin Board (the “Principal Market”))
applicable to the Company or any of the Subsidiaries or by which any property or
asset of the Company or any of the Subsidiaries is bound or affected except, in
the case of clause (ii) or (iii) above, to the extent such violations that could
not reasonably be expected to have a Material Adverse Effect.

     

    (e)           Consents.  Neither
the Company nor any Subsidiary is required to obtain any consent, authorization
or order of, or make any filing or registration with, any court, governmental
agency or any regulatory or self-regulatory agency or any other Person in order
for it to execute, deliver or perform any of its respective obligations under or
contemplated by the Transaction Documents, in each case, in accordance with the
terms hereof or thereof. All consents, authorizations, orders, filings and
registrations which the Company or any Subsidiary is required to obtain pursuant
to the preceding sentence have been obtained or effected on or prior to the
Closing Date, and neither the Company nor any of the Subsidiaries are aware of
any facts or circumstances which might prevent the Company or any Subsidiary
from obtaining or effecting any of the registration, application or filings
pursuant to the preceding sentence. The Company is not in violation of the
requirements of the Principal Market and has no knowledge of any facts or
circumstances which could reasonably lead to delisting or suspension of the
Common Stock in the foreseeable future.

     

    (f)           Acknowledgment Regarding
Buyer’s Purchase of Securities. The
Company acknowledges and agrees that each Buyer is acting solely in the capacity
of an arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company or any of the Subsidiaries, (ii) an “affiliate” (as
defined in Rule 144) of the Company or any of the Subsidiaries or (iii) to its
knowledge, a “beneficial owner” of more than 10% of the shares of Common Stock
(as defined for purposes of Rule 13d-3 of the Securities Exchange Act of 1934,
as amended (the “1934
Act”)). The Company further acknowledges that no Buyer is acting as a
financial advisor or fiduciary of the Company or any of the Subsidiaries (or in
any similar capacity) with respect to the Transaction Documents and the
transactions contemplated hereby and thereby, and any advice given by a Buyer or
any of its representatives or agents in connection with the Transaction
Documents and the transactions contemplated hereby and thereby is merely
incidental to such Buyer’s purchase of the Securities. The Company further
represents to each Buyer that the Company’s decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.

     

    (g)           No General Solicitation; No
Placement Agent’s Fees. Neither
the Company, nor any of the Subsidiaries or affiliates, nor any Person acting on
its or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with the offer or
sale of the Securities. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or brokers’ commissions (other
than for persons engaged by any Buyer or its investment advisor) relating to or
arising out of the transactions contemplated hereby.  Neither the
Company nor any of the Subsidiaries has engaged any placement agent or other
agent in connection with the sale of the Securities.

     

    (h)           No Integrated
Offering. None of
the Company, the Subsidiaries or any of their affiliates, nor any Person acting
on their behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances that
would require registration of the issuance of any of the Securities under the
1933 Act, whether through integration with prior offerings or otherwise, or
cause this offering of the Securities to require approval of stockholders of the
Company under any applicable stockholder approval provisions, including, without
limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed or
designated. None of the Company, the Subsidiaries, their affiliates nor any
Person acting on their behalf will take any action or steps referred to in the
preceding sentence that would require registration of the issuance of any of the
Securities under the 1933 Act or cause the offering of any of the Securities to
be integrated with other offerings.

    
      
         

      

      
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    (i)           Dilutive
Effect. The
Company understands and acknowledges that the number of Conversion Shares and
Warrant Shares will increase in certain circumstances. The Company further
acknowledges that its obligation to issue the Conversion Shares upon conversion
of the Notes and the Warrant Shares upon exercise of the Warrants in accordance
with this Agreement, the Notes and the Warrants is, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.

     

    (j)           Application of Takeover
Protections; Rights Agreement. The
Company and its board of directors have taken all necessary action, if any, in
order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Articles of Incorporation or
other organizational document or the laws of the jurisdiction of its
incorporation or otherwise which is or could become applicable to any Buyer as a
result of the transactions contemplated by this Agreement, including, without
limitation, the Company’s issuance of the Securities and any Buyer’s ownership
of the Securities. The Company and its board of directors have taken all
necessary action, if any, in order to render inapplicable any stockholder rights
plan or similar arrangement relating to accumulations of beneficial ownership of
shares of Common Stock or a change in control of the Company or any of the
Subsidiaries.

     

    (k)           SEC Documents; Financial
Statements. During
the two (2) years prior to the date hereof, the Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the 1934 Act (all
of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements, notes and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the “SEC Documents”). The Company
has delivered to the Buyers or their respective representatives true, correct
and complete copies of each of the SEC Documents not available on the EDGAR
system. As of their respective dates, the SEC Documents complied in all material
respects with the requirements of the 1934 Act and the rules and regulations of
the SEC promulgated thereunder applicable to the SEC Documents, and none of the
SEC Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto as in effect as of the time of filing. Such financial statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments which will not be material, either individually or in the
aggregate). No other information provided by or on behalf of the Company to the
Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(e) of this Agreement, contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein not misleading, in the light
of the circumstance under which they are or were made.

     

    (l)           Absence of Certain
Changes. Since
the date of the Company’s most recent audited or reviewed financial statements
contained in a Form 10-K, there has been no material adverse change and no
material adverse development in the business, assets, liabilities, properties,
operations (including results thereof), condition (financial or otherwise) or
prospects of the Company or any of the Subsidiaries, except as may be disclosed
in the SEC Documents filed after the date of such Form 10-K but prior to the
date hereof. Since the date of the Company’s most recent audited financial
statements contained in a Form 10-K, neither the Company nor any of the
Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, outside of the ordinary course of business or
(iii) made any material capital expenditures, individually or in the aggregate.
Neither the Company nor any of the Subsidiaries has taken any steps to seek
protection pursuant to any law or statute relating to bankruptcy, insolvency,
reorganization, liquidation or winding up, nor does the Company or any
Subsidiary have any knowledge or reason to believe that any of their respective
creditors intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact which would reasonably lead a creditor to do so. The
Company and the Subsidiaries, individually and on a consolidated basis, are not
as of the date hereof, and after giving effect to the transactions contemplated
hereby to occur at the Closing, will not be Insolvent (as defined below). For
purposes of this Section 3(l), “Insolvent” means, (I) with
respect to the Company and the Subsidiaries, on a consolidated basis, (i) the
present fair saleable value of the Company’s and the Subsidiaries’ assets is
less than the amount required to pay the Company’s and the Subsidiaries’ total
Indebtedness (as defined in Section 3(s)), (ii) the Company and the Subsidiaries
are unable to pay their debts and liabilities, subordinated, contingent or
otherwise, as such debts and liabilities become absolute and matured or (iii)
the Company and the Subsidiaries intend to incur or believe that they will incur
debts that would be beyond their ability to pay as such debts mature; and (II)
with respect to the Company and each Subsidiary, individually, (i) the present
fair saleable value of the Company’s or any of the Subsidiaries’ assets is less
than the amount required to pay each of their respective total Indebtedness,
(ii) the Company or any of the Subsidiaries are unable to pay their respective
debts and liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured or (iii) the Company or any of the
Subsidiaries intend to incur or believe that they will incur debts that would be
beyond their respective ability to pay as such debts mature. Neither the Company
nor any of the Subsidiaries has engaged in business or in any transaction, and
is not about to engage in business or in any transaction, for which the
Company’s or such Subsidiary’s remaining assets constitute unreasonably small
capital.

    
      
         

      

      
        -6-

        
          

        

      

      
         

      

    

     

    (m)           No Undisclosed Events,
Liabilities, Developments or Circumstances

     

    . No
event, liability, development or circumstance has occurred or exists, or is
reasonably expected to exist or occur with respect to the Company, any of the
Subsidiaries or their respective business, properties, liabilities, prospects,
operations (including results thereof) or condition (financial or otherwise),
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced or which would have a material adverse effect on
any Buyer’s investment hereunder.

     

    (n)           Conduct of Business;
Regulatory Permits

     

    . Neither
the Company nor any of the Subsidiaries is in violation of any material term of
or in default under its Articles of Incorporation, any certificate of
designation, preferences or rights of any other outstanding series of preferred
stock of the Company or any of the Subsidiaries or Bylaws or their
organizational charter, certificate of formation or articles or certificate of
incorporation or bylaws, respectively. Neither the Company nor any of the
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or any of the
Subsidiaries, and neither the Company nor any of the Subsidiaries will conduct
its business in violation of any of the foregoing, except in all cases for
possible violations which could not, individually or in the aggregate, have a
Material Adverse Effect. Without limiting the generality of the foregoing, the
Company is not in violation of any of the rules, regulations or requirements of
the Principal Market and has no knowledge of any facts or circumstances that
could reasonably lead to delisting or suspension of the Common Stock by the
Principal Market in the foreseeable future.  Since January 1, 2007,
(i) the Common Stock has been designated for quotation on the Principal Market,
(ii) trading in the Common Stock has not been suspended by the SEC or the
Principal Market and (iii) the Company has received no communication, written or
oral, from the SEC or the Principal Market regarding the suspension or delisting
of the Common Stock from the Principal Market. The Company and each of the
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.

     

    (o)           Foreign Corrupt
Practices.  Neither
the Company nor any of the Subsidiaries, nor to the Company’s knowledge, any
director, officer, agent, employee or other Person acting on behalf of the
Company or any of the Subsidiaries has, in the course of its actions for, or on
behalf of, the Company or any of the Subsidiaries (i) used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful expenses
relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from
corporate funds; (iii) violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful
bribe, rebate, payoff, influence payment, kickback or other unlawful payment to
any foreign or domestic government official or employee.

     

    (p)           Sarbanes-Oxley
Act. The
Company and each Subsidiary is in material compliance with all applicable
requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date
hereof, and all applicable rules and regulations promulgated by the SEC
thereunder that are effective as of the date hereof.

     

    (q)           Transactions With
Affiliates. Other
than the grant of stock options disclosed on Schedule 3(q) and except as
disclosed in the SEC Documents, none of the officers, directors or employees of
the Company or any of the Subsidiaries is presently a party to any transaction
with the Company or any of the Subsidiaries (other than for ordinary course
services as employees, officers or directors), including any contract, agreement
or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any such officer, director or employee or, to the
knowledge of the Company or any of the Subsidiaries, any corporation,
partnership, trust or other entity in which any such officer, director, or
employee has a substantial interest or is an officer, director, trustee or
partner.

    
      
         

      

      
        -7-

        
          

        

      

      
         

      

    

     

    (r)           Equity
Capitalization.  As
of the date hereof, the authorized capital stock of the Company consists of
100,000,000 shares of Common Stock, of which 47,230,349 shares are issued and
outstanding and 42,000 shares are reserved for issuance pursuant to securities
(other than the Notes and the Warrants) exercisable or exchangeable for, or
convertible into, Common Stock.  No shares of Common Stock are held in
treasury.  All of such outstanding shares are duly authorized and have
been, or upon issuance will be, validly issued and are fully paid and
non-assessable.  37,760,000 shares of the Company’s issued and
outstanding Common Stock on the date hereof are as of the date hereof owned by
Persons who are “affiliates” (as defined in Rule 405 of the 1933 Act and
calculated based on the assumption that only officers, directors and holders of
at least 10% of the Company’s issued and outstanding Common Stock are
“affiliates” without conceding that any such Persons are “affiliates” for
purposes of federal securities laws) of the Company or any of the Subsidiaries.
To the Company’s knowledge, as of the date hereof no Person owns 10% or more of
the Company’s issued and outstanding shares of Common Stock (calculated based on
the assumption that all Equivalents, whether or not presently exercisable or
convertible, have been fully exercised or converted (as the case may
be) taking account of any limitations on exercise or conversion (including
“blockers”) contained therein without conceding that such identified Person is a
10% stockholder for purposes of federal securities laws). Except as disclosed in
Schedule 3(r): (i) none of the
Company’s or any Subsidiary’s capital stock is subject to preemptive rights or
any other similar rights or any liens or encumbrances suffered or permitted by
the Company or any Subsidiary; (ii) except as disclosed in the SEC Documents,
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of the Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of the Subsidiaries is or may become
bound to issue additional capital stock of the Company or any of the
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of the Subsidiaries; (iii) there are no outstanding debt
securities, notes, credit agreements, credit facilities or other agreements,
documents or instruments evidencing Indebtedness (as defined in Section 3(s)) of
the Company or any of the Subsidiaries or by which the Company or any of the
Subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any amounts filed in connection with the Company or any
of the Subsidiaries; (v) there are no agreements or arrangements under which the
Company or any of the Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except pursuant to Section 4(n) hereof);
(vi) there are no outstanding securities or instruments of the Company or any of
the Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the
Company or any of the Subsidiaries is or may become bound to redeem a security
of the Company or any of the Subsidiaries; (vii) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities; (viii) neither the Company nor any
Subsidiary has any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; and (ix) neither the Company nor
any of the Subsidiaries have any liabilities or obligations required to be
disclosed in the SEC Documents which are not so disclosed in the SEC Documents,
other than those incurred in the ordinary course of the Company’s or the
Subsidiaries’ respective businesses and which, individually or in the aggregate,
do not or could not have a Material Adverse Effect.  The Company has
furnished to the Buyers true, correct and complete copies of the Company’s
Articles of Incorporation, as amended and as in effect on the date hereof (the
“Articles of
Incorporation”), and the Company’s bylaws, as amended and as in effect on
the date hereof (the “Bylaws”), and the terms of all
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock and the material rights of the holders thereof in respect thereto
that have not been disclosed in the SEC Documents.

     

    (s)           Indebtedness and Other
Contracts. Except
as disclosed on Schedule 3(s) or in the SEC
Documents, neither the Company nor any of the Subsidiaries (i) has any
outstanding Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument could reasonably be
expected to result in a Material Adverse Effect, (iii) is in violation of any
term of or in default under any contract, agreement or instrument relating to
any Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect.  For purposes of this
Agreement:  (x) “Indebtedness” of any Person
means, without duplication, (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services (including, without limitation, “capital leases” in
accordance with generally accepted accounting principles) (other than trade
payables entered into in the ordinary course of business), (C) all reimbursement
or payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (D) all obligations evidenced by notes, bonds, debentures
or similar instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses, (E) all
indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (F) all
monetary obligations under any leasing or similar arrangement which, in
connection with generally accepted accounting principles, consistently applied
for the periods covered thereby, is classified as a capital lease, (G) all
indebtedness referred to in clauses (A) through (F) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which
owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (H) all Contingent Obligations in respect of indebtedness
or obligations of others of the kinds referred to in clauses (A) through (G)
above; (y) “Contingent
Obligation” means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease,
dividend or other obligation of another Person if the primary purpose or intent
of the Person incurring such liability, or the primary effect thereof, is to
provide assurance to the obligee of such liability that such liability will be
paid or discharged, or that any agreements relating thereto will be complied
with, or that the holders of such liability will be protected (in whole or in
part) against loss with respect thereto; and (z) “Person” means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization, any other entity and a government or any
department or agency thereof.

    
      
         

      

      
        -8-

        
          

        

      

      
         

      

    

     

    (t)           Absence of
Litigation. Except
as set forth on Schedule 3(t) or in the SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by the Principal Market, any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of the Subsidiaries,
the Common Stock or any of the Company’s or the Subsidiaries’ officers or
directors which is outside of the ordinary course of business or individually or
in the aggregate could have a Material Adverse Effect.

     

    (u)           Insurance. The
Company and each of the Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company and the Subsidiaries are engaged. Neither the Company nor
any such Subsidiary has been refused any insurance coverage sought or applied
for, and neither the Company nor any such Subsidiary has any reason to believe
that it will be unable to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a Material
Adverse Effect.

     

    (v)           Employee
Relations.  Neither
the Company nor any of the Subsidiaries is a party to any collective bargaining
agreement or employs any member of a union. The Company believe that its and its
Subsidiaries’ relations with their respective employees are good. No executive
officer (as defined in Rule 501(f) promulgated under the 1933 Act) or other key
employee of the Company or any of the Subsidiaries has notified the Company or
any such Subsidiary that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer’s employment with the Company or
any such Subsidiary. No executive officer or other key employee of the Company
or any of the Subsidiaries is,  to the Company’s knowledge, in
violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or
any other contract or agreement or any restrictive covenant, and the continued
employment of each such executive officer or other key employee (as the case may
be) to the Company’s knowledge does not subject the Company or any of the
Subsidiaries to any liability with respect to any of the foregoing
matters.  The Company and the Subsidiaries are in compliance with all
federal, state, local and foreign laws and regulations respecting labor,
employment and employment practices and benefits, terms and conditions of
employment and wages and hours, except where failure to be in compliance would
not, either individually or in the aggregate, reasonably be expected to result
in a Material Adverse Effect.

     

    (w)           Title. The
Company and the Subsidiaries have good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned by
them which is material to the business of the Company and the Subsidiaries, in
each case, free and clear of all liens, encumbrances and defects except for
Permitted Liens (as defined in the Notes) and such as do not materially affect
the value of such property and do not interfere with the use made and proposed
to be made of such property by the Company and any of the Subsidiaries. Any real
property and facilities held under lease by the Company or any of the
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company or any of
the Subsidiaries.

     

    (x)           Intellectual Property
Rights. The
Company and the Subsidiaries own or possess adequate rights or licenses to use
all trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, original works, inventions, licenses,
approvals, governmental authorizations, trade secrets and other intellectual
property rights and all applications and registrations therefor (“Intellectual Property Rights”)
necessary to conduct their respective businesses as now conducted and as
presently proposed to be conducted.  None of the Company’s or the
Subsidiaries’ material Intellectual Property Rights have expired, terminated or
been abandoned, or are expected to expire, terminate or be abandoned, within
three years from the date of this Agreement.  The Company has no
knowledge of any infringement by the Company or any of the Subsidiaries of
Intellectual Property Rights of others.  There is no claim, action or
proceeding being made or brought, or to the knowledge of the Company or any of
the Subsidiaries, being threatened, against the Company or any of the
Subsidiaries regarding their Intellectual Property Rights, except as disclosed
in the SEC Documents.  The Company is not aware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and each of the Subsidiaries have
taken reasonable security measures to protect the secrecy, confidentiality and
value of all of their Intellectual Property Rights.

     

    (y)           Environmental
Laws. The
Company and the Subsidiaries (i) are in compliance with all Environmental Laws
(as defined herein), (ii) have received all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any such
permit, license or approval where, in each of the foregoing clauses (i), (ii)
and (iii), the failure to so comply could be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect.  The term
“Environmental Laws”
means all federal, state, local or foreign laws relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws relating to emissions, discharges, releases
or threatened releases of chemicals, pollutants, contaminants, or toxic or
hazardous substances or wastes (collectively, “Hazardous Materials”) into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved
thereunder.

    
      
         

      

      
        -9-

        
          

        

      

      
         

      

    

     

    (z)           Subsidiary
Rights. The
Company or one of the Subsidiaries has the unrestricted right to vote, and
(subject to limitations imposed by applicable law) to receive dividends and
distributions on, all capital securities of the Subsidiaries as owned by the
Company or such Subsidiary.

     

    (aa)           Tax
Status. The
Company and each of the Subsidiaries (i) has timely made or filed all foreign,
federal and state income and all other tax returns, reports and declarations
required by any jurisdiction to which it is subject, (ii) has timely paid all
taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply,
except in each case where the failure to file, pay or set aside would not have a
Material Adverse Effect. There are no unpaid taxes in any material amount
claimed to be due by the taxing authority of any jurisdiction, and the officers
of the Company and the Subsidiaries know of no basis for any such claim. The
Company is not operated in such a manner as to qualify as a passive foreign
investment company, as defined in Section 1297 of the U.S. Internal Revenue Code
of 1986, as amended.

     

    (bb)           Internal Accounting and
Disclosure Controls. The
Company and each of the Subsidiaries maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset and liability accountability, (iii) access to assets or
incurrence of liabilities is permitted only in accordance with management’s
general or specific authorization and (iv) the recorded accountability for
assets and liabilities is compared with the existing assets and liabilities at
reasonable intervals and appropriate action is taken with respect to any
difference. The Company maintains disclosure controls and procedures (as such
term is defined in Rule 13a-14 under the 1934 Act) that are effective in
ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the 1934 Act is recorded, processed, summarized
and reported, within the time periods specified in the rules and forms of the
SEC, including, without limitation, controls and procedures designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the 1934 Act is accumulated and communicated to the
Company’s management, including its principal executive officer or officers and
its principal financial officer or officers, as appropriate, to allow timely
decisions regarding required disclosure. Neither the Company nor any of the
Subsidiaries has received any notice or correspondence from any accountant
relating to any potential material weakness in any part of the system of
internal accounting controls of the Company or any of the
Subsidiaries.

     

    (cc)           Off Balance Sheet
Arrangements. There
is no transaction, arrangement, or other relationship between the Company or any
of the Subsidiaries and an unconsolidated or other off balance sheet entity that
is required to be disclosed by the Company in its 1934 Act filings and is not so
disclosed or that otherwise could be reasonably likely to have a Material
Adverse Effect.

     

    (dd)           Investment Company
Status. The
Company is not, and upon consummation of the sale of the Securities will not be,
an “investment company,” an affiliate of an “investment company,” a company
controlled by an “investment company” or an “affiliated person” of, or
“promoter” or “principal underwriter” for, an “investment company” as such terms
are defined in the Investment Company Act of  1940, as
amended.

     

    (ee)           Acknowledgement Regarding
Buyers’ Trading Activity. It is
understood and acknowledged by the Company (i) that, other than as contemplated
by Section 2(k), following the public disclosure of the transactions
contemplated by the Transaction Documents, in accordance with the terms thereof,
none of the Buyers have been asked by the Company or any of the Subsidiaries to
agree, nor has any Buyer agreed with the Company or any of the Subsidiaries, to
desist from purchasing or selling, long and/or short, securities of the Company,
or “derivative” securities based on securities issued by the Company or to hold
the Securities for any specified term; (ii) that any Buyer, and counter parties
in “derivative” transactions to which any such Buyer is a party, directly or
indirectly, presently may have a “short” position in the Common Stock which were
established prior to such Buyer’s knowledge of the transactions contemplated by
the Transaction Documents, and (iii) that each Buyer shall not be deemed to have
any affiliation with or control over any arm’s length counter party in any
“derivative” transaction. The Company further understands and acknowledges that
following the public disclosure of the transactions contemplated by the
Transaction Documents pursuant to the Press Release (as defined in Section 4(i),
one or more Buyers may engage in hedging and/or trading activities at various
times during the period that the Securities are outstanding, including, without
limitation, during the periods that the value of the Warrant Shares or
Conversion Shares, as applicable, deliverable with respect to the Securities are
being determined and (b) such hedging and/or trading activities, if any, can
reduce the value of the existing stockholders’ equity interest in the Company
both at and after the time the hedging and/or trading activities are being
conducted. The Company acknowledges that such aforementioned hedging and/or
trading activities do not constitute a breach of this Agreement or any other
Transaction Document or any of the documents executed in connection herewith or
therewith.

    
      
         

      

      
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    (ff)           Manipulation of
Price. Neither
the Company nor any of the Subsidiaries has, and, to the knowledge of the
Company, no Person acting on their behalf has, (i) taken, directly or
indirectly, any action designed to cause or to result in the stabilization or
manipulation of the price of any security of the Company or any of the
Subsidiaries to facilitate the sale or resale of any of the Securities, (ii)
sold, bid for, purchased, or paid any compensation for soliciting purchases of,
any of the Securities, or (iii) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company or any of the Subsidiaries.

     

    (gg)           Transfer
Taxes.  On
the Closing Date, all stock transfer or other taxes (other than income or
similar taxes) which are required to be paid in connection with the sale and
transfer of the Securities to be sold to each Buyer hereunder will be, or will
have been, fully paid or provided for by the Company, and all laws imposing such
taxes will be or will have been complied with.

     

    (hh)           Shell Company
Status. The
Company is not, and has not, since July 6, 2006, been, an issuer identified in
Rule 144(i)(1).

     

    (ii)           Seniority of
Notes. No
Indebtedness of the Company or any of the Subsidiaries, at the Closing, will
rank senior to, or pari
passu with, the Notes in right of payment, whether with respect to
payment or redemptions, interest, damages, upon liquidation or dissolution or
otherwise.

     

    (jj)           Disclosure.  The
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Buyers or their agents or counsel with any information that
constitutes or could reasonably be expected to constitute material, nonpublic
information concerning the Company or any of its Subsidiaries, other than the
existence of the transactions contemplated by this Agreement and the other
Transaction Documents.  The Company understands and confirms that each
of the Buyers will rely on the foregoing representations in effecting
transactions in securities of the Company.  All disclosure provided to
the Buyers regarding the Company and the Subsidiaries, their businesses and the
transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company or any of the Subsidiaries is true and
correct and does not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
Each press release issued by the Company or any of the Subsidiaries during the
twelve (12) months preceding the date of this Agreement did not at the time of
release contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading.  No event or circumstance has occurred or information
exists with respect to the Company or any of the Subsidiaries or its or their
business, properties, liabilities, prospects, operations (including results
thereof) or conditions (financial or otherwise), which, under applicable law,
rule or regulation, requires public disclosure at or before the date hereof or
announcement by the Company but which has not been so publicly announced or
disclosed. The Company acknowledges and agrees that no Buyer makes or has made
any representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Sections 2.

     

    4.           COVENANTS.

     

    (a)           Best
Efforts. Each
party shall use its best efforts timely to satisfy each of the conditions to be
satisfied by it as provided in Sections 6 and 7 of this Agreement.

     

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

    
      
         

      

      
        -11-

        
          

        

      

      
         

      

    

     

    (c)           Reporting
Status. Until
the date on which the Buyers shall have sold all of the Registrable Securities
(as defined in Section 4(n) below) (the “Reporting Period”), the
Company shall timely file all reports required to be filed with the SEC pursuant
to the 1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would no longer require or otherwise permit such
termination.

     

    (d)           Use of
Proceeds. The
Company shall use the net proceeds from the sale of the Securities for working
capital.

     

    (e)           Financial
Information. The
Company agrees to send the following to each Buyer during the Reporting Period
(i) unless the following are filed with the SEC through EDGAR and are available
to the public through the EDGAR system, within one (1) Business Day after the
filing thereof with the SEC, a copy of its Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q, any interim reports or any consolidated balance
sheets, income statements, stockholders’ equity statements and/or cash flow
statements for any period other than annual, any Current Reports on Form 8-K and
any registration statements (other than on Form S-8) or amendments filed
pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimile
copies of all press releases issued by the Company or any of the Subsidiaries,
unless such press release is otherwise available to the public through the EDGAR
system, and (iii) copies of any notices and other information made available or
given to the shareholders of the Company generally, contemporaneously with the
making available or giving thereof to the shareholders, unless such notices or
other information is otherwise available to the public through the EDGAR
system.

     

    (f)           Listing.  The
Company shall promptly secure the listing of all of the Registrable Securities
upon each national securities exchange and automated quotation system, if any,
upon which the shares of Common Stock are then listed (subject to official
notice of issuance) and shall maintain such listing of all Registrable
Securities from time to time issuable under the terms of the Transaction
Documents on such national securities exchange or automated quotation system.
The Company shall maintain the Common Stock’s authorization for quotation on the
Principal Market, the New York or American Stock Exchange, the Nasdaq Global
Market, the Nasdaq Global Select Market or the Nasdaq Capital Market (each, an
“Eligible Market”). The
Company shall not take any action which could be reasonably expected to result
in the delisting or suspension of the Common Stock on an Eligible Market. The
Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(f).

     

    (g)           Fees.  The
Company shall reimburse MKM Opportunity Master Fund, LLC (“MKM”) or its designee(s) (in
addition to any other expense amounts paid to any Buyer prior to the date of
this Agreement) for all reasonable costs and expenses incurred by it or its
affiliates in connection with the transactions contemplated by the Transaction
Documents in an amount not to exceed $30,000 (including, without limitation, all
reasonable legal fees and disbursements in connection therewith, documentation
and implementation of the transactions contemplated by the Transaction Documents
and due diligence in connection therewith), of which $10,000 has previously been
paid by the Company to MKM, which remaining amount shall be withheld by MKM from
its Purchase Price at the Closing.  The Company shall be responsible
for the payment of any placement agent’s fees, financial advisory fees, or
broker’s commissions (other than for Persons engaged by any Buyer or Persons
claiming rights due to the acts of a Buyer) relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
reasonable attorneys’ fees and out-of-pocket expenses) arising in connection
with any claim relating to any such payment. Except as otherwise set forth in
the Transaction Documents, each party to this Agreement shall bear its own
expenses in connection with the sale of the Securities to the
Buyers.

     

    (h)           Pledge of
Securities.
Notwithstanding anything to the contrary contained in Section 2(g), the Company
acknowledges and agrees that the Securities may be pledged by a Buyer in
connection with a bona fide margin agreement or other bona fide loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, except as may otherwise be required under applicable
securities laws, and no Buyer effecting a pledge of Securities shall be required
to provide the Company with any notice thereof or otherwise make any delivery to
the Company pursuant to this Agreement or any other Transaction Document. The
Company hereby agrees to execute and deliver such documentation as a pledgee of
the Securities may reasonably request in connection with a pledge of the
Securities to such pledgee by a Buyer.

    
      
         

      

      
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    (i)           Disclosure of Transactions
and Other Material Information. The
Company shall, on or before 8:30 a.m., New York time, on the first (1st)
Business Day after the date of this Agreement, issue a press release (the “Press Release”) reasonably
acceptable to the Buyers disclosing all the material terms of the transactions
contemplated by the Transaction Documents. On or before 8:30 a.m., New York
time, on the second (2nd) Business Day following the date of this Agreement, the
Company shall file a Current Report on Form 8-K describing all the material
terms of the transactions contemplated by the Transaction Documents in the form
required by the 1934 Act and attaching all the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this
Agreement), the form of the Notes and the form of Warrants) (including all
attachments, the “8-K
Filing”). From and after the issuance of the Press Release, the Company
shall have disclosed all material, nonpublic information delivered to any of the
Buyers by the Company or any of the Subsidiaries, or any of their respective
officers, directors, employees or agents (if any) in connection with the
transactions contemplated by the Transaction Documents. The Company shall not,
and the Company shall cause each of the Subsidiaries and each of its and their
respective officers, directors, employees and agents not to, provide any Buyer
with any material, nonpublic information regarding the Company or any of the
Subsidiaries from and after the issuance of the Press Release without the
express prior written consent of such Buyer, except as expressly contemplated by
Section 4(m)(viii). If a Buyer has, or believes it has, received any material,
nonpublic information regarding the Company or any of its Subsidiaries in breach
of the immediately preceding sentence, such Buyer shall provide the Company with
written notice thereof in which case the Company shall, within one (1) Trading
Day of the receipt of such notice, make a public disclosure of all such material
nonpublic information so provided. In the event of a breach of any of the
foregoing covenants by the Company, any of the Subsidiaries, or any of its or
their respective officers, directors, employees and agents (as determined in the
reasonable good faith judgment of such Buyer), in addition to any other remedy
provided herein or in the Transaction Documents, such Buyer shall have the right
to make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material, nonpublic information without the
prior approval by the Company, any of the Subsidiaries, or any of its or their
respective officers, directors, employees or agents. No Buyer shall have any
liability to the Company, any of the Subsidiaries, or any of its or their
respective officers, directors, employees, stockholders or agents, for any such
disclosure of such information.  Subject to the foregoing, neither the
Company nor any Buyer shall issue any press releases or any other public
statements with respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions (i)
in substantial conformity with the 8-K Filing and contemporaneously therewith
and (ii) as is required by applicable law and regulations (provided that, in the
case of clause (i), each Buyer shall have received a draft of any such press
release or other public disclosure prior to its release).  Without the
prior written consent of any applicable Buyer, the Company shall not (and shall
cause each of the Subsidiaries and affiliates to not) disclose the name of such
Buyer in any filing (other than the 8-K Filing), announcement, release or
otherwise, except as otherwise required by any law, rule or regulation
applicable to the Company after consultation with the Buyer.

     

    (j)           Reservation of
Shares. So long
as any Notes or Warrants remain outstanding, the Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 120% of (i) the maximum number of shares of Common Stock
issuable upon conversion of all the Notes (assuming for purposes hereof, that
the Notes are convertible at the Conversion Price (as defined in the Notes) and
without regard to any limitations on the exercise of the Notes set forth
therein) and (ii) the maximum number of shares of Common Stock issuable upon
exercise of all the Warrants (without regard to any limitations on the exercise
of the Warrants set forth therein).

     

    (k)           Conduct of
Business.  The
business of the Company and the Subsidiaries shall not be conducted in violation
of any law, ordinance or regulation of any governmental entity, except where
such violations would not result, either individually or in the aggregate, in a
Material Adverse Effect.

     

    (l)           Variable Rate
Transaction. Until
all of the Notes have been converted, redeemed or otherwise satisfied in
accordance with their terms, the Company and each Subsidiary shall be prohibited
from effecting or entering into an agreement to effect any Subsequent Placement
involving a “Variable Rate
Transaction,” except in the case where there is a “floor” price
(reasonably acceptable to the Buyers) set in such Variable Rate Transaction. The
term “Variable Rate
Transaction” shall mean a transaction in which the Company or any
Subsidiary (i) issues or sells any Equivalents either (A) at a conversion,
exercise or exchange rate or other price that is based upon and/or varies with
the trading prices of or quotations for the shares of Common Stock at any time
after the initial issuance of such Equivalents, or (B) with a conversion,
exercise or exchange price that is subject to being reset at some future date
after the initial issuance of such Equivalents or upon the occurrence of
specified or contingent events directly or indirectly related to the business of
the Company or the market for the Common Stock, other than pursuant to a
customary “weighted average” anti-dilution provision or (ii) enters into any
agreement (including, but not limited to, an equity line of credit) whereby the
Company or any Subsidiary may sell securities at a future determined price
(other than standard and customary “preemptive” or “participation” rights). Each
Buyer shall be entitled to obtain injunctive relief against the Company and the
Subsidiaries to preclude any such issuance, which remedy shall be in addition to
any right to collect damages.

    
      
         

      

      
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    (m)           Participation
Right. From
and after the date hereof and to and through the date that is two (2) years
after the date hereof, neither the Company nor any of the Subsidiaries shall,
directly or indirectly, issue, offer, sell, grant any option to purchase, or
otherwise dispose of (or announce any issuance, offer, sale, grant or any option
to purchase or other disposition of) any of their respective equity or equity
equivalent securities, including, without limitation, any debt, preferred stock,
rights, options, warrants or other instrument that is at any time and under any
circumstances convertible into or exchangeable for, or otherwise entitles the
holder thereof to receive, capital stock and other securities of the Company
(including, without limitation, any securities of the Company or any Subsidiary
which entitle the holder thereof to acquire Common Stock at any time, including
without limitation, any debt, preferred stock, rights, options, warrants or
other instrument that is at any time convertible into or exchangeable for, or
otherwise entitles the holder thereof to receive, Common Stock or other
securities that entitle the holder to receive, directly or indirectly, Common
Stock) (collectively with such capital stock or other securities of the Company,
“Equivalents”) (any such
issuance, offer, sale, grant, disposition or announcement being referred to as a
“Subsequent Placement”),
unless the Company shall have first complied with this Section 4(m). The Company
acknowledges and agrees that the right set forth in this Section 4(m) is a right
granted by the Company, separately, to each Buyer.

     

    (i)           At
least five (5) Trading Days prior to the closing of the Subsequent Placement,
the Company shall deliver to each Buyer a written notice of its intention to
effect a Subsequent Placement (each such notice, a “Pre-Notice”), which Pre-Notice
shall ask such Buyer if it wants to review the details of such financing. 
Upon the request of a Buyer, which shall be within two (2) Trading Days of its
receipt of the Pre-Notice, and only upon a request by such Buyer, the Company
shall promptly, but no later than one (1) Trading Day after such request,
deliver to such Buyer an irrevocable written notice (the “Offer Notice”) of any proposed
or intended issuance or sale or exchange (the “Offer”) of the securities
being offered (the “Offered
Securities”) in a Subsequent Placement, which Offer Notice shall (w)
identify and describe the Offered Securities, (x) describe the price and other
terms upon which they are to be issued, sold or exchanged, and the number or
amount of the Offered Securities to be issued, sold or exchanged, (y) identify
the Persons (if known) to which or with which the Offered Securities are to be
offered, issued, sold or exchanged and (z) offer to issue and sell to or
exchange with such Buyer in accordance with the terms of the Offer all of the
Offered Securities, provided that the
number of Offered Securities which such Buyer shall have the right to subscribe
for under this Section 4(m) shall be (a) based on such Buyer’s pro rata portion
of the aggregate original principal amount of the Notes purchased hereunder by
all Buyers (the “Basic
Amount”), and (b) with respect to each Buyer that elects to purchase its
Basic Amount, any additional portion of the Offered Securities attributable to
the Basic Amounts of other Buyers as such Buyer shall indicate it will purchase
or acquire should the other Buyers subscribe for less than their Basic Amounts
(the “Undersubscription
Amount”).

     

    (ii)           To
accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the fifth (5th) Business Day after such
Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth
the portion of such Buyer’s Basic Amount that such Buyer elects to purchase and,
if such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the “Notice of
Acceptance”). If the Basic Amounts subscribed for by all Buyers are less
than the total of all of the Basic Amounts, then such Buyer who has set forth an
Undersubscription Amount in its Notice of Acceptance shall be entitled to
purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the “Available Undersubscription
Amount”), such Buyer who has subscribed for any Undersubscription Amount
shall be entitled to purchase only that portion of the Available
Undersubscription Amount as the Basic Amount of such Buyer bears to the total
Basic Amounts of all Buyers that have subscribed for Undersubscription Amounts,
subject to rounding by the Company to the extent it deems reasonably necessary.
Notwithstanding the foregoing, if the Company desires to modify or amend the
terms and conditions of the Offer prior to the expiration of the Offer Period,
the Company may deliver to each Buyer a new Offer Notice and the Offer Period
shall expire on the fifth (5th) Business Day after such Buyer’s receipt of such
new Offer Notice.

    
      
         

      

      
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    (iii)           The
Company shall have (i) twenty (20) Business Days from the expiration of the
Offer Period above to offer, issue, sell or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by a
Buyer (the “Refused
Securities”) pursuant to a definitive agreement(s) (the “Subsequent Placement
Agreement”), but only to the offerees described in the Offer Notice (if
so described therein) and only upon terms and conditions (including, without
limitation, unit prices and interest rates) that are not more favorable to the
acquiring Person or Persons or less favorable to the Company than those set
forth in the Offer Notice and (ii) fifteen (15) Business Days from the
expiration of the Offer Period to publicly announce (a) the execution of such
Subsequent Placement Agreement, and (b) either (x) the consummation of the
transactions contemplated by such Subsequent Placement Agreement or (y) the
termination of such Subsequent Placement Agreement, which shall be filed with
the SEC on a Current Report on Form 8-K with such Subsequent Placement Agreement
and any documents contemplated therein filed as exhibits thereto.

     

    (iv)           In
the event the Company shall propose to sell less than all the Refused Securities
(any such sale to be in the manner and on the terms specified in Section
4(m)(iii) above), then such Buyer may, at its sole option and in its sole
discretion, reduce the number or amount of the Offered Securities specified in
its Notice of Acceptance to an amount that shall be not less than the number or
amount of the Offered Securities that such Buyer elected to purchase pursuant to
Section 4(m)(ii) above multiplied by a fraction, (i) the numerator of which
shall be the number or amount of Offered Securities the Company actually
proposes to issue, sell or exchange (including Offered Securities to be issued
or sold to Buyers pursuant to this Section 4(m) prior to such reduction) and
(ii) the denominator of which shall be the original amount of the Offered
Securities. In the event that any Buyer so elects to reduce the number or amount
of Offered Securities specified in its Notice of Acceptance, the Company may not
issue, sell or exchange more than the reduced number or amount of the Offered
Securities unless and until such securities have again been offered to the
Buyers in accordance with Section 4(m)(i) above.

     

    (v)           Upon
the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, such Buyer shall acquire from the Company, and the Company
shall issue to such Buyer, the number or amount of Offered Securities specified
in its Notice of Acceptance. The purchase by such Buyer of any Offered
Securities is subject in all cases to the preparation, execution and delivery by
the Company and such Buyer of a separate purchase agreement relating to such
Offered Securities reasonably satisfactory in form and substance to such Buyer
and its counsel.

     

    (vi)           Any
Offered Securities not acquired by a Buyer or other Persons in accordance with
this Section 4(m) may not be issued, sold or exchanged until they are again
offered to such Buyer under the procedures specified in this
Agreement.

     

    (vii)           The
Company and each Buyer agree that if any Buyer elects to participate in the
Offer, neither the Subsequent Placement Agreement with respect to such Offer nor
any other transaction documents related thereto (collectively, the “Subsequent Placement
Documents”) shall include any term or provision whereby such Buyer shall
be required to agree to any restrictions on trading as to any securities of the
Company owned by such Buyer prior to such Subsequent Placement.

     

    (viii)           Notwithstanding
anything to the contrary in this Section 4(m) and unless otherwise agreed to by
such Buyer, the Company shall either confirm in writing to such Buyer that the
transaction with respect to the Subsequent Placement has been abandoned or shall
publicly disclose its intention to issue the Offered Securities, in either case
in such a manner such that such Buyer will not be in possession of any material,
non-public information, by the tenth (10th) day following delivery of the Offer
Notice. If by such twenty-fifth (25th) day, no public disclosure regarding a
transaction with respect to the Offered Securities has been made, and no notice
regarding the abandonment of such transaction has been received by such Buyer,
such transaction shall be deemed to have been abandoned and such Buyer shall not
be deemed to be in possession of any material, non-public information with
respect to the Company or any of the Subsidiaries. Should the Company decide to
pursue such transaction with respect to the Offered Securities, the Company
shall provide such Buyer with another Offer Notice and such Buyer will again
have the right of participation set forth in this Section 4(m). The Company
shall not be permitted to deliver more than one such Offer Notice to such Buyer
in any sixty (60) day period.

     

    (ix)           The
restrictions contained in this Section 4(m) shall not apply in connection with
the issuance of any Excluded Securities (as defined in the Notes). The Company
shall not circumvent the provisions of this Section 4(m) by providing terms or
conditions to one Buyer that are not provided to all.

    
      
         

      

      
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    (n)           Piggyback
Registrations. If, at
any time during the three (3) year period following the date hereof, there is
not an existing and effective registration statement covering all of the
Registrable Securities and the Company shall determine to prepare and file with
the SEC a registration statement relating to an offering for its own account or
the account of others under the 1933 Act of any of its equity securities (other
than on Form S-4 or Form S-8 (each as promulgated under the 1933 Act) or their
then equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable in
connection with the company’s stock option or other employee benefit plans),
then the Company shall deliver to each Buyer a written notice of such
determination and, if within fifteen (15) days after the date of the delivery of
such notice, any such Buyer shall so request in writing, the Company shall
include in such registration statement all or any part of such Registrable
Securities such Buyer requests to be registered; provided, however, that the
Company shall not be required to register any Registrable Securities pursuant to
this Section 4(n) that are eligible for resale pursuant to Rule 144 (without
volume restrictions).  For purposes hereof, “Registrable Securities” means
(i) the Conversion Shares issued or issuable upon conversion of the Notes, (ii)
the Warrant Shares issued or issuable upon exercise of the Warrants and (iii)
any capital stock of the Company issued or issuable with respect to the
Conversion Shares, the Warrant Shares, the Notes or the Warrants, including,
without limitation, (1) as a result of any share split, share dividend,
recapitalization, exchange or similar event or otherwise and (2) shares of
capital stock of the Company into which the shares of Common Stock are converted
or exchanged and shares of capital stock of a Successor Entity (as defined in
the Warrants) into which the shares of Common Stock are converted or exchanged,
in each case, without regard to any limitations on conversion of the Notes or
exercise of the Warrants.

     

    (o)           Passive Foreign Investment
Company.  The
Company shall conduct its business in such a manner as will ensure that the
Company will not be deemed to constitute a passive foreign investment company
within the meaning of Section 1297 of the U.S. Internal Revenue Code of 1986, as
amended.

     

    (p)           Restriction on Redemption
and Cash Dividends. So long
as any Notes are outstanding, the Company shall not, directly or indirectly,
redeem, or declare or pay any cash dividend or distribution on, the Common Stock
without the prior express written consent of the Required Holders (as defined in
the Notes).

     

    (q)           DTC
Eligibility. The
Company shall pay all fees to DTC (as defined below) required to be paid, and
shall take all other necessary actions, so that the Company is eligible to
participate in DTC’s Fast Automated Securities Transfer Program no later than
thirty (30) days after the Closing Date.

     

    5.           REGISTER;
TRANSFER AGENT INSTRUCTIONS; LEGEND.

     

    (a)           Register. The
Company shall maintain at its principal executive offices (or such other office
or agency of the Company as it may designate by notice to each holder of
Securities), a register for the Notes and the Warrants in which the Company
shall record the name and address of the Person in whose name the Notes and the Warrants have been
issued (including the name and address of each transferee), the principal amount
of the Notes held by such Person, the number of Conversion Shares issuable upon
conversion of the Notes and the number of Warrant Shares issuable upon exercise
of the Warrants held by such Person. The Company shall keep the register open
and available at all times during business hours for inspection of any Buyer or
its legal representatives, provided such Buyer continues to hold any Notes or
Warrants.

    
      
         

      

      
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    (b)           Transfer Agent
Instructions. The
Company shall issue irrevocable instructions to its transfer agent and any
subsequent transfer agent in the form acceptable to the Buyers (the “Irrevocable Transfer Agent
Instructions”) to issue certificates or credit shares to the applicable
balance accounts at The Depository Trust Company (“DTC”), registered in the name
of each Buyer or its respective nominee(s), for the Conversion Shares and the
Warrant Shares in such amounts as specified from time to time by each Buyer to
the Company upon conversion of the Notes or the exercise of the Warrants (as the
case may be). The Company represents and warrants that no instruction other than
the Irrevocable Transfer Agent Instructions referred to in this Section 5(b),
and stop transfer instructions to give effect to Section 2(g) hereof, will be
given by the Company to its transfer agent with respect to the Securities, and
that the Securities shall otherwise be freely transferable on the books and
records of the Company to the extent provided in this Agreement and the other
Transaction Documents. If a Buyer effects a sale, assignment or transfer of the
Securities in accordance with Section 2(g), the Company shall permit the
transfer and shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such denominations as specified by such Buyer to effect such sale,
transfer or assignment. In the event that such sale, assignment or transfer
involves Conversion Shares or Warrant Shares sold, assigned or transferred
pursuant to an effective registration statement or in compliance with Rule 144,
the transfer agent shall issue such shares to such Buyer, assignee or transferee
(as the case may be) without any restrictive legend in accordance with Section
5(d) below. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to a Buyer. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 5(b) will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 5(b), that a
Buyer shall be entitled, in addition to all other available remedies, to an
order and/or injunction restraining any breach and requiring immediate issuance
and transfer, without the necessity of showing economic loss and without any
bond or other security being required. The Company shall cause its counsel to
issue the legal opinion referred to in the Irrevocable Transfer Agent
Instructions to the Company’s transfer agent on each Effective Date. Any fees
(with respect to the transfer agent, counsel to the Company or otherwise)
associated with the issuance of such opinion or the removal of any legends on
any of the Securities shall be borne by the Company.

     

    (c)           Legends. Each
Buyer understands that the certificates or other instruments representing the
Notes and the Warrants and, until such time as the resale of the Conversion
Shares and the Warrant Shares (as the case may be) have been registered under
the 1933 Act as contemplated by Section 4(n) hereof or are eligible for sale
pursuant to Rule 144, the stock certificates representing the Conversion Shares
and the Warrant Shares (as the case may be), except as set forth below, shall
bear any legend as required by the “blue sky” laws of any state and a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):

     

    [NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE
BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

     

    (d)           Removal of
Legends.
Certificates evidencing Securities shall not be required to contain the legend
set forth in Section 5(c) above or any other legend (i) while a registration
statement (including the Registration Statement) covering the resale of such
Securities is effective under the Securities Act, (ii) if such Securities are
eligible to be sold, assigned or transferred under Rule 144 (provided that a
Buyer provides the Company with reasonable assurances that such Securities are
eligible for sale, assignment or transfer under Rule 144 which shall not include
an opinion of counsel), (iii) in connection with a sale, assignment or other
transfer (other than under Rule 144) provided such Buyer provides the Company
with an opinion of counsel to such Buyer, in a generally acceptable form, to the
effect that such sale, assignment or transfer of the Securities may be made
without registration under the applicable requirements of the 1933 Act or (iv)
if such legend is not required under applicable requirements of the 1933 Act
(including, without limitation, controlling judicial interpretations and
pronouncements issued by the SEC). If a legend is not required pursuant to the
foregoing, the Company shall no later than three (3) Trading Days (as defined
below) following the delivery by a Buyer to the Company or the transfer agent
(with notice to the Company) of a legended certificate representing such
Securities (endorsed or with stock powers attached, signatures guaranteed, and
otherwise in form necessary to affect the reissuance and/or transfer, if
applicable), together with any other deliveries from such Buyer as may be
required above in this Section 5(d), as directed by such Buyer, either: (A)
deliver (or cause to be delivered to) such Buyer a certificate representing such
Securities that is free from all restrictive and other legends or (B) credit the
balance account of such Buyer’s or such Buyer’s nominee with DTC with a number
of shares of Common Stock equal to the number of Conversion Shares or Warrant
Shares (as the case may be) represented by the certificate, the conversion
notice or exercise notice (as the case may be) so delivered by such Buyer (the
date by which such certificate is required to be delivered to such Buyer or such
credit is so required to be made to the balance account of such Buyer’s or such
Buyer’s nominee with DTC pursuant to the foregoing is referred to herein as the
“Required Delivery
Date”).

    
      
         

      

      
        -17-

        
          

        

      

      
         

      

    

     

    (e)           Failure to Timely Deliver;
Buy-In. If the
Company fails to (i) issue and deliver (or cause to be delivered) to a Buyer by
the Required Delivery Date a certificate representing the Securities so
delivered to the Company by such Buyer that is free from all restrictive and
other legends or (ii) credit the balance account of such Buyer’s or such Buyer’s
nominee with DTC for such number of shares of Conversion Shares or Warrant
Shares so delivered to the Company, then, in addition to all other remedies
available to such Buyer, the Company shall pay in cash to such Buyer on each day
after the Required Delivery Date that the issuance or credit of such shares is
not timely effected an amount equal to 2% of the average VWAP of the Conversion
Shares for the five (5) Trading Day period immediately preceding the Required
Delivery Date multiplied by the number of Conversion Shares or Warrant Shares
(as the case may be) required to be delivered on the Required Delivery Date. In
addition to the foregoing, if the Company fails to so properly deliver such
unlegended certificates or so properly credit the balance account of such
Buyer’s or such Buyer’s nominee with DTC by the Required Delivery Date, and if
on or after the Required Delivery Date such Buyer purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of a
sale by such Buyer of shares of Common Stock that such Buyer anticipated
receiving from the Company without any restrictive legend (a “Buy-In”), then the Company
shall, within three (3) Trading Days after such Buyer’s request and in such
Buyer’s sole discretion, either (i) pay cash to such Buyer in an amount equal to
such Buyer’s total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased (the “Buy-In Price”), at which point
the Company’s obligation to deliver such certificate or credit such Buyer’s
balance account shall terminate and such shares shall be cancelled, or (ii)
promptly honor its obligation to deliver to such Buyer a certificate or
certificates or credit such Buyer’s DTC account representing such number of
shares of Common Stock that would have been issued if the Company timely
complied with its obligations hereunder and pay cash to such Buyer in an amount
equal to the excess (if any) of the Buy-In Price over the product of (A) such
number of shares of Conversion Shares or Warrant Shares (as the case may be)
that the Company was required to deliver to such Buyer by the Required Delivery
Date times (B) the average VWAP of the Common Stock for the five (5) Trading Day
period immediately preceding the Required Delivery Date.

     

    For
purposes of this Section 5(e), “VWAP” means, for any security
as of any date, the dollar volume-weighted average price for such security on
the Principal Market (or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded) during the period
beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York
time, as reported by Bloomberg Financial Markets (“Bloomberg”) through its
“Volume at Price” function or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as
reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the
highest closing bid price and the lowest closing ask price of any of the market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC
(formerly the National Quotation Bureau, Inc.). If VWAP cannot be calculated for
such security on such date on any of the foregoing bases, the VWAP of such
security on such date shall be the fair market value as mutually determined by
the Company and the Buyer. If the Company and the Buyer are unable to agree upon
the fair market value of such security, then they shall agree in good faith on a
reputable investment bank to make such determination of fair market value, whose
determination shall be final and binding and whose fees and expenses shall be
borne by the Company. All such determinations shall be appropriately adjusted
for any share dividend, share split or other similar transaction during such
period.  “Trading
Day” means any day on which the Common Stock is traded on the Principal
Market, or, if the Principal Market is not the principal trading market for the
Common Stock, then on the principal securities exchange or securities market on
which the Common Stock is then traded; provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York time).

    
      
         

      

      
        -18-

        
          

        

      

      
         

      

    

     

    6.           CONDITIONS
TO THE COMPANY’S OBLIGATION TO SELL.

     

    (a)           The
obligation of the Company hereunder to issue and sell the Notes and the related Warrants
to each Buyer at the Closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in their sole discretion by providing each Buyer with prior written
notice thereof:

     

    (i)           Such
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company.

     

    (ii)           Such
Buyer shall have delivered to the Company the Purchase Price (less, in the case
of MKM, the amount withheld pursuant to Section 4(g)) for the Note and the
related Warrants being purchased by such Buyer at the Closing by wire transfer
of immediately available funds pursuant to the wire instructions provided by the
Company.

     

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

     

    7.           CONDITIONS
TO EACH BUYER’S OBLIGATION TO PURCHASE.

     

    (a)           The
obligation of each Buyer hereunder to purchase its Note and its related Warrants
at the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for each
Buyer’s sole benefit and may be waived by such Buyer at any time in its sole
discretion by providing the Company with prior written notice
thereof:

     

    (i)           The
Company and each Subsidiary (as the case may be) shall have duly executed and
delivered to such Buyer each of the Transaction Documents to which it is a party
and the Company shall have duly executed and delivered to such Buyer a Note (in
such amount as is set forth across from such Buyer’s name in column (3) of the
Schedule of Buyers and the related Warrants
(for such number of shares of Common Stock as is set forth across from such
Buyer’s name in column (4) of the Schedule of Buyers) being purchased by such
Buyer at the Closing pursuant to this Agreement.

     

    (ii)           Such
Buyer shall have received the opinion of Richardson & Patel LLP, the
Company’s counsel, dated as of the Closing Date, in the form of Exhibit
C attached hereto.

     

    (iii)           The
Company shall have delivered to such Buyer a copy of the Irrevocable Transfer
Agent Instructions, in form acceptable to such Buyer, which instructions shall
have been delivered to and acknowledged in writing by the Company’s transfer
agent.

     

    (iv)           The
Company shall have delivered to such Buyer a certificate evidencing the
formation and good standing of the Company and each of the Subsidiaries in each
such entity’s jurisdiction of formation issued by the Secretary of State (or
comparable office) of such jurisdiction of formation as of a date within ten
(10) days of the Closing Date.

     

    (v)           The
Company shall have delivered to such Buyer a certificate evidencing the
Company’s and each Subsidiary’s qualification as a foreign corporation and good
standing issued by the Secretary of State (or comparable office) of each
jurisdiction in which the Company and each Subsidiary conducts business and is
required to so qualify, as of a date within ten (10) days of the Closing
Date.

    
      
         

      

      
        -19-

        
          

        

      

      
         

      

    

     

    (vi)           The
Company shall have delivered to such Buyer a certified copy of the Articles of
Incorporation as certified by the Florida Department of State within ten (10)
days of the Closing Date.

     

    (vii)           Each
of the Subsidiaries shall have delivered to such Buyer a certified copy of its
articles or certificate of incorporation as certified by the Secretary of State
(or comparable office) of such Subsidiary’s jurisdiction of incorporation within
ten (10) days of the Closing Date.

     

    (viii)           The
Company shall have delivered to such Buyer a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as adopted by the Company’s board of
directors in a form reasonably acceptable to such Buyer, (ii) the Articles of
Incorporation of the Company and the organizational documents of each Subsidiary
and (iii) the Bylaws of the Company and the bylaws of each Subsidiary, each as
in effect at the Closing, in the form attached hereto as Exhibit
D.

     

    (ix)           Each
and every representation and warranty of the Company shall be true and correct
in all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall be true and correct as of such date) and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required to be performed,
satisfied or complied with by the Company at or prior to the Closing Date. Such
Buyer shall have received a certificate, executed by the Chief Executive Officer
of the Company, dated as of the Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by such Buyer in the form
attached hereto as Exhibit
E.

     

    (x)           The
Company shall have delivered to such Buyer a letter from the Company’s transfer
agent certifying the number of shares of Common Stock outstanding on the Closing
Date immediately prior to the Closing.

     

    (xi)           The
Common Stock (I) shall be designated for quotation or listed on the Principal
Market and (II) shall not have been suspended, as of the Closing Date, by the
SEC or the Principal Market from trading on the Principal Market nor shall
suspension by the SEC or the Principal Market have been threatened, as of the
Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by
falling below the minimum maintenance requirements of the Principal
Market.

     

    (xii)           The
Company shall have obtained all governmental, regulatory or third-party consents
and approvals, if any, necessary for the sale of the Securities, including
without limitation, those required by the Principal Market.

     

    (xiii)           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 that prohibits the consummation of any of
the transactions contemplated by the Transaction Documents.

     

    (xiv)           Since
the date of execution of this Agreement, no event or series of events shall have
occurred that reasonably would have or result in a Material Adverse
Effect.

     

    (xv)           The
Company shall have obtained approval of the Principal Market to list the
Conversion Shares and the Warrant Shares, if required.

     

    (xvi)           The
Company and the Subsidiaries shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as such
Buyer or its counsel may reasonably request.

    
      
         

      

      
        -20-

        
          

        

      

      
         

      

    

     

    8.           TERMINATION.

     

    In the
event that the Closing shall not have occurred with respect to a Buyer on or
before ten (10) days from the date hereof due to the Company’s or such Buyer’s
failure to satisfy the conditions set forth in Sections 6 and 7 above (and a
non-breaching party’s failure to waive such unsatisfied condition(s)), any such
non-breaching party at any time shall have the right to terminate its
obligations under this Agreement with respect to such breaching party on or
after the close of business on such date without liability of such non-breaching
party to any other party; provided, however, that the
abandonment of the sale and purchase of the Notes and the Warrants shall be
applicable only to such non-breaching party providing such written notice; provided further,
notwithstanding any such termination the Company shall remain obligated to
reimburse the non-breaching Buyers for the expenses described in Section 4(g)
above. Nothing contained in this Section 8 shall be deemed to release any party
from any liability for any breach by such party of the terms and provisions of
this Agreement or the other Transaction Documents or to impair the right of any
party to compel specific performance by any other party of its obligations under
this Agreement or the other Transaction Documents.

     

    9.           MISCELLANEOUS.

     

    (a)           Governing Law; Jurisdiction;
Jury Trial. All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State of
New York. Each party hereby irrevocably submits to the exclusive jurisdiction of
the state and federal courts sitting in The City of New York, Borough of
Manhattan, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is brought in an
inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

     

    (b)           Counterparts. This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party. In
the event that any signature is delivered by facsimile transmission or by an
e-mail which contains a portable document format (.pdf) file of an executed
signature page, such signature page shall create a valid and binding obligation
of the party executing (or on whose behalf such signature is executed) with the
same force and effect as if such signature page were an original
thereof.

     

    (c)           Headings;
Gender. The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement. Unless the context
clearly indicates otherwise, each pronoun herein shall be deemed to include the
masculine, feminine, neuter, singular and plural forms thereof. The terms
“including,” “includes,” “include” and words of like import shall be construed
broadly as if followed by the words “without limitation.”  The terms
“herein,” “hereunder,” “hereof” and words of like import refer to this entire
Agreement instead of just the provision in which they are found.

    
      
         

      

      
        -21-

        
          

        

      

      
         

      

    

     

    (d)           Severability.  If
any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.  Notwithstanding anything to the contrary contained in
this Agreement or any other Transaction Document (and without implication that
the following is required or applicable), it is the intention of the parties
that in no event shall amounts and value paid by the Company and/or the
Subsidiaries (as the case may be), or payable to or received by the Buyers,
under the Transaction Documents, including without limitation, any amounts that
would be characterized as “interest” under applicable law, exceed amounts
permitted under any such applicable law. Accordingly, if any obligation to pay,
payment made to such Buyer, or collection by such Buyer pursuant the Transaction
Documents is finally judicially determined to be contrary to any such applicable
law, such obligation to pay, payment or collection shall be deemed to have been
made by mutual mistake of such Buyer, the Company and the Subsidiaries and such
amount shall be deemed to have been adjusted with retroactive effect to the
maximum amount or rate of interest, as the case may be, as would not be so
prohibited by the applicable law. Such adjustment shall be effected, to the
extent necessary, by reducing or refunding, at the option of such Buyer, the
amount of interest or any other amounts which would constitute unlawful amounts
required to be paid or actually paid to such Buyer under the Transaction
Documents. For greater certainty, to the extent that any interest, charges,
fees, expenses or other amounts required to be paid to or received by such Buyer
under any of the Transaction Documents or related thereto are held to be within
the meaning of “interest” or another applicable term to otherwise be violative
of applicable law, such amounts shall be pro-rated over the period of time to
which they relate.

     

    (e)           Entire Agreement;
Amendments. This
Agreement, the other Transaction Documents and the schedules and exhibits
attached hereto and thereto and the instruments referenced herein and therein
supersede all other prior oral or written agreements between the Buyers, the
Company, the Subsidiaries, their affiliates and Persons acting on their behalf
with respect to the matters contained herein and therein (provided that the
foregoing shall not have any effect on any agreements any Buyer has entered into
with the Company or any of its Subsidiaries prior to the date hereof with
respect to any prior investment made by such Buyer in the Company), and this
Agreement, the other Transaction Documents, the schedules and exhibits attached
hereto and thereto and the instruments referenced herein and therein 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
Company nor any Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters.  No provision of this
Agreement may be amended or waived other than by an instrument in writing signed
by the Company and the holders of at least eighty percent (80%) of the then
outstanding principal amount of the Notes issued hereunder, and any amendment or
to, or waiver of any provision of, this Agreement made in conformity with the
provisions of this Section 9(e) shall be binding on all Buyers and holders of
Securities, as applicable, provided that any party may give a waiver in writing
as to itself. No such amendment or waiver (unless given pursuant to the
foregoing proviso) shall be effective to the extent that it applies to less than
all of the holders of the Notes then outstanding. No consideration shall be
offered or paid to any Person to amend or consent to a waiver or modification of
any provision of any of the Transaction Documents unless the same consideration
also is offered to all of the parties to the Transaction Documents, holders of
the Notes or holders of the Warrants (as the case may be). The Company has not,
directly or indirectly, made any agreements with any Buyers relating to the
terms or conditions of the transactions contemplated by the Transaction
Documents except as set forth in the Transaction Documents. Without limiting the
foregoing, the Company confirms that, except as set forth in this Agreement, no
Buyer has made any commitment or promise or has any other obligation to provide
any financing to the Company, any Subsidiary or otherwise.

    
      
         

      

      
        -22-

        
          

        

      

      
         

      

    

     

    (f)           Notices. Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided confirmation
of transmission is mechanically or electronically generated and kept on file by
the sending party); or (iii) one (1) Business Day after deposit with an
overnight courier service with next day delivery specified, in each case,
properly addressed to the party to receive the same. The addresses and facsimile
numbers for such communications shall be:

     

    If to the
Company:

     

    Valley
Force Composite Technologies, Inc.

    50 East
River Center Blvd., Suite 820

    Covington,
Kentucky 41011

    Telephone:  (859)
581-5111

     

    Facsimile:  (859)
_______

     

    Attention:  Chief
Executive Officer

     

    With a
copy (for informational purposes only) to:

     

    Richardson
& Patel LLP

    The
Chrysler Building

    405
Lexington Avenue, 26th
Floor

    New York,
New York 10174

    Telephone:  (212)
907-6686

     

    Facsimile:  (212)
907-6687

     

    Attention:  Jody
R. Samuels, Esq.

     

    If to the
Transfer Agent:

     

    Florida
Atlantic Stock Transfer Inc.

    7130 N.
Nob Hill Road

    Fort
Lauderdale, FL 33321

    Telephone:  (954)
726-4954

     

    Facsimile:  _________________

     

    Attention:  _________________

    
      
         

      

      
        -23-

        
          

        

      

      
         

      

    

     

    If to a
Buyer, to its address and facsimile number set forth on the Schedule of Buyers,
with copies to such Buyer’s representatives as set forth on the Schedule of
Buyers,

     

    with a
copy (for informational purposes only) to:

     

    Greenberg
Traurig, LLP

    The
MetLife Building

    200 Park
Avenue, 15th
Floor

    New York,
New York 10166

    Telephone:  (212)
801-9200

    Facsimile:  (212)
801-6400

    Attention:  Spencer
G. Feldman, Esq.

    

    or to
such other address and/or facsimile number and/or to the attention of such other
Person as the recipient party has specified by written notice given to each
other party five (5) days prior to the effectiveness of such change; provided, that
Greenberg Traurig, LLP shall only be provided copies of notices sent to
MKM.  Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be rebuttable
evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

     

    (g)           Successors and
Assigns. This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns, including any purchasers of any of the
Securities. The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the holders of at
least eighty percent (80%) of the aggregate number of Registrable Securities
issued and issuable under the Transaction Documents, including, without
limitation, by way of a Fundamental Transaction (as defined in the Warrants)
(unless the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Warrants). A Buyer may assign some or
all of its rights hereunder in connection with transfer of any of its Securities
without the consent of the Company, in which event such assignee shall be deemed
to be a Buyer hereunder with respect to such assigned rights.

     

    (h)           No Third-Party
Beneficiaries. This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns, and is not for the benefit of, nor may any
provision hereof be enforced by, any other Person, other than the Indemnitees
referred to in Section 9(k).

     

    (i)           Survival. The
representations, warranties, agreements and covenants shall survive the Closing.
Each Buyer shall be responsible only for its own representations, warranties,
agreements and covenants hereunder.

     

    (j)           Further
Assurances. Each
party shall do and perform, or cause to be done and performed, all such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as any 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.

    
      
         

      

      
        -24-

        
          

        

      

      
         

      

    

     

    (k)           Indemnification.  In
consideration of each Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each holder of any
Securities and all of their stockholders, partners, members, officers,
directors, employees and direct or indirect investors and any of the foregoing
Persons’ agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”) from and against
any and all actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees
and disbursements (the “Indemnified Liabilities”),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company or any Subsidiary in any of the Transaction Documents, (b) any breach of
any covenant, agreement or obligation of the Company or any Subsidiary contained
in any of the Transaction Documents or (c) any cause of action, suit or claim
brought or made against such Indemnitee by a third party (including for these
purposes a derivative action brought on behalf of the Company or any Subsidiary)
and arising out of or resulting from (i) the execution, delivery, performance or
enforcement of any of the Transaction Documents, (ii) any transaction financed
or to be financed in whole or in part, directly or indirectly, with the proceeds
of the issuance of the Securities, (iii) any disclosure properly made by such
Buyer pursuant to Section 4(i), (iv) the status of such Buyer or holder of the
Securities as an investor in the Company pursuant to the transactions
contemplated by the Transaction Documents, (v) any untrue statement or alleged
untrue statement of a material fact in a registration statement or prospectus
(as amended or supplemented) covering all or any portion of the Registrable
Securities or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(vi) any violation or alleged violation by the Company of the 1933 Act, the 1934
Act, any other law, including without limitation, any state securities law, or
any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities pursuant to a registration statement, except, with
respect to clause (c), to the extent such Indemnified Liability arises from an
Indemnitee’s gross negligence, bad faith or willful misconduct. To the extent
that the foregoing undertaking by the Company may be unenforceable for any
reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.

     

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

     

    (m)           Remedies.  Each
Buyer and each holder of any Securities shall have all rights and remedies set
forth in the Transaction Documents and all rights and remedies which such
holders have been granted at any time under any other agreement or contract and
all of the rights which such holders have under any law. Any Person having any
rights under any provision of this Agreement shall be entitled to enforce such
rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. Furthermore, the Company recognizes
that in the event that it or any Subsidiary fails to perform, observe, or
discharge any or all of its or such Subsidiary’s (as the case may be)
obligations under the Transaction Documents, any remedy at law may prove to be
inadequate relief to the Buyers. The Company therefore agrees that the Buyers
shall be entitled to seek specific performance and/or temporary, preliminary and
permanent injunctive or other equitable relief from any court of competent
jurisdiction in any such case without the necessity of proving actual damages
and without posting a bond or other security.

     

    (n)           Withdrawal
Right.
Notwithstanding anything to the contrary contained in (and without limiting any
similar provisions of) the Transaction Documents, whenever any Buyer exercises a
right, election, demand or option under a Transaction Document and the Company
or any Subsidiary does not timely perform its related obligations within the
periods therein provided, then such Buyer may rescind or withdraw, in its sole
discretion from time to time upon written notice to the Company or such
Subsidiary (as the case may be), any relevant notice, demand or election in
whole or in part without prejudice to its future actions and rights

    
      
         

      

      
        -25-

        
          

        

      

      
         

      

    

     

    (o)           Payment Set
Aside. To the
extent that the Company or any Subsidiary makes a payment or payments to any
Buyer hereunder or pursuant to any of the other Transaction Documents or any of
the Buyers enforce or exercise their rights hereunder or thereunder, and such
payment or payments or the proceeds of such enforcement or exercise or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside, recovered from, disgorged by or are required to be refunded, repaid
or otherwise restored to the Company or any Subsidiary, a trustee, receiver or
any other Person under any law (including, without limitation, any bankruptcy
law, foreign, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred. Unless otherwise expressly indicated, all dollar amounts
referred to in this Agreement and the other Transaction Documents are in United
States Dollars (“US
Dollars”), and all amounts owing under this Agreement and all other
Transaction Documents shall be paid in US Dollars. All amounts denominated in
other currencies shall be converted in the US Dollar equivalent amount in
accordance with the Exchange Rate on the date of calculation. “Exchange Rate” means, in relation to
any amount of currency to be converted into US Dollars pursuant to this
Agreement, the US Dollar exchange rate as published in the Wall Street Journal
on the relevant date of calculation.

     

    (p)           Independent Nature of
Buyers’ Obligations and Rights.  The
obligations of each Buyer under the Transaction Documents are several and not
joint with the obligations of any other Buyer, and no Buyer shall be responsible
in any way for the performance of the obligations of any other Buyer under any
Transaction Document.  Nothing contained herein or in any other
Transaction Document, and no action taken by any Buyer pursuant hereto or
thereto, shall be deemed to constitute the Buyers as, and the Company
acknowledges that the Buyers do not so constitute, a partnership, an
association, a joint venture or any other kind of group or entity, or create a
presumption that the Buyers are in any way acting in concert or as a group or
entity with respect to such obligations or the transactions contemplated by the
Transaction Documents or any matters, and the Company acknowledges that the
Buyers are not acting in concert or as a group, and the Company shall not assert
any such claim, with respect to such obligations or the transactions
contemplated by the Transaction Documents. The decision of each Buyer to
purchase Securities pursuant to the Transaction Documents has been made by such
Buyer independently of any other Buyer. Each Buyer acknowledges that no other
Buyer has acted as agent for such Buyer in connection with such Buyer making its
investment hereunder and that no other Buyer will be acting as agent of such
Buyer in connection with monitoring such Buyer’s investment in the Securities or
enforcing its rights under the Transaction Documents. The Company and each Buyer
confirms that each Buyer has independently participated with the Company in the
negotiation of the transaction contemplated hereby with the advice of its own
counsel and advisors. Each Buyer shall be entitled to independently protect and
enforce its rights, including, without limitation, the rights arising out of
this Agreement or out of any other Transaction Documents, and it shall not be
necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose. The use of a single agreement to effectuate the
purchase and sale of the Securities contemplated hereby was solely in the
control of the Company, not the action or decision of any Buyer, and was done
solely for the convenience of the Company and not because it was required or
requested to do so by any Buyer.  It is expressly understood and
agreed that each provision contained in this Agreement and in each other
Transaction Document is between the Company and a Buyer, solely, and not between
the Company and the Buyers collectively and not between and among the
Buyers.

     

    [signature pages
follow]

    
      
         

      

      
        -26-

        
          

        

      

      
         

      

    

     

    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Agreement to
be duly executed as of the date first written above.

     

    COMPANY:

    

    VALLEY FORGE COMPOSITE TECHNOLOGIES,
INC.

     

    By:________________________________________

    Name:

    Title:

     

    Each of
the undersigned, being the Subsidiaries named in the foregoing Securities
Purchase Agreement, hereby acknowledges that it will receive substantial benefit
from the loan described in the Securities Purchase Agreement, and absolutely and
unconditionally guarantees the payment and performance by the Company of all of
its obligations under the Securities Purchase Agreement.  This is a
guaranty of payment and performance (and not merely of collection), and the
Buyers may proceed directly against the undersigned without any requirement to
first proceed or obtain any judgment against or exhaust any remedies with
respect to the Company.  This guaranty shall in no manner be affected
or impaired by (a) any amendment, modification, waiver, consent, compromise or
other indulgence granted to the Company under or in respect of the Securities
Purchase Agreement or any related agreement, (b) any failure by the Buyers to
insist upon strict performance or observance by the Company of any of the terms
of the Securities Purchase Agreement or any related agreement, (c) any
forbearance by the Buyers, (d) any bankruptcy, insolvency, receivership,
reorganization, liquidation or other such proceeding relating to the Company, or
(e) any relief of the Company from any of its obligations as aforesaid by
operation of law, in equity or otherwise.  This guaranty shall be
subject in all cases to any defenses (other than defenses based upon or arising
out of any bankruptcy, insolvency or reorganization of the Company) available to
the Company had the Buyers proceeded directly against the Company rather than
pursuant to this guaranty.

     

    VALLEY FORGE DETECTION SYSTEMS,
INC.

     

    By:________________________________________

    Name:

    Title:

     

    VALLEY FORGE AEROSPACE,
INC.

     

    By:________________________________________

    Name:

    Title:

     

    VALLEY FORGE IMAGING,
INC.

     

    By:________________________________________

    Name:

    Title:

     

    VALLEY FORGE IMAGING TECHNOLOGIES,
INC.

     

    By:________________________________________

    Name:

    Title:

    
      
         

      

      
        -27-

        
          

        

      

      
         

      

    

    

    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Agreement to
be duly executed as of the date first written above.

     

    

    
      	 
      	
              BUYERS:

               

            
	 
      	
              MKM
      OPPORTUNITY MASTER FUND, LLC

               

              By:______________________________________

              Name:

              Title:

               

            
	 
      	 
      

    

    

     

    
      
         

      

      
        -28-

        
          

        

      

      
         

      

    

    SCHEDULE
OF BUYERS

     

    

    
      	
              (1)

            	
              (2)

            	
              (3)

            	
              (4)

            	
              (5)

            	
              (6)

            
	
              
                 

                Buyer

              

            	
              Address
      and Facsimile Number

            	
              Principal
      Amount of Note

            	
              Number
      of

              Warrants

            	
              Purchase
      Price

            	
              Legal
      Representative’s

              Address
      and Facsimile Number

            
	 
      	 
      	 
      	 
      	 
      	 
      
	
              MKM
      Opportunity Master Fund, LLC

            	 
      	
              $500,000

            	
              1,000,000

            	
              $500,000

            	 
      

    

     

     

    
      
         

      

      
        -29-

        
          

        

      

      
         

      

    

    EXHIBITS

    
      
        	
                Exhibit
      A

              	
                Form
      of Note

              
	
                Exhibit
      B

              	
                Form
      of Warrant

              
	
                Exhibit
      C

              	
                Form
      of Company’s Counsel Opinion

              
	
                Exhibit
      D

              	
                Form
      of Secretary’s Certificate

              
	
                Exhibit
      E

              	
                Form
      of Officer’s Certificate

              
	 	 
	
                Schedule
      3(q)

              	
                Transactions
      with Affiliates

              
	
                Schedule
      3(r)

              	
                Capitalization

              
	
                Schedule
      3(s)

              	
                Indebtedness
      and Other Contracts

              
	
                Schedule
      3(t)

              	
                Litigation

              

      

    

     

    
      
         

      

      
        -30-ex102.htm

    Exhibit
10.2

     

    NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
(I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO
THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE
COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR
ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF
THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 16(a) HEREOF.  THE
PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES
ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE
FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

     

    VALLEY
FORGE COMPOSITE TECHNOLOGIES, INC.

     

    Senior
Convertible Note

     

    
      	
              Issuance
      Date:  July 7, 2008

            	
              Original
      Principal Amount: U.S. $

            

    

    

    FOR VALUE RECEIVED, Valley
Forge Composite Technologies, Inc., a Florida corporation (the “Company”), hereby promises to
pay to the order of __________________________, or registered assigns (“Holder”) the amount set out
above as the Original Principal Amount (as reduced pursuant to the terms hereof
pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether
upon the Maturity Date (as defined below), acceleration, redemption or otherwise
(in each case in accordance with the terms hereof) and to pay interest (“Interest”) on any outstanding
Principal at the applicable Interest Rate from the date set out above as the
Issuance Date (the “Issuance Date”) until the same becomes
due and payable, whether upon an Interest Date (as defined below) or the
Maturity Date or acceleration, conversion, redemption or otherwise (in each case
in accordance with the terms hereof). This Senior Convertible Note (including
all Senior Convertible Notes issued in exchange, transfer or replacement hereof,
this “Note”) is one of
an issue of Senior Convertible Notes issued pursuant to the Securities Purchase
Agreement on the Closing Date (collectively, the “Notes” and such other Senior
Convertible Notes, the “Other Notes”). Certain capitalized
terms used herein are defined in Section 26.

     

    1.           PAYMENTS OF
PRINCIPAL. On the Maturity Date, the Company shall pay to the Holder the
outstanding Principal amount, together with any accrued and unpaid Interest or
accrued and unpaid Late Charges on Principal and Interest.  Other than
as specifically permitted by this Note, the Company may not prepay any portion
of the outstanding Principal, accrued and unpaid Interest or accrued and unpaid
Late Charges on Principal and Interest, if any.

    
      
         

      

      
        -1-

        
          

        

      

      
         

      

    

     

    2.           INTEREST; INTEREST
RATE.

     

    (a)           Interest
on this Note shall commence accruing on the Issuance Date, shall accrue daily at
the Interest Rate on the outstanding Principal amount from time to time, shall
be computed on the basis of a 360-day year comprised of twelve (12) thirty (30)
day months and shall be payable in arrears for each Quarter on the first
Business Day immediately following the end of such Quarter during the period
beginning on the Issuance Date and ending on, and including, the Maturity Date
(each, an “Interest
Date”), with the first
Interest Date being October 1, 2008. Interest shall be payable on each Interest
Date to the record holder of this Note on the applicable Interest Date, and to
the extent that any Principal amount of this Note is converted prior to such
Interest Date, accrued and unpaid Interest with respect to such converted
Principal amount and accrued and unpaid Late Charges with respect to such
Principal and Interest shall be paid on the applicable Conversion Date (as
defined below) to the record holder of this Note, in cash or in shares of Common
Stock at the Interest Conversion Rate (as defined below), or a combination
thereof; provided, however, payment in
shares of Common Stock may only occur if during the fifteen (15) Business Days
immediately prior to the applicable Interest Date and through and including the
date such shares of Common Stock are issued to the Holder, all of the Equity
Conditions have been met and the Company shall have given the Holder notice in
accordance with the notice requirements set forth below.  From and
after the occurrence and during the continuance of any Event of Default, the
Interest Rate shall be increased to sixteen percent (16%). In the event that
such Event of Default is subsequently cured, the adjustment referred to in the
preceding sentence shall cease to be effective as of the date of such cure;
provided that
the Interest as calculated and unpaid at such increased rate during the
continuance of such Event of Default shall continue to apply to the extent
relating to the days after the occurrence of such Event of Default through and
including the date of such cure of such Event of Default.

     

    (b)           Subject
to the terms and conditions herein, the decision whether to pay interest
hereunder in cash or shares of Common Stock shall be at the discretion of the
Company.  Not less than fifteen (15) Business Days prior to each
Interest Date, the Company shall provide the Holder with written notice of its
election to pay interest hereunder either in cash or shares of Common Stock (the
Company may indicate in such notice that the election contained in such notice
shall continue for later periods until revised).  Within fifteen (15)
Business Days prior to an Interest Date, the Company’s election (whether
specific to an Interest Date or continuous) shall be irrevocable as to such
Interest Date.  Subject to the aforementioned conditions, failure to
timely provide such written notice shall be deemed an election by the Company to
pay the interest on such Interest Date in cash.  Payment of interest
in shares of Common Stock shall otherwise occur pursuant to Section 3(c) and
only for purposes of the payment of interest in shares, the Interest Date shall
be deemed the Conversion Date.  Interest shall cease to accrue with
respect to any principal amount converted, provided that the Company in fact
delivers the shares of Common Stock within the time period required by Section
3(c)(ii).  Except as otherwise provided herein, if at any time the
Company pays interest partially in cash and partially in shares of Common Stock,
then such payment shall be distributed ratably among the Holders based upon the
principal amount of the Notes held by each Holder.  Notwithstanding
anything to the contrary contained herein, if on any Interest Date the Company
has elected to pay interest in Common Stock and is not able to pay accrued
interest in the form of Common Stock because it does not then satisfy the
conditions for payment in the form of Common Stock set forth above, then, at the
option of the Holder, the Company, in lieu of delivering either shares of Common
Stock pursuant to this Section 2 or paying the regularly scheduled cash interest
payment, shall deliver, within three (3) Business Days of each applicable
Interest Date, an amount in cash equal to the product of the number of shares of
Common Stock otherwise deliverable to the Holder in connection with the payment
of interest due on such Interest Date and the highest VWAP during the period
commencing on the Interest Date and ending on the Business Day prior to the date
such payment is made.

     

    3.           CONVERSION OF NOTES.
This Note shall be convertible into shares of Common Stock (as defined below),
on the terms and conditions set forth in this Section 3.

     

    (a)           Conversion Right.
Subject to the provisions of Section 3(d), at any time or times on or after the
Issuance Date, the Holder shall be entitled to convert any portion of the
outstanding and unpaid Conversion Amount (as defined below) into fully paid and
non-assessable shares of Common Stock in accordance with Section 3(c), at the
Conversion Rate (as defined below).  The Company shall not issue any
fraction of a share of Common Stock upon any conversion.  If the
issuance would result in the issuance of a fraction of a share of Common Stock,
the Company shall round such fraction of a share of Common Stock up to the
nearest whole share.  The Company shall pay any and all transfer,
stamp and similar taxes that may be payable with respect to the issuance and
delivery of Common Stock upon conversion of any Conversion Amount.

     

    (b)           Conversion Rate. The
number of shares of Common Stock issuable upon conversion of any Conversion
Amount pursuant to Section 3(a) shall be determined by dividing (x) such
Conversion Amount by (y) the Conversion Price (the “Conversion
Rate”).

     

    (i)           “Conversion Amount” means the
portion of the Principal to be converted, redeemed or otherwise with respect to
which this determination is being made.

     

    (ii)           “Conversion Price” means, as of
any Conversion Date or other date of determination, $.50, subject to adjustment
as provided herein.

    
      
         

      

      
        -2-

        
          

        

      

      
         

      

    

     

    (c)           Mechanics of
Conversion.

     

    (i)           Optional Conversion.
To convert any Conversion Amount into shares of Common Stock on any date (a
“Conversion Date”), the
Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or
prior to 11:59 p.m., New York time, on such date, a copy of an executed notice
of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the
Company and (B) if required by Section 3(c)(iii), surrender this Note to a
nationally recognized overnight delivery service for delivery to the Company (or
an indemnification undertaking with respect to this Note in the case of its
loss, theft or destruction).  On or before the first (1st) Trading Day
following the date of receipt of a Conversion Notice, the Company shall transmit
by facsimile an acknowledgment of confirmation of receipt of such Conversion
Notice to the Holder and the Company’s transfer agent (the “Transfer Agent”). On or before
the third (3rd) Trading Day following the date of receipt of a Conversion Notice
(the “Share Delivery
Date”), the Company
shall (1) provided that the Transfer Agent is participating in The Depository
Trust Company’s (“DTC”)
Fast Automated Securities Transfer Program, credit such aggregate number of
shares of Common Stock to which the Holder shall be entitled to the Holder’s or
its designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and deliver (via reputable
overnight courier) to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee, for the
number of shares of Common Stock to which the Holder shall be entitled; and (2)
pay to the Holder in cash an amount equal to the accrued and unpaid Interest on
the Conversion Amount up to and including the Conversion Date, including accrued
and unpaid Late Charges with respect to such Conversion Amount and Interest. If
this Note is physically surrendered for conversion as required by Section
3(c)(iii) and the outstanding Principal of this Note is greater than the
Principal portion of the Conversion Amount being converted, then the Company
shall as soon as practicable and in no event later than three (3) Business Days
after receipt of this Note and at its own expense, issue and deliver to the
Holder (or its designee) a new Note (in accordance with Section 16(d))
representing the outstanding Principal not converted. The Person or Persons
entitled to receive the shares of Common Stock issuable upon a conversion of
this Note shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on the Conversion Date. In the event of a partial
conversion of this Note pursuant hereto, the Principal amount converted shall be
deducted as set forth in the Conversion Notice.

     

    (ii)           Company’s Failure to Timely
Convert. If the Company shall fail, for any reason or for no reason, to
issue to the Holder within three (3) Trading Days after the Company’s receipt of
a facsimile copy of a Conversion Notice, a certificate for the number of shares
of Common Stock to which the Holder is entitled and register such shares of
Common Stock on the Company’s share register or to credit the Holder’s or its
designee’s balance account with DTC for such number of shares of Common Stock to
which the Holder is entitled upon the Holder’s conversion of any Conversion
Amount (as the case may be) (a “Conversion Failure”), then, in
addition to all other remedies available to the Holder, (1) the Company shall
pay in cash to the Holder on each day after such third (3rd) Trading Day that
the issuance of such shares of Common Stock is not timely effected an amount
equal to 2% of the product of (A) the sum of the number of shares of Common
Stock not issued to the Holder on a timely basis and to which the Holder is
entitled and (B) the Closing Sale Price of the Common Stock on the Trading Day
immediately preceding the last possible date which the Company could have issued
such shares of Common Stock to the Holder without violating Section 3(c)(i) and
(2) the Holder, upon written notice to the Company, may void its Conversion
Notice with respect to, and retain or have returned (as the case may be) any
portion of this Note that has not been converted pursuant to such Conversion
Notice; provided that the
voiding of a Conversion Notice shall not affect the Company’s obligations to
make any payments which have accrued prior to the date of such notice pursuant
to this Section 3(c)(ii) or otherwise. In addition to the foregoing, if within
three (3) Trading Days after the Company’s receipt of the facsimile copy of a
Conversion Notice, the Company shall fail to issue and deliver a certificate to
the Holder and register such shares of Common Stock on the Company’s share
register or credit the Holder’s or its designee’s balance account with DTC for
the number of shares of Common Stock to which the Holder is entitled upon the
Holder’s conversion hereunder (as the case may be), and if on or after such
third (3rd) Trading Day the Holder purchases (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the
Holder of shares of Common Stock issuable upon such conversion that the Holder
anticipated receiving from the Company (a “Buy-In”), then the Company
shall, within three (3) Business Days after the Holder’s request and in the
Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the
Holder’s total purchase price (including brokerage commissions and other
out-of-pocket expenses, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at
which point the Company’s obligation to deliver such certificate (and to issue
such shares of Common Stock) shall terminate, or (ii) promptly honor its
obligation to deliver to the Holder a certificate or certificates representing
such shares of Common Stock or credit the Holder’s balance account with DTC for
the number of shares of Common Stock to which the Holder is entitled upon the
Holder’s conversion hereunder (as the case may be) and pay cash to the Holder in
an amount equal to the excess (if any) of the Buy-In Price over the product of
(A) such number of shares of Common Stock times (B) the Closing Sale Price of
the Common Stock on the Trading Day immediately preceding the Conversion
Date.

    
      
         

      

      
        -3-

        
          

        

      

      
         

      

    

     

    (iii)           Book-Entry.
Notwithstanding anything to the contrary set forth herein, upon conversion of
any portion of this Note in accordance with the terms hereof, the Holder shall
not be required to physically surrender this Note to the Company unless (A) the
full Conversion Amount represented by this Note is being converted or (B) the
Holder has provided the Company with prior written notice (which notice may be
included in a Conversion Notice) requesting reissuance of this Note upon
physical surrender of this Note. The Holder and the Company shall maintain
records showing the Principal, Interest and Late Charges converted and/or paid
(as the case may be) and the dates of such conversions and/or payments (as the
case may be) or shall use such other method, reasonably satisfactory to the
Holder and the Company, so as not to require physical surrender of this Note
upon conversion.

     

    (iv)           Pro Rata Conversion;
Disputes. In the event that the Company receives a Conversion Notice from
more than one holder of Notes for the same Conversion Date and the Company can
convert some, but not all, of such portions of the Notes submitted for
conversion, the Company, subject to Section 3(d), shall convert from each holder
of Notes electing to have Notes converted on such date a pro rata amount of such
holder’s portion of its Notes submitted for conversion based on the principal
amount of Notes submitted for conversion on such date by such holder relative to
the aggregate principal amount of all Notes submitted for conversion on such
date. In the event of a dispute as to the number of shares of Common Stock
issuable to the Holder in connection with a conversion of this Note, the Company
shall issue to the Holder the number of shares of Common Stock not in dispute
and resolve such dispute in accordance with Section 21.

     

    (d)           Limitations on
Conversions.

     

    (i)           Beneficial Ownership.
Notwithstanding anything to the contrary contained in this Note, this Note shall
not be convertible by the Holder hereof, and the Company shall not effect any
conversion of this Note or otherwise issue any shares of Common Stock to the
extent (but only to the extent) that, if after giving effect to such conversion,
the Holder or any of its affiliates would beneficially own in excess of 9.99%
(the “Maximum
Percentage”) of the outstanding shares of Common Stock
immediately after giving effect to such conversion. To the extent the above
limitation applies, the determination of whether this Note shall be convertible
(vis-à-vis other convertible, exercisable or exchangeable securities owned by
the Holder) shall, subject to such Maximum Percentage limitation, be determined
on the basis of the first submission to the Company for conversion, exercise or
exchange (as the case may be). No prior inability to convert this Note, or to
issue shares of Common Stock, pursuant to this paragraph shall have any effect
on the applicability of the provisions of this paragraph with respect to
any subsequent determination of convertibility. For purposes of this paragraph,
beneficial ownership and all determinations and calculations (including, without
limitation, with respect to calculations of percentage ownership) shall be
determined by the Holder in accordance with Section 13(d) of the 1934 Act (as
defined in the Securities Purchase Agreement) and the rules and regulations
promulgated thereunder. The provisions of this paragraph shall be implemented in
a manner otherwise than in strict conformity with the terms of this paragraph to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Maximum Percentage beneficial ownership
limitation herein contained or to make changes or supplements necessary or
desirable to properly give effect to such Maximum Percentage limitation. The
limitations contained in this paragraph shall apply to a successor Holder of
this Note. For any reason at any time, upon the written or oral request of the
Holder, the Company shall within one (1) Business Day confirm orally and in
writing to the Holder the number of shares of Common Stock then outstanding,
including by virtue of any prior conversion or exercise of convertible or
exercisable securities into Common Stock, including, without limitation,
pursuant to this Note or securities issued pursuant to the Securities Purchase
Agreement.  Each delivery of a Conversion Notice by the Holder will
constitute a representation by the Holder that it has evaluated the limitation
set forth in this paragraph and determined that issuance of the full number of
Conversion Shares requested by the Holder in such Conversion Notice is permitted
under this paragraph.

    
      
         

      

      
        -4-

        
          

        

      

      
         

      

    

     

    4.           RIGHTS UPON EVENT OF
DEFAULT.

     

    (a)           Event of
Default.  Each of the following events shall constitute an
“Event of
Default”:

     

    (i)           the
suspension  from trading or failure  of the Common Stock to
be listed on an Eligible Market for a period of five (5) consecutive days or for
more than an aggregate of ten (10) days in any 365-day period;

     

    (ii)           the
Company’s (A) failure to cure a Conversion Failure by delivery of the required
number of shares of Common Stock within five (5) Trading Days after the
applicable Conversion Date or (B) notice, written or oral, to any holder of the
Notes, including, without limitation, by way of public announcement or through
any of its agents, at any time, of its intention not to comply with a request
for conversion of any Notes into shares of Common Stock that is requested in
accordance with the provisions of the Notes, other than pursuant to Section
3(d);

     

    (iii)           at
any time following the tenth (10th) consecutive day that the Holder’s Authorized
Share Allocation is less than the number of shares of Common Stock that the
Holder would be entitled to receive upon a conversion of the full Conversion
Amount of this Note (without regard to any limitations on conversion set forth
in Section 3(d) or otherwise);

     

    (iv)           the
Company’s or any Subsidiary’s failure to pay to the Holder any amount of
Principal, Interest, Late Charges or other amounts when and as due under this
Note (including, without limitation, the Company’s or any Subsidiary’s failure
to pay any redemption payments or amounts hereunder) or any other Transaction
Document (as defined in the Securities Purchase Agreement) or any other
agreement, document, certificate or other instrument delivered in connection
with the transactions contemplated hereby and thereby to which the Holder is a
party, except, in the case of a failure to pay Interest and Late Charges when
and as due, in which case only if such failure remains uncured for a period of
at least five (5) Trading Days;

     

    (v)           the
Company fails to remove any restrictive legend on any certificate or any shares
of Common Stock issued to the Holder upon conversion or exercise (as the case
may be) of any Securities acquired by the Holder under the Securities Purchase
Agreement (including this Note) as and when required by such Securities or the
Securities Purchase Agreement, unless otherwise then prohibited by applicable
federal securities laws, and any such remains uncured for at least five (5)
Trading Days;

     

    (vi)           the
occurrence of any default under, redemption of or acceleration prior to maturity
of any Indebtedness (as defined in the Securities Purchase Agreement) of the
Company or any of its Subsidiaries, other than with respect to (A) Permitted
Senior Indebtedness and (B) any Other Notes;

     

    (vii)           bankruptcy,
insolvency, reorganization or liquidation proceedings or other proceedings for
the relief of debtors shall be instituted by or against the Company or any
Subsidiary and, if instituted against the Company or any Subsidiary by a third
party, shall not be dismissed within thirty (30) days of their
initiation;

     

    (viii)          the
commencement by the Company or any Subsidiary of a voluntary case or proceeding
under any applicable federal, state or foreign bankruptcy, insolvency,
reorganization or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or the consent by it to the entry of a
decree, order, judgment or other similar document in respect of the Company or
any Subsidiary in an involuntary case or proceeding under any applicable
federal, state or foreign bankruptcy, insolvency, reorganization or other
similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal, state or foreign
law, or the consent by it to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the execution of a composition of debts, or the
occurrence of any other similar federal, state or foreign proceeding, or the
admission by it in writing of its inability to pay its debts generally as they
become due, the taking of corporate action by the Company or any Subsidiary in
furtherance of any such action or the taking of any action by any Person to
commence a UCC foreclosure sale or any other similar action under federal, state
or foreign law;

    
      
         

      

      
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    (ix)           the
entry by a court of (i) a decree, order, judgment or other similar document in
respect of the Company or any Subsidiary of a voluntary or involuntary case or
proceeding under any applicable federal, state or foreign bankruptcy,
insolvency, reorganization or other similar law or (ii) a decree, order,
judgment or other similar document adjudging the Company or any Subsidiary as
bankrupt or insolvent, or approving as properly filed a petition seeking
liquidation, reorganization, arrangement, adjustment or composition of or in
respect of the Company or any Subsidiary under any applicable federal, state or
foreign law or (iii) a decree, order, judgment or other similar document
appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or
other similar official of the Company or any Subsidiary or of any substantial
part of its property, or ordering the winding up or liquidation of its affairs,
and the continuance of any such decree, order, judgment or other similar
document or any such other decree, order, judgment or other similar document
unstayed and in effect for a period of thirty (30) consecutive
days;

     

    (x)           a
final judgment or judgments for the payment of money aggregating in excess of
$250,000 are rendered against the Company and/or any of its Subsidiaries and
which judgments are not, within thirty (30) days after the entry thereof,
bonded, discharged or stayed pending appeal, or are not discharged within thirty
(30) days after the expiration of such stay; provided, however, that any
judgment which is covered by insurance or an indemnity from a credit worthy
party shall not be included in calculating the $250,000 amount set forth above
so long as the Company provides the Holder a written statement from such insurer
or indemnity provider (which written statement shall be reasonably satisfactory
to the Holder) to the effect that such judgment is covered by insurance or an
indemnity and the Company or such Subsidiary (as the case may be) will receive
the proceeds of such insurance or indemnity within thirty (30) days of the
issuance of such judgment;

     

    (xi)           the
Company and/or any Subsidiary, individually or in the aggregate, either (i)
fails to pay, when due, or within any applicable grace period, any payment with
respect to any Indebtedness in excess of $250,000 due to any third party, other
than, with respect to unsecured Indebtedness only, payments contested by the
Company and/or such Subsidiary (as the case may be) in good faith by proper
proceedings and with respect to which adequate reserves have been set aside for
the payment thereof in accordance with GAAP, or otherwise be in breach or
violation of any agreement for monies owed or owing in an amount in excess of
$250,000, which breach or violation permits the other party thereto to declare a
default or otherwise accelerate amounts due thereunder, or (ii) suffer to exist
any other circumstance or event that would, with or without the passage of time
or the giving of notice, result in a default or event of default under any
agreement binding the Company or any Subsidiary, which default or event of
default would or is likely to have a material adverse effect on the business,
assets, operations (including results thereof), liabilities, properties,
condition (including financial condition) or prospects of the Company or any of
its Subsidiaries, individually or in the aggregate;

     

    (xii)           the
Company or any Subsidiary materially breaches any representation, warranty,
covenant or other term or condition of any Transaction Document, except, in the
case of a breach of a covenant of any Transaction Document which is curable,
only if such breach remains uncured for a period of at least five (5) Trading
Days;

     

    (xiii)                      any
material breach or failure in any respect by the Company or any Subsidiary to
comply with any provision of Section 12 of this Note; or 

     

    (xiv)                      any
Event of Default (as defined in the Other Notes) occurs with respect to any
Other Notes.

    
      
         

      

      
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    (b)           Redemption Right.
Upon the occurrence of an Event of Default with respect to this Note or any
Other Note, the Company shall within one (1) Business Day deliver written notice
thereof via facsimile and overnight courier (with next day delivery specified)
(an “Event of Default
Notice”) to the Holder. At any time after the earlier of the Holder’s
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default, the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (the “Event of Default Redemption
Notice”) to the Company, which Event of Default Redemption Notice shall
indicate the portion of this Note the Holder is electing to redeem. Each portion
of this Note subject to redemption by the Company pursuant to this Section 4(b)
shall be redeemed by the Company at a price equal to the greater of (i) the
product of (A) the sum of the Conversion Amount to be redeemed together with
accrued and unpaid Interest with respect to such Conversion Amount and accrued
and unpaid Late Charges with respect to such Conversion Amount and Interest and
(B) the Redemption Premium and (ii) the product of (X) the Conversion Rate with
respect to such sum of the Conversion Amount together with accrued and unpaid
Interest with respect to such Conversion Amount and accrued and unpaid Late
Charges with respect to such Conversion Amount and Interest in effect at such
time as the Holder delivers an Event of Default Redemption Notice and (Y) the
product of (1) the Equity Value Redemption Premium and (2) the greater of (I)
the Closing Sale Price of the Common Stock on the date immediately preceding
such Event of Default, (II) the Closing Sale Price of the Common Stock on the
date immediately after such Event of Default and (III) the Closing Sale Price of
the Common Stock on the date the Holder delivers the Event of Default Redemption
Notice (the “Event of
Default Redemption
Price”). Redemptions required by this Section 4(b) shall be made in
accordance with the provisions of Section 10. To the extent redemptions required
by this Section 4(b) are deemed or determined by a court of competent
jurisdiction to be prepayments of the Note by the Company, such redemptions
shall be deemed to be voluntary prepayments. Notwithstanding anything to the
contrary in this Section 4, but subject to Section 3(d), until the Event of
Default Redemption Price (together with any interest thereon) is paid in full,
the Conversion Amount submitted for redemption under this Section 4(b) (together
with any interest thereon) may be converted, in whole or in part, by the Holder
into Common Stock pursuant to Section 3. In the event of a partial redemption of
this Note pursuant hereto, the Principal amount redeemed shall be deducted as
set forth in the Event of Default Redemption Notice. The parties hereto agree
that in the event of the Company’s redemption of any portion of the Note under
this Section 4(b), the Holder’s damages would be uncertain and difficult to
estimate because of the parties’ inability to predict future interest rates and
the uncertainty of the availability of a suitable substitute investment
opportunity for the Holder. Accordingly, any redemption premium due under this
Section 4(b) is intended by the parties to be, and shall be deemed, a reasonable
estimate of the Holder’s actual loss of its investment opportunity and not as a
penalty.

     

    5.           RIGHTS UPON FUNDAMENTAL
TRANSACTION.

     

    (a)           Assumption. The
Company shall not enter into or be party to a Fundamental Transaction unless
(i) the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with
the provisions of this Section 5(a) pursuant to written agreements in form and
substance satisfactory to the Holder and approved by the Holder prior to such
Fundamental Transaction, including agreements to deliver to each holder of Notes
in exchange for such Notes a security of the Successor Entity evidenced by a
written instrument substantially similar in form and substance to the Notes,
including, without limitation, having a principal amount and interest rate equal
to the principal amounts then outstanding and the interest rates of the Notes
held by such holder, having similar conversion rights as the Notes and having
similar ranking to the Notes, and satisfactory to the Holder and (ii) the
Successor Entity (including its Parent Entity) is a publicly traded corporation
whose common stock is quoted on or listed for trading on an Eligible Market.
Upon the occurrence of any Fundamental Transaction, the Successor Entity shall
succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Note and the other Transaction
Documents referring to the “Company” shall refer instead to the Successor
Entity), and may exercise every right and power of the Company and shall assume
all of the obligations of the Company under this Note and the other Transaction
Documents with the same effect as if such Successor Entity had been named as the
Company herein. Upon consummation of the Fundamental Transaction, the Successor
Entity shall deliver to the Holder confirmation that there shall be issued upon
conversion or redemption of this Note at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of the Company’s Common Stock (or
other securities, cash, assets or other property (except such items still
issuable under Section 6, which shall continue to be receivable thereafter)
issuable upon the conversion or redemption of the Notes prior to such
Fundamental Transaction, such shares of the publicly traded common stock (or
their equivalent) of the Successor Entity (including its Parent Entity) which
the Holder would have been entitled to receive upon the happening of such
Fundamental Transaction had this Note been converted immediately prior to such
Fundamental Transaction (without regard to any limitations on the conversion of
this Note), as adjusted in accordance with the provisions of this Note. The
provisions of this Section shall apply similarly and equally to successive
Fundamental Transactions and shall be applied without regard to any limitations
on the conversion of this Note.

    
      
         

      

      
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    (b)           Redemption Right. No
sooner than twenty (20) Trading Days nor later than ten (10) Trading Days prior
to the consummation of a Fundamental Transaction, but not prior to the public
announcement of such Fundamental Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a “Fundamental Transaction Notice”). At any time during
the period beginning after the Holder’s receipt of a Fundamental Transaction
Notice and ending on the later of twenty (20) Trading Days after (A)
consummation of such Fundamental Transaction or (B) the date of receipt of such
Fundamental Transaction Notice, the Holder may require the Company to redeem all
or any portion of this Note by delivering written notice thereof (“Fundamental Transaction Redemption
Notice”) to the Company, which Fundamental Transaction Redemption Notice
shall indicate the Conversion Amount the Holder is electing to
redeem.  The portion of this Note subject to redemption pursuant to
this Section 5 shall be redeemed by the Company in cash at a price equal to the
greater of (i) the sum of (x) the product of the Fundamental Transaction
Redemption Premium and the Conversion Amount being redeemed and (y) the amount
of any accrued but unpaid Interest on such Conversion Amount being redeemed and
accrued and unpaid Late Charges, if any, with respect to such Conversion Amount
and Interest through the date of such redemption payment and (ii) the product of
(x) the Equity Value Redemption Premium and (y) the sum of (1) the product of
(A) the Conversion Amount being redeemed multiplied by (B) the quotient
determined by dividing (I) the aggregate cash consideration and the aggregate
cash value of any non-cash consideration per share of Common Stock to be paid to
the holders of the shares of Common Stock upon consummation of the Fundamental
Transaction (any such non-cash consideration to be valued at the higher of the
Closing Sale Price of such securities as of the Trading Day immediately prior to
the consummation of such Fundamental Transaction, the Closing Sale Price on the
Trading Day immediately following the public announcement of such proposed
Fundamental Transaction and the Closing Sale Price on the Trading Day
immediately prior to the public announcement of such proposed Fundamental
Transaction) by (II) the Conversion Price plus (2) the amount of any accrued but
unpaid Interest on such Conversion Amount being redeemed and accrued and unpaid
Late Charges, if any, with respect to such Conversion Amount and Interest
through the date of such redemption payment, (the “Fundamental Transaction Redemption
Price”).  Redemptions required by this Section 5 shall be made
in accordance with the provisions of Section 10 and shall have priority to
payments to stockholders in connection with a Fundamental Transaction. To the
extent redemptions required by this Section 5(b) are deemed or determined by a
court of competent jurisdiction to be prepayments of the Note by the Company,
such redemptions shall be deemed to be voluntary prepayments. Notwithstanding
anything to the contrary in this Section 5, but subject to Section 3(d), until
the Fundamental Transaction Redemption Price (together with any interest
thereon) is paid in full, the Conversion Amount submitted for redemption under
this Section 5(b) (together with any interest thereon) may be converted, in
whole or in part, by the Holder into Common Stock pursuant to Section 3. In the
event of a partial redemption of this Note pursuant hereto, the Principal amount
redeemed shall be deducted as set forth in the Fundamental Transaction
Redemption Notice. The parties hereto agree that in the event of the Company’s
redemption of any portion of the Note under this Section 5(b), the Holder’s
damages would be uncertain and difficult to estimate because of the parties’
inability to predict future interest rates and the uncertainty of the
availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any redemption premium due under this Section 5(b) is intended by
the parties to be, and shall be deemed, a reasonable estimate of the Holder’s
actual loss of its investment opportunity and not as a penalty.

     

    6.           RIGHTS UPON ISSUANCE OF
PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

     

    (a)           Purchase Rights. In
addition to any adjustments pursuant to Section 7 below, if at any time the
Company grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the “Purchase Rights”), then the
Holder will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which the Holder could have acquired if
the Holder had held the number of shares of Common Stock acquirable upon
complete conversion of this Note (without taking into account any limitations or
restrictions on the convertibility of this Note) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights (provided, however, that to the
extent that the Holder’s right to participate in any such Purchase Right would
result in the Holder exceeding the Maximum Percentage, then the Holder shall not
be entitled to participate in such Purchase Right to such extent (or beneficial
ownership of such shares of Common Stock as a result of such Purchase Right to
such extent) and such Purchase Right to such extent shall be held in abeyance
for the Holder until such time, if ever, as its right thereto would not result
in the Holder exceeding the Maximum Percentage).

    
      
         

      

      
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    (b)           Other Corporate
Events. In addition to and not in substitution for any other rights
hereunder, prior to the consummation of any Fundamental Transaction pursuant to
which holders of shares of Common Stock are entitled to receive securities or
other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company
shall make appropriate provision to insure that the Holder will thereafter have
the right to receive upon a conversion of this Note (i) in addition to the
shares of Common Stock receivable upon such conversion, such securities or other
assets to which the Holder would have been entitled with respect to such shares
of Common Stock had such shares of Common Stock been held by the Holder upon the
consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu
of the shares of Common Stock otherwise receivable upon such conversion, such
securities or other assets received by the holders of shares of Common Stock in
connection with the consummation of such Corporate Event in such amounts as the
Holder would have been entitled to receive had this Note initially been issued
with conversion rights for the form of such consideration (as opposed to shares
of Common Stock) at a conversion rate for such consideration commensurate with
the Conversion Rate. The provisions of this Section shall apply similarly and
equally to successive Corporate Events and shall be applied without regard to
any limitations on the conversion or redemption of this Note.

     

    7.           RIGHTS UPON ISSUANCE OF
OTHER SECURITIES.

     

    (a)           Adjustment of Conversion
Price upon Issuance of Common Stock.  If and whenever from and
after the Subscription Date and to and through the date that is two (2) years
after the Subscription Date, the Company issues or sells, or in accordance with
this Section 7(a) is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or
for the account of the Company, but excluding any Excluded Securities (as
defined in the Securities Purchase Agreement) issued or sold or deemed to have
been issued or sold) for a consideration per share (the “New Issuance Price”) less than
a price equal to the Conversion Price in effect immediately prior to such issue
or sale or deemed issuance or sale (such lesser price being referred to as the
“Applicable Price”) (the
foregoing a “Dilutive
Issuance”), then immediately after such Dilutive Issuance, the Conversion
Price then in effect shall be reduced to an amount equal to the New Issuance
Price. For purposes of determining the adjusted Conversion Price under this
Section 7(a), the following shall be applicable:

     

    (i)           Issuance of
Options.  If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion, exercise or
exchange of any Convertible Securities issuable upon exercise of any such Option
is less than the Applicable Price, then such share of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Option for such price per share. For
purposes of this Section 7(a)(i), the “lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Options or upon
conversion, exercise or exchange of any Convertible Securities issuable upon
exercise of any such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion, exercise or exchange of any Convertible
Security issuable upon exercise of such Option. Except as contemplated below, no
further adjustment of the Conversion Price shall be made upon the actual
issuance of such share of Common Stock or of such Convertible Securities upon
the exercise of such Options or upon the actual issuance of such share of Common
Stock upon conversion, exercise or exchange of such Convertible
Securities.

     

    (ii)           Issuance of Convertible
Securities.  If the Company in any manner issues or sells any
Convertible Securities and the lowest price per share for which one share of
Common Stock is issuable upon the conversion, exercise or exchange thereof is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such Convertible Securities for such price per
share.  For the purposes of this Section 7(a)(ii), the “lowest price
per share for which one share of Common Stock is issuable upon the conversion,
exercise or exchange thereof” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to one
share of Common Stock upon the issuance or sale of the Convertible Security and
upon conversion, exercise or exchange of such Convertible Security. Except as
contemplated below, no further adjustment of the Conversion Price shall be made
upon the actual issuance of such share of Common Stock upon conversion, exercise
or exchange of such Convertible Securities, and if any such issue or sale of
such Convertible Securities is made upon exercise of any Options for which
adjustment of the Conversion Price has been or is to be made pursuant to other
provisions of this Section 7(a), except as contemplated below, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.

    
      
         

      

      
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    (iii)           Change in Option Price or
Rate of Conversion. If the purchase or exercise price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion, exercise or exchange of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exercisable or
exchangeable for shares of Common Stock increases or decreases at any time, the
Conversion Price in effect at the time of such increase or decrease shall be
adjusted to the Conversion Price which would have been in effect at such time
had such Options or Convertible Securities provided for such increased or
decreased purchase price, additional consideration or increased or decreased
conversion rate (as the case may be) at the time initially granted, issued or
sold. For purposes of this Section 7(a)(iii), if the terms of any Option or
Convertible Security that was outstanding as of the Subscription Date are
increased or decreased in the manner described in the immediately preceding
sentence, then such Option or Convertible Security and the shares of Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such increase or decrease. No
adjustment pursuant to this Section 7(a) shall be made if such adjustment would
result in an increase of the Conversion Price then in effect.

     

    (iv)           Calculation of Consideration
Received. In case any Option is issued in connection with the issue or
sale of other securities of the Company, together comprising one integrated
transaction in which no specific consideration is allocated to such Options by
the parties thereto, the Options will be deemed to have been issued for the
difference of (i) the aggregate fair market value of such Options and other
securities issued or sold in such integrated transaction, less (ii) the fair
market value of the securities other than such Option, issued or sold in such
transaction and the other securities issued or sold in such integrated
transaction will be deemed to have been issued or sold for the balance of the
consideration received by the Company.  If any shares of Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor will be deemed to
be the net amount received by the Company therefor. If any shares of Common
Stock, Options or Convertible Securities are issued or sold for a consideration
other than cash, the amount of such consideration received by the Company will
be the fair value of such consideration, except where such consideration
consists of publicly traded securities, in which case the amount of
consideration received by the Company for such securities will be the average
VWAP of such security for the five (5) Trading Day period immediately preceding
the date of receipt. If any shares of Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such shares of Common Stock, Options or Convertible Securities (as the case may
be). The fair value of any consideration other than cash or publicly traded
securities will be determined jointly by the Company and the Holder. If such
parties are unable to reach agreement within ten (10) days after the occurrence
of an event requiring valuation (the “Valuation Event”), the fair
value of such consideration will be determined within five (5) Trading Days
after the tenth (10th) day following such Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the Holder. The
determination of such appraiser shall be final and binding upon all parties
absent manifest error and the fees and expenses of such appraiser shall be borne
by the Company.

     

    (v)           Record Date. If the
Company takes a record of the holders of shares of Common Stock for the purpose
of entitling them (A) to receive a dividend or other distribution payable in
Common Stock, Options or in Convertible Securities or (B) to subscribe for or
purchase shares of Common Stock, Options or Convertible Securities, then such
record date will be deemed to be the date of the issue or sale of the shares of
Common Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of
such right of subscription or purchase (as the case may be).

     

    (b)           Adjustment of Conversion
Price upon Subdivision or Combination of Common Stock.  If the
Company at any time on or after the Subscription Date subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced. If the Company at any time on or after the Subscription
Date combines (by combination, reverse stock split or otherwise) one or more
classes of its outstanding shares of Common Stock into a smaller number of
shares, the Conversion Price in effect immediately prior to such combination
will be proportionately increased. Any adjustment pursuant to this Section 7(b)
shall become effective immediately after the effective date of such subdivision
or combination. If any event requiring an adjustment under this Section 7(b)
occurs during the period that a Conversion Price is calculated hereunder, then
the calculation of such Conversion Price shall be adjusted appropriately to
reflect such event.

    
      
         

      

      
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    (c)           Other Events. In the
event that the Company (or any direct or indirect subsidiary thereof) shall
take any action to which the provisions hereof are not strictly applicable, or,
if applicable, would not operate to protect the Holder from dilution or if any
event occurs of the type contemplated by the provisions of this Section 7 but
not expressly provided for by such provisions (including, without limitation,
the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company’s Board of Directors shall in good faith
determine and implement an appropriate adjustment in the Conversion Price so as
to protect the rights of the Holder; provided that no such
adjustment pursuant to this Section 7(c) will increase the Conversion Price as
otherwise determined pursuant to this Section 7, provided further that
if the Holder does not accept such adjustments as appropriately protecting its
interests hereunder against such dilution, then the Company’s Board of Directors
and the Holder shall agree, in good faith, upon an independent investment bank
of nationally recognized standing to make such appropriate adjustments, whose
determination shall be final and binding and whose fees and expenses shall be
borne by the Company.

     

    8.           NONCIRCUMVENTION. The
Company hereby covenants and agrees that the Company will not, by amendment of
its Certificate of Incorporation, Bylaws or through any reorganization, transfer
of assets, consolidation, merger, scheme of arrangement, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Note, and will at all
times in good faith carry out all of the provisions of this Note and take all
action as may be required to protect the rights of the Holder of this Note.
Without limiting the generality of the foregoing, the Company (i) shall not
increase the par value of any shares of Common Stock receivable upon conversion
of this Note above the Conversion Price then in effect, (ii) shall take all
such actions as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the conversion of this Note, and (iii) shall, so long as any of the Notes
are outstanding, take all action necessary to reserve and keep available out of
its authorized and unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the Notes, the maximum number of shares of Common
Stock as shall from time to time be necessary to effect the conversion of the
Notes then outstanding (without regard to any limitations on
conversion).

     

    9.           RESERVATION OF AUTHORIZED
SHARES.

     

    (a)           Reservation. The
Company shall initially reserve out of its authorized and unissued Common Stock
a number of shares of Common Stock for each of the Notes equal to 120% of the
entire Conversion Rate with respect to the entire Conversion Amount of each such
Note as of the Issuance Date.  So long
as any of the Notes are outstanding, the Company shall take all action necessary
to reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Notes, 120% of the
number of shares of Common Stock as shall from time to time be necessary to
effect the conversion of all of the Notes then outstanding; provided that at no
time shall the number of shares of Common Stock so reserved be less than the
number of shares required to be reserved by the previous sentence (without
regard to any limitations on conversions) (the “Required Reserve
Amount”).  The initial number of shares of Common Stock
reserved for conversions of the Notes and each increase in the number of shares
so reserved shall be allocated pro rata among the holders of the Notes based on
the original principal amount of the Notes held by each holder at the Closing
(as defined in the Securities Purchase Agreement) or increase in the number of
reserved shares (as the case may be) (the “Authorized Share Allocation”).
In the event that a holder shall sell or otherwise transfer any of such holder’s
Notes, each transferee shall be allocated a pro rata portion of such holder’s
Authorized Share Allocation. Any shares of Common Stock reserved and allocated
to any Person which ceases to hold any Notes shall be allocated to the remaining
holders of Notes, pro rata based on the principal amount of the Notes then held
by such holders.

     

    (b)           Insufficient Authorized
Shares. If, notwithstanding Section 9(a), and not in limitation thereof,
at any time while any of the Notes remain outstanding the Company does not have
a sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon conversion of the Notes at
least a number of shares of Common Stock equal to the Required Reserve Amount
(an “Authorized Share
Failure”), then the Company shall immediately take all action necessary
to increase the Company’s authorized shares of Common Stock to an amount
sufficient to allow the Company to reserve the Required Reserve Amount for the
Notes then outstanding. Without limiting the generality of the foregoing
sentence, as soon as practicable after the date of the occurrence of an
Authorized Share Failure, but in no event later than sixty (60) days after the
occurrence of such Authorized Share Failure, the Company shall hold a meeting of
its stockholders for the approval of an increase in the number of authorized
shares of Common Stock.  In connection with such meeting, the Company
shall provide each stockholder with a proxy statement and shall use its best
efforts to solicit its stockholders’ approval of such increase in authorized
shares of Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.

    
      
         

      

      
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    10.           HOLDER’S
REDEMPTIONS.

     

    (a)           Mechanics. The
Company shall deliver the applicable Event of Default Redemption Price to the
Holder within five (5) Business Days after the Company’s receipt of the Holder’s
Event of Default Redemption Notice. If the Holder has submitted a Fundamental
Transaction Redemption Notice in accordance with Section 5(b), the Company shall
deliver the applicable Fundamental Transaction Redemption Price to the Holder
concurrently with the consummation of such Fundamental Transaction if such
notice is received prior to the consummation of such Fundamental Transaction and
within five (5) Business Days after the Company’s receipt of such notice
otherwise.  In the event of a redemption of less than all of the
Conversion Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 16(d))
representing the outstanding Principal which has not been redeemed. In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company
pays such unpaid Redemption Price in full, the Holder shall have the option, in
lieu of redemption, to require the Company to promptly return to the Holder all
or any portion of this Note representing the Conversion Amount that was
submitted for redemption and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid. Upon the Company’s receipt of
such notice, (x) the applicable Redemption Notice shall be null and void with
respect to such Conversion Amount, (y) the Company shall immediately return this
Note, or issue a new Note (in accordance with Section 16(d)) to the Holder
representing the sum of such Conversion Amount to be redeemed together with
accrued and unpaid Interest with respect to such Conversion Amount and accrued
and unpaid Late Charges with respect to such Conversion Amount and Interest and
(z) after Shareholder Approval is obtained, the Conversion Price of this Note or
such new Notes shall be adjusted to the lesser of (A) the Conversion Price as in
effect on the date on which the applicable Redemption Notice is voided and (B)
the lowest Closing Bid Price of the Common Stock during the period beginning on
and including the date on which the applicable Redemption Notice is delivered to
the Company and ending on and including the date on which the applicable
Redemption Notice is voided. The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which have
accrued prior to the date of such notice with respect to the Conversion Amount
subject to such notice.

     

    (b)           Redemption by Other
Holders. Upon the Company’s receipt of notice from any of the holders of
the Other Notes for redemption or repayment as a result of an event or
occurrence substantially similar to the events or occurrences described in
Section 4(b) or Section 5(b) (each, an “Other Redemption Notice”), the
Company shall immediately, but no later than one (1) Business Day of its receipt
thereof, forward to the Holder by facsimile a copy of such notice. If the
Company receives a Redemption Notice and one or more Other Redemption Notices,
during the seven (7) Business Day period beginning on and including the date
which is three (3) Business Days prior to the Company’s receipt of the Holder’s
applicable Redemption Notice and ending on and including the date which is three
(3) Business Days after the Company’s receipt of the Holder’s applicable
Redemption Notice and the Company is unable to redeem all principal, interest
and other amounts designated in such Redemption Notice and such Other Redemption
Notices received during such seven (7) Business Day period, then the Company
shall redeem a pro rata amount from each holder of the Notes (including the
Holder) based on the principal amount of the Notes submitted for redemption
pursuant to such Redemption Notice and such Other Redemption Notices received by
the Company during such seven (7) Business Day period.

     

    11.           VOTING
RIGHTS.  The Holder shall have no voting rights as the holder
of this Note, except as required by law, including, without limitation, the
Business Corporation Act of the State of Florida, and as expressly provided in
this Note.

     

    12.           COVENANTS.

     

    (a)           Rank.  All
payments due under this Note (a) shall rank pari passu with all Other
Notes and (b) shall be senior to all other Indebtedness of the Company and its
Subsidiaries, other than the Permitted Senior Indebtedness.

     

    (b)           Incurrence of
Indebtedness. So long as this Note is outstanding, the Company shall not,
and the Company shall not permit any of its Subsidiaries to, directly or
indirectly, incur or guarantee, assume or suffer to exist any Indebtedness,
other than (i) the Indebtedness evidenced by this Note and the Other Notes and
(ii) Permitted Indebtedness.

    
      
         

      

      
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    (c)           Existence of Liens.
So long as this Note is outstanding, the Company shall not, and the Company
shall not permit any of its Subsidiaries to, directly or indirectly, allow or
suffer to exist any mortgage, lien, pledge, charge, security interest or other
encumbrance upon or in any property or assets (including accounts and contract
rights) owned by the Company or any of its Subsidiaries (collectively, “Liens”) other than Permitted
Liens.

     

    (d)           Restricted Payments.
The Company shall not, and the Company shall not permit any of its Subsidiaries
to, directly or indirectly, redeem, defease, repurchase, repay or make any
payments in respect of, by the payment of cash or cash equivalents (in whole or
in part, whether by way of open market purchases, tender offers, private
transactions or otherwise), all or any portion of any Indebtedness (other than
Permitted Senior Indebtedness), whether by way of payment in respect of
principal of (or premium, if any) or interest on, such Indebtedness if at the
time such payment is due or is otherwise made or, after giving effect to such
payment, (i) an event constituting an Event of Default has occurred and is
continuing or (ii) an event that with the passage of time and without being
cured would constitute an Event of Default has occurred and is
continuing.

     

    (e)           Restriction on Redemption
and Cash Dividends. Until all of the Notes have been converted, redeemed
or otherwise satisfied in accordance with their terms, the Company shall not,
directly or indirectly, redeem, repurchase or declare or pay any cash dividend
or distribution on its capital stock without the prior express written consent
of the Holder.

     

    (f)           Restriction on Transfer of
Assets. The Company shall not, and shall cause each Subsidiary to not,
sell, lease, convey or otherwise dispose of any assets or rights of the Company
or any Subsidiary owned or hereafter acquired whether in a single transaction or
a series of related transactions, other than (i) sales, leases, conveyances and
other dispositions of such assets or rights by the Company and its Subsidiaries
that, in the aggregate, do not have a fair market value in excess of $250,000 in
any twelve (12) month period and (ii) sales of inventory in the ordinary course
of business.

     

    (g)           Maturity of
Indebtedness. The Company shall not permit any Indebtedness of the
Company or any of the Subsidiaries to mature or accelerate prior to the Maturity
Date, other than Permitted Senior Indebtedness.

     

    13.           PARTICIPATION. The
Holder, as the holder of this Note, shall be entitled to receive such dividends
paid and distributions made to the holders of Common Stock to the same extent as
if the Holder had converted this Note into Common Stock (without regard to any
limitations on conversion herein or elsewhere) and had held such shares of
Common Stock on the record date for such dividends and distributions. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock (provided, however, that to the
extent that the Holder’s right to participate in any such dividend or
distribution would result in the Holder exceeding the Maximum Percentage, then
the Holder shall not be entitled to participate in such dividend or distribution
to such extent (or the beneficial ownership of any such shares of Common Stock
as a result of such dividend or distribution to such extent) and such dividend
or distribution to such extent shall be held in abeyance for the benefit of the
Holder until such time, if ever, as its right thereto would not result in the
Holder exceeding the Maximum Percentage).

     

    14.           AMENDING THE TERMS OF
NOTES. The prior written consent of the Holder shall be required for any
change or amendment to this Note. No consideration shall be offered or paid to
the Holder to amend or consent to a waiver or modification of any provision of
this Note unless the same consideration is also offered to all of the holders of
the Other Notes. The Holder shall be entitled, at its option, to the benefit of
any amendment to any of the Other Notes.

     

    15.           TRANSFER. This Note
and any shares of Common Stock issued upon conversion of this Note may be
offered, sold, assigned or transferred by the Holder without the consent of the
Company, subject only to the provisions of Section 2(g) of the Securities
Purchase Agreement.

    
      
         

      

      
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    16.           REISSUANCE OF THIS
NOTE.

     

    (a)           Transfer. If this
Note is to be transferred, the Holder shall surrender this Note to the Company,
whereupon the Company will forthwith issue and deliver upon the order of the
Holder a new Note (in accordance with Section 16(d)), registered as the Holder
may request, representing the outstanding Principal being transferred by the
Holder and, if less than the entire outstanding Principal is being transferred,
a new Note (in accordance with Section 16(d)) to the Holder representing the
outstanding Principal not being transferred. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the provisions
of Section 3(c)(iii) following conversion or redemption of any portion of this
Note, the outstanding Principal represented by this Note may be less than the
Principal stated on the face of this Note.

     

    (b)           Lost, Stolen or Mutilated
Note. Upon receipt by the Company of evidence reasonably satisfactory to
the Company of the loss, theft, destruction or mutilation of this Note (as to
which a written certification and the indemnification contemplated below shall
suffice as such evidence), and, in the case of loss, theft or destruction, of
any indemnification undertaking by the Holder to the Company in customary and
reasonable form and, in the case of mutilation, upon surrender and cancellation
of this Note, the Company shall execute and deliver to the Holder a new Note (in
accordance with Section 16(d)) representing the outstanding
Principal.

     

    (c)           Note Exchangeable for
Different Denominations. This Note is exchangeable, upon the surrender
hereof by the Holder at the principal office of the Company, for a new Note or
Notes (in accordance with Section 16(d) and in principal amounts of at least
$10,000) representing in the aggregate the outstanding Principal of this Note,
and each such new Note will represent such portion of such outstanding Principal
as is designated by the Holder at the time of such surrender.

     

    (d)           Issuance of New
Notes. Whenever the Company is required to issue a new Note pursuant to
the terms of this Note, such new Note (i) shall be of like tenor with this Note,
(ii) shall represent, as indicated on the face of such new Note, the Principal
remaining outstanding (or in the case of a new Note being issued pursuant to
Section 16(a) or Section 16(c), the Principal designated by the Holder which,
when added to the principal represented by the other new Notes issued in
connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, from the
Issuance Date.

     

    17.           REMEDIES, CHARACTERIZATIONS,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies provided
in this Note shall be cumulative and in addition to all other remedies available
under this Note and any of the other Transaction Documents at law or in equity
(including a decree of specific performance and/or other injunctive relief), and
nothing herein shall limit the Holder’s right to pursue actual and consequential
damages for any failure by the Company to comply with the terms of this
Note.  The Company covenants to the Holder that there shall be no
characterization concerning this instrument other than as expressly provided
herein. Amounts set forth or provided for herein with respect to payments,
conversion and the like (and the computation thereof) shall be the amounts to be
received by the Holder and shall not, except as expressly provided herein, be
subject to any other obligation of the Company (or the performance thereof). The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened breach, the Holder shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach, without the
necessity of showing economic loss and without any bond or other security being
required.

     

    18.           PAYMENT OF COLLECTION,
ENFORCEMENT AND OTHER COSTS.  If (a) this Note is placed in the
hands of an attorney for collection or enforcement or is collected or enforced
through any legal proceeding or the Holder otherwise takes action to collect
amounts due under this Note or to enforce the provisions of this Note or (b)
there occurs any bankruptcy, reorganization, receivership of the Company or
other proceedings affecting Company creditors’ rights and involving a claim
under this Note, then the Company shall pay the costs incurred by the Holder for
such collection, enforcement or action or in connection with such bankruptcy,
reorganization, receivership or other proceeding, including, without limitation,
attorneys’ fees and disbursements.

    
      
         

      

      
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    19.           CONSTRUCTION;
HEADINGS.  This Note shall be deemed to be jointly drafted by
the Company and the Holder and shall not be construed against any Person as the
drafter hereof. The headings of this Note are for convenience of reference and
shall not form part of, or affect the interpretation of, this Note. Terms used
in this Note but defined in the other Transaction Documents shall have the
meanings ascribed to such terms on the Closing Date in such other Transaction
Documents unless otherwise consented to in writing by the Holder.

     

    20.           FAILURE OR INDULGENCE NOT
WAIVER. No failure or delay on the part of the Holder in the exercise of
any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege. No waiver shall be effective unless it is in writing and signed by an
authorized representative of the waiving party.

     

    21.           DISPUTE RESOLUTION.
In the case of a dispute as to the determination of the Closing Bid Price, the
Closing Sale Price or the fair market value or the arithmetic calculation of the
Conversion Rate or any Redemption Price, the Company or the Holder (as the case
may be) shall submit the disputed determinations or arithmetic calculations (as
the case may be) via facsimile within two (2) Business Days of receipt, or
deemed receipt, of the applicable notice or other event giving rise to such
dispute (as the case may be) to the Company or the Holder (as the case may be).
If the Holder and the Company are unable to agree upon such determination or
calculation within two (2) Business Days of such disputed determination or
arithmetic calculation being submitted to the Company or the Holder (as the case
may be), then the Company shall, within two (2) Business Days submit via
facsimile (a) the disputed determination of the Closing Bid Price, the Closing
Sale Price or fair market value (as the case may be) to an independent,
reputable investment bank selected by the Company and approved by the Holder or
(b) the disputed arithmetic calculation of the Conversion Rate or any Redemption
Price (as the case may be) to the Company’s independent, outside accountant. The
Company shall cause at its expense the investment bank or the accountant (as the
case may be) to perform the determinations or calculations (as the case may be)
and notify the Company and the Holder of the results no later than ten (10)
Business Days from the time it receives such disputed determinations or
calculations (as the case may be). Such investment bank’s or accountant’s
determination or calculation (as the case may be) shall be binding upon all
parties absent demonstrable error.

     

    22.           NOTICES;
PAYMENTS.

     

    (a)           Notices. Whenever
notice is required to be given under this Note, unless otherwise provided
herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt
written notice of all actions taken pursuant to this Note, including in
reasonable detail a description of such action and the reason therefore. Without
limiting the generality of the foregoing, the Company will give written notice
to the Holder (i) immediately upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least fifteen (15) days prior to the date on which the
Company closes its books or takes a record (A) with respect to any dividend or
distribution upon the Common Stock, (B) with respect to any grant, issuances, or
sales of any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property to holders of shares of Common Stock or
(C) for determining rights to vote with respect to any Fundamental Transaction,
dissolution or liquidation, provided in each case that such information shall be
made known to the public prior to or in conjunction with such notice being
provided to the Holder.

     

    (b)           Payments. Whenever
any payment of cash is to be made by the Company to any Person pursuant to this
Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier
service to such Person at such address as previously provided to the Company in
writing (which address, in the case of each of the Buyers, shall initially be as
set forth on the Schedule of Buyers attached to the Securities Purchase
Agreement); provided that the Holder may elect to receive a payment of cash via
wire transfer of immediately available funds by providing the Company with prior
written notice setting out such request and the Holder’s wire transfer
instructions. Whenever any amount expressed to be due by the terms of this Note
is due on any day which is not a Business Day, the same shall instead be due on
the next succeeding day which is a Business Day and, in the case of any Interest
Date which is not the date on which this Note is paid in full, the extension of
the due date thereof shall not be taken into account for purposes of determining
the amount of Interest due on such date. Any amount of Principal or other
amounts due under the Transaction Documents which is not paid when due shall
result in a late charge being incurred and payable by the Company in an amount
equal to interest on such amount at the rate of sixteen percent (16%) per annum
from the date such amount was due until the same is paid in full (“Late Charge”).

    
      
         

      

      
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    23.           CANCELLATION.  After
all Principal, accrued Interest and other amounts at any time owed on this Note
have been paid in full, this Note shall automatically be deemed canceled, shall
be surrendered to the Company for cancellation and shall not be
reissued.

     

    24.           WAIVER OF
NOTICE.  To the extent permitted by law, the Company hereby
irrevocably waives demand, notice, presentment, protest and all other demands
and notices in connection with the delivery, acceptance, performance, default or
enforcement of this Note and the Securities Purchase Agreement.

     

    25.           GOVERNING
LAW.  This Note shall be construed and enforced in
accor­dance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of New York. The Company hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in The City of
New York, Borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper.  Nothing contained herein shall be deemed to limit in any
way any right to serve process in any manner permitted by law.  In the
event that any provision of this Note is invalid or unenforceable under any
applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law.  Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of this Note.
Nothing contained herein shall be deemed or operate to preclude the Holder from
bringing suit or taking other legal action against the Company in any other
jurisdiction to collect on the Company’s obligations to the Holder, to realize
on any collateral or any other security for such obligations, or to enforce a
judgment or other court ruling in favor of the Holder. THE COMPANY HEREBY IRREVOCABLY WAIVES
ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

     

    26.           CERTAIN
DEFINITIONS.  For purposes of this Note, the following terms
shall have the following meanings:

     

    (a)           “Approved Stock Plan” means any
employee benefit plan which has been or hereafter is approved by the Board of
Directors of the Company, pursuant to which the Company's securities may be
issued to any employee, officer or director for services provided to the
Company.

     

    (b)           “Bloomberg” means Bloomberg
Financial Markets.

     

    (c)           “Business Day” means any day
other than Saturday, Sunday or other day on which commercial banks in The City
of New York are authorized or required by law to remain closed.

     

    (d)           “Closing Bid Price” and “Closing Sale Price” means, for
any security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price
(as the case may be) then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York time, as reported by Bloomberg,
or, if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price or last trade price,
respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price or last trade price,
respectively, of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price or last trade price, respectively, is reported for such security by
Bloomberg, the average of the bid prices, or the ask prices, respectively, of
any market makers for such security as reported in the “pink sheets” by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid
Price or the Closing Sale Price cannot be calculated for a security on a
particular date on any of the foregoing bases, the Closing Bid Price or the
Closing Sale Price (as the case may be) of such security on such date shall be
the fair market value as mutually determined by the Company and the Holder. If
the Company and the Holder are unable to agree upon the fair market value of
such security, then such dispute shall be resolved in accordance with the
procedures in Section 21. All such determinations shall be appropriately
adjusted for any stock dividend, stock split, stock combination or other similar
transaction during such period.

    
      
         

      

      
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    (e)           “Closing Date” shall have the
meaning set forth in the Securities Purchase Agreement, which date is the date
the Company initially issued Notes pursuant to the terms of the Securities
Purchase Agreement.

     

    (f)           “Common Stock” means
(i) the Company’s shares of common stock, par value $.001 per share, and
(ii) any capital stock into which such common stock shall have been changed or
any share capital resulting from a reclassification of such common
stock.

     

    (g)           “Convertible Securities” means
any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for shares of Common Stock.

     

    (h)           “Current Subsidiaries” means,
collectively, Valley Forge Detection Systems, Inc., Valley Forge Aerospace,
Inc., Valley Forge Imaging, Inc. and Valley Forge Imaging Technologies,
Inc. and each of the foregoing, individually, a “Current
Subsidiary.”

     

    (i)           “Eligible Market” means the
Principal Market, The New York or American Stock Exchange, Inc., the Nasdaq
Global Select Market, the Nasdaq Global Market or the Nasdaq Capital
Market.

     

    (j)           “Equity Conditions” means: (i)
on each day during the period beginning one month prior to the applicable date
of determination and ending on and including the applicable date of
determination either (x) the applicable registration statement filed shall be
effective and the prospectus contained therein shall be available for the resale
of all of the Registrable Securities (which, solely for clarification purposes,
includes all shares of Common Stock issuable upon conversion of this Note,
including, without limitation, under Section 3) in accordance with the terms of
Section 4(n) of the Securities Purchase Agreement or (y) all Registrable
Securities shall be eligible for sale without restriction and without the need
for registration under any applicable federal or state securities laws (in each
case, disregarding any limitation on conversion or exercise); (ii) on each day
during the period beginning three months prior to the applicable date of
determination and ending on and including the applicable date of determination
(the “Equity Conditions
Measuring Period”), the shares of Common Stock (including all Registrable
Securities) are listed or designated for quotation on an Eligible Market and
shall not have been suspended from trading on an Eligible Market (other than
suspensions of not more than two (2) days and occurring prior to the applicable
date of determination due to business announcements by the Company) nor shall
delisting or suspension by an Eligible Market have been threatened (with a
reasonable prospect of delisting occurring) or pending either (A) in writing by
such Eligible Market or (B) by falling below the minimum listing maintenance
requirements of the Eligible Market on which the shares of Common Stock are then
listed; (iii) on each day during the Equity Conditions Measuring Period, the
Company shall have delivered all shares of Common Stock issuable upon conversion
of this Note on a timely basis as set forth in Section 3 hereof and all other
shares of capital stock required to be delivered by the Company on a timely
basis as set forth in the other Transaction Documents; (iv) any shares of Common
Stock to be issued in connection with the event requiring determination may be
issued in full without violating Section 3(d) hereof or the rules or regulations
of the Eligible Market on which the Common Stock is then listed; (v) on each day
during the Equity Conditions Measuring Period, no public announcement of a
pending, proposed or intended Fundamental Transaction shall have occurred which
has not been abandoned, terminated or consummated, (vi) the Company shall have
no knowledge of any fact that would reasonably be expected to cause (1) the
applicable registration statement required to be filed pursuant to Section 4(n)
of the Securities Purchase Agreement not to be effective or the prospectus
contained therein not to be available for the resale of at least all of the
Registrable Securities or (2) any Registrable Securities not to be eligible for
sale without restriction pursuant to Rule 144 under the 1933 Act and any
applicable state securities laws (in each case, disregarding any limitation on
conversion or exercise); (vii) the Holder shall not be in (and no other Buyer
shall be in) possession of any material, non-public information provided to any
of them by the Company or any of its affiliates, other than as expressly
contemplated by Section 4(i) of the Securities Purchase Agreement; (viii) on
each day during the Equity Conditions Measuring Period, the Company otherwise
shall have been in material compliance with and shall not have breached any
provision, covenant, representation or warranty of any Transaction Document; and
(ix) on each day during the Equity Conditions Measuring Period, there shall not
have occurred an Event of Default or an event that with the passage of time or
giving of notice would constitute an Event of Default.

     

    (k)           “Equity Value Redemption
Premium” means 120%.

    
      
         

      

      
        -17-

        
          

        

      

      
         

      

    

     

     

    (l)           "Excluded Securities" means any
Common Stock issued or issuable: (i) in connection with the Securities Purchase
Agreement, (ii) in connection with any Approved Stock Plan; (iii) upon
conversion of the Notes or the exercise of the Warrants; (iv) upon conversion of
any Options or Convertible Securities which are outstanding on the day
immediately preceding the Subscription Date, provided that the terms of such
Options or Convertible Securities are not amended, modified or changed on or
after the Subscription Date; (v) in connection with mergers, acquisitions,
strategic business partnerships or joint ventures, in each case with
non-affiliated third parties and otherwise on an arm's-length basis, the primary
purpose of which is not to raise additional capital; and (vi) upon the issuance
of Options or the exercise of any Options issued to banks or other financial
institutions in connection with (1) commercial credit agreements or (2) the
issuance of non-convertible debt by the Company, each of which the primary
purpose is not to raise additional capital.

     

    (m)           “Fundamental Transaction” means
that the Company shall, directly or indirectly, in one or more related
transactions, (i) consolidate or merge with or into (whether or not the Company
is the surviving corporation) another Person, or (ii) sell, assign, transfer,
convey or otherwise dispose of all or substantially all of the properties or
assets of the Company to another Person, or (iii) allow another Person to make a
purchase, tender or exchange offer that is accepted by the holders of more than
50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the Person or Persons making or party to, or associated or
affiliated with the Persons making or party to, such purchase, tender or
exchange offer), or (iv) consummate a stock purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person whereby such other Person
acquires more than the 50% of the outstanding shares of Common Stock (not
including any shares of Common Stock held by the other Person or other Persons
making or party to, or associated or affiliated with the other Persons making or
party to, such stock purchase agreement or other business combination), or (v)
reorganize, recapitalize or reclassify its Common Stock, or (vi) any “person” or
“group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the
Exchange Act) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
ordinary voting power represented by issued and outstanding Common
Stock.

     

    (n)           “Fundamental Transaction Redemption
Premium” means 120%.

     

    (o)           
“GAAP” means United
States generally accepted accounting principles, consistently
applied.

     

    (p)           “Holder Pro Rata Amount” means
a fraction (i) the numerator of which is the original Principal amount of this
Note on the Closing Date and (ii) the denominator of which is the aggregate
original principal amount of all Notes issued to the initial purchasers pursuant
to the Securities Purchase Agreement on the Closing Date.

     

    (q)           “Interest Conversion Rate”
means the lesser of (a) the Conversion Price and (b) the 90% of the lesser of
(i) the average of the twenty (20) VWAPs immediately prior to the applicable
Interest Date or (ii) the average of the twenty (20) VWAPs immediately prior to
the date the applicable interest payment shares are issued and delivered if
after the Interest Date.

     

    (r)           “Interest Rate” means eight percent (8%)
per annum.

     

    (s)           “Maturity Date” shall mean July 7, 2011;
provided, however, that the
Maturity Date may be extended at the option of the Holder (i) in the event that,
and for so long as, an Event of Default shall have occurred and be continuing or
any event shall have occurred and be continuing that with the passage of time
and the failure to cure would result in an Event of Default or (ii) through the
date that is twenty (20) Business Days after the consummation of a Fundamental
Transaction in the event that a Fundamental Transaction is publicly announced or
a Fundamental Transaction Notice is delivered prior to the Maturity Date; provided, further, that if a
Holder elects to convert some or all of this Note pursuant to Section 3 hereof,
and the Conversion Amount would be limited pursuant to Section 3(d) hereunder,
the Maturity Date shall automatically be extended until such time as such
provision shall not limit the conversion of this Note.

    
      
         

      

      
        -18-

        
          

        

      

      
         

      

    

     

    (t)           
“New Subsidiaries”
means, as of any date of determination, any Person (i) in which the Company
after the Subscription Date, directly or indirectly, owns or acquires any of the
outstanding capital stock or holds any equity or similar interest of such Person
or (ii) in which the Company after the Subscription Date, directly or
indirectly, controls or operates all or any part of the business, operations or
administration of such Person, and each of the foregoing, individually, a “New Subsidiary.”

     

    (u)           “Options” means any rights,
warrants or options to subscribe for or purchase shares of Common Stock or
Convertible Securities.

     

    (v)           “Parent Entity” of a Person
means an entity that, directly or indirectly, controls the applicable Person and
whose common stock or equivalent equity security is quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent Entity, the
Person or Parent Entity with the largest public market capitalization as of the
date of consummation of the Fundamental Transaction.

     

    (w)           “Permitted Indebtedness” means
(i) total Indebtedness of the Company and the Subsidiaries not to exceed
$1,000,000 in the aggregate outstanding at any time; provided, however, that such
Indebtedness shall be made expressly subordinate in right of payment to the
Indebtedness evidenced by the Notes, as reflected in a written agreement
acceptable to the Required Holders and approved by the Required Holders in
writing, and which Indebtedness does not provide at any time for (A) the
payment, prepayment, repayment, repurchase or defeasance, directly or
indirectly, of any principal or premium, if any, thereon until ninety-one (91)
days after the Maturity Date or later and (B) total interest and fees at a rate
in excess of the Interest Rate; (ii) equipment leases and purchase money
obligations of the Company and the Subsidiaries not to exceed $250,000 in the
aggregate outstanding at any time, (iii) Indebtedness evidenced by this Note and
the Other Notes, (iv) Indebtedness of the Company pursuant to a traditional
credit facility from a bank, financial institution or other institutional
lender, and (v) surety bonds required by the Company, or any of its
Subsidiaries, to obtain regulatory permits, licenses or insurance as part of
conducting its business.

     

    (x)           “Permitted Liens” means (i) any
Lien for taxes not yet due or delinquent or being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or
delinquent, (iii) any Lien created by operation of law, such as materialmen’s
liens, mechanics’ liens and other similar liens, arising in the ordinary course
of business with respect to a liability that is not yet due or delinquent or
that are being contested in good faith by appropriate proceedings, (iv) Liens
(A) upon or in any equipment acquired or held by the Company or any of its
Subsidiaries to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition or lease of such
equipment, or (B) existing on such equipment at the time of its acquisition,
provided that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment, (v) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clauses (i) and (iv) above, provided
that any extension, renewal or replacement Lien shall be limited to the property
encumbered by the existing Lien and the principal amount of the Indebtedness
being extended, renewed or refinanced does not increase, (vi) leases or
subleases and licenses and sublicenses granted to others in the ordinary course
of the Company's business, not interfering in any material respect with the
business of the Company and its Subsidiaries taken as a whole, (vii) Liens in
favor of customs and revenue authorities arising as a matter of law to secure
payments of custom duties in connection with the importation of goods, (viii)
Liens securing the Company’s obligations under the Notes, and (ix) any Lien
securing Permitted Senior Indebtedness.

     

    (y)           “Permitted Senior
Indebtedness” means the Indebtedness
described in clauses (ii), (iv) and (v) of Permitted Indebtedness.

     

    (z)           “Person” means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization, any other entity and a government or any
department or agency thereof.

    
      
         

      

      
        -19-

        
          

        

      

      
         

      

    

     

    (aa)           “Principal Market” means the
Over-the-Counter Bulletin Board.

     

    (bb)           “Quarter” means each of: the
period beginning on and including July 1 and ending on and including September
30; the period beginning on and including October 1 and ending on and including
December 31; the period beginning on and including January 1 and ending on and
including March 31; and the period beginning on and including April 1 and ending
on and including June 30.

     

    (cc)           “Redemption Notices” means,
collectively, the Event of Default Redemption Notice and the Fundamental
Transaction Redemption Notice, and each of the foregoing, individually, a “Redemption
Notice.”

     

    (dd)           “Redemption Premium” means (i)
in the case of the Events of Default described in Section 4(a) other than
Sections 4(a)(vii) through 4(a)(ix)), 120% or (ii) in the case of the Events of
Default described in Sections 4(a)(vii) through 4(a)(ix), 100%.

     

    (ee)           “Redemption Prices” means,
collectively, the Event of Default Redemption Price and the Fundamental
Transaction Redemption Price, and each of the foregoing, individually, a “Redemption
Price.”

     

    (ff)           “Required Holders” means the
holders of Notes representing at least eighty percent (80%) of the aggregate
principal amount of the Notes then outstanding.

     

    (gg)           
“SEC” means the United
States Securities and Exchange Commission.

     

    (hh)           “Securities Purchase Agreement”
means that certain securities purchase agreement, dated as of the Subscription
Date, by and among the Company and the initial holders of the Notes pursuant to
which the Company issued the Notes and Warrants.

     

    (ii)           “Subscription Date” means July
7, 2008.

     

    (jj)           “Subsidiaries” means, as of any
date of determination, collectively, all Current Subsidiaries and all New
Subsidiaries, and each of the foregoing, individually, a “Subsidiary.”

     

    (kk)           “Successor Entity” means the
Person (or, if so elected by the Holder, the Parent Entity) formed by, resulting
from or surviving any Fundamental Transaction or the Person (or, if so elected
by the Holder, the Parent Entity) with which such Fundamental Transaction shall
have been entered into.

     

    (ll)           “Trading Day” means any day on
which the Common Stock is traded on the Principal Market, or, if the Principal
Market is not the principal trading market for the Common Stock, then on the
principal securities exchange or securities market on which the Common Stock is
then traded; provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York time).

    
      
         

      

      
        -20-

        
          

        

      

      
         

      

    

     

    (mm)       “VWAP” means, for any security
as of any date, the dollar volume-weighted average price for such security on
the Principal Market (or, if the Principal Market is not the principal trading
market for such security, then on the principal securities exchange or
securities market on which such security is then traded) during the period
beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York
time, as reported by Bloomberg through its “Volume at Price” function or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York time, and
ending at 4:00:00 p.m., New York time, as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau,
Inc.). If the VWAP cannot be calculated for such security on such date on any of
the foregoing bases, the VWAP of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the
Company and the Holder are unable to agree upon the fair market value of such
security, then such dispute shall be resolved in accordance with the procedures
in Section 21. All such determinations shall be appropriately adjusted for any
share dividend, share split or other similar transaction during such
period.

     

    (nn)           “Warrants” has the meaning
ascribed to such term in the Securities Purchase Agreement, and shall include
all warrants issued in exchange therefor or replacement thereof.

     

    27.           DISCLOSURE. Upon
receipt or delivery by the Company of any notice in accordance with the terms of
this Note, unless the Company has in good faith determined that the matters
relating to such notice do not constitute material, nonpublic information
relating to the Company or any of its Subsidiaries, the Company shall within one
(1) Business Day after any such receipt or delivery publicly disclose such
material, nonpublic information on a Current Report on Form 8-K or otherwise. In
the event that the Company believes that a notice contains material, nonpublic
information relating to the Company or any of its Subsidiaries, the Company so
shall indicate to such Holder contemporaneously with delivery of such notice,
and in the absence of any such indication, the Holder shall be allowed to
presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.

     

    [signature page
follows]

    
      
         

      

      
        -21-

        
          

        

      

      
         

      

    

     

    

    IN
WITNESS WHEREOF, the Company has caused this Note to be duly executed as of the
Issuance Date set forth above.

    
      
         

        
          
            	 	      
                    VALLEY
      FORGE COMPOSITE TECHNOLOGIES, INC.

                  	 
	 	 	 	 
	
                     

                  	
                    By:
      

                  	/s/ 	 
	 	 	Name:	 
	 	 	Title:	 
	 	 	 	 

          

        

      

       

    

    Each of
the undersigned, being the Subsidiaries named in the Securities Purchase
Agreement, hereby acknowledges that it will receive substantial benefit from the
loan represented by the foregoing Senior Convertible Note, and absolutely and
unconditionally guarantees the payment and performance by the Company of all of
its obligations under the Senior Convertible Note.  This is a guaranty
of payment and performance (and not merely of collection), and the Holder may
proceed directly against the undersigned without any requirement to first
proceed or obtain any judgment against or exhaust any remedies with respect to
the Company.  This guaranty shall in no manner be affected or impaired
by (a) any amendment, modification, waiver, consent, compromise or other
indulgence granted to the Company under or in respect of the Senior Convertible
Note or any related agreement, (b) any failure by the Holder to insist upon
strict performance or observance by the Company of any of the terms of the
Senior Convertible Note or any related agreement, (c) any forbearance by the
Holder, (d) any bankruptcy, insolvency, receivership, reorganization,
liquidation or other such proceeding relating to the Company, or (e) any relief
of the Company from any of its obligations as aforesaid by operation of law, in
equity or otherwise.  This guaranty shall be subject in all cases to
any defenses (other than defenses based upon or arising out of any bankruptcy,
insolvency or reorganization of the Company) available to the Company had the
Holder proceeded directly against the Company rather than pursuant to this
guaranty.

    
      
        
           

          
            
              	 	      
                      Valley
      Forge Detection Systems, Inc.

                    	 
	 	 	 	 
	
                       

                    	
                      By:
      

                    	/s/ 	 
	 	 	Name:	 
	 	 	Title:	 
	 	 	 	 

              
                
                   

                  
                    
                      	 	      
                              Valley
      Forge Aerospace, Inc.

                            	 
	 	 	 	 
	
                               

                            	
                              By:
      

                            	/s/ 	 
	 	 	Name:	 
	 	 	Title:	 
	 	 	 	 

                      
                        
                           

                          
                            
                              	 	      
                                      Valley
      Forge Imaging, Inc.

                                    	 
	 	 	 	 
	
                                       

                                    	
                                      By:
      

                                    	/s/ 	 
	 	 	Name:	 
	 	 	Title:	 
	 	 	 	 

                              
                                
                                   

                                  
                                    
                                      	 	      
                                              Valley
      Forge Imaging Technologies, Inc.

                                            	 
	 	 	 	 
	
                                               

                                            	
                                              By:
      

                                            	/s/ 	 
	 	 	Name:	 
	 	 	Title:	 
	 	 	 	 

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

    
      
         

      

      
        -22-

        
          

        

      

      
         

      

    

    EXHIBIT
I

    

    VALLEY
FORGE COMPOSITE TECHNOLOGIES, INC.

    CONVERSION
NOTICE

     

    Reference
is made to the Senior Convertible Note (the “Note”) issued to the
undersigned by Valley Forge Composite Technologies, Inc. (the “Company”). In accordance with
and pursuant to the Note, the undersigned hereby elects to convert the
Conversion Amount (as defined in the Note) of the Note indicated below into
shares of Common Stock, par value $.001 per share (the “Common Stock”), of the
Company, as of the date specified below.

     

    
      	
              Date
      of Conversion:

            	 
      
	
              Aggregate
      Conversion Amount to be converted:

            	 
      
	
              Please
      confirm the following information:

            
	
              Conversion
      Price:

            	 
      
	
              Number
      of shares of Common Stock to be issued:

            	 
      
	
              Please
      issue the Common Stock into which the Note is being converted in the
      following name and to the following address:

            
	
              Issue
      to:

            	 
      
	 
      	 
      
	 
      	 
      
	
              Facsimile
      Number:

            	 
      
	
              Authorization:

            	 
      
	
              By:

            	 
      
	
              Title:

            	 
      
	
              Dated:

            	 
      
	
              Account
      Number:

            	 
      
	
                (if
      electronic book entry transfer)

            	 
      
	
              Transaction
      Code Number:

            	 
      
	
                (if
      electronic book entry transfer)

            	 
      

    

    
      
         

      

      
        -23-

        
          

        

      

      
         

      

    

    ACKNOWLEDGMENT

     

    The
Company hereby acknowledges this Conversion Notice and hereby directs
_________________ to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated _____________, 2008,
from the Company and acknowledged and agreed to by
________________________.

     

    
      
        
           

          
            
              	 	      
                      VALLEY
      FORGE COMPOSITE TECHNOLOGIES, INC.

                    	 
	 	 	 	 
	
                       

                    	
                      By:
      

                    	/s/ 	 
	 	 	Name:	 
	 	 	Title:	 
	 	 	 	 

            

          

        

         

        
          
             

          

          
            -24-

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