Document:

Employment Agreement dated 01/01/99 between NMB and Scott Montgomery

 EXHIBIT 10.1 
 EMPLOYMENT AGREEMENT 
 THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as
of the 1st day of January, 1999 (the “Effective Date”), between MERCANTILE NATIONAL BANK, a National Banking Association organized and existing under the laws of the United States (the “Bank”), and SCOTT A MONTGOMERY
(“Montgomery”). 
 WITNESSETH: 
 A. The Bank hereby retains Montgomery’s exclusive services as its President and Chief Executive Officer subject to the terms and conditions set forth in this Agreement. 
 B. Montgomery accepts such employment and enters into this Agreement subject to the terms and conditions set forth herein. 
 NOW, THEREFORE, in consideration of mutual promises of the parties set forth in this Agreement, the Bank and Montgomery hereby agree as follows:

 1. EMPLOYMENT—The Bank hereby employs Montgomery, and Montgomery accepts employment, as President and Chief Executive Officer of the
Bank, to perform such duties as may from time to time be appropriate, subject at all times to the control and direction of the Board of Directors of the Bank and the terms and conditions of this Agreement. It is understood and agreed that Montgomery
shall at all times report solely to the Board of Directors of the Bank and that Montgomery’s responsibilities shall at all times be consistent with those which would normally be assigned to the chief executive officer of a commercial bank in
size and condition similar to the Bank. 
 1.1 EXCLUSIVE EMPLOYMENT—During the term of this Agreement, Montgomery shall devote his time,
attention and energies to the business and affairs of the Bank and to the performance of his duties hereunder and shall not, without the prior written consent of the Bank, participate in any other business activity or render services for any other
person, firm, corporation or for-profit organization for compensation, or for any non-profit organization where such service is or would be related to Montgomery’s employment under this Agreement. 
 1.2 PERFORMANCE OF DUTIES OF BANCORP—Montgomery agrees to perform duties for National Mercantile (“Bancorp”) as may be delegated or
assigned to him by Bancorp and are not inconsistent with his duties as President and Chief Executive Officer of the Bank. Montgomery shall hold the title of President and Chief Executive Officer of Bancorp, but Montgomery shall not be deemed an
employee of Bancorp, and shall receive no additional remuneration for duties he performs pursuant to this paragraph. 
 1.3 DIRECTORSHIPS OF
BANK AND BANCORP—Montgomery shall be elected a member of the respective Boards of Directors of the Bank and Bancorp, but shall receive no director’s fees or other additional remuneration for his services as a member of said Boards of
Directors. 
 1.4 PERSONAL INVESTMENTS—Montgomery may from time to time engage in normal personal investments which do not conflict with
or detract from the performance of his duties hereunder. 
 1.5 NON-COMPETITION DURING EMPLOYMENT TERM—During the term of his employment
hereunder, Montgomery shall not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, shareholder, corporate officer or director, or in any other individual or representative capacity, engage or participate
in any business or activity within the Bank’s primary service area that is in competition with any business in which the Bank or Bancorp is then presently engaged, or in which Montgomery has knowledge that the Bank or Bancorp then contemplates
becoming engaged, without first obtaining the written consent of the Bank or Bancorp. 

 2. TERM Montgomery’s employment under this Agreement shall commence on January 1, 1999, and
shall expire on December 31, 2004; unless terminated sooner as hereinafter provided (the “term” or “term of employment”). This Agreement supersedes and replaces the Employment Agreement dated June 21, 1996. 

3. COMPENSATION AND BENEFITS—In consideration of Montgomery’s performance of his duties and responsibilities as set forth in this Agreement,
Montgomery shall receive the following compensation and benefits: 
 3.1 BASE SALARY—From January 1, 1999 until December 31,
2004, the Bank shall pay Montgomery a semi-monthly salary at an annualized rate of $250,000, less applicable withholding. After three years of the term have passed, the Board of Directors of the Bank and Bancorp shall review Montgomery’s
compensation and if, in the opinion of the Board of Directors, the success of the Bank and the operating profit be appropriate, the Board shall adjust his compensation upward. 
 3.2 INCENTIVE COMPENSATION—In the event the Bank achieves a pretax net profit during any calendar (January 1—December 31) year during the term
of Montgomery’s employment, Montgomery shall receive an incentive bonus in an amount equivalent to five percent (5%) of the Bank’s pretax net profit for that calendar year, less applicable withholding. Such incentive bonus shall be
paid, if earned, on or before April 1 of the year following the year during which the applicable pretax net profit was earned. Additionally, in the event the Bank achieves a pretax net profit AND a return ratio of at least one and one-half
percent (1.5%) of pretax net profit to assets during a calendar year, the Board of Directors shall award Montgomery an additional incentive bonus in an amount equivalent to two percent (2%) of the Bank’s pretax net profit for that
calendar year, less applicable withholding. Such additional incentive bonus shall be paid, if earned, on or before April 1 of the year following the year during which the applicable pretax net profit was earned. Montgomery understands and
agrees that nothing in this Agreement is intended to create or imply any right on his part to receive, or duty on the part of the Bank to pay, a bonus or incentive compensation for any calendar year in which the Bank FAILS to achieve a pretax net
profit; provided, however, that in the event the Bank fails to achieve a pretax net profit or suffers a pretax net loss during any calendar year during the term of Montgomery’s employment, the Bank’s Board of Directors may, in its sole and
absolute discretion, award Montgomery a discretionary incentive bonus in an amount it deems appropriate under the circumstances, taking into account such factors as Montgomery’s performance of his duties hereunder, the Bank’s net profit
for that calendar year, and the economic climate within which the Bank is operating. However, in no event shall such annual bonuses, whether incentive or discretionary, exceed an amount which, when added to Montgomery’s base compensation for
the calendar year for which the applicable pretax profit (or loss) is calculated, bring Montgomery’s total compensation for the calendar year to an amount in excess of $400,000. 
 3.3 STOCK OPTIONS—In the discretion of the Board of Directors, Montgomery shall be awarded options and participate in the National Mercantile
Bancorp 1990 Stock Option Plan and the 1996 Stock Incentive Plan and the National Mercantile Bancorp Amended 1996 Stock Incentive Plan according to the terms thereof and as they may, from time to time, be amended by action of the Board of Directors.

 3.3.1 Stock Options may not be exercised by Montgomery to the extent that the exercise of such Stock Options will cause an ownership
change to occur pursuant to Section 382 of the Internal Revenue Code. Section 382 provides, among other things, that utilization of net operating losses will be restricted if there is a change in ownership of the loss corporation Changes
in ownership are determined by reference to five percent (5%) shareholders. 
 3.3.2 Stock Options shall not be considered for the
purposes of Paragraph 3.2 of this Agreement when determining whether Montgomery’s total compensation for any calendar year exceeds the salary caps set forth in Paragraph 3.2. 
 3.4 STOCK APPRECIATION RIGHTS—Pursuant to a separate stock rights agreement and pursuant to shareholder approval of the 1996 Stock Incentive Plan,
Bancorp granted Montgomery a non-qualified stock option (“Option”) and tandem stock appreciation right (“Tandem SAR”) with respect to 16,500 shares of 

 
Bancorp common stock (the “Option and Tandem SAR”) under the 1996 Plan. Such stock rights agreement, which was executed by Montgomery and Bancorp,
includes, among others, the following terms and conditions: 
 3.4.1 The Option and Tandem SAR were granted on the first business day
immediately following shareholder approval of the 1996 Plan described in Paragraph 3.4.5, below. 
 3.4.2 Subject to the terms of Paragraph
3.4.8, below, the Option and Tandem SAR with respect to 16,500 of said shares shall have vested and become exercisable on June 30, 1998, and shall expire ninety (90) days after the term hereof or Montgomery’s discharge without cause.

 3.4.3 Any portion of the Option and Tandem SAR which is vested but has not been exercised at the time Montgomery ceases to be employed by
the Bank for any reason shall expire ninety (90) days after the date Montgomery ceases to be employed by the Bank. 
 3.4.4 The exercise
price for each Option under the Option and Tandem SAR were equal to the fair market value of a share of Bancorp common stock on the date of grant. “Fair market value” shall mean the average of the bid and asked prices of Bancorp common
stock as quoted on the NASDAQ stock markets on the applicable date. If, for any reason, no such price is available, “fair market value” shall mean the fair market value of a share of Bancorp common stock as determined by the Stock Option
Committee of Bancorp’s Board of Directors in their sole discretion. 
 3.4.5 In accordance with the terms of the 1996 Plan, Montgomery
may exercise the Option and Tandem SAR by either (i) exercising the Option portion of the Option and Tandem SAR and paying the exercise price with respect to the shares of Bancorp common stock underlying the exercised Option and receiving such
shares of Bancorp common stock or (ii) exercising the Tandem SAR portion of the Option and Tandem SAR in which case Bancorp shall pay to Montgomery an amount equal to the excess, if any, of the fair market value of a share of the stock on the
exercise date over the fair market value of the stock on the date of grant, multiplied by the number of shares of stock for which the Option and Tandem SAR is exercised, which amount may, in the sole discretion of the Stock Option Committee of the
Board of Directors of Bancorp, be paid to Montgomery in cash or in Bancorp common stock, subject to all other terms and conditions of the 1996 Plan. In the event Montgomery elects to exercise the Option with respect to any portion of the Option and
Tandem SAR, Montgomery shall be deemed to have forfeited the Tandem SAR with respect to that portion of the Option and Tandem SAR. In the event Montgomery elects to exercise the Tandem SAR with respect to any portion of the Option and Tandem SAR,
Montgomery shall be deemed to have forfeited the Option with respect to that portion of Option and Tandem SAR. 
 3.4.6 The Option and Tandem
SAR issued pursuant to paragraph 3.4 of this Agreement shall be subject to all terms and conditions, including the anti-dilution provisions, contained in the 1996 Plan. 
 3.4.7 Notwithstanding the foregoing provisions, no portion of the Option and Tandem SAR may be exercised by Montgomery to the extent that the exercise of such Option and Tandem SAR will cause an ownership change to
occur pursuant to Section 382 of the Internal Revenue Code. Section 382 provides, among other things, that utilization of net operating losses will be restricted if there is a change in ownership of the loss corporation. Changes in
ownership are determined by reference to 5% shareholders. 
 3.4.8 The Option and Tandem SAR, and amounts received by Montgomery as a
consequence of partial or total exercise of the Option and Tandem SAR, shall not be considered for the purposes of Paragraph 3.2 of this Agreement when determining whether Montgomery’s total compensation for any calendar year exceeds the salary
caps set forth in Paragraph 3.2. 
 3.5 VACATION—Montgomery shall be entitled to vacation time at an annualized rate of twenty
(20) days per year, during which time compensation hereunder shall be paid in full. Montgomery shall take ten (10) days of such vacation consecutively during each calendar year. However, Montgomery shall not take MORE than ten
(10) business days of vacation consecutively without prior approval of the Chairman of the Bank’s Board of 

 
Directors. Montgomery shall make every effort to utilize his vacation time during the calendar year in which it was earned. In the event that Montgomery does
not utilize all of his vacation-time during the calendar year in which it was earned, such vacation time shall carry over to the next calendar year; provided, however, that in the event that Montgomery’s vacation carryover from prior years
together with the current year’s accrual reaches 30 days, no further vacation shall accrue until Montgomery has taken a vacation and his accrued vacation account has dropped below his maximum 30 day entitlement. No vacation days will be earned
for the period during which Montgomery has accumulated 30 days of vacation. 
 3.6 ATHLETIC CLUB MEMBERSHIP—During the term of
Montgomery’s employment, the Bank shall pay the initiation fee or other initial expense, and any periodic dues, with respect to Montgomery’s membership in an athletic club of his choice, provided that Montgomery’s membership in such
club is deemed by the Board of Directors of the Bank to be beneficial to the business interests of the Bank. This provision shall not entitle Montgomery to membership in a golf club or country club. It is understood and agreed by Montgomery that the
Bank shall have no liability to Montgomery or any third party for club dues, expenses or any charges whatsoever relating to any period after the termination of Montgomery’s employment with the Bank 
 3.7 LUNCHEON OR DINING CLUB MEMBERSHIP—During the term of Montgomery’s employment, the Bank shall pay the initiation fee or other initial
expense, and any periodic dues, with respect to Montgomery’s membership in a luncheon or dining club of his choice, provided that Montgomery’s membership in such club is deemed by the Board of Directors of the Bank to be beneficial to the
business interests of the Bank. This provision shall not entitle Montgomery to membership in a golf club or country club. It is understood and agreed by Montgomery that the Bank shall have no liability to Montgomery or any third party for club dues,
expenses or any charges whatsoever relating to any period after the termination of Montgomery’s employment with the Bank. 
 3.8
AUTOMOBILE—The Bank shall provide Montgomery with a 1998 BMW 740IL, or equivalent vehicle, to be leased or owned by the Bank at the Bank’s discretion. Upon the termination of his employment, Montgomery shall have the right to purchase said
automobile at the depreciated book value of the automobile calculated on the effective date of his termination. 
 3.9 PERSONAL
COMPUTER—The Bank shall purchase a portable laptop computer for Montgomery’s exclusive use during the term of his employment with the Bank. Montgomery shall return said computer to the Bank upon the termination of his employment with the
Bank. Upon the termination of his employment hereunder, Montgomery may purchase said computer at the depreciated book value of the computer calculated on the effective date of his termination. 
 3.10 OTHER FRINGE BENEFITS—During the term of his employment, Montgomery shall be entitled to and shall receive the benefits from the Bank’s
group major medical insurance program as well as any other health, accident or other insurance programs, any pension or other retirement programs, and any other fringe benefits and perquisites that the Bank may from time to time generally accord to
its senior executives (“executive benefits programs”). The Bank reserves the right to cancel or to alter or modify the terms, conditions and/or scope of any of the executive benefit programs any time and from time to time by substituting a
plan of equal or greater value. 
 3.11 EXPENSES AND REIMBURSEMENT – The Bank shall pay directly or shall reimburse Montgomery for all
reasonable, ordinary and necessary business expenses incurred or paid by Montgomery during the term of his employment and in connection with the performance of his services pursuant to this Agreement, provided that Montgomery presents to the
Chairman of the Bank’s Board of Directors or the Chairman of the Audit Committee of the Bank’s Board of Directors expense statements or vouchers and such other supporting information as the audit committee may from time to time reasonably
request, and further provided that, to the extent that such expenses exceed $2,500 in any month, the Chairman of the Board or the Chairman of the Audit Committee approves such expenses. The Bank shall reimburse Montgomery for reasonable business
expenses incurred in entertaining business guests at any club joined by Montgomery in accordance with Paragraphs 4.6 and 4.7 of this Agreement. In the event any month’s expenses in excess of $2,500 are not approved by the Chairman of the Board
or the Chairman of the Audit Committee, Montgomery shall submit a summary of those expenses to the 

 
Audit Committee, and Montgomery shall receive reimbursement for those expenses only upon the approval of a majority of the Audit Committee. In the event of
the termination of Montgomery’s employment for any reason, whether by the Bank or by Montgomery, Montgomery shall be reimbursed within thirty (30) days of termination for any reasonable, ordinary and necessary documented business expenses
incurred prior to termination, to the extent that such expenses would otherwise be reimbursable pursuant to the terms of this Paragraph, upon presentation of expense statements or vouchers and such other supporting information as the Bank may
reasonably request. 
 3.12 WITHHOLDING – Bank shall have the right to withhold from any payment otherwise due to Montgomery under this
Agreement the amount of income and any other taxes required to be withheld by Bank as employer by applicable city, state or federal law. 
 4. INDEMNIFICATION—Montgomery shall be fully indemnified by the Bank and Bancorp to the extent permitted by California law, and shall be defended and held harmless absolutely and irrevocably by the Bank and Bancorp to the extent
permitted by California law, from and against all claims, demands, liabilities, costs, expenses, damages and causes of action of any nature whatsoever arising out of, relating to or incidental to Montgomery’s good faith execution of his duties
under this Agreement and/or the good faith execution of his duties as an officer, employee and/or director of the Bank or Bancorp, provided that Montgomery shall advise the Bank and Bancorp immediately of any such claim or litigation and cooperate
fully with the Bank and Bancorp in connection therewith, and provided further that the Bank and Bancorp shall have the right to assume and control the defense of such action and to take whatever action is necessary to discharge their obligations.
The provisions hereof are in addition to and do not limit any other right to indemnity that Montgomery has by way of law or agreement. 
 5.
LIFE INSURANCE—The Bank shall have the right, but not the obligation, to take out insurance on the life of Montgomery at its sole cost and expense and for its sole benefit, and Montgomery acknowledges that he shall have no right in or to such
insurance or the proceeds of that insurance. Montgomery agrees to cooperate with the Bank in obtaining such insurance and to submit, at his reasonable convenience, to the usual medical and other examinations required in connection with obtaining
such insurance. 
 6. PROPERTY RIGHTS. 
 6.1 CONFIDENTIAL OR PROPRIETARY INFORMATION—Montgomery acknowledges that all information concerning or pertaining to the business, plans and prospects, of the Bank, Bancorp, or any of their related or affiliated entities, including but
not limited to financial information, customer lists, files, documents, records or specifications, which Montgomery may now possess or may obtain during or after the term of this Agreement, is confidential and is the property of the Bank, Bancorp
and/or their affiliated entities. Montgomery agrees that he shall not, without the prior written consent of the Bank or Bancorp, cause or permit such information to be published, disclosed, divulged or otherwise made accessible to any other firm,
person or corporation either during or after the term of his employment, and Montgomery further agrees that such information will at no time be used by him except in connection with the business of and for the exclusive benefit of the Bank or
Bancorp. Montgomery shall return to the Bank all documents, files, records or other tangible evidence of such confidential or proprietary information, including all photocopies, extracts or summaries, prior to the termination of his employment. The
provisions of this Paragraph 6.1 shall survive the expiration, suspension or termination, for any reason, of this Agreement and/or Montgomery’s employment with the Bank. 
 6.2 OWNERSHIP OF MATERIALS AND IDEAS/USE OF NAME—The Bank, as Montgomery’s employer, shall own, and Montgomery hereby transfers and assigns to
the Bank, all rights in and to any material and/or ideas written, suggested or submitted by Montgomery in the course of his employment under this Agreement, and all other results and proceeds of Montgomery’s services under this Agreement, all
without the necessity of any additional compensation; provided, however, that nothing in this Paragraph 6.2 shall be deemed in any manner to restrict or qualify Montgomery’s ownership or possession of personal notes, memoranda, correspondence,
books or records not constituting trade secrets or other property of the Bank. During the term of Montgomery’s employment, the Bank and Bancorp shall also have the right (but not the obligation) to use Montgomery’s name without additional
consideration in connection with his services pursuant to this Agreement. 

 6.3 DELIVERY OF PROPERTY—Other than as provided in Sections 3.8 and 3.9, upon the termination of
Montgomery’s employment under this Agreement, Montgomery shall immediately deliver to the Bank any and all property in his possession or under his control belonging to the Bank or Bancorp, in good condition, ordinary wear and tear and damage by
any cause beyond his reasonable; control excepted. 
 7. REPRESENTATION AND WARRANTY—Montgomery represents and warrants that he will be
breaching no contract with any other person or entity by entering into this Agreement and/or by performing the services provided for in this Agreement. 
 8. TERMINATION OF EMPLOYMENT—Notwithstanding any provision of this Agreement to the contrary, Montgomery’s employment hereunder may be terminated prior to the expiration of the term of this Agreement under
the following circumstances: 
 8.1 Employment hereunder shall terminate automatically upon Montgomery’s death. 
 8.2 The Bank may terminate Montgomery’s employment hereunder upon the happening of any of the following events: 
 8.2.1 The Bank may terminate Montgomery’s employment in the event of Montgomery’s permanent disability. For the purposes of this Agreement,
Montgomery shall be deemed to have become “permanently disabled” if (a) after completing the sixty (60)-day waiting period for coverage under the Bank’s long-term disability program (the “LTD Program”), Montgomery,
because of ill health or physical or mental disability, shall have become entitled to immediate disability payments under the LTD Program or (b) Montgomery, because of ill health, physical or mental disability, in competency or incapacity,
shall have been unable to perform his duties and responsibilities under this Agreement in the ordinary and usual manner required of a person in his position either for ninety (90) days consecutively, or ninety (90) days in any particular
period of one hundred twenty (120) consecutive days. 
 8.2.2 The Bank may terminate Montgomery’s employment hereunder at any time
for cause. For purposes of this Agreement, the term “cause” shall mean, (a) any act of dishonesty, unauthorized disclosure of confidential information or fraud by Montgomery in the performance of his duties hereunder; (b) the
commission of a felony—involving theft or fraud of any kind; (c) the commission of a fraud or misappropriation or embezzlement of property of the Bank, Bancorp or of any affiliate or customer of the Bank or Bancorp; (d) a willful and
material breach by Montgomery of obligations under this Agreement, all (a, b, c and d) with or without prosecution or conviction, (e) the inability of the Bank to secure a bond for the services of Montgomery, or Montgomery engaging in
conduct that would preclude the Bank’s ability to bond Montgomery; or (f) a written order or directive from the Office of the Comptroller of the Currency or the Board of Governors of the Federal Reserve System ordering the removal of
Montgomery as an executive officer or director of the Bank or Bancorp. 
 8.2.3 The Bank, by resolution of its Board of Directors, at any
time in its sole and absolute discretion, may terminate Montgomery’s employment hereunder without cause, for any reason. 
 8.3 Upon any
termination pursuant to this Paragraph 8, Montgomery shall be entitled to all salary and benefits to be paid or provided by the Bank under this Agreement up to the date of such termination. In addition, and in lieu of any and all other rights or
remedies which Montgomery may have, if this Agreement is terminated prior to the expiration of its term, Montgomery shall have the following rights and remedies: 
 8.3.1 In the event of termination based on death or permanent disability as set forth in Paragraphs 8.1 or 8.2.1 above, the Bank shall not have any obligation to continue to pay salary, bonus and other benefits
provided for in Paragraph 3 and its subparts above, or any other sums proposed hereunder, except that Montgomery shall be entitled to receive any salary, bonus and benefits accrued but unpaid as of the date of termination, and Montgomery, or his
heirs in the event of his death, shall be entitled to all benefits under any death or disability plans provided under Paragraph 3.10 above, to the extent the Bank adopts or establishes any such plan covering Montgomery. 

 8.3.2 If Montgomery’s employment is terminated for cause, as set forth and defined in Paragraph
8.2.2 above, Montgomery shall be entitled to receive all base salary and benefits accrued but unpaid or stock options vested but not redeemed or exercised as of the date of termination. The Bank shall have no further obligation to pay the salary and
other benefits provided for in Paragraph 3 and its subparts above, or any other sums provided hereunder, except as may be required by applicable law. Such payment shall be made to Montgomery within thirty (30) days after the date of his
termination. 
 8.3.3 If Montgomery is terminated by the Bank prior to the expiration of this Agreement without cause, or if the Bank
substantially and adversely changes Montgomery’s status, title, position or responsibilities as provided for in this Agreement and Montgomery resigns as a consequence, or if the Bank requires Montgomery to be based at any place outside a thirty
(30) mile radius from the Bank’s current headquarters except for reasonably required travel on the Bank’s business and Montgomery resigns as a consequence, Montgomery shall be entitled to receive as severance his base salary at the
then annual rate paid semi-monthly for eighteen (18) months from the date of such termination, along with any unpaid bonus which Montgomery had been awarded but not paid by the Bank’s Board of Directors under the terms of Paragraph 3.2 of
this Agreement; provided, however, that such payments shall cease and not be owing in the event that Montgomery breaches any part of Paragraphs 6 or 9 of this Agreement. 
 8.3.4 If Montgomery terminates his employment with the Bank for any reason other than those set forth in Paragraph 8.3.3 above, he shall be entitled to no severance payments hereunder, and he shall have no greater
rights and obligations than if his employment was terminated for cause under Paragraph 8.2.2. 
 8.3.5 In the event Montgomery is terminated
without cause, is receiving severance hereunder, and is rehired by the Bank or Bancorp during the period of his severance payments, such severance payments, if any remain, shall be suspended during the term of such reemployment, and shall be
reinstituted at the expiration of such reemployment. 
 8.3.6 Regardless of the reason for his termination of employment, Montgomery (and his
dependents and beneficiaries, as applicable) shall be entitled to continued coverage under the Bank’s benefit programs to the same extent as applicable generally to employees of the Bank who have terminated employment. In the event Montgomery
is entitled to severance pursuant to Paragraph 8.3.3, above, Montgomery’s benefits shall continue during the period during which he is receiving such severance payments as though he were still an employee of the Bank. 
 8.4 NOTICE OF NON-RENEWAL—The Bank shall give notice, no less than one hundred eighty (180) days prior to the end of the term of this
Agreement, of its intention to renew or not to renew this Agreement. Such notice shall not be a termination, and none of the rights or duties set forth herein shall be affected thereby. If notice is not given, this contract shall be extended on the
same terms for one (1) year. If notice is given not to extend, Montgomery shall receive as salary continuation twelve (12) months’ salary following the expiration date of the contract, but not participation in net profit under
Paragraph 3.2, above. 
 9. NO SOLICITATION OF CUSTOMERS OR EMPLOYEES—In the event of the termination of Montgomery’s employment
for any reason, whether by the Bank or by Montgomery, Montgomery agrees that he shall not, alone or as a member, employee, or agent of any partnership, or as an officer, agent, employee, director, or stockholder of any other corporation, whether
directly or indirectly, for a period of one (1) year after the effective date of such termination, (a) solicit any then existing customer of the Bank or Bancorp for the opportunity to provide any services of the kind offered to or provided
to that customer by Bank or Bancorp, or (b) solicit for employment any person employed by the Bank or Bancorp, or encourage or induce any such person to terminate his or her employment by the Bank or Bancorp. 
 10. GENERAL 
 10.1 GOVERNING LAW—This
Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California applicable to agreements made and to be performed entirely in California. 

 10.2 CAPTIONS—The paragraph headings contained in this Agreement are for reference purposes only and
shall not in any way affect the meaning or interpretation of this Agreement or define, limit or extend the scope of this Agreement or of any particular article or paragraph of this Agreement. 
 10.3 ENTIRE AGREEMENT—This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter of this
Agreement, and supersedes any and all prior agreements, arrangements and understandings, written or oral, between the parties relating to the subject matter, except that the Indemnity Agreement between the Bank and Montgomery dated November 1,
1995, (“Indemnity Agreement”) shall remain in full force and effect. Other than the Indemnity Agreement, all prior understandings, representations, negotiations or agreements, if any, between the parties hereto relating to the employment
of Montgomery by the Bank, including the CEO Term Sheet between Montgomery and the Bank dated November 1, 1995, are hereby terminated, rescinded and superseded by this Agreement, and Montgomery agrees that any rights and remedies, if any, he
may have under any such prior understandings, representations, negotiations or agreements are hereby waived and terminated. 
 10.4 NO OTHER
REPRESENTATIONS—No representation, promise, inducement or statement of intention has been made by a party that is not embodied in this Agreement, and no party shall be bound by or liable for any alleged representation, promise, inducement or
statement of intention not so set forth. 
 10.5 ASSIGNMENT—This Agreement, and Montgomery’s rights and obligations under this
Agreement, may not be assigned by Montgomery. The Bank may assign its rights, together with its obligations, under this Agreement in connection with any sale, transfer or other disposition of all or substantially all of its business and assets; and
such rights and obligations shall inure to, and be binding upon, any successor to the business or substantially all of the assets of the Bank or Bancorp, whether by merger, purchase of stock or assets or otherwise. This Agreement shall be binding
upon, and shall inure to the benefit of, the respective successors and permitted assigns of the parties. 
 10.6 WAIVER AND
MODIFICATION—This Agreement may not be amended, modified, superseded, canceled, renewed or extended, and the terms, conditions or covenants of this Agreement may not be waived, unless by a written instrument executed by the parties to this
Agreement. The failure of a party at any time or times to require performance of any provision of this Agreement shall in no manner affect its right at a later time to enforce the same. No waiver by a party of the breach of any term or covenant
contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained
in this Agreement. 
 10.7 ACKNOWLEDGMENT—Montgomery hereby acknowledges that this Agreement is, from the outset, without liability to,
or recourse against, any officer or director of either Bank or Bancorp, and that, except with respect to Bancorp’s indemnity under Paragraph 4, his sole recourse under this Agreement shall be against Bank. 
 10.8 SEVERABILITY/CURTAILMENT—Nothing contained in this Agreement shall be construed to require the commission of any act contrary to law, and
wherever there is any conflict between any provision of this Agreement and any material statute, law, ordinance or regulation contrary to which the parties have no legal right to contract, then the latter shall prevail, but in any such event the
provisions of this Agreement so affected shall be curtailed and limited only to the minimum extent necessary to bring it within the legal requirements. The remainder of the affected provision and the other provisions of this Agreement shall continue
in full force and effect and shall in no way be affected, impaired or invalidated, and the parties shall immediately employ their best efforts in good faith to negotiate a valid provision to substitute for the invalidated one. 
 10.9 FURTHER ASSURANCES—Montgomery and the Bank each agree, without the necessity of any further consideration, to execute and deliver such other
documents and take such other actions as may be reasonably requested by any other party in order to consummate more effectively and carry out more fully the intent and subject matter of this Agreement. 

 10.10 DISPUTE RESOLUTION—Any controversy or claim arising out of this Agreement or out of
Montgomery’s employment with the Bank or Bancorp, whether based on contract, tort, statute or otherwise, including but not limited to federal and state statutes proscribing age discrimination or any other form of discrimination, shall be
submitted exclusively to final and binding arbitration in Los Angeles, California, to an arbitrator chosen in accordance with the then existing labor arbitration rules of the American Arbitration Association. Any such arbitration shall comply with
and be governed by the provisions of the California Arbitration Act, Paragraphs 1280 through 1294.2 of the California Code of Civil Procedure. Except as provided therein, each party expressly waives any right it may have to seek-redress in any other
forum. The arbitrator chosen by the parties shall have all the powers granted under the rules of the American Arbitration Association and the California Arbitration Act including, without limitation, the power to grant any monetary or other remedy
which could be granted by a court of competent jurisdiction considering such claim based on contract, tort, statutes or otherwise, including, without limitation, any state, federal or local statute or ordinance concerning employment. Any and all
controversies or claims arising out of this Agreement or out of Montgomery’s employment by the Bank, whether based on contract, tort, statute or otherwise, shall be asserted, if at all, within six (6) months after the act or omission
giving rise to such controversy or claim unless otherwise agreed in writing by the Bank and Montgomery. 
 10.11
INJUNCTION—Notwithstanding the dispute resolution provision of Paragraph 11.10, in the event of a breach of the confidentiality provisions of Paragraph 6.1 or the non-solicitation provisions of Paragraph 10 of this Agreement, or in the event of
conduct injurious to the Bank or Bancorp or either of their business reputations, Montgomery agrees that in addition to any other rights the Bank or Bancorp may have, the Bank and/or Bancorp may seek injunctive relief in an appropriate state or
federal court to preclude further violation or to seek to collect damages. 
 10.12 ATTORNEYS’ FEES—Should Montgomery, the Bank or
Bancorp institute any action or proceeding to enforce any provision of this Agreement, or for damages by reason of any alleged breach of any provision hereof, or for a declaration of any party’s rights or obligations hereunder, or to set aside
any provision hereof, or for any other remedy, the prevailing party shall be entitled to be reimbursed by the losing party for all costs, expenses and reasonable attorneys fees incurred in such action or proceeding. 
 10.13 MONTGOMERY’S ATTORNEYS’ FEES—The Bank shall reimburse Montgomery for his reasonable attorneys’ fees and legal expenses incurred
in assisting in the preparation of this Agreement, provided however, that the Bank shall not be obligated to reimburse Montgomery for attorneys’ fees and legal expenses in excess of $1,000.00. 
 10.14 LIMITATION ON PAYMENT—If all or any portion of the payments payable to Montgomery pursuant to this Agreement, together with other payments
which Montgomery has the right to receive from the Bank or Bancorp, would cause a deduction disallowance under Section 280G of the Internal Revenue Code or would cause the imposition of an excise tax under Section 4999 of the Internal
Revenue Code, such payments shall reduced to the extent necessary to make Section 280G and Section 4999 inapplicable. All payments to Montgomery from the Bank or Bancorp under this Agreement or any other agreement between Montgomery and
the Bank or Bancorp shall be subject to 12 U.S.C. Section 1828(k) and 12 C.F.R. part 359 and any other applicable provision of law. 

 IN WITNESS WHEREOF, Mercantile National Bank caused this Agreement to be executed by its duly authorized
officers, and Scott A. Montgomery has duly executed this Agreement, as of the date set forth against their respective signatures. 
  

									
		 		 		 		 	MERCANTILE NATIONAL BANK
				
	Dated: 3-11-99	 		 	By	 	/s/    DION G. MORROW        
		 		 		 		 	Title: Chairman of the Board of Directors
				
	Dated: 3-11-99	 		 	By	 	/s/    SCOTT A.
MONTGOMERY        
		 		 		 		 	Scott A. Montgomery

 Agreed as to the obligations of National Mercantile Bancorp specified in the foregoing Agreement.

  

									
		 		 		 		 	NATIONAL MERCANTILE BANCORP
				
	Dated:	 		 	By	 	/s/    ROBERT E. GIPSON        
		 		 		 		 	Title: Chairman of the Board of Directors

  

 10Silver Dragon Resources Inc.: Exhibit 4.1 - Prepared by TNT Filings Inc.

SUBSCRIPTION AGREEMENT 

THIS SUBSCRIPTION AGREEMENT (this "Agreement"),
dated as of November 2, 2006, by and among Silver Dragon Resources, Inc., a
Delaware corporation (the "Company"), and the subscribers identified on
the signature page hereto (each a "Subscriber" and collectively "Subscribers").

WHEREAS, the Company and the
Subscribers are executing and delivering this Agreement in reliance upon an
exemption from securities registration afforded by the provisions of Section
4(2), Section 4(6) and/or Regulation D ("Regulation D") as promulgated by
the United States Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "1933 Act"). 

WHEREAS, the parties desire that,
upon the terms and subject to the conditions contained herein, the Company shall
issue and sell to the Subscribers, as provided herein, and the Subscribers shall
purchase Five Hundred Thousand Dollars ($500,000) (the "Purchase Price")
of the Company's Units at a per Unit Purchase Price of $1.00, subject to
adjustment as described in this Agreement, each Unit consisting of one share of
common stock, $.0001 par value (the "Common Stock" or "Shares"),
and share purchase warrants in the form attached hereto as Exhibit A (the
"Warrants"), to purchase shares of Common Stock (the "Warrant Shares").
The Purchase Price shall be payable to the Company on the Closing Date. The
Common Stock, the Warrants and the Warrant Shares are collectively referred to
herein as the "Securities"; and 

WHEREAS, the aggregate proceeds of
the sale of the Common Stock and the Warrants contemplated hereby may be held in
escrow pursuant to the terms of a Funds Escrow Agreement which may be executed
by the parties substantially in the form attached hereto as Exhibit B
(the "Escrow Agreement"). 

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

1.        
Purchase and Sale of Shares and Warrants. Subject to the satisfaction (or
waiver) of the conditions to Closing set forth in this Agreement and the Escrow
Agreement, each Subscriber shall purchase the Shares and Warrants for the
portion of the Purchase Price indicated on the signature page hereto, and the
Company shall sell such Shares and Warrants to the Subscriber. The Purchase
Price for the Shares and Warrants shall be paid in cash. The entire Purchase
Price shall be allocated to the Shares. 

2.        
Escrow Arrangements; Deliveries. Upon execution hereof by the parties and
pursuant to the terms of the Escrow Agreement, each Subscriber agrees to make
the deliveries required of such Subscriber as set forth in the Escrow Agreement
and the Company agrees to make the deliveries required of the Company as set
forth in the Escrow Agreement. 

3.        
Warrants. 

(a)        
A Warrants. On the Closing Date, the Company will issue and deliver Class
A Warrants to the Subscribers. One Class A Warrant will be issued for each two
Shares issued on the Closing Date. The per Warrant Share exercise price to
acquire a Warrant Share upon exercise of a Class A Warrant shall be $2.00. The
Class A Warrants shall be exercisable until five (5) years after the Closing
Date.

1

(b)        
B Warrants. On the Closing Date, the Company will issue and deliver Class
B Warrants to the Subscribers. One Class B Warrant will be issued for each two
Shares issued on the Closing Date. The per Warrant Share exercise price to
acquire a Warrant Share upon exercise of a Class B Warrant shall be $5.00. The
Class B Warrants shall be exercisable until five (5) years after the Closing
Date. 

(c)         C Warrants. On the
Closing Date, the Company will issue and deliver Class C Warrants to the
Subscribers. Two Class C Warrants will be issued for each Share issued on the
Closing Date. The per Warrant Share exercise price to acquire a Warrant Share
upon exercise of a Class C Warrant shall be $1.00. The Class C Warrants shall be
exercisable until one (1) year after the Closing Date. 

4.         
Subscriber's Representations and Warranties. Each Subscriber hereby
represents and warrants to and agrees with the Company only as to such
Subscriber that: 

(a)        
Information on Company. The Subscriber has been furnished with or has had
access at the EDGAR Website of the Commission to the Company's Form 10-KSB for
the year ended December 31, 2005 as filed with the Commission, together with all
subsequently filed Forms 10-QSB, 8-K, and filings made with the Commission
available at the EDGAR website (hereinafter referred to collectively as the "Reports").
In addition, the Subscriber has received in writing from the Company such other
information concerning its operations, financial condition and other matters as
the Subscriber has requested in writing (such other information is collectively,
the "Other Written Information"), and considered all factors the
Subscriber deems material in deciding on the advisability of investing in the
Securities. 

(b)        
Information on Subscriber. The Subscriber (and, if the Subscriber is
acting on behalf of a principal, such principal) is, and will be at the time of
the issuance of the Common Stock and exercise of any of the Warrants, an
"accredited investor", as such term is defined in Regulation D promulgated by
the Commission under the 1933 Act, is experienced in investments and business
matters, has made investments of a speculative nature and has purchased
securities of United States publicly-owned companies in private placements in
the past and, with its representatives, has such knowledge and experience in
financial, tax and other business matters as to enable the Subscriber to utilize
the information made available by the Company to evaluate the merits and risks
of and to make an informed investment decision with respect to the proposed
purchase, which represents a speculative investment. The Subscriber has the
authority and is duly and legally qualified to purchase and own the Securities.
The Subscriber is able to bear the risk of such investment for an indefinite
period and to afford a complete loss thereof. The information set forth on the
signature page hereto regarding the Subscriber is accurate and complete. 

(c)        
Purchase of Common Stock and Warrants. On the Closing Date, the
Subscriber will have purchased the Common Stock and Warrants as principal for
its own account (or, if the Subscriber is acting on behalf of a principal, such
principal) for investment only and not with a view toward, or for resale in
connection with, the public sale or any distribution thereof. 

(d)        
Compliance with Securities Act. The Subscriber understands and agrees
that the Securities have not been registered under the 1933 Act or any
applicable state securities laws, by reason of their issuance in a transaction
that does not require registration under the 1933 Act (based in part on the
accuracy of the representations and warranties of Subscriber contained herein),
and that such Securities must be held indefinitely unless a subsequent
disposition is registered under the 1933 Act or any applicable state securities
laws or is exempt from such registration. Until the Actual Effective Date, the
Subscriber will not maintain a net short position in the Common Stock contrary
to applicable rules and
regulations. Notwithstanding anything to the contrary contained in this
Agreement, such Subscriber may transfer (without restriction and without the
need for an opinion of counsel) the Securities to its Affiliates (as defined
below) provided that each such Affiliate is an "accredited investor" under
Regulation D and such Affiliate agrees to be bound by the terms and conditions
of this Agreement. For the purposes of this Agreement, an "Affiliate" of
any person or entity means any other person or entity directly or indirectly
controlling, controlled by or under direct or indirect common control with such
person or entity. Affiliate when employed in connection with the Company
includes each Subsidiary [as defined in Section 5(a)] of the Company. For
purposes of this definition, "control" means the power to direct the
management and policies of such person or firm, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise. 

2

(e)        
Shares Legend. The Shares and the Warrant Shares shall bear the following
or similar legend: 

"THE SHARES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT
OR ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO SILVER DRAGON RESOURCES, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED." 

(f)        
Warrants Legend. The Warrants shall bear the following 

or similar legend: 

"THIS WARRANT AND THE COMMON
SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE
UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
WARRANT UNDER SAID ACT OR ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO SILVER DRAGON RESOURCES, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED." 

(g)        
Communication of Offer. The offer to sell the Securities was directly
communicated to the Subscriber by the Company. At no time was the Subscriber
presented with or solicited by any leaflet, newspaper or magazine article, radio
or television advertisement, or any other form of general advertising or
solicited or invited to attend a promotional meeting otherwise than in
connection and concurrently with such communicated offer. 

(h)        
Authority; Enforceability. This Agreement and other agreements delivered
together with this Agreement or in connection herewith have been duly
authorized, executed and delivered by the Subscriber and are valid and binding
agreements enforceable in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors’ rights generally and
to general principles of equity; and
Subscriber has full corporate power and authority necessary to enter into this
Agreement and such other agreements and to perform its obligations hereunder and
under all other agreements entered into by the Subscriber relating hereto. 

3

(i)        
No Governmental Review. Each Subscriber understands that no United States
federal or state agency or any other governmental or state agency has passed on
or made recommendations or endorsement of the Securities or the suitability of
the investment in the Securities nor have such authorities passed upon or
endorsed the merits of the offering of the Securities. 

(j)        
Correctness of Representations. Each Subscriber represents as to such
Subscriber that the foregoing representations and warranties are true and
correct as of the date hereof and, unless a Subscriber otherwise notifies the
Company prior to the Closing Date (as hereinafter defined), shall be true and
correct as of the Closing Date. 

(k)        
Organization and Standing of the Subscribers. If the Subscriber is an
entity, such Subscriber is a corporation, partnership or other entity duly
incorporated or organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation or organization and has the requisite
corporate power to own its assets and to carry on its business. 

(l)        
No Conflicts. The execution, delivery and performance of this Agreement
and the consummation by such Subscriber of the transactions contemplated hereby
or relating hereto do not and will not (i) result in a violation of such
Subscriber's charter documents or bylaws or other organizational documents 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 or obligation to which such Subscriber is a party or by
which its properties or assets are bound, or result in a violation of any law,
rule, or regulation, or any order, judgment or decree of any court or
governmental agency applicable to such Subscriber or its properties (except for
such conflicts, defaults and violations as would not, individually or in the
aggregate, have a material adverse effect on such Subscriber). Such Subscriber
is not required to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this Agreement or to
purchase the Notes or acquire the Warrants in accordance with the terms hereof,
provided that for purposes of the representation made in this sentence, such
Subscriber is assuming and relying upon the accuracy of the relevant
representations and agreements of the Company herein. (m) Survival. The
foregoing representations and warranties shall survive the Closing Date for a
period of three years. 

5.        
Company Representations and Warranties. The Company represents and
warrants to and agrees with each Subscriber that except as set forth in the
Reports or the Other Written Information and as otherwise qualified in the
Transaction Documents: 

(a)        
Due Incorporation. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power to own its properties and to
carry on its business as disclosed in the Reports. The Company is in good
standing in each jurisdiction where the nature of the business conducted or
property owned by it makes such qualification necessary, other than those
jurisdictions in which the failure to so qualify would not have a Material
Adverse Effect. For purpose of this Agreement, a "Material Adverse Effect"
shall mean a material adverse effect on the financial condition, results of
operations, properties or business of the Company taken individually, or in the
aggregate, as a whole. For purposes of this Agreement, "Subsidiary"
means, with respect to any entity at any date, any corporation,
limited or general partnership, limited liability
company, trust, estate, association, joint venture or other business entity) of
which more than 50% of (i) the outstanding capital stock having (in the absence
of contingencies) ordinary voting power to elect a majority of the board of
directors or other managing body of such entity, (ii) in the case of a
partnership or limited liability company, the interest in the capital or profits
of such partnership or limited liability company or (iii) in the case of a
trust, estate, association, joint venture or other entity, the beneficial
interest in such trust, estate, association or other entity business is, at the
time of determination, owned or controlled directly or indirectly through one or
more intermediaries, by such entity. All the Company’s Subsidiaries as of the
Closing Date are set forth on Schedule 5(a) hereto. 

4

(b)        
Outstanding Stock. All issued and outstanding shares of capital stock of
the Company and each of its subsidiaries have been duly authorized and validly
issued and are fully paid and nonassessable. 

(c)        
Authority; Enforceability. This Agreement, the Common Stock, the Warrants
and the Escrow Agreement and any other agreements delivered together with this
Agreement or in connection herewith (collectively "Transaction Documents")
have been duly authorized, executed and delivered by the Company and are valid
and binding agreements enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
generally and to general principles of equity. The Company has full corporate
power and authority necessary to enter into and deliver the Transaction
Documents and to perform its obligations thereunder. 

(d)        
Additional Issuances. There are no outstanding agreements or preemptive
or similar rights affecting the Company's common stock or equity and no
outstanding rights, warrants or options to acquire, or instruments convertible
into or exchangeable for, or agreements or understandings with respect to the
sale or issuance of any shares of common stock or equity of the Company or other
equity interest in any of the subsidiaries of the Company except as described on
Schedule 5(d). The common stock of the Company on a fully diluted basis
outstanding as of the last trading day preceding the Closing Date is set forth
on Schedule 5(d). 

(e)        
Consents. No consent, approval, authorization or order of any court,
governmental agency or body or arbitrator having jurisdiction over the Company,
or any of its affiliates, the American Stock Exchange, the National Association
of Securities Dealers, Inc., Nasdaq National Market, the OTC Bulletin Board ("Bulletin
Board") nor the Company's shareholders is required for the execution by the
Company of the Transaction Documents and compliance and performance by the
Company of its obligations under the Transaction Documents, including, without
limitation, the issuance and sale of the Securities. 

(f)        
No Violation or Conflict. Assuming the representations and warranties of
the Subscribers in Section 4 are true and correct, neither the issuance and sale
of the Securities nor the performance of the Company’s obligations under the
Transaction Documents by the Company will: 

(i)        
violate, conflict with, result in a breach of, or constitute a default (or an
event which with the giving of notice or the lapse of time or both would be
reasonably likely to constitute a default) under (A) the articles or certificate
of incorporation, charter or bylaws of the Company, (B) to the Company's
knowledge, any decree, judgment, order, law, treaty, rule, regulation or
determination applicable to the Company of any court, governmental agency or
body, or arbitrator having jurisdiction over the Company or any of its
subsidiaries or over the properties or assets of the Company or any of its
affiliates, (C) the terms of any bond, debenture, note or any other evidence of
indebtedness, or any agreement, stock option or other similar plan, indenture,
lease, mortgage, deed of trust or other 
instrument to which the Company or
any of its affiliates or subsidiaries is a party, by which the Company or any of
its affiliates or subsidiaries is bound, or to which any of the properties of
the Company or any of its affiliates or subsidiaries is subject, or (D) the
terms of any "lock-up" or similar provision of any underwriting or similar
agreement to which the Company, or any of its affiliates or subsidiaries is a
party except the violation, conflict, breach, or default of which would not have
a Material Adverse Effect on the Company; or 

5

(ii)        
result in the creation or imposition of any lien, charge or encumbrance upon the
Securities or any of the assets of the Company, its subsidiaries or any of its
affiliates; or 

(iii)        
result in the activation of any anti-dilution rights or a reset or repricing of
any debt or security instrument of any other creditor or equity holder of the
Company, nor result in the acceleration of the due date of any obligation of the
Company; or 

(iv)        
result in the activation of any piggy-back registration rights of any person or
entity holding securities of the Company or having the right to receive
securities of the Company; or 

(v)        
result in a violation of Section 5 under the 1933 Act. 

(g)        
The Securities. The Securities upon issuance: 

(i)        
are, or will be, free and clear of any security interests, liens, claims or
other encumbrances, subject to restrictions upon transfer under the 1933 Act and
any applicable state securities laws; 

(ii)        
have been, or will be, duly and validly authorized and on the date of issuance
of the Shares and upon exercise of the Warrants, the Shares and Warrant Shares
will be duly and validly issued, fully paid and nonassessable (and if registered
pursuant to the 1933 Act, and resold pursuant to an effective registration
statement will be free trading and unrestricted, provided that each Subscriber
complies with the prospectus delivery requirements of the 1933 Act); 

(iii)        
will not have been issued or sold in violation of any preemptive or other
similar rights of the holders of any securities of the Company; 

(iv)        
will not subject the holders thereof to personal liability by reason of being
such holders; and 

(v)        
provided Subscriber’s representations herein are true and accurate, will have
been issued in reliance upon an exemption from the registration requirements of
and will not result in a violation of Section 5 under the 1933 Act. 

(h)        
Litigation. There is no pending or, to the best knowledge of the Company,
threatened action, suit, proceeding or investigation before any court,
governmental agency or body, or arbitrator having jurisdiction over the Company,
or any of its affiliates that would affect the execution by the Company or the
performance by the Company of its obligations under the Transaction Documents.
There is no pending or, to the best knowledge of the Company, basis for or
threatened action, suit, proceeding or investigation before any court,
governmental agency or body, or arbitrator having jurisdiction over the Company,
or any of its affiliates which litigation if adversely determined would have a
Material Adverse Effect on the Company. 

6

(i)        
Reporting Company. The Company is a publicly-held company subject to
reporting obligations pursuant to Section 13 of the Securities Exchange Act of
1934, as amended (the "1934 Act") and has a class of common shares
registered pursuant to Section 12(g) of the 1934 Act. Pursuant to the provisions
of the 1934 Act, the Company has timely filed all reports and other materials
required to be filed thereunder with the Commission during the twelve months
preceding the Closing Date except Form 10-KSB for the for the fiscal year
ended December 31, 2005 and Form 10-QSB for the quarter ended June 30, 2006.

(j)        
No Market Manipulation. The Company and its Affiliates have not taken,
and will not take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or manipulation of
the price of the common stock of the Company to facilitate the sale or resale of
the Securities or affect the price at which the Securities may be issued or
resold. 

(k)        
Information Concerning Company. The Reports contain all material
information relating to the Company and its operations and financial condition
as of their respective dates and all the information required to be disclosed
therein. Since the last day of the fiscal year of the most recent audited
financial statements included in the Reports ("Latest Financial Date"),
and except as modified in the Other Written Information or in the Schedules
hereto, there has been no Material Adverse Event relating to the Company's
business, financial condition or affairs not disclosed in the Reports. The
Reports do not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances when made. 

(l)        
Dilution. The Company’s executive officers and directors understand the
nature of the Securities being sold hereby and recognize that the issuance of
the Securities will have a potential dilutive effect on the equity holdings of
other holders of the Company’s equity or rights to receive equity of the
Company. The board of directors of the Company has concluded, in its good faith
business judgment that the issuance of the Securities is in the best interests
of the Company. The Company specifically acknowledges that its obligation to
issue the Warrant Shares upon exercise of the Warrants is binding upon the
Company and enforceable regardless of the dilution such issuance may have on the
ownership interests of other shareholders of the Company or parties entitled to
receive equity of the Company. 

(m)        
Defaults. The Company is not in violation of its articles of
incorporation or bylaws. The Company is (i) not in default under or in violation
of any other material agreement or instrument to which it is a party or by which
it or any of its properties are bound or affected, which default or violation
would have a Material Adverse Effect, (ii) not in default with respect to any
order of any court, arbitrator or governmental body or subject to or party to
any order of any court or governmental authority arising out of any action, suit
or proceeding under any statute or other law respecting antitrust, monopoly,
restraint of trade, unfair competition or similar matters, or (iii) to the
Company’s knowledge not in violation of any statute, rule or regulation of any
governmental authority which violation would have a Material Adverse Effect. 

(n)        
Not an Integrated Offering. Neither the Company, nor any of its
Affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offer of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
the Bulletin Board which would impair the exemptions relied upon in this
Offering or the Company’s ability to timely comply with its obligations
hereunder. Nor will the Company or any of its
Affiliates take any action or steps that would cause the offer or issuance of
the Securities to be integrated with other offerings which would impair the
exemptions relied upon in this Offering or the Company’s ability to timely
comply with its obligations hereunder. The Company will not conduct any offering
other than the transactions contemplated hereby that will be integrated with the
offer or issuance of the Securities, which would impair the exemptions relied
upon in this Offering or the Company’s ability to timely comply with its
obligations hereunder. 

7

(o)        
No General Solicitation. Neither the Company, nor any of its Affiliates,
nor to its knowledge, 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. 

(p)        
Listing. The Company's common stock is quoted on the Bulletin Board under
the symbol SDRG.OB. The Company has not received any oral or written notice that
its common stock is not eligible nor will become ineligible for quotation on the
Bulletin Board nor that its common stock does not meet all requirements for the
continuation of such quotation. The Company satisfies all the requirements for
the continued quotation of its common stock on the Bulletin Board. 

(q)        
No Undisclosed Liabilities. The Company has no liabilities or obligations
which are material and which are not disclosed in the Reports and Other Written
Information, other than those incurred in the ordinary course of the Company’s
businesses since June 30, 2006 and which, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect, except as
disclosed on Schedule 5(q). 

(r)        
No Undisclosed Events or Circumstances. Since June 30, 2006, no event or
circumstance has occurred or exists with respect to the Company or its
businesses, properties, operations or financial condition, that, under
applicable law, rule or regulation, requires public disclosure or announcement
prior to the date hereof by the Company but which has not been so publicly
announced or disclosed in the Reports. 

(s)        
Capitalization. The authorized and outstanding capital stock of the
Company and Subsidiaries as of the date of this Agreement and the Closing Date
(not including the Securities) are set forth on Schedule 5(d). Except as
set forth on Schedule 5(d), there are no options, warrants, or rights to
subscribe to, securities, rights or obligations convertible into or exchangeable
for or giving any right to subscribe for any shares of capital stock of the
Company or any of its Subsidiaries. All of the outstanding shares of Common
Stock of the Company have been duly and validly authorized and issued and are
fully paid and nonassessable. 

(t)        
No Disagreements with Accountants and Lawyers. There are no disagreements
of any kind presently existing, or reasonably anticipated by the Company to
arise, between the Company and the accountants and lawyers formerly or presently
employed by the Company, including but not limited to disputes or conflicts over
payment owed to such accountants and lawyers. 

(u)        
Transfer Agent. The name, address, telephone number, fax number, contact
person and email address of the Company transfer agent is set forth on 
Schedule 5(u) hereto. 

(v)        
Investment Company. Neither the Company nor any Affiliate is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended. 

(w)        
Company Predecessor. All representations made by or relating to the
Company of a historical or prospective nature and all undertakings described in
Sections 8(g) through 8(l) shall
relate, apply and refer to the Company, its predecessors, and the Subsidiaries.

8

 (x)        
Subsidiary Representations. The Company makes each of the representations
contained in Sections 5(a), (b), (d), (e), (f), (h), (k), (m), (q), (r), (s),
(t), (v) and (w) of this Agreement, as same relate to each Subsidiary of the
Company, with the same qualifications to each such representation. 

(y)        
Correctness of Representations. The Company represents that the foregoing
representations and warranties are true and correct as of the date hereof in all
material respects, and, unless the Company otherwise notifies the Subscribers
prior to the Closing Date, shall be true and correct in all material respects as
of the Closing Date. 

(z)        
Survival. The foregoing representations and warranties shall survive the
Closing Date for a period of three years. 

6.         
Regulation D Offering. The offer and issuance of the Securities to the
Subscribers is being made pursuant to the exemption from the registration
provisions of the 1933 Act afforded by Section 4(2) or Section 4(6) of the 1933
Act and/or Rule 506 of Regulation D promulgated thereunder. On the Closing Date,
the Company will provide an opinion reasonably acceptable to Subscriber from the
Company's legal counsel opining on the availability of an exemption from
registration under the 1933 Act as it relates to the offer and issuance of the
Securities and other matters reasonably requested by Subscribers. A form of the
legal opinion is annexed hereto as Exhibit C. The Company will provide,
at the Company's expense, such other legal opinions in the future as are
reasonably necessary for the resale of the Common Stock and exercise of the
Warrants and resale of the Warrant Shares. 

7.         
Broker/Legal Fees. 

(a)        
Broker’s Commission. The Company on the one hand, and each Subscriber
(for himself only) on the other hand, agrees to indemnify the other against and
hold the other harmless from any and all liabilities to any persons claiming
brokerage commissions or similar fees other than the entity identified on 
Schedule 7 hereto ("Broker") on account of services purported to have
been rendered on behalf of the indemnifying party in connection with this
Agreement or the transactions contemplated hereby and arising out of such
party’s actions. Anything in this Agreement to the contrary notwithstanding,
each Subscriber is providing indemnification only for such Subscriber’s own
actions and not for any action of any other Subscriber. Each Subscriber’s
liability hereunder is several and not joint. The Company agrees that it will
pay the Broker the fees set forth on Schedule 7 hereto ("Broker’s Fees").
The Company represents that there are no other parties entitled to receive fees,
commissions, or similar payments in connection with the offering described in
this Agreement except the Broker. 

(b)        
Legal Fees. The Company shall pay to Grushko & Mittman, P.C., a cash fee
of $15,000, of which $3,980 has already been paid ("Subscriber’s Legal Fees")
as reimbursement for services rendered to the Subscribers in connection with
this Agreement and the purchase and sale of the Shares and Warrants (the "Offering").
The Subscriber’s Legal Fees will be payable on the Closing Date out of funds
held pursuant to the Escrow Agreement. 

8.         
Covenants of the Company. The Company covenants and agrees with the
Subscribers as follows: 

(a)        
Stop Orders. The Company will advise the Subscribers, within twenty-four
(24) hours after the Company receives notice of issuance by the Commission, any
state securities commission or any other regulatory authority of any stop order
or of any order preventing or suspending any offering of any securities of the
Company, or of the suspension of the qualification of the Common Stock of the
Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose. 

9

(b)        
Listing. If applicable, the Company shall promptly secure the listing of
the shares of Common Stock and the Warrant Shares upon each national securities
exchange, or electronic or automated quotation system upon which they are or
become eligible for listing and shall maintain such listing so long as any Notes
or Warrants are outstanding. The Company will maintain the listing or quotation
of its Common Stock on the American Stock Exchange, Nasdaq Capital Market,
Nasdaq National Market System, Bulletin Board, or New York Stock Exchange
(whichever of the foregoing is at the time the principal trading exchange or
market for the Common Stock (the "Principal Market")), and will comply in
all material respects with the Company's reporting, filing and other obligations
under the bylaws or rules of the Principal Market, as applicable. The Company
will provide the Subscribers copies of all notices it receives notifying the
Company of the threatened and actual delisting of the Common Stock from any
Principal Market. As of the date of this Agreement, the Bulletin Board is the
Principal Market. The Company may list the Common Stock on the Toronto Stock
Exchange ("TSX") provided the Shares and Warrant Shares are
contemporaneously listed thereon. Such TSX listing notwithstanding, the Company
must maintain its listing on one of the above listed Principal Markets. 

(c)        
Market Regulations. If applicable, the Company shall notify the
Commission, the Principal Market and applicable state authorities, in accordance
with their requirements, of the transactions contemplated by this Agreement, and
shall take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Securities to the Subscribers and promptly provide copies
thereof to Subscriber. 

(d)        
Filing Requirements. From the date of this Agreement and until the
earlier of (i) two (2) years after the Closing Date, or (ii) until all the
Shares and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement as defined in Section 10 or pursuant to
Rule 144, without regard to volume limitations, the Company will (A) cause its
Common Stock to continue to be registered under Section 12(b) or 12(g) of the
1934 Act, (B) timely comply in all respects with its reporting and filing
obligations under the 1934 Act, (C) voluntarily comply with all reporting
requirements that are applicable to an issuer with a class of shares registered
pursuant to Section 12(g) of the 1934 Act, if Company is not subject to such
reporting requirements, and (D) comply with all requirements related to any
registration statement filed pursuant to this Agreement. The Company will use
its best efforts not to take any action or file any document (whether or not
permitted by the 1933 Act or the 1934 Act or the rules thereunder) to terminate
or suspend such registration or to terminate or suspend its reporting and filing
obligations under said acts until two (2) years after the Closing Date. Until
the later of the resale of the Shares and the Warrant Shares by each Subscriber
or two (2) years after the Closing Date, the Company will use its best efforts
to continue the listing or quotation of the Common Stock on a Principal Market
and will comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Principal Market. The Company
agrees to timely file a Form D with respect to the Securities if required under
Regulation D and to provide a copy thereof to each Subscriber promptly after
such filing. 

(e)        
Use of Proceeds. The proceeds of the Offering will be employed by the
Company for the purposes set forth on Schedule 8(e) hereto. Except as set
forth on Schedule 8(e), the Purchase Price may not and will not be used
for accrued and unpaid officer and director salaries, payment of financing
related debt, redemption of outstanding notes or equity instruments of the
Company, litigation related expenses or settlements, brokerage fees, nor
non-trade obligations outstanding on a Closing Date. 

10

(f)        
Reservation. Prior to the Closing Date, the Company undertakes to
reserve, pro rata, on behalf of the Subscribers from its authorized but unissued
Common Stock, a number of common shares equal to 100% of the amount of Shares
and Warrant Shares issuable upon exercise of the Warrants. Failure to have
sufficient shares reserved pursuant to this Section 8(f) shall be a material
default of the Company’s obligations under this Agreement. 

(g)        
Taxes. From the date of this Agreement and until the sooner of (i) two
(2) years after the Closing Date, or (ii) until all the Shares and Warrant
Shares have been resold or transferred by all the Subscribers pursuant to the
Registration Statement or pursuant to Rule 144, without regard to volume
limitations, the Company will promptly pay and discharge, or cause to be paid
and discharged, when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon the income, profits, property or
business of the Company; provided, however, that any such tax, assessment,
charge or levy need not be paid if the validity thereof shall currently be
contested in good faith by appropriate proceedings and if the Company shall have
set aside on its books adequate reserves with respect thereto, and provided,
further, that the Company will pay all such taxes, assessments, charges or
levies forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefore. 

(h)        
Insurance. From the date of this Agreement and until the sooner of (i)
two (2) years after the Closing Date, or (ii) until all the Shares and Warrant
Shares have been resold or transferred by all the Subscribers pursuant to the
Registration Statement or pursuant to Rule 144, without regard to volume
limitations, the Company will keep its assets which are of an insurable
character (it being understood that the Company’s mining rights are not
insurable) insured by financially sound and reputable insurers against loss
or damage by fire, explosion and other risks customarily insured against by
companies in the Company’s line of business, in amounts sufficient to prevent
the Company from becoming a co-insurer and not in any event less than one
hundred percent (100%) of the insurable value of the property insured less
reasonable deductible amounts; and the Company will maintain, with financially
sound and reputable insurers, insurance against other hazards and risks and
liability to persons and property to the extent and in the manner customary for
companies in similar businesses similarly situated and to the extent available
on commercially reasonable terms. 

(i)        
Books and Records. From the date of this Agreement and until the sooner
of (i) two (2) years after the Closing Date, or (ii) until all the Shares and
Warrant Shares have been resold or transferred by all the Subscribers pursuant
to the Registration Statement or pursuant to Rule 144, without regard to volume
limitations, the Company will keep true records and books of account in which
full, true and correct entries will be made of all dealings or transactions in
relation to its business and affairs in accordance with generally accepted
accounting principles applied on a consistent basis. 

(j)        
Governmental Authorities. From the date of this Agreement and until the
sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares
and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without regard
to volume limitations, the Company shall duly observe and conform in all
material respects to all valid requirements of governmental authorities relating
to the conduct of its business or to its properties or assets. 

(k)        
Intellectual Property. From the date of this Agreement and until the
sooner of (i) two (2) years after the Closing Date, or (ii) until all the Shares
and Warrant Shares have been resold or transferred by all the Subscribers
pursuant to the Registration Statement or pursuant to Rule 144, without regard
to volume limitations, the Company shall maintain in full force and effect its
corporate existence, rights and franchises and all licenses and other rights to
use intellectual property owned or possessed by it and reasonably deemed to be
necessary to the conduct of its business, unless it is sold for value. 

11

(l)        
Properties. From the date of this Agreement and until the sooner of (i)
two (2) years after the Closing Date, or (ii) until all the Shares and Warrant
Shares have been resold or transferred by all the Subscribers pursuant to the
Registration Statement (as defined in Section 10.1(ii) hereof) or pursuant to
Rule 144, without regard to volume limitations, the Company will keep its
properties in good repair, working order and condition, reasonable wear and tear
excepted, and from time to time make all necessary and proper repairs, renewals,
replacements, additions and improvements thereto; and the Company will at all
times comply with each provision of all leases to which it is a party or under
which it occupies property if the breach of such provision could reasonably be
expected to have a Material Adverse Effect. 

(m)        
Confidentiality/Public Announcement. From the date of this Agreement and
until the sooner of (i) two (2) years after the Closing Date, or (ii) until all
the Shares and Warrant Shares have been resold or transferred by all the
Subscribers pursuant to the Registration Statement or pursuant to Rule 144,
without regard to volume limitations, the Company agrees that except in
connection with a Form 8-K or the Registration Statement or as otherwise
required in any other Commission filing, it will not disclose publicly or
privately the identity of the Subscribers unless expressly agreed to in writing
by a Subscriber, only to the extent required by law and then only upon
reasonable prior notice to Subscriber. In any event and subject to the
foregoing, the Company shall file a Form 8-K or make a public announcement
describing the Offering not later than the first business day after the Closing
Date. In the Form 8-K or public announcement, the Company will specifically
disclose the amount of Common Stock outstanding immediately after the Closing. A
form of the proposed Form 8-K or public announcement to be employed in
connection with the Closing is annexed hereto as Exhibit D. 

(n)        
Further Registration Statements. Except for a registration statement
filed on behalf of the Subscribers pursuant to Section 10 of this Agreement 
and the registration statements relating to the proposed initial public offering
of the Company’s securities in Canada, or as described on Schedule 10.1,
the Company will not file any registration statement with the Commission or with
state regulatory authorities without the consent of the Subscribers until the
expiration of the "Exclusion Period", which is defined as the sooner of (i)
the Registration Statement shall have been current and available for use in
connection with the resale of the Registrable Securities (as defined in Section
10.1(i) for a period of 365 days, or (ii) until all the Shares and Warrant
Shares have been resold or transferred by the Subscribers pursuant to the
Registration Statement or Rule 144(k) under the 1933 Act, without regard to
volume limitations. 

(o)        
Blackout. The Company undertakes and covenants that until December 31,
2006 the Company will not enter into any acquisition, merger, exchange or
sale or other transaction that delays the effectiveness of any pending
registration statement or causes an already effective registration statement to
no longer be effective or current for more than 20 consecutive days or 45 days
during any 365 day period, provided that the Company may enter into a definitive
agreement with Hubei Silver Mine Co., Ltd. and Cistex Global Investment Inc.,
relating to the acquisition by the Company of a 60% equity interest in Hubei
Silver Mine Co., Ltd. provided the Company is able to timely and fully comply
with Form 8-K reporting obligations in connection with such acquisition. 

(p)        
Non-Public Information. The Company covenants and agrees that neither it
nor any other person acting on its behalf will provide any Subscriber or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Subscriber shall have
agreed in writing to receive such information. The Company understands and
confirms that each Subscriber shall be relying on the foregoing representations
in effecting transactions in securities of the Company. In any event, the
Company will offer to the Subscriber an opportunity to review and comment on the
Registration Statement thereto between three and five business days prior to the
proposed filing date thereof. 

12

(q)        
Offering Restrictions. Until 30 days after the expiration of the
Exclusion Period, except for the Excepted Issuances [as defined in Section
11(a)], the Company will not enter into an agreement to nor issue any
convertible debt or other securities convertible into common stock or equity of
the Company nor modify any of the foregoing which may be outstanding at anytime,
nor enter into any equity line of credit or similar agreement, nor issue nor
agree to issue any floating or variable priced equity linked instruments nor any
of the foregoing or equity with price reset rights, without the prior written
consent of the Subscriber, which consent may be withheld for any reason. 

(r)        
Negative Covenants. Until the sooner of (i) two years after the Closing
Date, or (ii) the date Subscribers are no longer holders of the Shares or
Warrant Shares issued and issuable hereunder and when liquidated damages are
accruing or are outstanding, without the consent of the Subscribers, which
consent will not be unreasonably withheld, the Company will not and will not
permit any of its Subsidiaries to directly or indirectly: 

(i)        
create, incur, assume or suffer to exist any pledge, hypothecation, assignment,
deposit arrangement, lien, charge, claim, security interest, security title,
mortgage, security deed or deed of trust, easement or encumbrance, or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever (including any lease or title retention agreement,
any financing lease having substantially the same economic effect as any of the
foregoing, and the filing of, or agreement to give, any financing statement
perfecting a security interest under the Uniform Commercial Code or comparable
law of any jurisdiction) (each, a "Lien") upon any of its property,
whether now owned or hereafter acquired, if such Lien is a result of a
convertible note or other similar convertible equity instrument that is secured
by any lockbox arrangement, except for (i) the Excepted Issuances (as defined in
Section 12(a) hereof), (ii) (a) Liens imposed by law for taxes that are not yet
due or are being contested in good faith and for which adequate reserves have
been established in accordance with generally accepted accounting principles;
(b) carriers’, warehousemen’s, mechanics’, material men’s, repairmen’s and other
like Liens imposed by law, arising in the ordinary course of business and
securing obligations that are not overdue by more than 30 days or that are being
contested in good faith and by appropriate proceedings; (c) pledges and deposits
made in the ordinary course of business in compliance with workers’
compensation, unemployment insurance and other social security laws or
regulations; (d) deposits to secure the performance of bids, trade contracts,
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature, in each case in the ordinary course of
business; (e) Liens created with respect to the financing of the purchase of new
property in the ordinary course of the Company’s business up to the amount of
the purchase price of such property, or (f) easements, zoning restrictions,
rights-of-way and similar encumbrances on real property imposed by law or
arising in the ordinary course of business that do not secure any monetary
obligations and do not materially detract from the value of the affected
property (each of (a) through (f), a "Permitted Lien") and (iii)
indebtedness for borrowed money which is not senior or pari passu in right of
payment to the payment of the Notes; 

(ii)        
amend its certificate of incorporation, bylaws or its charter documents so as to
materially adversely affect any rights of the Subscriber; or 

(iii)        
repay, repurchase or offer to repay, repurchase, redeem, or otherwise acquire or
make any dividend or distribution in respect of any of its Common Stock,
preferred stock, or other equity securities or debt other than (1) dividend or
distribution of the securities held by the Company, (2) to the extent permitted
or required under the Transaction Documents, and (3) any financing disclosed on
Schedule 8(r). 

13

(s)        
Lock Up Agreement. The Company will deliver to the Subscribers on or
before the Closing Date and enforce the provisions of the irrevocable Lock Up
Agreement ("Lock Up Agreement") in the form annexed hereto as Exhibit
E, with Marc Hazout. 

9.         
Covenants of the Company and Subscriber Regarding Indemnification. 

(a)        
The Company agrees to indemnify, hold harmless, reimburse and defend the
Subscribers, the Subscribers' officers, directors, agents, affiliates, control
persons, and principal shareholders, against any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any
nature, incurred by or imposed upon the Subscriber or any such person which
results, arises out of or is based upon (i) any material misrepresentation by
Company or breach of any warranty by Company in any of the Transaction
Documents; or (ii) after any applicable notice and/or cure periods, any breach
or default in performance by the Company of any covenant or undertaking to be
performed by the Company under any Transaction Documents other than its
obligations under Section 10 of this Agreement. 

(b)        
Each Subscriber agrees to indemnify, hold harmless, reimburse and defend the
Company and each of the Company’s officers, directors, agents, affiliates,
control persons against any claim, cost, expense, liability, obligation, loss or
damage (including reasonable legal fees) of any nature, incurred by or imposed
upon the Company or any such person which results, arises out of or is based
upon (i) any material misrepresentation by such Subscriber in this Agreement or
in any Exhibits or Schedules attached hereto, or other agreement delivered
pursuant hereto; or (ii) after any applicable notice and/or cure periods, any
breach or default in performance by such Subscriber of any covenant or
undertaking to be performed by such Subscriber hereunder, or any other agreement
entered into by the Company and Subscribers, relating hereto. 

(c)        
In no event shall the liability of any Subscriber or permitted successor
hereunder or under any other agreement delivered in connection herewith be
greater in amount than the dollar amount of the net proceeds actually received
by such Subscriber upon the sale of Registrable Securities (as defined herein),
except with respect to such Subscribers fraud or willful negligence. 

(d)        
The procedures set forth in Section 10.5 shall apply to the indemnifications set
forth in Sections 9(a) and 9(b) above. 

10.1.     Registration Rights.
The Company hereby grants the following registration rights to holders of the
Securities. 

(i)        
On one occasion, for a period commencing one hundred and twenty-six (126) days
after the Closing Date, but not later than two (2) years after the Closing Date
("Request Date"), upon a written request therefor from any record holder
or holders of more than 50% of the Shares and Warrant Shares actually issued
upon exercise of the Warrants, the Company shall prepare and file with the
Commission a registration statement under the 1933 Act registering the Shares
and Warrant Shares issuable upon exercise of the Warrants (collectively "Registrable
Securities") which are the subject of such request for unrestricted public
resale by the holder thereof. For purposes of Sections 10.1(i) and 10.1(ii),
Registrable Securities shall not include Securities (A) which are registered for
resale in an effective registration statement, (B) included for registration in
a pending registration statement, or (C) which have been issued without further
transfer restrictions after a sale or transfer pursuant to an effective
registration statement or Rule 144 under the 1933 Act. Upon the receipt of such
request, the Company shall promptly give written notice to all other record
holders of the Registrable Securities that such registration statement is to be
filed and shall include in such registration statement Registrable Securities
for which it has received written requests within ten (10) days after the
Company gives such written notice. Such other requesting record holders shall be
deemed to have exercised their demand registration right under this Section
10.1(i). 

14

(ii)        
If the Company at any time proposes to register any of its securities under the
1933 Act for sale to the public, whether for its own account or for the account
of other security holders or both, except with respect to registration
statements on Forms S-4, S-8 or another form not available for registering the
Registrable Securities for sale to the public, provided the Registrable
Securities are not otherwise registered for resale by the Subscribers or Holder
pursuant to an effective registration statement, each such time it will give at
least fifteen (15) days' prior written notice to the record holder of the
Registrable Securities of its intention so to do. Upon the written request of
the holder, received by the Company within ten (10) days after the giving of any
such notice by the Company, to register any of the Registrable Securities not
previously registered, the Company will cause such Registrable Securities as to
which registration shall have been so requested to be included with the
securities to be covered by the registration statement proposed to be filed by
the Company, all to the extent required to permit the sale or other disposition
of the Registrable Securities so registered by the holder of such Registrable
Securities (the "Seller" or "Sellers"). In the event that any
registration pursuant to this Section 10.1(ii) shall be, in whole or in part, an
underwritten public offering of Common Stock of the Company, the number of
shares of Registrable Securities to be included in such an underwriting may be
reduced by the managing underwriter if and to the extent that the Company and
the underwriter shall reasonably be of the opinion that such inclusion would
adversely affect the marketing of the securities to be sold by the Company
therein; provided, however, that the Company shall notify the Seller in writing
of any such reduction. Notwithstanding the foregoing provisions, or Section 10.4
hereof, the Company may withdraw or delay or suffer a delay of any registration
statement referred to in this Section 10.1(ii) without thereby incurring any
liability to the Seller. 

(iii)        
The Company shall file with the Commission a Form SB-2 registration statement
(the "Registration Statement") (or such other form that it is eligible to
use) in order to register the Registrable Securities for resale and distribution
under the 1933 Act not later than forty-five (45) days after the Closing Date
(the "Filing Date"), and use its reasonable efforts to cause the
Registration Statement to be declared effective not later than one hundred and
twenty-five (125) days after the Closing Date (the "Effective Date"). The
"Actual Effective Date" shall be the date the Registration is actually
declared effective. The Registration Statement will cover not less than a number
of shares of Common Stock that is equal to the Shares and Warrant Shares
issuable pursuant to this Agreement upon exercise of the Warrants (the "Registrable
Securities"). The Registrable Securities shall be reserved and set aside
exclusively for the benefit of each Subscriber and Warrant holder, pro rata, and
not issued, employed or reserved for anyone other than each such Subscriber and
Warrant holder. The Registration Statement will promptly be amended or one or
more additional registration statements will be promptly filed by the Company as
necessary to register additional shares of Common Stock to allow the public
resale of all Common Stock included in and issuable by virtue of the Registrable
Securities. Without the consent of a majority of the Subscribers, no securities
of the Company other than the Registrable Securities will be included in the
Registration Statement, except as described on Schedule 10.1. The Company
will promptly provide to the holders of the Registrable Securities, copies of
all filings and Commission letters of comment and notify Subscribers (by
telecopier and by e-mail addresses provided by Subscribers) and Grushko &
Mittman, P.C. (by telecopier and by email to Counslers@aol.com)
on or before the second business day following the day the Company receives
notice that (i) the Commission has no comments or no further comments on the
Registration Statement, and (ii) the registration statement has been declared
effective. 

15

10.2.        
Registration Procedures. If and whenever the Company is required by the
provisions of Section 10.1(i) to effect the registration of any Registrable
Securities under the 1933 Act, the Company will, as expeditiously as
practicable: 

(a)        
use its reasonable efforts to prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective until such registration statement has been effective for a
period of two (2) years, and comply in all material respects with the provisions
of the 1933 Act with respect to the disposition of all of the Registrable
Securities covered by such registration statement in accordance with the
intended method of disposition for the holder of such registrable securities
("Seller’) set forth in such registration statement for such period. If the
Registration Statement is withdrawn for any reason, the Company shall file
replacement registration statement as expeditiously as practicable; 

(c)        
furnish to the Sellers, at the Company’s expense, such number of copies of the
registration statement and the prospectus included therein (including each
preliminary prospectus) as such persons reasonably may request in order to
facilitate the public sale or their disposition of the securities covered by
such registration statement; 

(d)        
use its commercially reasonable efforts to register or qualify the Registrable
Securities covered by such registration statement under the securities or "blue
sky" laws of New York and such jurisdictions as the Sellers shall request in
writing, provided, however, that the Company shall not for any such purpose be
required to qualify generally to transact business as a foreign corporation in
any jurisdiction where it is not so qualified, subject itself to in any such
jurisdiction or to consent to general service of process in any such
jurisdiction; 

(e)        
if applicable, list the Registrable Securities covered by such registration
statement with any securities exchange or market on which the Common Stock of
the Company is then listed; 

(f)        
notify the Subscribers not later than the next day after the Company becomes
aware that a prospectus relating thereto is required to be delivered under the
1933 Act, of the happening of any event of which the Company has knowledge as a
result of which the prospectus contained in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading or which becomes subject to a Commission, state or other governmental
order suspending the effectiveness of the registration statement covering any of
the Shares or Warrant Shares; 

(g)        
provided same would not be in violation of the provision of Regulation FD under
the 1934 Act, make available for inspection by the Sellers, and any attorney,
accountant or other agent retained by the Seller or underwriter, all publicly
available, non-confidential financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all publicly available, non-confidential
information reasonably requested by the seller, attorney, accountant or agent in
connection with such registration statement; and 

(h)        
provide to the Sellers copies of the Registration Statement and amendments
thereto three business days prior to the filing thereof with the Commission

10.3.        
Provision of Documents. In connection with each registration described in
this Section 10, each Seller or holder of Registrable Securities will furnish to
the Company in writing such information and
representation letters with respect to
itself and the proposed distribution by it as the Company shall reasonably deem
necessary in order to assure compliance with federal and applicable state
securities laws. 

16

10.4.        
Non-Registration Events. The Company and the Subscribers agree that the
Sellers will suffer damages if the Registration Statement is not filed by the
Filing Date and not declared effective by the Commission by the Effective Date,
and any registration statement required under Section 10.1(i) or 10.1(ii) is not
filed within 60 days after written request and declared effective by the
Commission within 120 days after such request, and maintained in the manner and
within the time periods contemplated by Section 10 hereof, if (A) the Company
does not use its best efforts in causing the Registration Statement to become
effective as early as reasonably possible with all material needed within a
reasonable time frame, (B) the Registration Statement is not declared effective
within five (5) business days after receipt by the Company or its attorneys of a
written or oral communication from the Commission that the Registration
Statement will not be reviewed or that the Commission has no further comments,
(C) if the registration statement described in Sections 10.1(i) or 10.1(ii) is
not filed within 60 days after such written request, or is not declared
effective within 125 days after such written request, or (D) any registration
statement described in Sections 10.1(i), 10.1(ii) or 10.1(iv) is filed and
declared effective but shall thereafter cease to be effective for a period of
time which shall exceed 45 days in the aggregate per year (defined as a period
of 365 days commencing on the date the Registration Statement is declared
effective) or more than 20 consecutive days (each such event referred to in
clauses A through E of this Section 10.4 is referred to herein as a "Non-Registration
Event"), then the Company shall pay to the holders of Registrable Securities
included in the Registration Statement, as Liquidated Damages, an aggregate
amount equal to one percent (1%) of the Purchase Price of the Shares owned of
record by such holder which are subject to such Non-Registration Event for each
thirty (30) days of the initial aggregate sixty (60) days of the pendency of
Non-Registration Events and one and one-half percent (1.5%) thereafter for each
thirty (30) days of the pendency of Non-Registration Events. A prorated portion
shall be payable for any period of less than 30 days. The Company must pay the
Liquidated Damages in cash. The Liquidated Damages must be paid within ten (10)
days after the end of each thirty (30) day period or shorter part thereof for
which Liquidated Damages are payable. In the event a Registration Statement is
filed by the Filing Date but is withdrawn prior to being declared effective by
the Commission, then such Registration Statement will be deemed to have not been
filed. All oral or written comments received from the Commission relating to the
Registration Statement must be responded to within twelve (12) business days
after receipt of comments from the Commission. Notwithstanding the foregoing,
the Company shall not be liable to the Subscriber under this Section 10.4 for
any events or delays occurring as a consequence of the acts or omissions of the
Subscribers contrary to the obligations undertaken by Subscribers in this
Agreement. Liquidated Damages will not accrue nor be payable pursuant to this
Section 10.4 nor will a Non-Registration Event be deemed to have occurred for
times during which Registrable Securities are transferable by the holder of
Registrable Securities pursuant to Rule 144(k) under the 1933 Act. 

10.5.        
Expenses. All expenses incurred by the Company in complying with Section
11, including, without limitation, all registration and filing fees, printing
expenses (if required), fees and disbursements of counsel and independent public
accountants for the Company, fees and expenses (including reasonable counsel
fees) incurred in connection with complying with state securities or "blue sky"
laws, fees of the National Association of Securities Dealers, Inc., transfer
taxes, and fees of transfer agents and registrars, are called "Registration
Expenses." All underwriting discounts and selling commissions applicable to
the sale of Registrable Securities are called "Selling Expenses." The
Company will pay all Registration Expenses in connection with the registration
statement under Section 11. Selling Expenses in connection with each
registration statement under Section 11 shall be borne by the Seller and may be
apportioned among the Sellers in proportion to the number of shares sold by the
Seller relative to the number of shares sold under such registration statement
or as all Sellers thereunder may agree. 

17

10.6.        
Indemnification and Contribution. 

(a)        
In the event of a registration of any Registrable Securities under the 1933 Act
pursuant to Section 10, the Company will, to the extent permitted by law,
indemnify and hold harmless the Seller, each officer of the Seller, each
director of the Seller, each underwriter of such Registrable Securities
thereunder and each other person, if any, who controls such Seller or
underwriter within the meaning of the 1933 Act, against any losses, claims,
damages or liabilities, joint or several, to which the Seller, or such
underwriter or controlling person may become subject under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Registrable Securities was registered under the 1933 Act
pursuant to Section 10, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances when made, and will, subject to the provisions of
Section 10.6(c), reimburse the Seller, each such underwriter and each such
controlling person for any reasonable legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company shall
not be liable to the Seller to the extent that any such damages arise out of or
are based upon an untrue statement or omission made in any preliminary
prospectus if (i) the Seller failed to send or deliver a copy of the final
prospectus delivered by the Company to the Seller with or prior to the delivery
of written confirmation of the sale by the Seller to the person asserting the
claim from which such damages arise, (ii) the final prospectus would have
corrected such untrue statement or alleged untrue statement or such omission or
alleged omission, (iii) to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by any such Seller, or any such controlling person, in writing
specifically for use in such registration statement or prospectus, (iv) to the
extent that any such loss, claim, damage or liability results from the
settlement of any claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld,
delayed or conditioned. 

(b)        
In the event of a registration of any of the Registrable Securities under the
1933 Act pursuant to Section 10, each of the Sellers severally but not jointly
will, to the extent permitted by law, indemnify and hold harmless the Company,
and each person, if any, who controls the Company within the meaning of the 1933
Act, each officer of the Company who signs the registration statement, each
director of the Company, each underwriter and each person who controls any
underwriter within the meaning of the 1933 Act, against all losses, claims,
damages or liabilities, joint or several, to which the Company or such officer,
director, underwriter or controlling person may become subject under the 1933
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the registration
statement under which such Registrable Securities were registered under the 1933
Act pursuant to Section 10, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and each such officer, director,
underwriter and controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action, provided, however, that the Seller will be
liable hereunder in any such case if and only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with information pertaining to such Seller, as such, furnished
in writing to the Company by such Seller specifically for use in such
registration statement or prospectus, and provided, further, however, that the
liability of the Seller hereunder shall be limited to the
net proceeds actually received by the
Seller from the sale of Registrable Securities covered by such registration
statement. Seller shall not be liable under this Section 10.6(b) for any such
loss, claim, damage or liability that results from the settlement of any claim
if such settlement is effected without the prior written consent of the Seller,
which consent shall not be unreasonably withheld, delayed or conditioned. 

18

(c)        
Promptly after receipt by an indemnified party hereunder of notice of the
commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party hereunder, notify the
indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 10.6(c) and shall only
relieve it from any liability which it may have to such indemnified party under
this Section 10.6(c), except and only if and to the extent the indemnifying
party is prejudiced by such omission. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, to the extent it shall wish, to assume and undertake the defense thereof
with counsel satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
such indemnified party under this Section 10.6(c) for any legal expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation and of liaison with counsel
so selected, provided, however, that, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified parties, as a group, shall have the right to select one
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the reasonable expenses and fees of such
separate counsel and other expenses related to such participation to be
reimbursed by the indemnifying party as incurred. 

(d)        
In order to provide for just and equitable contribution in the event of joint
liability under the 1933 Act in any case in which either (i) a Seller, or any
controlling person of a Seller, makes a claim for indemnification pursuant to
this Section 10.6 but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 10.6 provides for indemnification in such case, or (ii)
contribution under the 1933 Act may be required on the part of the Seller or
controlling person of the Seller in circumstances for which indemnification is
not provided under this Section 10.6; then, and in each such case, the Company
and the Seller will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion so that the Seller is responsible only for the portion
represented by the percentage that the public offering price of its securities
offered by the registration statement bears to the public offering price of all
securities offered by such registration statement, provided, however, that, in
any such case, (y) the Seller will not be required to contribute any amount in
excess of the public offering price of all such securities sold by it pursuant
to such registration statement; and (z) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) will be
entitled to contribution from any person or entity who was not guilty of such
fraudulent misrepresentation. 

10.7.        
Delivery of Unlegended Shares. 

(a)        
Within five (5) business days (such fifth business day being the "Unlegended
Shares Delivery Date") after the business day on which the Company has
received (i) a notice that Shares or Warrant Shares or any other Common Stock
held by a Subscriber have been sold pursuant to the Registration Statement or
Rule 144 under the 1933 Act, (ii) a representation that the prospectus delivery
requirements, or the requirements of Rule 144, as applicable and if required,
have been satisfied, and (iii) the original share certificates representing the
shares of Common Stock that have been sold, and (iv) in the case of sales under
Rule 144, customary representation letters of the Subscriber and/or Subscriber’s
broker regarding compliance with the requirements of Rule 144, the Company at
its expense, (y) shall deliver, and shall cause legal counsel selected by the
Company to deliver to its transfer agent (with copies to Subscriber) an
appropriate instruction and opinion of such counsel, directing the delivery of
shares of Common Stock without any legends including the legend set forth in
Section 4(e) above, reissuable pursuant to any effective and current
Registration Statement described in Section 11 of this Agreement or pursuant to
Rule 144 under the 1933 Act (the "Unlegended Shares"); and (z) cause the
transmission of the certificates representing the Unlegended Shares together
with a legended certificate representing the balance of the submitted Shares
certificate, if any, to the Subscriber at the address specified in the notice of
sale, via express courier, by electronic transfer or otherwise on or before the
Unlegended Shares Delivery Date. 

19

(b)        
In lieu of delivering physical certificates representing the Unlegended Shares,
if the Company’s transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer program, upon request of a
Subscriber, so long as the certificates therefor do not bear a legend and the
Subscriber is not obligated to return such certificate for the placement of a
legend thereon, the Company shall cause its transfer agent to electronically
transmit the Unlegended Shares by crediting the account of Subscriber’s prime
broker with DTC through its Deposit Withdrawal Agent Commission system. Such
delivery must be made on or before the Unlegended Shares Delivery Date. 

(c)        
The Company understands that a delay in the delivery of the Unlegended Shares
pursuant to Section 10 hereof later than five (5) business days after the
Unlegended Shares Delivery Date could result in economic loss to a Subscriber.
As compensation to a Subscriber for such loss, the Company agrees to pay late
payment fees (as liquidated damages and not as a penalty) to the Subscriber for
late delivery of Unlegended Shares in the amount of $100 per business day after
the Delivery Date for each $10,000 of purchase price of the Unlegended Shares
subject to the delivery default. If during any 360 day period, the Company fails
to deliver Unlegended Shares as required by this Section 10.7 for an aggregate
of thirty (30) days, then each Subscriber or assignee holding Securities subject
to such default may, at its option, require the Company to redeem all or any
portion of the Shares and Warrant Shares subject to such default at a price per
share equal to 120% of the Purchase Price of such Common Stock and Warrant
Shares ("Unlegended Redemption Amount"). The amount of the aforedescribed
liquidated damages that have accrued or have been paid for the twenty-day period
prior to the receipt by the Subscriber of the Unlegended Redemption Amount shall
be credited against the Unlegended Redemption Amount. The Company shall pay any
payments incurred under this Section in immediately available funds upon demand.

(d)        
In addition to any other rights available to a Subscriber, if the Company fails
to deliver to a Subscriber Unlegended Shares as required pursuant to this
Agreement, within five (5) business days after the Unlegended Shares Delivery
Date and the Subscriber or a broker on the Subscriber’s behalf, purchases (in an
open market transaction or otherwise) shares of common stock to deliver in
satisfaction of a sale by such Subscriber of the shares of Common Stock which
the Subscriber was entitled to receive from the Company (a "Buy-In"),
then the Company shall pay in cash to the Subscriber (in addition to any
remedies available to or elected by the Subscriber) the amount by which (A) the
Subscriber's total purchase price (including brokerage commissions, if any) for
the shares of common stock so purchased exceeds (B) the aggregate purchase price
of the shares of Common Stock delivered to the Company for reissuance as
Unlegended Shares together with interest thereon at a rate of 15% per annum,
accruing until such amount and any accrued interest thereon is paid in full
(which amount shall be paid as liquidated damages and not as a penalty). For
example, if a Subscriber purchases shares of Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to $10,000 of purchase
price of shares of Common Stock delivered to the Company for reissuance as
Unlegended Shares, the Company shall be required to pay the Subscriber $1,000,
plus interest. The Subscriber shall provide the Company written notice
indicating the amounts payable to the Subscriber in respect of the Buy-In 

20

(e)        
In the event a Subscriber shall request delivery of Unlegended Shares as
described in Section 10.7 and the Company is required to deliver such Unlegended
Shares pursuant to Section 10.7, the Company may not refuse to deliver
Unlegended Shares based on any claim that such Subscriber or any one associated
or affiliated with such Subscriber has been engaged in any violation of law, or
for any other reason, unless, an injunction or temporary restraining order from
a court, on notice, restraining and or enjoining delivery of such Unlegended
Shares or exercise of all or part of said Warrant shall have been sought and
obtained by the Company or at the Company’s request or with the Company’s
assistance, and the Company has posted a surety bond for the benefit of such
Subscriber in the amount of 120% of the amount of the aggregate purchase price
of the Common Stock and Warrant Shares which are subject to the injunction or
temporary restraining order, which bond shall remain in effect until the
completion of arbitration/litigation of the dispute and the proceeds of which
shall be payable to such Subscriber to the extent Subscriber obtains judgment in
Subscriber’s favor. 

11.            
(a)         Right of First Refusal.
Until 365 days after the Actual Effective Date, the Subscribers shall be given
not less than five (5) business days prior written notice of any proposed sale
by the Company of its Common Stock, other equity securities, obligations
convertible or exercisable for equity securities or debt obligations, except in
connection with (i) full or partial consideration in connection with a strategic
merger, acquisition, consolidation or purchase of substantially all of the
securities or assets of corporation or other entity which holders of such
securities or debt are not at any time granted registration rights, (ii) the
Company’s issuance of securities in connection with strategic license agreements
and other partnering arrangements so long as such issuances are not for the
purpose of raising capital and which holders of such securities or debt are not
at any time granted registration rights, and (iii) the Company’s issuance of
Common Stock or the issuances or grants of options to purchase Common Stock
pursuant to stock option plans and employee stock purchase plans described on 
Schedule 5(d) hereto at prices equal to or higher than the closing price of
the Common Stock on the issue date of any of the foregoing (collectively the
foregoing are "Excepted Issuances"). The Subscribers who exercise their
rights pursuant to this Section 11(a) shall have the right during the five (5)
business days following receipt of the notice to purchase such offered Common
Stock, debt or other securities in accordance with the terms and conditions set
forth in the notice of sale in the same proportion to each other as their
purchase of Shares in the Offering. In the event such terms and conditions are
modified during the notice period, the Subscribers shall be given prompt notice
of such modification and shall have the right during the five (5) business days
following the notice of modification, whichever is longer, to exercise such
right. 

(b)        
Favored Nations Provision. Other than the Excepted Issuances, if at any
time Shares or Warrant Shares are held by a Subscriber, the Company shall offer,
issue or agree to issue any Common Stock or securities convertible into or
exercisable for shares of Common Stock (or modify any of the foregoing which may
be outstanding) to any person or entity ("Third Party Purchaser") at a
price per share of Common Stock or exercise price per share of Common Stock
which shall be less than the per share Purchase Price of the Shares, or less
than the exercise price per Warrant Share, respectively, of the Subscribers
holding Shares, Warrants, or Warrant Shares, then the Company shall issue, for
each such occasion, additional shares of Common Stock to each Subscriber so that
the average per share purchase price
of the shares of Common Stock issued to the Subscriber (of only the Shares or
Warrant Shares still owned by the Subscriber) is equal to such other lower price
per share and the Warrant Exercise Price shall automatically be reduced to such
other lower price per share. The average Purchase Price of the Shares and
average exercise price in relation to the Warrant Shares shall be calculated
separately for the Shares and Warrant Shares. The delivery to the Subscriber of
the additional shares of Common Stock shall be not later than 15 business days
from the closing date of the transaction giving rise to the requirement to issue
additional shares of Common Stock. If the Third Party Purchaser is offered
registration rights with respect to the shares purchased by such Third Party
Purchaser, the Subscribers are granted, at their election, such other
registration rights or the registration rights described in Section 10 hereof in
relation to such additional shares of Common Stock except that the Filing Date
and Effective Date vis-à-vis such additional common shares shall be,
respectively, the forty-fifth (45th) and ninetieth (90th)
date after the closing date giving rise to the requirement to issue the
additional shares of Common Stock. For purposes of the issuance and adjustment
described in this paragraph, the issuance of any security of the Company
carrying the right to convert such security into shares of Common Stock or of
any warrant, right or option to purchase Common Stock shall result in the
issuance of the additional shares of Common Stock upon the actual issuance of
such convertible security, warrant, right or option and again at any time upon
any subsequent issuances of shares of Common Stock upon exercise of such
conversion or purchase rights if such issuance is at a price lower than the
Conversion Price or Warrant exercise price in effect upon such issuance. The
Subscriber is also given the right to elect to substitute any term or terms of
any other offering in connection with which the Subscriber has rights as
described in Section 11(a), for any term or terms of the Offering in connection
with Securities owned by Subscriber as of the date the notice described in
Section 11(a) is required to be given to Subscriber.. The rights of the
Subscriber set forth in this Section 11 are in addition to any other rights the
Subscriber has pursuant to this Agreement, any Transaction Document, and any
other agreement referred to or entered into in connection herewith. 

21

(c)        
Maximum Exercise of Rights. In the event the exercise of the rights
described in Sections 11(a) and 11(b) would result in the issuance of an amount
of Common Stock of the Company that would exceed the maximum amount that may be
issued to a Subscriber calculated in the manner described in Section 10 of the
Warrant, then the issuance of such additional shares of Common Stock of the
Company to such Subscriber will be deferred in whole or in part until such time
as such Subscriber is able to beneficially own such Common Stock without
exceeding the maximum amount set forth calculated in the manner described in
Section 10 of the Warrant. The determination of when such Common Stock may be
issued shall be made by each Subscriber as to only such Subscriber. 

(d)        
From the date of this Agreement and until the earlier of (i) two (2) years after
the Closing Date or (ii) until all the Shares have been resold or transferred by
all the Subscribers pursuant to the Registration Statement, in the event the
Company amends its certificate of incorporation to effect a reverse stock split
of the Company’s Common Stock, then the Company shall issue for each such
occasion, additional shares of Common Stock to each Subscriber so that the
average price of the Shares still held by the Subscriber shall be equal to 85%
of the average of the closing price of the Common stock for the 20 trading days
following the date of such reverse split. This section shall apply only if the
application shall result in the issuance of Common Stock to the Subscribers. 

12.           
Miscellaneous. 

(a)        
Notices. All notices, demands, requests, consents, approvals, and other
communications required or permitted hereunder shall be in writing and, unless
otherwise specified herein, shall be (i) personally served, (ii) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(iii) delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram, or facsimile, addressed as set forth
below or to such other address as such party shall have specified most recently
by written notice. Any notice or other communication required or permitted to be
given hereunder shall be deemed effective (a) upon hand delivery or delivery by
facsimile, with accurate confirmation generated by the transmitting facsimile
machine, at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be: (i) if to the Company, to: Silver Dragon Resources,
Inc., 1121 Steeles Avenue West, Suite 803, Toronto, Ontario M2R 3W7, Attn: Marc
M. Hazout, President and CEO, telecopier: (416) 661-9510, with a copy by
telecopier only to: Garfin Zeidenberg LLP, Yonge-Norton Center, 5255 Yonge
Street, Suite 800, Toronto, Ontario, Canada M2N 6P4, Attn: Stephen M. Cohen,
B.A., LL.B., telecopier number: (416) 512-9992, and (ii) if to the Subscribers,
to: the one or more addresses and telecopier numbers indicated on the signature
pages hereto, with an additional copy by telecopier only to: Grushko & Mittman,
P.C., 551 Fifth Avenue, Suite 1601, New York, New York 10176, telecopier number:
(212) 697-3575, and (iii) if to the Broker, to: the address and telecopier
number set forth on Schedule 7 hereto. 

22

(b)        
Closing. The consummation of the transactions contemplated herein shall
take place at the offices of Grushko & Mittman, P.C., 551 Fifth Avenue, Suite
1601, New York, New York 10176, upon the satisfaction of all conditions to
Closing set forth in this Agreement. The "Closing Date" shall be the date
that subscriber funds representing the net amount due to the Company from the
Purchase Price of the Offering are received by the Company, provided such funds
are received by the Company not later than the first business day after
transmission of such funds, otherwise the Closing Date shall be the date such
funds are actually received by the Company. 

(c)        
Entire Agreement; Assignment. This Agreement and other documents
delivered in connection herewith represent the entire agreement between the
parties hereto with respect to the subject matter hereof and may be amended only
by a writing executed by both parties. Neither the Company nor the Subscribers
have relied on any representations not contained or referred to in this
Agreement and the documents delivered herewith. No right or obligation of either
party shall be assigned by that party without prior notice to and the written
consent of the other party. 

(d)        
Counterparts/Execution. This Agreement may be executed in any number of
counterparts and by the different signatories hereto on separate counterparts,
each of which, when so executed, shall be deemed an original, but all such
counterparts shall constitute but one and the same instrument. This Agreement
may be executed by facsimile signature and delivered by facsimile transmission.

(e)        
Law Governing this Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard to
principles of conflicts of laws. Any action brought by either party against the
other concerning the transactions contemplated by this Agreement shall be
brought only in the state courts of New York or in the federal courts located in
the state of New York. The parties and the individuals executing this
Agreement and other agreements referred to herein or delivered in connection
herewith on behalf of the Company agree to submit to the jurisdiction of such
courts and waive trial by jury. The prevailing party shall be entitled to
recover from the other party its reasonable attorney's fees and costs. In the
event that any provision of this Agreement or any other agreement delivered in
connection herewith 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 any agreement.

23

(f)        
Specific Enforcement, Consent to Jurisdiction. The Company and Subscriber
acknowledge and agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof, this being in addition to any other remedy to which
any of them may be entitled by law or equity. Subject to Section 12(e) hereof,
each of the Company, Subscriber and any signator hereto in his personal capacity
hereby waives, and agrees not to assert in any such suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction in New York of
such court, that the suit, action or proceeding is brought in an inconvenient
forum or that the venue of the suit, action or proceeding is improper. Nothing
in this Section shall affect or limit any right to serve process in any other
manner permitted by law. 

(g)        
Independent Nature of Subscribers. The Company acknowledges that the
obligations of each Subscriber under the Transaction Documents are several and
not joint with the obligations of any other Subscriber, and no Subscriber shall
be responsible in any way for the performance of the obligations of any other
Subscriber under the Transaction Documents. The Company acknowledges that the
decision of each Subscriber to purchase Securities has been made by such
Subscriber independently of any other Subscriber and independently of any
information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company which may have been made or
given by any other Subscriber or by any agent or employee of any other
Subscriber, and no Subscriber or any of its agents or employees shall have any
liability to any Subscriber (or any other person) relating to or arising from
any such information, materials, statements or opinions. The Company
acknowledges that nothing contained in any Transaction Document, and no action
taken by any Subscriber pursuant hereto or thereto (including, but not limited
to, the (i) inclusion of a Subscriber in the SB-2 Registration Statement and
(ii) review by, and consent to, such Registration Statement by a Subscriber)
shall be deemed to constitute the Subscribers as a partnership, an association,
a joint venture or any other kind of entity, or create a presumption that the
Subscribers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. The
Company acknowledges that each Subscriber shall be entitled to independently
protect and enforce its rights, including without limitation, the rights arising
out of the Transaction Documents, and it shall not be necessary for any other
Subscriber to be joined as an additional party in any proceeding for such
purpose. The Company acknowledges that it has elected to provide all Subscribers
with the same terms and Transaction Documents for the convenience of the Company
and not because Company was required or requested to do so by the Subscribers.
The Company acknowledges that such procedure with respect to the Transaction
Documents in no way creates a presumption that the Subscribers are in any way
acting in concert or as a group with respect to the Transaction Documents or the
transactions contemplated thereby. 

(h)        
Consent. As used in the Agreement, "consent of the Subscribers" or
similar language means the consent of holders of not less than 70% of the total
of the Shares and Warrant Shares owned by Subscribers on the date consent is
requested. 

(i)         
Equitable Adjustment. The Securities and the purchase prices of
Securities shall be equitably adjusted to offset the effect of stock splits,
stock dividends, and distributions of property or equity interests of the
Company to its shareholders. 

24

(j)        
Currency. All references to money, dollars and currency shall mean the
currency of the United States. 

[THIS SPACE INTENTIONALLY LEFT BLANK] 

 

 

 

 

 

 

 

 

25

SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT 

Please acknowledge your acceptance of the foregoing
Subscription Agreement by signing and returning a copy to the undersigned
whereupon it shall become a binding agreement between us. 

	
    SILVER DRAGON RESOURCES, INC.

	
    a Delaware corporation

	
     

	
     

	
    By: ___________________________

	
           Name: Marc
    M. Hazout

	
           Title:
    President and CEO

	
     

	
    Dated: as of November 2, 2006

 

	
     
	
     
	
     
	
     
	
     
	
     

	
    
    SUBSCRIBER
	
    
    PURCHASE
	
    
    SHARES
	
    
    CLASS A
	
    
    CLASS B
	
    
    CLASS C

	
     
	
    
    PRICE
	
     
	
    
    WARRANTS
	
    
    WARRANTS
	
    
    WARRANTS

	
    
    ALPHA CAPITAL ANSTALT
	
    
    $500,000.00
	
    
    500,000
	
    
    250,000
	
    
    250,000
	
    
    1,000,000

	
    
    Pradafant 7
	
     
	
     
	
     
	
     
	
     

	
    
    9490 Furstentums
	
     
	
     
	
     
	
     
	
     

	
    
    Vaduz, Lichtenstein
	
     
	
     
	
     
	
     
	
     

	
    
    Fax: 011-42-32323196
	
     
	
     
	
     
	
     
	
     

	
     
	
     
	
     
	
     
	
     
	
     

	
     
	
     
	
     
	
     
	
     
	
     

	
     
	
     
	
     
	
     
	
     
	
     

	
     
	
     
	
     
	
     
	
     
	
     

	
    
    _______________________
	
     
	
     
	
     
	
     
	
     

	
    
    (Signature)
	
     
	
     
	
     
	
     
	
     

	
    
    By:
	
     
	
     
	
     
	
     
	
     

	
    
    Title:
	
     
	
     
	
     
	
     
	
     

 

LIST OF EXHIBITS AND SCHEDULES 

	Exhibit A	Forms of Class A and
    Class B and Class C Warrants
	 	 
	Exhibit B	Escrow Agreement
	 	 
	Exhibit C	Form of Legal Opinion
	 	 
	Exhibit D	Form 8-K or Public
    Announcement
	 	 
	Exhibit E	Form of Lock Up
    Agreement
	 	 
	Schedule 5(a)	Subsidiaries
	 	 
	Schedule 5(d)	Additional Issuances /
    Capitalization
	 	 
	Schedule 5(q)	Undisclosed
    Liabilities
	 	 
	Schedule 5(v)	Transfer Agent
	 	 
	Schedule 7	Broker
	 	 
	Schedule 8(e)	Use of Proceeds
	 	 
	Schedule 8(r)	Negative Covenants
	 	 
	Schedule 10.1	Other Securities to be
    Registered

 

EXHIBIT E 

LOCK UP AGREEMENT 

This AGREEMENT (the "Agreement") is made as of the
2nd day of November, 2006, by the signatories hereto (each a "Holder"), in
connection with his ownership of shares of Silver Dragon Resources, Inc., a
Delaware corporation (the "Company"). 

NOW, THEREFORE, for good and valuable consideration,
the sufficiency and receipt of which consideration are hereby acknowledged,
Holder agrees as follows: 

1.     Background. 

a.     Holder is the actual
and/or beneficial owner of the amount of shares of the Common Stock, $0.0001 par
value, of the Company ("Common Stock") and rights to purchase Common Stock
designated on the signature page hereto. 

b.     Holder acknowledges that
the Company has entered into or will enter into an agreement with each
subscriber ("Subscription Agreement") to the Company’s Common Stock and Warrants
(the "Subscribers"), for the sale of Common Stock and Warrants to the
Subscribers for an aggregate of up to $500,000 (the "Offering"). Holder
understands that, as a condition to proceeding with the Offering, the
Subscribers have required, and the Company has agreed to obtain an agreement
from the Holder to refrain from selling any securities of the Company at an
effective price per share of Common Stock of less than $1.50 ("Minimum Price")
from the date of the Subscription Agreement until six months after the Actual
Effective Date (the "Restriction Period"). 

2.     Share Restriction. 

a.     Holder hereby agrees that
during the Restriction Period, the Holder will not sell or otherwise dispose of
any shares of Common Stock or any options, warrants or other rights to purchase
shares of Common Stock or any other security of the Company which Holder owns or
has a right to acquire as of the date hereof or acquires hereafter during the
Restriction Period at less than the Minimum Price, except in connection with an
offer made to all shareholders of the Company in connection with any merger,
consolidation or similar transaction involving the Company. Holder further
agrees that the Company is authorized to and the Company agrees to place "stop
orders" on its books to prevent any transfer of shares of Common Stock or other
securities of the Company held by Holder in violation of this Agreement. 

b.     Any subsequent issuance to
and/or acquisition of shares or the right to acquire shares by Holder will be
subject to the provisions of this Agreement. 

c.     Notwithstanding the
foregoing restrictions on transfer, the Holder may, at any time and from time to
time during the Restriction Period, transfer the Common Stock (i) as bona fide
gifts or transfers by will or intestacy, (ii) to any trust for the direct or
indirect benefit of the undersigned or the immediate family of the Holder,
provided that any such transfer shall not involve a disposition for value, (iii)
to a partnership which is the general partner of a partnership of which the
Holder is a general partner, provided, that, in the case of any gift or transfer
described in clauses (i), (ii) or (iii), each donee or transferee agrees in
writing to be bound by the terms and conditions contained herein in the same
manner as such terms and conditions apply to the undersigned. For purposes
hereof, "immediate family" means any relationship by blood, marriage or
adoption, not more remote than first cousin. 

3.     Miscellaneous. 

a.     At any time, and from time
to time, after the signing of this Agreement Holder will execute such additional
instruments and take such action as may be reasonably requested by the
Subscribers to carry out the 
intent and purposes of this Agreement. 

b.     This Agreement shall be
governed, construed and enforced in accordance with the laws of the State of New
York without regard to conflicts of laws principles that would result in the
application of the substantive laws of another jurisdiction, except to the
extent that the securities laws of the state in which Holder resides and federal
securities laws may apply. Any proceeding brought to enforce this Agreement may
be brought exclusively in courts sitting in New York County, New York. 

c.     This Agreement contains
the entire agreement of the Holder with respect to the subject matter hereof.

d.     This Agreement shall be
binding upon Holder, its legal representatives, successors and assigns. 

e.     This Agreement may be
signed and delivered by facsimile and such facsimile signed and delivered shall
be enforceable. 

f.     The Company agrees not to
take any action or allow any act to be taken which would be inconsistent with
this Agreement nor to amend or terminate this Agreement without the consent of
the Subscribers. 

g.     The Subscribers are third
party beneficiaries of this Agreement, with right of enforcement. 

h.     Capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the
Subscription Agreement. 

i.     The Minimum Price shall be
adjusted to equitably offset stock splits and similar events. 

IN WITNESS WHEREOF, and intending to be legally bound
hereby, Holder has executed this Agreement as of the day and year first above
written. 

	
    HOLDER:

	
     

	
    
    _________________________________

	
    (Signature of Holder)

	
    
    _________________________________

	
    (Print Name of Holder)

	
    
    _________________________________

	
    Number of Shares of Common Stock Owned

	
    
    _________________________________

	
    Number of Shares of Common Stock

	
    Beneficially Owned

	
    
    _________________________________

	
    Number of shares of Common Stock issuable

	
    upon exercise of Stock Options and Warrants

	
    Beneficially Owned

	
     

	
    COMPANY:

	
    SILVER DRAGON RESOURCES, INC.

	
     

	
    By:_______________________________

	 

SCHEDULE 7 

	BROKER:	DRAGONFLY CAPITAL PARTNERS, LLC.
	 	The Packard Building
	 	1310 S. Tryon Street, Suite 109
	 	Charlotte, NC 28203
	 	Fax: (704) 342-9750
	 	 

Cash Fee. The Company agrees that it will pay
the Broker, on the Closing Date a fee of seven percent (7%) of the Purchase
Price ("Broker’s Cash Fee"). The Company represents that there are no
other parties entitled to receive fees, commissions, or similar payments in
connection with the Offering except the Broker. 

Broker’s Warrants. On the
Closing Date, the Company will issue to the Broker, seven (7) Class A Warrants
for each one hundred (100) Shares issued to the Subscribers and seven (7) Class
B Warrants for each one hundred (100) Shares issued to the Subscribers on the
Closing (collectively "Broker’s Warrants") similar to and carrying the
same rights as the Class A and Class B Warrants issuable to the Subscribers. 

All the representations, covenants, warranties,
undertakings, remedies, liquidated damages, indemnification, and other rights
including but not limited to reservation requirements and registration rights
made or granted to or for the benefit of the Subscribers are hereby also made
and granted to and for the benefit of the Broker in respect of the Broker’s
Warrants.

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