Document:

WARRANT CONVERSION
AGREEMENT

      

      THIS WARRANT CONVERSION
AGREEMENT (the “Conversion Agreement”), dated
as of December ___, 2008, is entered into by and between Neonode, Inc., a
Delaware corporation (the “Corporation”), and
_____________________ (the “Holder”).

      

      WHEREAS, the Holder is the
holder and beneficial owner of warrants for the purchase of up to ______ shares
of common stock of the Corporation and/or ___ Units (as such term is defined in
the Unit Purchase Warrant), (the “Warrants”); and

      

      WHEREAS, to comply with the
relevant NASDAQ maintenance criteria and to raise capital to finance the
Corporation’s business going forward, the Corporation will be engaging in
certain refinancing and capital raising activities, including the conversion of
the Warrants into shares of Preferred B Stock, as defined below;
and

      

      WHEREAS, subject to the terms
and conditions contained herein, Holder is willing to convert all of the
Warrants into shares of the Corporation’s Series B Preferred Stock, par value
US$0.001 each (the "Preferred B
Stock"), all as provided herein.

      

      NOW, THEREFORE, in
consideration of the premises and the mutual promises, representations and
warranties made herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:

      

      1.           Conversion of
Warrants.

      

      1.1           Pursuant
to the terms and conditions of this Conversion Agreement, the Holder hereby
surrenders, assigns, and transfers to the Corporation all right, title, and
interest in and to the Warrants in exchange for ____ shares of Preferred B Stock
of the Corporation (the “Conversion
Shares”).

      

      1.2           In
full consideration of the acceptance of the Warrants, the Corporation shall
issue the Conversion Shares to the Holder.

      

      1.3           Subject
to the issuance of the Conversion Shares to the Holder, the Holder hereby
releases the Corporation and its officers, directors, employees, and affiliates
from any and all claims, rights, and causes of action, with respect to, in
connection with, or arising out of the Warrants.

      

      1.4           The
Holder acknowledges the following:

      

       
(a)           that the
Holder may lose his entire investment in the Corporation; and

      

       
(b)           that the
stockholders of the Corporation may vote to reject (i) an increase in the
authorized share capital of the Corporation to enable the issuance of shares of
common stock upon conversion of the Conversion Shares or (ii) a modification of
the initial conversion rate of the Preferred B Stock; and

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

       
(c)           certain
members of the Board of Directors of the Corporation are personally involved in
the Corporation’s refinancing and capital raising activities and will be
investing their own funds in the Corporation, and that the personal interest of
these Directors in these transactions creates the potential for a conflict of
interest.

      

        A
complete discussion of the risks associated with this transaction and an
investment in the Corporation are set forth in the Corporation’s Form 10-K filed
with the SEC on April 15, 2008 for the fiscal year ended December 31, 2007, Form
S-3 filed with the SEC on September 23, 2008, and Form 10-Q filed with the SEC
on November 19, 2008 for the quarter ended September 30, 2008, and in Section 5
below.

      

      2.           The
Closing.

      

      2.1           The
consummation of the transactions contemplated hereby (the “Closing”) shall take place on
December __, 2008, or on such other date as the parties mutually agree, (the
“Closing
Date”).  The Closing shall take place at the offices of the
Corporation, or at such other place as the parties mutually agree.

      

      2.2           At
the Closing, (a) the Holder shall deliver to the Company all of the Warrants to
be converted into the Conversion Shares, and (b) the Corporation shall issue and
deliver to the Holder, a stock certificate or certificates registered in the
name of the Holder evidencing the Conversion Shares issued to the
Holder.

      

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

         

      

      3.           Series B Preferred
Stock.

      

      3.1           Certificate of
Designations. The rights, preferences, privileges, and restrictions of
the Preferred B Stock shall be as described in the Certificate of Designations,
of which a copy has been provided to each Holder.

      

      3.2           Conversion. Subject
to approval of the stockholders of the Corporation, each share of Preferred B
Stock shall be convertible into 132.07 shares of the Corporation’s common stock
(the “Conversion Rate”).

      

      3.3           Stockholder Approval.
The Corporation shall provide each stockholder entitled to vote at either (a)
the next annual meeting of stockholders of the Corporation or (b) a special
meeting of stockholders of the Corporation, which shall be promptly called and
held not later than March 30, 2009, (the “Stockholder Meeting”), with a proxy
statement soliciting each such stockholder’s affirmative vote at the Stockholder
Meeting for approval of resolutions (i) increasing the authorized share capital
of the Corporation so as to authorize a sufficient amount of authorized share
capital to enable the issuance of shares of common stock upon conversion of the
Conversion Shares, and (ii) approving the Conversion Rate, (the “Stockholder
Approvals”).

      

      3.4           Acknowledgement. The
Holder acknowledges that its right to convert the Conversion Shares into shares
of common stock of the Corporation is subject to the Stockholder Approvals, and
that there can be no guarantee that the Stockholder Approvals will be
obtained

      

      4.   
       Information on the
Corporation; Legal proceedings

      

      4.1           Information on the
Corporation. Each Holder has been furnished with or has had access at the
EDGAR Website of the SEC to the Corporation's Form 10-K filed on April 15, 2008
for the fiscal year ended December 31, 2007 and the financial statements
included therein for the year ended December 31, 2007 together with all
subsequent filings made with the SEC available at the EDGAR website ("Reports").  In
addition, each Holder may have received in writing from the Corporation such
other information concerning its operations, financial condition and other
matters as such Holder has requested in writing, identified thereon as "Other
Written Information" and considered all factors such Holder deems material in
deciding on the advisability of investing in the Conversion
Shares.

      

      4.2           Legal
Proceedings.                                           

      

      4.2.1       Alpha Capital
Anstalt. On September 4, 2008, Alpha Capital Anstalt (“Alpha”), an
investor in the Corporation from previous private placement transactions,
initiated a law suit against the Corporation in the United States District Court
for the Southern District of New York alleging that the Corporation failed to
issue certain stock certificates pursuant to the terms and conditions of certain
investment subscription agreements.  Alpha asked the court to award
them $734,650 in damages plus attorneys fees. Although the Corporation believes
the claim has no merit, the Corporation has reached an agreement in principal on
the terms for a negotiated settlement with Alpha, which agreement has not as of
yet been finalized.

      

      
        
          
          

        

        
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      4.2.2       Empire Asset
Management. On December 9, 2008, Empire Asset Management (“Empire”), a
broker dealer that acted as the Corporation’s financial advisor and exclusive
placement agent and purchased stock for their own account in previous private
placement transactions, initiated a law suit against the Corporation in the
Supreme Court of the State of New York alleging that the Corporation
misrepresented the success of its business to induce Empire to invest in the
Corporation.  Empire is seeking compensatory damages in an unspecified
amount for the harm allegedly suffered.  The Corporation believes that
the action has no merit and intends to defend vigorously against the
action.

      

      4.2.3       Nasdaq. On May 29,
2008, the Corporation received a NASDAQ Staff deficiency letter indicating that
the market value of our listed securities had been below the minimum $35 million
requirement for continued inclusion under its listing standards (the “Market
Capitalization Rule”), and provided until June 30, 2008 for the Corporation to
demonstrate compliance.  On July 1, 2008, the Corporation received a
NASDAQ Staff Determination letter stating that the Corporation had not regained
compliance with the Market Capitalization Rule and, unless the Corporation
requests an appeal of this determination, trading of the Corporation’s common
stock will be suspended at the opening of business on July 10, 2008 and NASDAQ
will remove the Corporation’s securities from listing and registration on the
NASDAQ Capital Market. The Corporation has appealed the determination with the
NASDAQ Listing Qualifications Panel (the “Panel”), which stays the suspension of
Nenode’s securities pending the Panel’s decision.  The Corporation
appeared before the Panel on August 28, 2008 and the Corporation is awaiting its
decision.

      

      In
addition, on July 3, 2008, the Corporation received a NASDAQ Staff deficiency
letter indicating that for the last 30 consecutive days, the bid price for the
Corporation’s common stock had closed below the $1.00 minimum requirement for
continued inclusion under its listing standards (the “Minimum Bid Price Rule”),
and provided the Corporation with 180 days (or until December 30, 2008) to
regain compliance. 

      

      Furthermore,
on December 11, 2008, the Corporation received a Nasdaq Staff deficiency letter
(the “Notice”) from The NASDAQ Stock Market Listing Qualifications Department
stating that the Corporation has not paid certain fees required by Marketplace
Rule 4310(c)(13) (the “Rule”). The Corporation’s past due balance currently
totals $43,615.08.  The Notice further stated that the Nasdaq Listing
Qualification Panel (“Panel”) will consider this matter in rendering a
determination regarding the Corporation’s continued listing on the NASDAQ
Capital Markets.

      

      5.           Risk
Factors

      

      An
investment in the Corporation’s preferred stock involves a high degree of risk.
Before surrendering your Warrants for the Conversion Shares, you should consider
carefully the specific risks detailed in this “Risk Factors” section together
with all of the other information contained in this Conversion Agreement and any
other documents incorporated by reference herein. If any of these risks occur,
the Corporation’s business, results of operations and financial condition could
be harmed, the price of the Corporation’s preferred stock could decline, and you
may lose all or part of your investment in the Corporation.

      

      
        
          
          

        

        
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      5.1       The Corporation’s
independent registered public accounting firm issued a going concern opinion on
the Corporation’s financial statements, questioning the Corporation’s ability to
continue as a going concern.

       

      Due to
the Corporation’s need to raise additional financing to fund the Corporation’s
operations and satisfy obligations as they become due, the Corporation’s
independent registered public accounting firm has included an explanatory
paragraph in its report on the Corporation’s December 31, 2007 consolidated
financial statements regarding its substantial doubt as to the Corporation’s
ability to continue as a going concern. This may have a negative impact on the
trading price of the Corporation’s common stock and adversely impact the
Corporation’s ability to obtain necessary financing.

      

      5.2       The Refinancing
the Corporation may be unsuccessful and the stockholders of the Corporation may
lose their entire investment in the Corporation.

      

      The
individuals and entities participating in the refinancing of the Corporation,
including the investors, note holders, warrant holders, and employees of the
Swedish subsidiary should be aware that if the Corporation is not successful in
its refinancing endeavors, their entire investment in the Company could become
worthless.  Even if the Corporation is successful, there can be no
assurance that the participants in the refinancing of the Corporation will
derive a profit from their investment.

      

      5.3       The Corporation’s current management
and Directors are personally involved in the Corporation’s refinancing and
capital raising activities.

      

      The
Corporation’s board of directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders.  In addition, as part of the Corporation’s refinancing
efforts, the Corporation’s current directors, Per Bystedt, will be investing
additional funds in the Corporation in exchange for the issuance to them of
preferred stock, as well as participating in a share exchange transaction with
the Corporation as stockholders of a Swedish company to whom the Company will be
issuing preferred stock.  The fact that the current management and
Directors of the Corporation have a personal interest as investors in the
Corporation creates the potential for a conflict of interest.  While
the Corporation believes that the proposed refinancing and capital raising
transactions that the Corporation will be entering into with the Corporation’s
management and directors are fair and in the best interests of the Corporation,
there is a risk that the personal involvement of the management and directors
may have affected their judgment.

      

      5.4       The tax
implications of this refinancing transaction are complex and should be reviewed
by the investor’s tax advisor.

      

      The tax
implications, including United States federal income tax consequences, of this
refinancing transaction are complex.  Each investor should consult its
own tax advisor regarding the particular United States Federal, state, local and
foreign tax consequences of purchasing, holding, and disposing of our Preferred
and Common Stock, including the consequences of any proposed change in
applicable laws.

      

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

      

      RISKS
RELATED TO THE CORPORATION’S BUSINESS

      

      5.5       The Corporation
will require additional capital to fund the Corporation’s operations, which
capital may not be available on commercially attractive terms or at
all.

      

      The
Corporation will require sources of capital in addition to cash on hand to
continue operations and to implement the Corporation’s strategy. The Corporation
does not have sufficient liquid assets to continue operating into the end of
December 2008. The Corporation estimates that the Corporation will need a
minimum of approximately $1.3 million of additional cash from additional
financings, to fund operating expenses through March 31, 2009. The Corporation
is currently evaluating different financing alternatives including but not
limited to selling shares of the Corporation’s common or preferred stock or
issuing notes that may be converted in shares of the Corporation’s common stock
which could result in the issuance of additional shares.  If the
Corporation’s operations do not become cash flow positive as projected the
Corporation will be forced to seek credit line facilities from financial
institutions, additional private equity investment or debt arrangements. No
assurances can be given that the Corporation will be successful in obtaining
such additional financing on reasonable terms, or at all. If adequate funds are
not available on acceptable terms, or at all, the Corporation may be unable to
adequately fund the Corporation’s business plans and it could have a negative
effect on the Corporation’s business, results of operations and financial
condition.  In addition, if funds are available, the issuance of
equity securities or securities convertible into equity could dilute the value
of shares of the Corporation’s stock and cause the market price to fall, and the
issuance of debt securities could impose restrictive covenants that could impair
the Corporation’s ability to engage in certain business
transactions.

      

      5.6       The Corporation’s
common stock is at risk for delisting from the NASDAQ Capital Market. If it is
delisted, the Corporation’s stock price and the liquidity of the Corporation’s
stock may be impacted.

       

      The
Corporation's common stock is quoted on The NASDAQ Capital Market under the
symbol “NEON”.  In order for the Corporation's common stock to
continue to be quoted on the NASDAQ Capital Market, the Corporation must satisfy
various listing maintenance standards established by NASDAQ.  Among
other things, as such requirements pertain to the Corporation, the Corporation
is required to have stockholders’ equity of at least $2.5 million or a market
capitalization of at least $35 million and the Corporation’s common stock must
have a minimum closing bid price of $1.00 per share.

       

      On May
29, 2008, the Corporation received a NASDAQ staff deficiency letter from The
NASDAQ Stock Market Listing Qualifications Department stating that for the last
10 consecutive business days, the market value of the Corporation's listed
securities has been below the minimum $35 million requirement for continued
inclusion under Marketplace Rule 4310 (c)(3)(B) (the "Rule"). The notice further
states that pursuant to Marketplace Rule 4310(c)(8)(C), the Corporation was
provided 30 calendar days (or until June 30, 2008) to regain
compliance.

      

      
        
          
          

        

        
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      On July
1, 2008, the Corporation received a notice from NASDAQ that it had not regained
compliance within the specified time period and that unless the Corporation
requested an appeal of the non-compliance determination the Corporation's
securities would be suspended from trading on the NASDAQ Capital Market on July
10, 2008. The Corporation has submitted a request to have a hearing to the
NASDAQ Listing Qualifications Panel (Panel).  The Corporation's
request stays the delisting of its securities pending the hearing and a
determination by the Panel.  The Corporation appeared before the Panel
on August 28, 2008. On November 18, 2008, the Corporation received a
determination letter from the Panel that the Panel granted the Corporation an
extension until December 29, 2008 to complete its proposed restructuring and
refinancing transactions and regain compliance with the Rule.

      

      Additionally,
on July 3, 2008, the Corporation received another staff deficiency letter from
NASDAQ stating that for the last 30 consecutive business days, the bid price of
our common stock closed below the $1.00 minimum required for continued inclusion
under Marketplace Rule 4310(c)(4). The notice further states that pursuant to
Marketplace Rule 4310(c)(8)(D), the Corporation will be provided 180 calendar
days (or until December 30, 2008) to regain compliance. If, at any time before
December 30, 2008, the bid price of the Corporation's common stock closes at
$1.00 per share or more for a minimum of 10 consecutive business days, the
Corporation may regain compliance with the Minimum Bid Price Rule. NASDAQ
subsequently modified its Marketplace Rules and notified the Corporation that it
has until April 6, 2009 to regain compliance with the bid price under
Marketplace Rule 4310(c)(4).

      

      Additionally
on December 11, 2008, the Corporation received a Nasdaq Staff deficiency letter
from The NASDAQ Stock Market Listing Qualifications Department stating that it
has not paid certain fees required by Marketplace Rule 4310(c)(13) (the
“Rule”). The Corporation’s past due balance currently total $43,615.08. The
notice further states that the Nasdaq Listing Qualification Panel (“Panel”) will
consider this matter in rendering a determination regarding the Corporation’s
continued listing on the NASDAQ Capital Markets.

      

      5.7       The Corporation
has never been profitable and the Corporation anticipates significant additional
losses in the future.

      

      The
Corporation was formed in 2006 as a holding company owning and operating Neonode
AB, its Swedish subsidiary, which was formed in 2004 and has been primarily
engaged in the business of developing and selling mobile phones.  On
December 9, 2008, Neonode AB, filed a petition for bankruptcy in compliance with
the Swedish Bankruptcy Act (1987:672). Mr. Hans Ödén of the Stockholm-based
Ackordscentralen AB, a consultancy firm specializing in insolvency, was
appointed by the district court of Stockholm to administrate the process.
Although the Corporation has transferred the intellectual property (IP) related
to its touch screen technology from Neonode AB to the Corporation pursuant to an
intercompany borrowing asset pledge agreement, the Swedish bankruptcy court may
not allow the transfer and require the Corporation to return the IP to Neonode
AB. The Corporation has a limited operating history on which to base an
evaluation of the Corporation’s business and prospects. The Corporation’s
prospects must be considered in light of the risks and uncertainties encountered
by companies in the early stages of development, particularly companies in new
and rapidly evolving markets. After refinancing efforts have been completed, the
Corporation’s success will depend on many factors, including, but not limited
to:

      
        

        
          
            
            

          

          
            7

            
              

            

          

          
            
            

          

        

      

       

      
        	 
      	
                ·

              	
                the
      growth of the worldwide market for touch screen mobile
      devices;

              
	 
      	
                ·

              	
                the
      Corporations ability to develop and sell or license its touchscreen
      technology to third party companies to embed in their products
      ;

              
	 
      	
                ·

              	
                the
      level of competition from other touch screen technologies faced by the
      Corporation; and

              
	 
      	
                ·

              	
                the
      ability of future customers of the Corporation’s touchscreen technology to
      develop and sell products incorporating the Corporation’s touch screen
      technology.

              

      

       

      In
addition, the Corporation has experienced substantial net losses in each fiscal
period since the Corporation’s inception. These net losses resulted from a lack
of substantial revenues and the significant costs incurred in the development of
the Corporation’s products and infrastructure. The Corporation’s ability to
continue as a going concern is dependent on the Corporation’s ability to raise
additional funds and implement the Corporation’s business plan.

       

      The
Corporation’s limited operating history and the emerging nature of the
Corporation’s market, together with the other risk factors set forth in this
Section, make prediction of the Corporation’s future operating results
difficult. There can also be no assurance that the Corporation will ever achieve
significant revenues or profitability or, if significant revenues and
profitability are achieved, that they could be sustained.

      

      5.8       The Corporation’s
vendors may deny the Corporation’s requests to delay or reduce the payment of
amounts owed to them or to cancel shipments of materials and products purchased
from and to allow the Corporation to return unused materials and products
already received from them.

      

      The
Corporation is not generating cash from operations and has been incurring
significant losses. The Corporation has been funding the Corporation’s
operations primarily with cash proceeds raised through the sale of notes that
are convertible into the Corporation’s common stock, shares of the Corporation’s
common stock, and warrants. Unless the Corporation is able to increase the
Corporation’s revenues and decrease expenses substantially and secure an
external funding source, the Corporation may not be able to pay the
Corporation’s vendors the amount due them and the Corporation will not have
sufficient cash to support the Corporation’s operations for the next six
months.

      

      The
Corporation’s vendors may resort to legal action to try to enforce payment in
full pursuant to the terms or the original payment commitment.

       

      
        
          
          

        

        
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      5.9       If the
Corporation fails to develop and introduce new products and services
successfully and in a cost effective and timely manner, the Corporation will not
be able to compete effectively and the Corporation’s ability to generate
revenues will suffer.

      

      The
Corporation operates in a highly competitive, rapidly evolving environment, and
the Corporation’s success depends on the Corporation’s ability to develop and
introduce new products and services that the Corporation’s customers and end
users choose to buy. If the Corporation is unsuccessful at developing and
introducing new products and services that are appealing to the Corporation’s
customers and end users with acceptable quality, prices and terms, the
Corporation will not be able to compete effectively and the Corporation’s
ability to generate revenues will suffer.

       

      The
development of new products and services is very difficult and requires high
levels of innovation. The development process is also lengthy and costly. If the
Corporation fails to anticipate the Corporation’s end users’ needs or
technological trends accurately, or the Corporation is unable to complete the
development of products and services in a cost effective and timely fashion, the
Corporation will be unable to introduce new products and services into the
market or successfully compete with other providers.

       

      As the
Corporation introduces new or enhanced products or integrates new technology
into new or existing products, the Corporation faces risks including, among
other things, disruption in customers’ ordering patterns, excessive levels of
older product inventories, inability to deliver sufficient supplies of new
products to meet customers’ demand, possible product and technology defects, and
a potentially different sales and support environment. Premature announcements
or leaks of new products, features, or technologies may exacerbate some of these
risks. The Corporation’s failure to manage the transition to newer products or
the integration of newer technology into new or existing products could
adversely affect the Corporation’s business, results of operations and financial
condition.

      

      5.10     The mobile device
industry is highly competitive and many of the Corporation’s competitors have
significantly greater resources to engage in product development, manufacturing,
distribution and marketing.

       

      The
mobile device industry, in which the Corporation is engaged, is a highly
competitive business with companies of all sizes engaged in business in all
areas of the world, including companies with far greater resources than the
Corporation has. There can be no assurance that other competitors, with greater
resources and business connections, will not compete successfully against the
Corporation in the future. The Corporation’s competitors may adopt new
technologies that reduce the demand for the Corporation’s products or render the
Corporation’s technologies obsolete, which may have a material adverse effect on
the cost structure and competitiveness of the Corporation’s products, possibly
resulting in a negative effect on the Corporation’s revenues, profitability or
liquidity.

       

      5.11     The Corporation’s
future results could be harmed by economic, political, regulatory and other
risks associated with international sales and operations.

       

      Because
the Corporation plans to sell the Corporation’s products worldwide and most of
the facilities where the Corporation’s future customers’ devices will be
manufactured, distributed and supported are located outside the United States,
the Corporation’s business is subject to risks associated with doing business
internationally, such as:

      

      
        	 
      	
                ·

              	
                changes
      in foreign currency exchange rates;

              

      

      

      
        
          
          

        

        
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                ·

              	
                the
      impact of recessions in the global economy or in specific sub
      economies;

              
	 
      	
                ·

              	
                changes
      in a specific country’s or region’s political or economic conditions,
      particularly in emerging markets;

              
	 
      	
                ·

              	
                changes
      in international relations;

              
	 
      	
                ·

              	
                trade
      protection measures and import or export licensing
      requirements;

              
	 
      	
                ·

              	
                changes
      in tax laws;

              
	 
      	
                ·

              	
                compliance
      with a wide variety of laws and regulations which may have civil and/or
      criminal consequences for them and the Corporation’s officers and
      directors who they indemnify;

              
	 
      	
                ·

              	
                difficulty
      in managing widespread sales operations; and

              
	 
      	
                ·

              	
                difficulty
      in managing a geographically dispersed workforce in compliance with
      diverse local laws and customs.

              

      

      

      In
addition, the Corporation is subject to changes in demand for the Corporation’s
products resulting from exchange rate fluctuations that make the Corporation’s
products relatively more or less expensive in international markets. If exchange
rate fluctuations occur, the Corporation’s business and results of operations
could be harmed by decreases in demand for the Corporation’s products or
reductions in margins.

      

      While the
Corporation sells the Corporation’s products worldwide, one component of the
Corporation’s strategy is to expand the Corporation’s sales efforts in countries
with large populations and propensities for adopting new technologies. The
Corporation has limited experience with sales and marketing in some of these
countries. There can be no assurance that the Corporation will be able to market
and sell the Corporation’s products in all of the Corporation’s targeted
international markets. If the Corporation’s international efforts are not
successful, the Corporation’s business growth and results of operations could be
harmed.

       

      5.12     The Corporation
must significantly enhance the Corporation’s sales and product development
organizations.

       

      The
Corporation will need to improve the effectiveness and breadth of the
Corporation’s sales operations in order to increase market awareness and sales
of the Corporation’s products, especially as the Corporation expands into new
markets. Competition for qualified sales personnel is intense, and the
Corporation may not be able to hire the kind and number of sales personnel the
Corporation is targeting. Likewise, the Corporation’s efforts to improve and
refine the Corporation’s products require skilled engineers and programmers.
Competition for professionals capable of expanding the Corporation’s research
and development organization is intense due to the limited number of people
available with the necessary technical skills. If the Corporation is unable to
identify, hire or retain qualified sales, marketing and technical personnel, the
Corporation’s ability to achieve future revenue may be adversely
affected.

      

      
        
          
          

        

        
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      5.13     The Corporation
is dependent on the services of the Corporation’s key
personnel.

       

      The
Corporation is dependent on the Corporation’s current management for the
foreseeable future. The loss of the services of any member of management could
have a materially adverse effect on the Corporation’s operations and
prospects.

      

      5.14     If third parties
infringe the Corporation’s intellectual property or if the Corporation is unable
to secure and protect the Corporation’s intellectual property, the Corporation
may expend significant resources enforcing the Corporation’s rights or suffer
competitive injury.

       

      The
Corporation’s success depends in large part on the Corporation’s proprietary
technology and other intellectual property rights. The Corporation relies on a
combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
the Corporation’s proprietary rights. The Corporation’s intellectual property,
particularly the Corporation’s patents, may not provide the Corporation with a
significant competitive advantage. If the Corporation fails to protect or to
enforce the Corporation’s intellectual property rights successfully, the
Corporation’s competitive position could suffer, which could harm the
Corporation’s results of operations.

       

      The
Corporation’s pending patent and trademark applications for registration may not
be allowed, or others may challenge the validity or scope of the Corporation’s
patents or trademarks, including patent or trademark applications or
registrations. Even if the Corporation’s patents or trademark registrations are
issued and maintained, these patents or trademarks may not be of adequate scope
or benefit to them or may be held invalid and unenforceable against third
parties.

       

      The
Corporation may be required to spend significant resources to monitor and police
the Corporation’s intellectual property rights. Effective policing of the
unauthorized use of the Corporation’s products or intellectual property is
difficult and litigation may be necessary in the future to enforce the
Corporation’s intellectual property rights. Intellectual property litigation is
not only expensive, but time consuming, regardless of the merits of any claim,
and could divert attention of the Corporation’s management from operating the
business. Despite the Corporation’s efforts, the Corporation may not be able to
detect infringement and may lose competitive position in the market before they
do so. In addition, competitors may design around the Corporation’s technology
or develop competing technologies. Intellectual property rights may also be
unavailable or limited in some foreign countries, which could make it easier for
competitors to capture market share.

       

      Despite
the Corporation’s efforts to protect the Corporation’s proprietary rights,
existing laws, contractual provisions and remedies afford only limited
protection. Intellectual property lawsuits are subject to inherent uncertainties
due to, among other things, the complexity of the technical issues involved, and
the Corporation cannot ensure that the Corporation will be successful in
asserting intellectual property claims. Attempts may be made to copy or reverse
engineer aspects of the Corporation’s products or to obtain and use information
that the Corporation regard as proprietary. Accordingly, the Corporation cannot
ensure that the Corporation will be able to protect the Corporation’s
proprietary rights against unauthorized third party copying or use. The
unauthorized use of the Corporation’s technology or of the Corporation’s
proprietary information by competitors could have an adverse effect on the
Corporation’s ability to sell the Corporation’s products.

       

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

       

      5.15     The Corporation
has an international presence in countries whose laws may not provide protection
of the Corporation’s intellectual property rights to the same extent as the laws
of the United States, which may make it more difficult for the Corporation to
protect the Corporation’s intellectual property.

       

      As part
of the Corporation’s business strategy, the Corporation targets customers and
relationships with suppliers and original distribution manufacturers in
countries with large populations and propensities for adopting new technologies.
However, many of these countries do not address misappropriation of intellectual
property or deter others from developing similar, competing technologies or
intellectual property. Effective protection of patents, copyrights, trademarks,
trade secrets and other intellectual property may be unavailable or limited in
some foreign countries. In particular, the laws of some foreign countries in
which the Corporation does business may not protect the Corporation’s
intellectual property rights to the same extent as the laws of the United
States. As a result, the Corporation may not be able to effectively prevent
competitors in these regions from infringing the Corporation’s intellectual
property rights, which would reduce the Corporation’s competitive advantage and
ability to compete in those regions and negatively impact the Corporation’s
business.

      

      5.16     If the
Corporation is unable to obtain key technologies from third parties on a timely
basis and free from errors or defects, the Corporation may have to delay or
cancel the release of certain products or features in the Corporation’s products
or incur increased costs.

       

      The
Corporation licenses third-party software for use in the Corporation’s products,
including the operating systems. The Corporation’s ability to release and sell
the Corporation’s products, as well as the Corporation’s reputation, could be
harmed if the third-party technologies are not delivered to customers in a
timely manner, on acceptable business terms or contain errors or defects that
are not discovered and fixed prior to release of the Corporation’s products and
the Corporation is unable to obtain alternative technologies on a timely and
cost effective basis to use in the Corporation’s products. As a result, the
Corporation’s product shipments could be delayed, the Corporation’s offering of
features could be reduced or the Corporation may need to divert the
Corporation’s development resources from other business objectives, any of which
could adversely affect the Corporation’s reputation, business and results of
operations.

      

      5.17     The Corporation’s
product strategy is to base the Corporation’s products on software operating
systems that are commercially available to competitors.

      

      The
Corporation’s multimedia phone is based on a commercially available version of
Microsoft’s Windows CE. The Corporation cannot ensure that the Corporation will
be able to maintain this licensing agreement with Microsoft and that Microsoft
will not grant similar rights to the Corporation’s competitors or that the
Corporation will be able to sufficiently differentiate the Corporation’s
multimedia phone from the multitude of other devices based on Windows
CE.

      

      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

      

      In
addition, there is significant competition in the operating system software and
services market, including proprietary operating systems such as Symbian and
Palm OS, open source operating systems, such as Linux, other proprietary
operating systems and other software technologies, such as Java and RIM’s
licensed technology. This competition is being developed and promoted by
competitors and potential competitors, some of which have significantly greater
financial, technical and marketing resources than the Corporation has, such as
Access, Motorola, Nokia, Sony-Ericsson and RIM. These competitors could provide
additional or better functionality than the Corporation does or may be able to
respond more rapidly than the Corporation can to new or emerging technologies or
changes in customer requirements. Competitors in this market could devote
greater resources to the development, promotion and sale of their products and
services and the third-party developer community, which could attract the
attention of influential user segments.

      

      If the
Corporation is unable to continue to differentiate the operating systems that
the Corporation includes in the Corporation’s mobile computing devices, the
Corporation’s revenues and results of operations could be adversely
affected.

      

      5.18     The market for
touchscreen technologies is volatile, and changing market conditions, or failure
to adjust to changing market conditions, may adversely affect the Corporation’s
revenues, results of operations and financial condition, particularly given the
Corporation’s size, limited resources and lack of
diversification.

      

      The
Corporation operates in the touchscreen technology market, which has seen
significant growth during the past years. The Corporation cannot ensure that
this significant growth in the sales of the touchscreen technology market will
continue. If the Corporation is unable to adequately respond to changes in
demand for the Corporation’s products, the Corporation’s revenues and results of
operations could be adversely affected. In addition, as the Corporation’s
products mature and face greater competition, the Corporation may experience
pressure on the Corporation’s product pricing to preserve demand for the
Corporation’s products, which would adversely affect the Corporation’s margins,
results of operations and financial condition.

      

      This
reliance on the success of and trends in the Corporation’s industry is
compounded by the size of the Corporation’s organization and the Corporation’s
focus on touchscreen technology These factors also make the Corporation more
dependent on investments of the Corporation’s limited resources. For example,
the Corporation faces many resource allocation decisions, such as: where to
focus the Corporation’s research and development, geographic sales and marketing
and partnering efforts; which aspects of the Corporation’s business to
outsource; and which operating systems and email solutions to support. Given the
size and undiversified nature of the Corporation’s organization, any error in
investment strategy could harm the Corporation’s business, results of operations
and financial condition.

      

      5.19     Changes in
financial accounting standards or practices may cause unexpected fluctuations in
and may adversely affect the Corporation’s reported results of
operations.

      

      Any
change in financial accounting standards or practices that cause a change in the
methodology or procedures by which the Corporation tracks, calculates, records
and reports the Corporation’s results of operations or financial condition or
both could cause fluctuations in and adversely affect the Corporation’s reported
results of operations and cause the Corporation’s historical financial
information to not be reliable as an indicator of future results.

      

      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

         

      

      5.20     Wars, terrorist
attacks or other threats beyond the Corporation’s control could negatively
impact consumer confidence, which could harm the Corporation’s operating
results.

      

      Wars,
terrorist attacks or other threats beyond the Corporation’s control could have
an adverse impact on the United States, Europe and world economy in general, and
consumer confidence and spending in particular, which could harm the
Corporation’s business, results of operations and financial
condition.

      

      RISKS
RELATED TO OWNING THE CORPORATION’S STOCK

      

      5.21     The Corporation
will issue additional shares of its common stock as a result of the proposed
refinancing activities and the Corporation’s stock price could be negatively
affected.

      

      The
proposed refinancing agreements will require the Corporation to seek shareholder
approval to amend the Corporations bylaws to increase the authorized shares of
common stock from 75,000,000 to an amount greater than 500,000,000. The
Corporation currently has approximately 30,600,000 shares of common stock
outstanding and after the proposed transactions it is estimated that the
Corporation will have greater than 400,000,000 shares of common stock
outstanding. As a result of the issuance of the additional shares of the common
stock the Corporation’s stock price could be negatively affected.

      

      5.22     If the
Corporation continues to experience losses, the Corporation could experience
difficulty meeting the Corporation’s business plan and the Corporation’s stock
price could be negatively affected.

      

      If the
Corporation is unable to gain market acceptance of the Corporation’s mobile
phone handsets, the Corporation will experience continuing operating losses and
negative cash flow from the Corporation’s operations. Any failure to achieve or
maintain profitability could negatively impact the market price of the
Corporation’s common stock. The Corporation anticipates that the Corporation
will continue to incur product development, sales and marketing and
administrative expenses. As a result, the Corporation will need to generate
significant quarterly revenues if the Corporation is to achieve and maintain
profitability. A substantial failure to achieve profitability could make it
difficult or impossible for the Corporation to grow the Corporation’s business.
The Corporation’s business strategy may not be successful, and the Corporation
may not generate significant revenues or achieve profitability. Any failure to
significantly increase revenues would also harm the Corporation’s ability to
achieve and maintain profitability. If the Corporation does achieve
profitability in the future, the Corporation may not be able to sustain or
increase profitability on a quarterly or annual basis.

      

      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

      

      

      5.23     The Corporation’s
certificate of incorporation and bylaws and the Delaware General Corporation Law
contain provisions that could delay or prevent a change in
control.

      

      The
Corporation’s board of directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of common stock and/or preferred stock
will be subject to, and may be materially adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock could have the effect of making it more difficult
for a third party to acquire a majority of the Corporation’s outstanding voting
stock. Furthermore, certain other provisions of the Corporation’s certificate of
incorporation and bylaws may have the effect of delaying or preventing changes
in control or management, which could adversely affect the market price of the
Corporation’s common stock. In addition, the Corporation is subject to the
provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law.

      

      5.24     The Corporation’s
stock price has been volatile, and an investment in the Corporation’s stock
could suffer a decline in value.

      

      There has
been significant volatility in the market price and trading volume of equity
securities, which is unrelated to the financial performance of the companies
issuing the securities. These broad market fluctuations may negatively affect
the market price of the Corporation’s common stock. One may not be able to
resell one’s shares at or above the price one’s pays for those shares due to
fluctuations in the market price of the Corporation’s common stock caused by
changes in the Corporation’s operating performance or prospects and other
factors.

      

      Some
specific factors that may have a significant effect on the Corporation’s common
stock market price include:

      

      
        	 
      	
                ·

              	
                actual
      or anticipated fluctuations in the Corporation’s operating results or
      future prospects;

              
	 
      	
                ·

              	
                the
      Corporation’s announcements or the Corporation’s competitors’
      announcements of new products;

              
	 
      	
                ·

              	
                the
      public’s reaction to the Corporation’s press releases, the Corporation’s
      other public announcements and the Corporation’s filings with the
      SEC;

              
	 
      	
                ·

              	
                strategic
      actions by the Corporation or the Corporation’s competitors, such as
      acquisitions or restructurings;

              
	 
      	
                ·

              	
                new
      laws or regulations or new interpretations of existing laws or regulations
      applicable to the Corporation’s business;

              
	 
      	
                ·

              	
                changes
      in accounting standards, policies, guidance, interpretations or
      principles;

              
	 
      	
                ·

              	
                changes
      in the Corporation’s growth rates or the Corporation’s competitors’ growth
      rates;

              
	 
      	
                ·

              	
                developments
      regarding the Corporation’s patents or proprietary rights or those of the
      Corporation’s competitors;

              
	 
      	
                ·

              	
                the
      Corporation’s inability to raise additional capital as
    needed;

              
	 
      	
                ·

              	
                concern
      as to the efficacy of the Corporation’s products;

              
	 
      	
                ·

              	
                changes
      in financial markets or general economic
  conditions;

              

      

      

      
        
          
          

        

        
          15

          
            

          

        

        
          
          

        

      

      

      
        	 
      	
                ·

              	
                sales
      of common stock by the Corporation or members of the Corporation’s
      management team;

              
	 
      	
                ·

              	
                certain
      anti-dilution features included in certain securities issued in prior
      financing transactions; and

              
	 
      	
                ·

              	
                changes
      in stock market analyst recommendations or earnings estimates regarding
      the Corporation’s common stock, other comparable companies or the
      Corporation’s industry generally.

              

      

      

      5.25     Future sales of
the Corporation’s common stock could adversely affect its price and the
Corporation’s future capital-raising activities could involve the issuance of
equity securities, which would dilute an investment in the Corporation and could
result in a decline in the trading price of the Corporation’s common
stock.

      

      The
Corporation may sell securities in the public or private equity markets if and
when conditions are favorable, even if the Corporation does not have an
immediate need for additional capital at that time. Sales of substantial amounts
of common stock, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Corporation’s common stock and the
Corporation’s ability to raise capital. The Corporation may issue additional
common stock in future financing transactions or as incentive compensation for
the Corporation’s executive management and other key personnel, consultants and
advisors. Issuing any equity securities would be dilutive to the equity
interests represented by the Corporation’s then-outstanding shares of common
stock. The market price for the Corporation’s common stock could decrease as the
market takes into account the dilutive effect of any of these issuances.
Furthermore, the Corporation may enter into financing transactions at prices
that represent a substantial discount to the market price of the Corporation’s
common stock or issue securities that have anti-dilution features. A negative
reaction by investors and securities analysts to any discounted sale of the
Corporation’s equity securities or sales of securities with anti-dilution
features could result in a decline in the trading price of the Corporation’s
common stock.

      

      5.26     If registration
rights that the Corporation has previously granted are exercised, then the price
of the Corporation’s common stock may be adversely affected.

      

      The
Corporation has agreed to register with the SEC the shares of common stock
issued to former stockholders in connection with the merger and to participants
in private placement financings the Corporation completed in March 2008 and May
2008. In the event these securities are registered with the SEC, they may be
freely sold in the open market, subject to trading restrictions to which the
Corporation’s insiders holding the shares may be subject from time to time. In
the event that the Corporation fails to register such shares in a timely basis,
the Corporation may have liabilities to such stockholders. The Corporation
expects that the Corporation also will be required to register any securities
sold in future private financings. The sale of a significant amount of shares in
the open market, or the perception that these sales may occur, could cause the
trading price of the Corporation’s common stock to decline or become highly
volatile.

      

      
        
          
          

        

        
          16

          
            

          

        

        
          
          

        

      

       

      RISKS
RELATED TO OWNING OUR PREFERRED STOCK

      

      5.27     There is no
public market for the Preferred Stock.

      

      There is
no public for the Preferred Stock to be issued pursuant to this Agreement and
the Company does not intend to apply for listing of the Preferred Stock on any
securities exchange.  No assurance can be given that the stockholders
of the Corporation will agree to the conversion ratio for Common Stock set forth
in the Certificate of Designations of Preferred Stock or that an active trading
market for the Preferred Stock will develop.  If an active market does
not develop and/or the Preferred Stock is not converted to Common Stock pursuant
to the conversion ratio set forth in the Certificate of Designations of
Preferred Stock, the market price and liquidity of the Preferred Stock may be
adversely affected and you may lose your total investment. 

      

      5.28     We expect
volatility in the price of our common stock, which may subject us to securities
litigation.

      

      If we
complete the refinancing transactions, the market for our common stock may be
characterized by significant price volatility when compared to seasoned issuers,
and we expect that our share price will be more volatile than a seasoned issuer
for the indefinite future. In the past, plaintiffs have often initiated
securities class action litigation against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management’s attention and
resources.

      

      5.29     The current
worldwide financial and credit markets are difficult to
access.

      

      The
recent collapse of the worldwide financial and credit markets make it extremely
difficult to access source of capital or borrowings, Credit line facilities from
financial institutions, additional private equity investments, or debt
arrangements may not be available to the Corporation for some time in the
future. No assurances can be given that the Corporation will be successful in
obtaining such additional financing on reasonable terms, or at all. If adequate
funds are not available on acceptable terms, or at all, the Corporation may be
unable to adequately fund the Corporation’s business plans and it could have a
negative effect on the Corporation’s business, results of operations and
financial condition.

      

      THE
SECURITIES TO BE ISSUED INVOLVE A HIGH DEGREE OF RISK AND MAY RESULT IN THE LOSS
OF ONE’S ENTIRE INVESTMENT. ANY PERSON CONSIDERING THE PURCHASE OF THESE
SECURITIES SHOULD BE AWARE OF THESE AND OTHER FACTORS AND SHOULD CONSULT WITH
HIS LEGAL, TAX AND FINANCIAL ADVISORS PRIOR TO EXECUTING THIS AGREEMENT. THE
SECURITIES SHOULD ONLY BE PURCHASED BY PERSONS WHO CAN AFFORD TO LOSE ALL OF
THEIR INVESTMENT.

      

      6.           Representations, Warranties,
and Agreements of the Holder

      

      The
Holder hereby represents, warrants, acknowledges, understands and agrees (as the
case may be) to the following and acknowledges the Corporation's reliance on
exemption from registration pursuant to a registration statement under the
Securities Act of 1933, as amended (the “Securities Act”) is predicated
upon the representations of the Subscriber set forth herein:

      
        

        
          
            
            

          

          
            17

            
              

            

          

          
            
            

          

        

      6.1       Authorization. 
The Holder has full power and authority to enter into this Conversion Agreement,
and the Conversion Agreement has been duly executed by the Holder, and such
authorization constitutes a valid and legally binding obligation of the Holder,
enforceable in accordance with its terms.

       

      6.2       Title. The Holder
holds all right, title, and interest in and to the Warrants to be converted by
it at the Closing, and has not placed or permitted to be placed on such Warrants
any liens, encumbrances, or adverse claims of any kind whatsoever as of the
Closing.

      

      6.3       Shares of Preferred B Stock
Not Registered. The Holder hereby acknowledges that the Conversion Shares
will not be issued by the Corporation pursuant to a registration statement under
the Securities Act, and therefore the Holder may be required to hold the
Conversion Shares for an indeterminate period.  The Conversion Shares
are issued pursuant hereto in reliance upon a specific exemption from the
registration requirement of the Securities Act which depends, in part, upon the
accuracy of the representations, warranties, and agreements of the Holder set
forth in this Conversion Agreement.

      

      6.4       Investment
Intent.  The Holder is acquiring the Conversion Shares for the
Holder’s own account as principal, not as a nominee or agent, for investment
purposes only, and not with a view to, or for, resale, distribution, or
fractionalization thereof, in whole or in part, which resale, distribution, or
fractionalization would violate the Securities Act.  The Holder agrees
that a legend to the foregoing effect may be placed upon any and all
certificates issued representing the Conversion Shares.  Further, the
Holder does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to the Conversion Shares being issued to the
Holder.  The Holder acknowledges that he has been afforded the
opportunity to ask questions of, and to obtain any information from, the
Corporation and the Board of Directors as he deems necessary to determine the
suitability and advisability of, and the merits and risk of, an investment in
the Preferred B Stock.

      

      6.5       Risk. The Holder is
aware that: (i) investment in the Corporation involves a high degree of risk,
may result in a lack liquidity, and places substantial restrictions on
transferability of interest; and (ii) no Federal or state agency has made any
finding or determination as to the fairness for investment by the public, nor
has made any recommendation or endorsement, of the Conversion
Shares.

      

      6.6       Financial Ability.
The Holder has sufficient financial resources available to support the loss of
all or a portion of the Holder’s investment in the Corporation, has no need for
liquidity in the investment in the Corporation, and is able to bear the economic
risk of the investment.  The Holder is sophisticated and experienced
in investment matters, and, as a result, is in a position to evaluate an
investment in the Corporation.

      

      
        
          
          

        

        
          18

          
            

          

        

        
          
          

        

         

      

      6.7       Receipt of
Information. The Holder has been furnished with any and all materials
that he has requested relating to the Corporation and to the Conversion Shares,
and the Holder has been afforded the opportunity to ask questions of the senior
management and directors of the Corporation concerning the terms and conditions
of this transaction and to obtain any additional information necessary to verify
the accuracy of the information provided to the Holder.  The Holder
understands that such material is current information about the Corporation and
does not in any way guarantee future performance or the completion of future
proposed events discussed in such material.  The Holder, either alone
or with his professional advisors, has the capacity to protect his own interests
in connection with this transaction.

      

      6.8       Accredited Investor.
If the Holder is a U.S. person, (i) such Holder qualifies as an “accredited
investor” as such term is defined in Regulation D promulgated under the
Securities Act, and (ii) such Holder, if it is a corporation, partnership,
limited liability company, trust, or other business entity, has not been
organized for the purpose of purchasing the Conversion
Shares.   In this regard, the Holder represents, warrants, and
agrees that:

       

      6.8.1         The
Holder is experienced in investment and business matters.

      

      6.8.2         The
Holder has made investments of a speculative nature and has purchased
non-registered securities of United States publicly-owned companies in the
past.

      

      6.8.3         The
Holder, with its representatives, has such knowledge and experience in
financial, tax, and other business matters as to enable the Holder to utilize
the information made available by the Corporation to evaluate the merits and
risks of and to make an informed investment decision with respect to the
purchase of the Conversion Shares.

      

      6.8.4         The
Holder is able to bear the risk of such investment for an indefinite period and
to afford a complete loss thereof.

      

      6.9       Regulation S
Exemption.  If the Holder is not a U.S. Person, the Holder
understands that that the Conversion Shares are being issued to him in reliance
on an exemption from the registration requirements of United States federal and
the state securities laws under Regulation S promulgated under the Securities
Act, and that the Corporation is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments, and understandings of
the Holder set forth herein order to determine the applicability of such
exemptions and the suitability of the Holder to acquire the Conversion
Shares.  In this regard, the Holder represents, warrants, and agrees
that:

      

      6.9.1         The
Holder is not a U.S. Person and is not acquiring the Conversion Shares for the
account or benefit of a U.S. Person.

      

      6.9.2         At
the time of the origination of contact concerning this Agreement and the date of
the execution and delivery of this Agreement, the undersigned was outside of the
United States.

      

      
        
          
          

        

        
          19

          
            

          

        

        
          
          

        

         

      

      6.9.3         The
Holder will not, during the period commencing on the date of issuance of the
Conversion Shares and ending on the first anniversary of such date, or such
shorter period as may be permitted by Regulation S or other applicable
securities law (the "Restricted Period"), offer, sell, pledge or otherwise
transfer the Conversion Shares in the United States, or to a U.S. Person for the
account or for the benefit of a U.S. Person, or otherwise in a manner that is
not in compliance with Regulation S.

      

      6.9.4         The
Holder will, after expiration of the Restricted Period, offer, sell pledge or
otherwise transfer the Conversion Shares only pursuant to registration under the
Securities Act or an available exemption therefrom, and, in accordance with all
applicable state foreign securities laws.

      

      6.9.5         The
Holder was not in the United States engaged in, and prior to the expiration of
the Restricted Period will not engage in, any short selling of or any hedging
transaction with respect to the Conversion Shares, including without limitation,
any put, call or other option transaction, option writing, or equity
swap.

      

      6.9.6         Neither
the Holder nor or any person acting on his behalf has engaged, nor will engage,
in any directed selling efforts to a U.S. Person with respect to the Conversion
Shares, and the Holder and any person acting on his behalf have complied and
will comply with the "offering restrictions" requirements of Regulation S under
the Securities Act.

      

      6.9.7         The
transactions contemplated by this Conversion Agreement have not been
pre-arranged with a buyer located in the United States or with a U.S. Person,
and are not part of a plan or scheme to evade the registration requirements of
the Securities Act.

      

      6.9.8         Neither
the Holder nor any person acting on his behalf has undertaken or carried out any
activity for the purpose of, or that could reasonably be expected to have the
effect of, conditioning the market in the United States, its territories or
possessions, for any of the Conversion Shares.  The Holder agrees not
to cause any advertisement of the Conversion Shares to be published in any
newspaper or periodical or posed in any public place and not to issue any
circular relating to the Conversion Shares, except such advertisements that
include the statements required by Regulation S under the Securities Act, and
only offshore and not in the U.S. or its territories, and only in compliance
with any local applicable securities laws.

      

      6.9.9         Compliance with Local
Laws. Any resale of the Conversion Shares during the “distribution
compliance period” as defined in Ruled 902(f) to Regulation S shall be made only
in compliance with exemptions from registration afforded by Regulation
S.  Further, any such sale of the Conversion Shares in any
jurisdiction outside of the United States will be made in compliance with the
securities laws of such jurisdiction.  The Holder will not offer to
sell or sell the Conversion Shares in any jurisdiction unless the Holder obtains
all required consents, if any.

      

      6.10     The
Holder consents to the Corporation making a notation on its records or giving
instructions to any transfer agent of the Corporation in order to implement the
restrictions on transfer of the Conversion Shares set forth in this Section
6.

      

      
        
          
          

        

        
          20

          
            

          

        

        
          
          

        

         

      

      6.11     Legend. The Holder
acknowledges that the certificates evidencing the Conversion Shares will bear a
legend substantially similar to the following, in addition to any other legend
required to be placed thereon by applicable federal or state securities
laws:

      

      “THE
SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL A REGISTRATION STATEMENT WITH
RESPECT THERETO IS DECLARED EFFECTIVE UNDER SUCH ACT, OR NEONODE, INC. RECEIVES
AN OPINION OF COUNSEL FOR THE HOLDER REASONABLY SATISFACTORY TO COUNSEL FOR
NEONODE, INC. THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT
IS AVAILABLE.”

      

      7.           Representations, Warranties
and Agreements of the Corporation.

      

      The
Corporation hereby represents, warrants, and covenants as follows:

      

      7.1       Organization and
Qualification.  The Corporation is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has the requisite corporate power to own its properties and to
carry on its business as it is now being conducted.

      

      7.2       Authorization,
Enforceability.  (i) The Corporation has the requisite
corporate power and authority to enter into this Conversion Agreement and to
perform its obligations hereunder  in accordance with the terms
hereof, (ii) the execution and delivery of this Conversion Agreement by the
Corporation and the consummation by it of the transactions contemplated hereby
have been duly authorized by the Corporation’s Board of Directors and further
consent or authorization of the Corporation by its Board of Directors is not
required; and (iii) upon the execution and delivery of this Conversion Agreement
by the Corporation, this Conversion Agreement will constitute valid and binding
obligations of the Corporation enforceable against the Corporation in accordance
with their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of creditors’ rights and
remedies or by other equitable principles of general application.

      

      7.3       Issuance of
Shares.  The Conversion Shares to be issued and delivered by
the Corporation hereunder, when so issued and delivered, will be duly and
validly issued, fully paid and nonassessable and will be issued in reliance upon
applicable exemptions from the registration and qualification provisions of all
applicable securities laws of the United States and each state whose securities
laws may be applicable thereto.  All Conversion Shares will be issued
free of any preemptive or similar right and free and clear of any claim, lien,
security interest or other encumbrance.  Assuming the accuracy of the
Holder’s representations and warranties hereunder, the issuance to the Holder of
the Conversion Shares will be exempt from the registration requirements of the
Securities Act and will be made in reliance upon applicable exemptions from the
registration and qualification provisions of all applicable state securities
laws.

      

      
        
          
          

        

        
          21

          
            

          

        

        
          
          

        

         

      

      8.           Miscellaneous

      

      8.1       Definition of
Terms.  All pronouns and any variations thereof used herein
shall be deemed to refer to the masculine, feminine, neuter, singular or plural
as the identity of the person or persons may require.

      

      8.2       Entire
Agreement.  This Conversion Agreement, together with the
documents referenced herein, constitute the entire understanding among the
parties with respect to the subject matter hereof, and supersede any prior
understanding and/or written or oral agreements among them.  This
Conversion Agreement may not be changed or modified, except by an agreement in
writing signed by each of the parties hereto.

      

      8.3       Binding Effect; Successors
and Assigns.  Each Holder agrees not to transfer or assign this
Conversion Agreement, or any of the Holder’s interest herein, and further agrees
that the transfer or assignment of the Conversion Shares shall be made only in
accordance with applicable laws and the terms of this Conversion
Agreement.  Subject to the foregoing, this Conversion Agreement shall
be binding upon and inure to the benefits of the parties hereto, their
successors and assigns.

      

      8.4       Governing
Law.  This Conversion Agreement shall be governed by the laws
of the state of Delaware applicable to contracts made and wholly performed in
that jurisdiction.

      

      8.5       Notices.  All
notices or other communications hereunder shall be in writing and shall be
delivered by hand or mailed by registered or certified mail, return receipt
requested, to the Holder at the addresses provided in Exhibit A and to the
Corporation at its registered office.  The Corporation and the Holder
may change their addresses for notices by written notice to each of the Parties,
as required.

      

      8.6       Counterparts. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.

      

      IN WITNESS WHEREOF, the
Parties have executed this Conversion Agreement on the date set forth
above.

      

      
        
          
            
              
                	
                        THE CORPORATION

                      	 	
                        THE
      HOLDER

                      
	 
      	 	 
      
	
                        Neonode,
      Inc.

                      	 	
                        [insert
      name]

                      
	 
      	 	 
      
	 
      	 	 
      
	
                        Name:

                      	 	
                        Name:

                      
	
                        Title:

                      	 	
                        Title:

                      
	
                        Date:

                      	 	
                        Date:

                      

              

            

          

        

      

      

      
        
          
          

        

        
          22SERIES A PREFERRED STOCK
SUBSCRIPTION AGREEMENT

    

    THIS SERIES A PREFERRED STOCK
SUBSCRIPTION AGREEMENT (the “Subscription Agreement”), is
made and entered into as of the ____ day of December, 2008 (the “Effective Date”), by and among
Neonode, Inc., a
Delaware corporation (the “Corporation”), and the
subscribers whose names and addresses are listed on Exhibit
A attached hereto (each, a “Subscriber” and collectively,
the “Subscribers”).  The
Corporation and the Subscribers shall be referred to collectively herein as the
“Parties” and each
separately as a “Party”.

    

    WHEREAS, the Board of
Directors of the Corporation has determined that it is in the best interests of
the Corporation to raise capital by means of the issuance of shares of the
Corporation’s Series A Preferred Stock, par value US$0.001 each (the "Preferred A Stock") to the
Subscribers at the Price Per Share (as defined below); and

    

    WHEREAS, to comply with the
relevant NASDAQ maintenance criteria and to raise capital to finance the
Corporation’s business going forward, the Corporation will be engaging in
certain refinancing and capital raising activities, including the sale of
Preferred A Stock to the Subscribers; and

    

    WHEREAS, the Subscribers are
interested in investing in the Corporation pursuant to the terms and conditions
more fully set forth in this Agreement;

    

    NOW THEREFORE, in
consideration of the premises and the mutual promises herein made, and in
consideration of the representations, warranties, and covenants herein
contained, and intending to be legally bound hereby, the Parties agree as
follows

    

    1.           Subscription for
Shares

    

    1.1           Subscription. Subject
to the terms and conditions set forth herein, the Subscribers hereby subscribe
for and agree to purchase from the Corporation, one hundred and fifty thousand
(150,000) shares (the “Purchased Shares”) of the
Corporation’s Preferred A Stock, at a price equal to ten dollars ($10.00) per
share (the “Price Per
Share”), for an aggregate purchase price equal to one million five
hundred thousand U.S. Dollars ($1,500,000) (the “Subscription
Price”).

    

    1.2           Allocation. The
Purchased Shares shall be allocated among the Subscribers as set forth in Exhibit
A, in consideration of the payment of the Subscription Price by the
Subscribers to the Corporation.

    

    1.3           Each
Subscriber acknowledges the following:

    

    (a)           that
the Subscriber may lose his entire investment in the Corporation;
and

    

    (b)           that
the stockholders of the Corporation may vote to reject (i) an increase in the
authorized share capital of the Corporation to enable the issuance of shares of
common stock upon conversion of the Purchased Shares or (ii) a modification of
the initial conversion rate of the Preferred A Stock; and

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

    (c)           certain
members of the Board of Directors of the Corporation are personally involved in
the Corporation’s refinancing and capital raising activities and will be
investing their own funds in the Corporation, and that the personal interest of
these Directors in these transactions creates the potential for a conflict of
interest.

    

    A
complete discussion of the risks associated with this transaction and an
investment in the Corporation are set forth in the Corporation’s Form 10-K filed
with the SEC on April 15, 2008 for the fiscal year ended December 31, 2007, Form
S-3 filed with the SEC on September 23, 2008, and Form 10-Q filed with the SEC
on November 19, 2008 for the quarter ended September 30, 2008, and in Section 5
below.

    

    2.           Closing.

    

    2.1           The
closing (the “Closing”)
of the purchase and sale of the Purchased Shares shall take place on or about
December ___, 2008 (the “Closing Date”) at the offices
of the Corporation.

    

    2.2           At
the Closing, (a) the Subscribers shall pay to the Corporation the full
Subscription Price; and (b) the Corporation shall issue and deliver to each
Subscriber a stock certificate or certificates, registered in the name of such
Subscriber, evidencing the Purchased Shares purchased by such
Subscriber.

    
      
         

      

      
        -2-

        
          

        

      

      
         

      

    

    

    3.           The Preferred A
Stock

    

    3.1           Certificate of
Designations. The rights, preferences, privileges, and restrictions of
the Preferred A Stock shall be as described in the Certificate of Designations,
of which a copy has been provided to each Subscriber.

    

    3.2           Conversion. Subject
to approval of the stockholders of the Corporation, each share of Preferred A
Stock shall be convertible into 480.63 shares of the Corporation’s common stock
(the “Conversion Rate”).

    

    3.3           Stockholder Approval.
The Corporation shall provide each stockholder entitled to vote at either (a)
the next annual meeting of stockholders of the Corporation or (b) a special
meeting of stockholders of the Corporation, which shall be promptly called and
held not later than March 30, 2009, (the “Stockholder Meeting”), with a proxy
statement soliciting each such stockholder’s affirmative vote at the Stockholder
Meeting for approval of resolutions (i) increasing the authorized share capital
of the Corporation so as to authorize a sufficient amount of authorized share
capital to enable the issuance of shares of common stock upon conversion of the
Purchased Shares, and (ii) approving the Conversion Rate, (the “Stockholder
Approvals”).

    

    3.4           Acknowledgement. The
Subscribers acknowledge that their right to convert the Purchased Shares into
shares of common stock of the Corporation is subject to the Stockholder
Approvals, and that there can be no guarantee that the Stockholder Approvals
will be obtained.

    

    4.           Information on the Company;
Legal Proceedings

    

    4.1           Information on the
Company. Each Subscriber has been furnished with or has had access at the
EDGAR Website of the SEC to the Company's Form 10-K filed on April 15, 2008 for
the fiscal year ended December 31, 2007 and the financial statements included
therein for the year ended December 31, 2007 together with all subsequent
filings made with the SEC available at the EDGAR website ("Reports").  In
addition, each Subscriber may have received in writing from the Company such
other information concerning its operations, financial condition and other
matters as such Subscriber has requested in writing, identified thereon as
"Other Written Information" and considered all factors such Subscriber deems
material in deciding on the advisability of investing in the Purchased
Shares.

    

    4.2           Legal
Proceedings.

    

    4.2.1           Alpha Capital
Anstalt. On September 4, 2008, Alpha Capital Anstalt (“Alpha”), an
investor in the Corporation from previous private placement transactions,
initiated a law suit against the Corporation in the United States District Court
for the Southern District of New York alleging that the Corporation failed to
issue certain stock certificates pursuant to the terms and conditions of certain
investment subscription agreements.  Alpha asked the court to award
them $734,650 in damages plus attorneys fees. Although the Corporation believes
the claim has no merit, the Corporation has reached an agreement in principal on
the terms for a negotiated settlement with Alpha, which agreement has not as of
yet been finalized.

     

    
      
        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

     

    4.2.2           Empire Asset
Management. On December 9, 2008, Empire Asset Management (“Empire”), a
broker dealer that acted as the Corporation’s financial advisor and exclusive
placement agent and purchased stock for their own account in previous private
placement transactions, initiated a law suit against the Corporation in the
Supreme Court of the State of New York alleging that the Corporation
misrepresented the success of its business to induce Empire to invest in the
Corporation.  Empire is seeking compensatory damages in an unspecified
amount for the harm allegedly suffered.  The Corporation believes that
the action has no merit and intends to defend vigorously against the
action.

    

    4.2.3           Nasdaq. On May 29,
2008, the Corporation received a NASDAQ Staff deficiency letter indicating that
the market value of our listed securities had been below the minimum $35 million
requirement for continued inclusion under its listing standards (the “Market
Capitalization Rule”), and provided until June 30, 2008 for the Corporation to
demonstrate compliance.  On July 1, 2008, the Corporation received a
NASDAQ Staff Determination letter stating that the Corporation had not regained
compliance with the Market Capitalization Rule and, unless the Corporation
requests an appeal of this determination, trading of the Corporation’s common
stock will be suspended at the opening of business on July 10, 2008 and NASDAQ
will remove the Corporation’s securities from listing and registration on the
NASDAQ Capital Market. The Corporation has appealed the determination with the
NASDAQ Listing Qualifications Panel (the “Panel”), which stays the suspension of
Neonode’s securities pending the Panel’s decision.  The Corporation
appeared before the Panel on August 28, 2008 and the Corporation is awaiting its
decision.

    

    In
addition, on July 3, 2008, the Corporation received a NASDAQ Staff deficiency
letter indicating that for the last 30 consecutive days, the bid price for the
Corporation’s common stock had closed below the $1.00 minimum requirement for
continued inclusion under its listing standards (the “Minimum Bid Price Rule”),
and provided us 180 days (or until December 30, 2008) to regain
compliance. 

    

    Furthermore,
on December 11, 2008, the Corporation received a Nasdaq Staff deficiency letter
(the “Notice”) from The NASDAQ Stock Market Listing Qualifications Department
stating that the Corporation has not paid certain fees required by Marketplace
Rule 4310(c)(13) (the “Rule”). The Corporation’s past due balance currently
totals $43,615.08.  The Notice further stated that the Nasdaq Listing
Qualification Panel (“Panel”) will consider this matter in rendering a
determination regarding the Corporation’s continued listing on the NASDAQ
Capital Markets.

    

    5.           Risk
Factors

    

    An
investment in the Corporation’s preferred stock involves a high degree of risk.
You should consider carefully the specific risks detailed in this “Risk Factors”
section together with all of the other information contained in this
Subscription Agreement and any other documents incorporated by reference herein.
If any of these risks occur, the Corporation’s business, results of operations
and financial condition could be harmed, the price of the Corporation’s
preferred stock could decline, and you may lose all or part of your investment
in the Corporation.

    
      
         

      

      
        -4-

        
          

        

      

      
         

      

    

    

    5.1           The Corporation’s
independent registered public accounting firm issued a going concern opinion on
the Corporation’s financial statements, questioning the Corporation’s ability to
continue as a going concern.

     

    Due to
the Corporation’s need to raise additional financing to fund the Corporation’s
operations and satisfy obligations as they become due, the Corporation’s
independent registered public accounting firm has included an explanatory
paragraph in its report on the Corporation’s December 31, 2007 consolidated
financial statements regarding its substantial doubt as to the Corporation’s
ability to continue as a going concern. This may have a negative impact on the
trading price of the Corporation’s common stock and adversely impact the
Corporation’s ability to obtain necessary financing.

    

    5.2           The Refinancing
of the Corporation may be unsuccessful and the stockholders of the Corporation
may lose their entire investment in the Corporation.

    

    The
individuals and entities participating in the refinancing of the Corporation,
including the investors, note holders, warrant holders, and employees of the
Swedish subsidiary should be aware that if the Corporation is not successful in
its refinancing endeavors, their entire investment in the Company could become
worthless. Even if the Corporation is successful, there can be no assurance that
the participants in the refinancing of the Corporation will derive a profit from
their investment.

    

    5.3           The Corporation’s current management
and Directors are personally involved in the Corporation’s refinancing and
capital raising activities.

    

    The
Corporation’s board of directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders.  In addition, as part of the Corporation’s refinancing
efforts, the Corporation’s current directors, Per Bystedt, will be investing
additional funds in the Corporation in exchange for the issuance to them of
preferred stock, as well as participating in a share exchange transaction with
the Corporation as stockholders of a Swedish company to whom the Company will be
issuing preferred stock.  The fact that the current management and
Directors of the Corporation have a personal interest as investors in the
Corporation creates the potential for a conflict of interest.  While
the Corporation believes that the proposed refinancing and capital raising
transactions that the Corporation will be entering into with the Corporation’s
management and directors are fair and in the best interests of the Corporation,
there is a risk that the personal involvement of the management and directors
may have affected their judgment.

    

    5.4           The tax
implications of this refinancing transaction are complex and should be reviewed
by the investor’s tax advisor.

    

    The tax
implications, including United States federal income tax consequences, of this
refinancing transaction are complex.  Each investor should consult its
own tax advisor regarding the particular United States Federal, state, local and
foreign tax consequences of purchasing, holding, and disposing of our Preferred
and Common Stock, including the consequences of any proposed change in
applicable laws.

    
      
         

      

      
        -5-

        
          

        

      

      
         

      

    

    

    RISKS
RELATED TO THE CORPORATION’S BUSINESS

    

    5.5           The Corporation
will require additional capital to fund the Corporation’s operations, which
capital may not be available on commercially attractive terms or at
all.

    

    The
Corporation will require sources of capital in addition to cash on hand to
continue operations and to implement the Corporation’s strategy. The Corporation
does not have sufficient liquid assets to continue operating into the end of
December 2008. The Corporation estimates that the Corporation will need a
minimum of approximately $1.3 million of additional cash from additional
financings, to fund operating expenses through March 31, 2009. The Corporation
is currently evaluating different financing alternatives including but not
limited to selling shares of the Corporation’s common or preferred stock or
issuing notes that may be converted in shares of the Corporation’s common stock
which could result in the issuance of additional shares.  If the
Corporation’s operations do not become cash flow positive as projected the
Corporation will be forced to seek credit line facilities from financial
institutions, additional private equity investment or debt arrangements. No
assurances can be given that the Corporation will be successful in obtaining
such additional financing on reasonable terms, or at all. If adequate funds are
not available on acceptable terms, or at all, the Corporation may be unable to
adequately fund the Corporation’s business plans and it could have a negative
effect on the Corporation’s business, results of operations and financial
condition.  In addition, if funds are available, the issuance of
equity securities or securities convertible into equity could dilute the value
of shares of the Corporation’s stock and cause the market price to fall, and the
issuance of debt securities could impose restrictive covenants that could impair
the Corporation’s ability to engage in certain business
transactions.

    

    5.6           The Corporation’s
common stock is at risk for delisting from the NASDAQ Capital Market. If it is
delisted, the Corporation’s stock price and the liquidity of the Corporation’s
stock may be impacted.

     

    The
Corporation's common stock is quoted on The NASDAQ Capital Market under the
symbol “NEON”.  In order for the Corporation's common stock to
continue to be quoted on the NASDAQ Capital Market, the Corporation must satisfy
various listing maintenance standards established by NASDAQ.  Among
other things, as such requirements pertain to the Corporation, the Corporation
is required to have stockholders’ equity of at least $2.5 million or a market
capitalization of at least $35 million and the Corporation’s common stock must
have a minimum closing bid price of $1.00 per share.

     

    On May
29, 2008, the Corporation received a NASDAQ staff deficiency letter from The
NASDAQ Stock Market Listing Qualifications Department stating that for the last
10 consecutive business days, the market value of the Corporation's listed
securities has been below the minimum $35 million requirement for continued
inclusion under Marketplace Rule 4310 (c)(3)(B) (the "Rule"). The notice further
states that pursuant to Marketplace Rule 4310(c)(8)(C), the Corporation was
provided 30 calendar days (or until June 30, 2008) to regain
compliance.

    
      
         

      

      
        -6-

        
          

        

      

      
         

      

    

    

    On July
1, 2008, the Corporation received a notice from NASDAQ that it had not regained
compliance within the specified time period and that unless the Corporation
requested an appeal of the non-compliance determination the Corporation's
securities would be suspended from trading on the NASDAQ Capital Market on July
10, 2008. The Corporation has submitted a request to have a hearing to the
NASDAQ Listing Qualifications Panel (Panel).  The Corporation's
request stays the delisting of its securities pending the hearing and a
determination by the Panel.  The Corporation appeared before the Panel
on August 28, 2008. On November 18, 2008, the Corporation received a
determination letter from the Panel that the Panel granted the Corporation an
extension until December 29, 2008 to complete its proposed refinancing
transactions and regain compliance with the Rule.

    

    Additionally,
on July 3, 2008, the Corporation received another staff deficiency letter from
NASDAQ stating that for the last 30 consecutive business days, the bid price of
our common stock closed below the $1.00 minimum required for continued inclusion
under Marketplace Rule 4310(c)(4). The notice further states that pursuant to
Marketplace Rule 4310(c)(8)(D), the Corporation will be provided 180 calendar
days (or until December 30, 2008) to regain compliance. If, at any time before
December 30, 2008, the bid price of the Corporation's common stock closes at
$1.00 per share or more for a minimum of 10 consecutive business days, the
Corporation may regain compliance with the Minimum Bid Price Rule. NASDAQ
subsequently modified its Marketplace Rules and notified the Corporation that it
has until April 6, 2009 to regain compliance with the bid price under
Marketplace Rule 4310(c)(4).

    

    Additionally
on December 11, 2008, the Corporation received a Nasdaq Staff deficiency letter
from The NASDAQ Stock Market Listing Qualifications Department stating that it
has not paid certain fees required by Marketplace Rule 4310(c)(13) (the
“Rule”). The Corporation’s past due balance currently total $43,615.08. The
notice further states that the Nasdaq Listing Qualification Panel (“Panel”) will
consider this matter in rendering a determination regarding the Corporation’s
continued listing on the NASDAQ Capital Markets.

    

    5.7           The Corporation
has never been profitable and the Corporation anticipates significant additional
losses in the future.

    

    The
Corporation was formed in 2006 as a holding company owning and operating Neonode
AB, its Swedish subsidiary, which was formed in 2004 and has been primarily
engaged in the business of developing and selling mobile phones.  On
December 9, 2008, Neonode AB, filed a petition for bankruptcy in compliance with
the Swedish  Bankruptcy Act (1987:672). Mr. Hans Ödén of the
Stockholm-based Ackordscentralen AB, a consultancy firm specializing in
insolvency, was appointed by the district court of Stockholm to administrate the
process. Although the Corporation has transferred the intellectual property (IP)
related to its touch screen technology from Neonode AB to the Corporation
pursuant to an intercompany borrowing asset pledge agreement, the Swedish
bankruptcy court may not allow the transfer and require the Corporation to
return the IP to Neonode AB. The Corporation has a limited operating history on
which to base an evaluation of the Corporation’s business and prospects. The
Corporation’s prospects must be considered in light of the risks and
uncertainties encountered by companies in the early stages of development,
particularly companies in new and rapidly evolving markets. After refinancing
efforts have been completed,  the Corporation’s success will depend on
many factors, including, but not limited to:

    
      
         

      

      
        -7-

        
          

        

      

      
         

      

    

     

    
      	 
      	
              ·

            	
              the
      growth of the worldwide market for touch screen mobile
      devices;

            
	 
      	
              ·

            	
              the
      Corporations ability to develop and sell or license its touchscreen
      technology to third party companies to embed in their products
      ;

            

    

    
      	 
      	
              ·

            	
              the
      level of competition from other touch screen technologies faced by the
      Corporation; and

            
	 
      	
              ·

            	
              the
      ability of future customers of the Corporation’s touchscreen technology to
      develop and sell products incorporating the Corporation’s touch screen
      technology.

            

    

    

    In
addition, the Corporation has experienced substantial net losses in each fiscal
period since the Corporation’s inception. These net losses resulted from a lack
of substantial revenues and the significant costs incurred in the development of
the Corporation’s products and infrastructure. The Corporation’s ability to
continue as a going concern is dependent on the Corporation’s ability to raise
additional funds and implement the Corporation’s business plan.

     

    The
Corporation’s limited operating history and the emerging nature of the
Corporation’s market, together with the other risk factors set forth in this
Section, make prediction of the Corporation’s future operating results
difficult. There can also be no assurance that the Corporation will ever achieve
significant revenues or profitability or, if significant revenues and
profitability are achieved, that they could be sustained.

    

    5.8           The Corporation’s
vendors may deny the Corporation’s requests to delay or reduce the payment of
amounts owed to them or to cancel shipments of materials and products purchased
from and to allow the Corporation to return unused materials and products
already received from them.

    

    The
Corporation is not generating cash from operations and has been incurring
significant losses. The Corporation has been funding the Corporation’s
operations primarily with cash proceeds raised through the sale of notes that
are convertible into the Corporation’s common stock, shares of the Corporation’s
common stock, and warrants. Unless the Corporation is able to increase the
Corporation’s revenues and decrease expenses substantially and secure an
external funding source, the Corporation may not be able to pay the
Corporation’s vendors the amount due them and the Corporation will not have
sufficient cash to support the Corporation’s operations for the next six
months.

    

    The
Corporation’s vendors may resort to legal action to try to enforce payment in
full pursuant to the terms or the original payment commitment.

    
      
         

      

      
        -8-

        
          

        

      

      
         

      

    

    

    5.9           If the
Corporation fails to develop and introduce new products and services
successfully and in a cost effective and timely manner, the Corporation will not
be able to compete effectively and the Corporation’s ability to generate
revenues will suffer.

    

    The
Corporation operates in a highly competitive, rapidly evolving environment, and
the Corporation’s success depends on the Corporation’s ability to develop and
introduce new products and services that the Corporation’s customers and end
users choose to buy. If the Corporation is unsuccessful at developing and
introducing new products and services that are appealing to the Corporation’s
customers and end users with acceptable quality, prices and terms, the
Corporation will not be able to compete effectively and the Corporation’s
ability to generate revenues will suffer.

    

    The
development of new products and services is very difficult and requires high
levels of innovation. The development process is also lengthy and costly. If the
Corporation fails to anticipate the Corporation’s end users’ needs or
technological trends accurately, or the Corporation is unable to complete the
development of products and services in a cost effective and timely fashion, the
Corporation will be unable to introduce new products and services into the
market or successfully compete with other providers.

    

    As the
Corporation introduces new or enhanced products or integrates new technology
into new or existing products, the Corporation faces risks including, among
other things, disruption in customers’ ordering patterns, excessive levels of
older product inventories, inability to deliver sufficient supplies of new
products to meet customers’ demand, possible product and technology defects, and
a potentially different sales and support environment. Premature announcements
or leaks of new products, features, or technologies may exacerbate some of these
risks. The Corporation’s failure to manage the transition to newer products or
the integration of newer technology into new or existing products could
adversely affect the Corporation’s business, results of operations and financial
condition.

    

    5.10           The mobile device
industry is highly competitive and many of the Corporation’s competitors have
significantly greater resources to engage in product development, manufacturing,
distribution and marketing.

    

    The
mobile device industry, in which the Corporation is engaged, is a highly
competitive business with companies of all sizes engaged in business in all
areas of the world, including companies with far greater resources than the
Corporation has. There can be no assurance that other competitors, with greater
resources and business connections, will not compete successfully against the
Corporation in the future. The Corporation’s competitors may adopt new
technologies that reduce the demand for the Corporation’s products or render the
Corporation’s technologies obsolete, which may have a material adverse effect on
the cost structure and competitiveness of the Corporation’s products, possibly
resulting in a negative effect on the Corporation’s revenues, profitability or
liquidity.

    

    5.11           The Corporation’s
future results could be harmed by economic, political, regulatory and other
risks associated with international sales and operations.

    

    Because
the Corporation plans to sell the Corporation’s products worldwide and most of
the facilities where the Corporation’s future customers devices will be
manufactured, distributed and supported are located outside the United States,
the Corporation’s business is subject to risks associated with doing business
internationally, such as:

    

    
      	 
      	
              ·

            	
              changes
      in foreign currency exchange rates;

            

    

     

    
      
         

      

      
        -9-

        
          

        

      

      
         

      

    

    

    
      	 
      	
              ·

            	
              the
      impact of recessions in the global economy or in specific sub
      economies;

            
	 
      	
              ·

            	
              changes
      in a specific country’s or region’s political or economic conditions,
      particularly in emerging markets;

            
	 
      	
              ·

            	
              changes
      in international relations;

            
	 
      	
              ·

            	
              trade
      protection measures and import or export licensing
      requirements;

            
	 
      	
              ·

            	
              changes
      in tax laws;

            
	 
      	
              ·

            	
              compliance
      with a wide variety of laws and regulations which may have civil and/or
      criminal consequences for them and the Corporation’s officers and
      directors who they indemnify;

            
	 
      	
              ·

            	
              difficulty
      in managing widespread sales operations; and

            
	 
      	
              ·

            	
              difficulty
      in managing a geographically dispersed workforce in compliance with
      diverse local laws and customs.

            

    

    

    In
addition, the Corporation is subject to changes in demand for the Corporation’s
products resulting from exchange rate fluctuations that make the Corporation’s
products relatively more or less expensive in international markets. If exchange
rate fluctuations occur, the Corporation’s business and results of operations
could be harmed by decreases in demand for the Corporation’s products or
reductions in margins.

    

    While the
Corporation sells the Corporation’s products worldwide, one component of the
Corporation’s strategy is to expand the Corporation’s sales efforts in countries
with large populations and propensities for adopting new technologies. The
Corporation has limited experience with sales and marketing in some of these
countries. There can be no assurance that the Corporation will be able to market
and sell the Corporation’s products in all of the Corporation’s targeted
international markets. If the Corporation’s international efforts are not
successful, the Corporation’s business growth and results of operations could be
harmed.

    

    5.12           The Corporation
must significantly enhance the Corporation’s sales and product development
organizations.

    

    The
Corporation will need to improve the effectiveness and breadth of the
Corporation’s sales operations in order to increase market awareness and sales
of the Corporation’s products, especially as the Corporation expands into new
markets. Competition for qualified sales personnel is intense, and the
Corporation may not be able to hire the kind and number of sales personnel the
Corporation is targeting. Likewise, the Corporation’s efforts to improve and
refine the Corporation’s products require skilled engineers and programmers.
Competition for professionals capable of expanding the Corporation’s research
and development organization is intense due to the limited number of people
available with the necessary technical skills. If the Corporation is unable to
identify, hire or retain qualified sales, marketing and technical personnel, the
Corporation’s ability to achieve future revenue may be adversely
affected.

    
      
         

      

      
        -10-

        
          

        

      

      
         

      

    

    

    5.13           The Corporation
is dependent on the services of the Corporation’s key
personnel.

    

    The
Corporation is dependent on the Corporation’s current management for the
foreseeable future. The loss of the services of any member of management could
have a materially adverse effect on the Corporation’s operations and
prospects.

    

    5.14           If third parties
infringe the Corporation’s intellectual property or if the Corporation is unable
to secure and protect the Corporation’s intellectual property, the Corporation
may expend significant resources enforcing the Corporation’s rights or suffer
competitive injury.

    

    The
Corporation’s success depends in large part on the Corporation’s proprietary
technology and other intellectual property rights. The Corporation relies on a
combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
the Corporation’s proprietary rights. The Corporation’s intellectual property,
particularly the Corporation’s patents, may not provide the Corporation with a
significant competitive advantage. If the Corporation fails to protect or to
enforce the Corporation’s intellectual property rights successfully, the
Corporation’s competitive position could suffer, which could harm the
Corporation’s results of operations.

    

    The
Corporation’s pending patent and trademark applications for registration may not
be allowed, or others may challenge the validity or scope of the Corporation’s
patents or trademarks, including patent or trademark applications or
registrations. Even if the Corporation’s patents or trademark registrations are
issued and maintained, these patents or trademarks may not be of adequate scope
or benefit to them or may be held invalid and unenforceable against third
parties.

    

    The
Corporation may be required to spend significant resources to monitor and police
the Corporation’s intellectual property rights. Effective policing of the
unauthorized use of the Corporation’s products or intellectual property is
difficult and litigation may be necessary in the future to enforce the
Corporation’s intellectual property rights. Intellectual property litigation is
not only expensive, but time consuming, regardless of the merits of any claim,
and could divert attention of the Corporation’s management from operating the
business. Despite the Corporation’s efforts, the Corporation may not be able to
detect infringement and may lose competitive position in the market before they
do so. In addition, competitors may design around the Corporation’s technology
or develop competing technologies. Intellectual property rights may also be
unavailable or limited in some foreign countries, which could make it easier for
competitors to capture market share.

    

    Despite
the Corporation’s efforts to protect the Corporation’s proprietary rights,
existing laws, contractual provisions and remedies afford only limited
protection. Intellectual property lawsuits are subject to inherent uncertainties
due to, among other things, the complexity of the technical issues involved, and
the Corporation cannot ensure that the Corporation will be successful in
asserting intellectual property claims. Attempts may be made to copy or reverse
engineer aspects of the Corporation’s products or to obtain and use information
that the Corporation regard as proprietary. Accordingly, the Corporation cannot
ensure that the Corporation will be able to protect the Corporation’s
proprietary rights against unauthorized third party copying or use. The
unauthorized use of the Corporation’s technology or of the Corporation’s
proprietary information by competitors could have an adverse effect on the
Corporation’s ability to sell the Corporation’s products.

    
      
         

      

      
        -11-

        
          

        

      

      
         

      

    

    

    5.15           The Corporation
has an international presence in countries whose laws may not provide protection
of the Corporation’s intellectual property rights to the same extent as the laws
of the United States, which may make it more difficult for the Corporation to
protect the Corporation’s intellectual property.

    

    As part
of the Corporation’s business strategy, the Corporation targets customers and
relationships with suppliers and original distribution manufacturers in
countries with large populations and propensities for adopting new technologies.
However, many of these countries do not address misappropriation of intellectual
property or deter others from developing similar, competing technologies or
intellectual property. Effective protection of patents, copyrights, trademarks,
trade secrets and other intellectual property may be unavailable or limited in
some foreign countries. In particular, the laws of some foreign countries in
which the Corporation does business may not protect the Corporation’s
intellectual property rights to the same extent as the laws of the United
States. As a result, the Corporation may not be able to effectively prevent
competitors in these regions from infringing the Corporation’s intellectual
property rights, which would reduce the Corporation’s competitive advantage and
ability to compete in those regions and negatively impact the Corporation’s
business.

    

    5.16           If the
Corporation is unable to obtain key technologies from third parties on a timely
basis and free from errors or defects, the Corporation may have to delay or
cancel the release of certain products or features in the Corporation’s products
or incur increased costs.

    

    The
Corporation licenses third-party software for use in the Corporation’s products,
including the operating systems. The Corporation’s ability to release and sell
the Corporation’s products, as well as the Corporation’s reputation, could be
harmed if the third-party technologies are not delivered to customers in a
timely manner, on acceptable business terms or contain errors or defects that
are not discovered and fixed prior to release of the Corporation’s products and
the Corporation is unable to obtain alternative technologies on a timely and
cost effective basis to use in the Corporation’s products. As a result, the
Corporation’s product shipments could be delayed, the Corporation’s offering of
features could be reduced or the Corporation may need to divert the
Corporation’s development resources from other business objectives, any of which
could adversely affect the Corporation’s reputation, business and results of
operations.

    

    5.17           The Corporation’s
product strategy is to base the Corporation’s products on software operating
systems that are commercially available to competitors.

    

    The
Corporation’s multimedia phone is based on a commercially available version of
Microsoft’s Windows CE. The Corporation cannot ensure that the Corporation will
be able to maintain this licensing agreement with Microsoft and that Microsoft
will not grant similar rights to the Corporation’s competitors or that the
Corporation will be able to sufficiently differentiate the Corporation’s
multimedia phone from the multitude of other devices based on Windows
CE.

    
      
         

      

      
        -12-

        
          

        

      

      
         

      

    

    

    In
addition, there is significant competition in the operating system software and
services market, including proprietary operating systems such as Symbian and
Palm OS, open source operating systems, such as Linux, other proprietary
operating systems and other software technologies, such as Java and RIM’s
licensed technology. This competition is being developed and promoted by
competitors and potential competitors, some of which have significantly greater
financial, technical and marketing resources than the Corporation has, such as
Access, Motorola, Nokia, Sony-Ericsson and RIM. These competitors could provide
additional or better functionality than the Corporation does or may be able to
respond more rapidly than the Corporation can to new or emerging technologies or
changes in customer requirements. Competitors in this market could devote
greater resources to the development, promotion and sale of their products and
services and the third-party developer community, which could attract the
attention of influential user segments.

    

    If the
Corporation is unable to continue to differentiate the operating systems that
the Corporation includes in the Corporation’s mobile computing devices, the
Corporation’s revenues and results of operations could be adversely
affected.

    

    5.18           The market for
touchscreen technologies is volatile, and changing market conditions, or failure
to adjust to changing market conditions, may adversely affect the Corporation’s
revenues, results of operations and financial condition, particularly given the
Corporation’s size, limited resources and lack of
diversification.

    

    The
Corporation operates in the touchscreen technology market, which has seen
significant growth during the past years. The Corporation cannot ensure that
this significant growth in the sales of the touchscreen technology market will
continue. If the Corporation is unable to adequately respond to changes in
demand for the Corporation’s products, the Corporation’s revenues and results of
operations could be adversely affected. In addition, as the Corporation’s
products mature and face greater competition, the Corporation may experience
pressure on the Corporation’s product pricing to preserve demand for the
Corporation’s products, which would adversely affect the Corporation’s margins,
results of operations and financial condition.

    

    This
reliance on the success of and trends in the Corporation’s industry is
compounded by the size of the Corporation’s organization and the Corporation’s
focus on touchscreen technology These factors also make the Corporation more
dependent on investments of the Corporation’s limited resources. For example,
the Corporation faces many resource allocation decisions, such as: where to
focus the Corporation’s research and development, geographic sales and marketing
and partnering efforts; which aspects of the Corporation’s business to
outsource; and which operating systems and email solutions to support. Given the
size and undiversified nature of the Corporation’s organization, any error in
investment strategy could harm the Corporation’s business, results of operations
and financial condition.

    
      
         

      

      
        -13-

        
          

        

      

      
         

      

    

    

    5.19           Changes in
financial accounting standards or practices may cause unexpected fluctuations in
and may adversely affect the Corporation’s reported results of
operations.

    

    Any
change in financial accounting standards or practices that cause a change in the
methodology or procedures by which the Corporation tracks, calculates, records
and reports the Corporation’s results of operations or financial condition or
both could cause fluctuations in and adversely affect the Corporation’s reported
results of operations and cause the Corporation’s historical financial
information to not be reliable as an indicator of future results.

    

    5.20           Wars, terrorist
attacks or other threats beyond the Corporation’s control could negatively
impact consumer confidence, which could harm the Corporation’s operating
results.

    

    Wars,
terrorist attacks or other threats beyond the Corporation’s control could have
an adverse impact on the United States, Europe and world economy in general, and
consumer confidence and spending in particular, which could harm the
Corporation’s business, results of operations and financial
condition.

    

    RISKS
RELATED TO OWNING THE CORPORATION’S STOCK

    

    5.21           The Corporation
will issue additional shares of its common stock as a result of the proposed
refinancing activities and the Corporation’s stock price could be negatively
affected.

    

    The
proposed refinancing agreements will require the Corporation to seek shareholder
approval to amend the Corporations bylaws to increase the authorized shares of
common stock from 75,000,000 to an amount greater than 500,000,000. The
Corporation currently has approximately 30,600,000 shares of common stock
outstanding and after the proposed transactions it is estimated that the
Corporation will have greater than 400,000,000 shares of common stock
outstanding. As a result of the issuance of the additional shares of the common
stock the Corporation’s stock price could be negatively affected.

    

    5.22           If the
Corporation continues to experience losses, the Corporation could experience
difficulty meeting the Corporation’s business plan and the Corporation’s stock
price could be negatively affected.

    

    If the
Corporation is unable to gain market acceptance of the Corporation’s mobile
phone handsets, the Corporation will experience continuing operating losses and
negative cash flow from the Corporation’s operations. Any failure to achieve or
maintain profitability could negatively impact the market price of the
Corporation’s common stock. The Corporation anticipates that the Corporation
will continue to incur product development, sales and marketing and
administrative expenses. As a result, the Corporation will need to generate
significant quarterly revenues if the Corporation is to achieve and maintain
profitability. A substantial failure to achieve profitability could make it
difficult or impossible for the Corporation to grow the Corporation’s business.
The Corporation’s business strategy may not be successful, and the Corporation
may not generate significant revenues or achieve profitability. Any failure to
significantly increase revenues would also harm the Corporation’s ability to
achieve and maintain profitability. If the Corporation does achieve
profitability in the future, the Corporation may not be able to sustain or
increase profitability on a quarterly or annual basis.

    
      
         

      

      
        -14-

        
          

        

      

      
         

      

    

    

    5.23           The Corporation’s
certificate of incorporation and bylaws and the Delaware General Corporation Law
contain provisions that could delay or prevent a change in
control.

    

    The
Corporation’s board of directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of common stock and/or preferred stock
will be subject to, and may be materially adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock could have the effect of making it more difficult
for a third party to acquire a majority of the Corporation’s outstanding voting
stock. Furthermore, certain other provisions of the Corporation’s certificate of
incorporation and bylaws may have the effect of delaying or preventing changes
in control or management, which could adversely affect the market price of the
Corporation’s common stock. In addition, the Corporation is subject to the
provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law.

    

    5.24           The Corporation’s
stock price has been volatile, and an investment in the Corporation’s stock
could suffer a decline in value.

    

    There has
been significant volatility in the market price and trading volume of equity
securities, which is unrelated to the financial performance of the companies
issuing the securities. These broad market fluctuations may negatively affect
the market price of the Corporation’s common stock. One may not be able to
resell one’s shares at or above the price one’s pays for those shares due to
fluctuations in the market price of the Corporation’s common stock caused by
changes in the Corporation’s operating performance or prospects and other
factors.

    

    Some
specific factors that may have a significant effect on the Corporation’s common
stock market price include:

    

    
      	 
      	
              ·

            	
              actual
      or anticipated fluctuations in the Corporation’s operating results or
      future prospects;

            
	 
      	
              ·

            	
              the
      Corporation’s announcements or the Corporation’s competitors’
      announcements of new products;

            
	 
      	
              ·

            	
              the
      public’s reaction to the Corporation’s press releases, the Corporation’s
      other public announcements and the Corporation’s filings with the
      SEC;

            
	 
      	
              ·

            	
              strategic
      actions by the Corporation or the Corporation’s competitors, such as
      acquisitions or restructurings;

            
	 
      	
              ·

            	
              new
      laws or regulations or new interpretations of existing laws or regulations
      applicable to the Corporation’s business;

            
	 
      	
              ·

            	
              changes
      in accounting standards, policies, guidance, interpretations or
      principles;

            
	 
      	
              ·

            	
              changes
      in the Corporation’s growth rates or the Corporation’s competitors’ growth
      rates;

            
	 
      	
              ·

            	
              developments
      regarding the Corporation’s patents or proprietary rights or those of the
      Corporation’s competitors;

            
	 
      	
              ·

            	
              the
      Corporation’s inability to raise additional capital as
    needed;

            
	 
      	
              ·

            	
              concern
      as to the efficacy of the Corporation’s products;

            
	 
      	
              ·

            	
              changes
      in financial markets or general economic conditions;

            
	 
      	
              ·

            	
              sales
      of common stock by the Corporation or members of the Corporation’s
      management team;

            

    

     

    
      
         

      

      
        -15-

        
          

        

      

      
         

      

    

    

    
      	 
      	
              ·

            	
              certain
      anti-dilution features included in certain securities issued in prior
      financing transactions; and

            
	 
      	
              ·

            	
              changes
      in stock market analyst recommendations or earnings estimates regarding
      the Corporation’s common stock, other comparable companies or the
      Corporation’s industry generally.

            

    

    

    5.25           Future sales of
the Corporation’s common stock could adversely affect its price and the
Corporation’s future capital-raising activities could involve the issuance of
equity securities, which would dilute an investment in the Corporation and could
result in a decline in the trading price of the Corporation’s common
stock.

    

    The
Corporation may sell securities in the public or private equity markets if and
when conditions are favorable, even if the Corporation does not have an
immediate need for additional capital at that time. Sales of substantial amounts
of common stock, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Corporation’s common stock and the
Corporation’s ability to raise capital. The Corporation may issue additional
common stock in future financing transactions or as incentive compensation for
the Corporation’s executive management and other key personnel, consultants and
advisors. Issuing any equity securities would be dilutive to the equity
interests represented by the Corporation’s then-outstanding shares of common
stock. The market price for the Corporation’s common stock could decrease as the
market takes into account the dilutive effect of any of these issuances.
Furthermore, the Corporation may enter into financing transactions at prices
that represent a substantial discount to the market price of the Corporation’s
common stock or issue securities that have anti-dilution features. A negative
reaction by investors and securities analysts to any discounted sale of the
Corporation’s equity securities or sales of securities with anti-dilution
features could result in a decline in the trading price of the Corporation’s
common stock.

    

    5.26           If registration
rights that the Corporation has previously granted are exercised, then the price
of the Corporation’s common stock may be adversely affected.

    

    The
Corporation has agreed to register with the SEC the shares of common stock
issued to former stockholders in connection with the merger and to participants
in private placement financings the Corporation completed in March 2008 and May
2008. In the event these securities are registered with the SEC, they may be
freely sold in the open market, subject to trading restrictions to which the
Corporation’s insiders holding the shares may be subject from time to time. In
the event that the Corporation fails to register such shares in a timely basis,
the Corporation may have liabilities to such stockholders. The Corporation
expects that the Corporation also will be required to register any securities
sold in future private financings. The sale of a significant amount of shares in
the open market, or the perception that these sales may occur, could cause the
trading price of the Corporation’s common stock to decline or become highly
volatile.

    
      
         

      

      
        -16-

        
          

        

      

      
         

      

    

    

    RISKS
RELATED TO OWNING OUR PREFERRED STOCK

    

    5.27           There is no
public market for the Preferred Stock.

    

    There is
no public for the Preferred Stock to be issued pursuant to this Agreement and
the Company does not intend to apply for listing of the Preferred Stock on any
securities exchange.  No assurance can be given that the stockholders
of the Corporation will agree to the conversion ratio for Common Stock set forth
in the Certificate of Designations of Preferred Stock or that an active trading
market for the Preferred Stock will develop.  If an active market does
not develop and/or the Preferred Stock is not converted to Common Stock pursuant
to the conversion ratio set forth in the Certificate of Designations of
Preferred Stock, the market price and liquidity of the Preferred Stock may be
adversely affected and you may lose your total investment. 

    

    5.28           We expect
volatility in the price of our common stock, which may subject us to securities
litigation.

    

    If we
complete the refinancing transactions, the market for our common stock may be
characterized by significant price volatility when compared to seasoned issuers,
and we expect that our share price will be more volatile than a seasoned issuer
for the indefinite future. In the past, plaintiffs have often initiated
securities class action litigation against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management’s attention and
resources.

    

    5.29           The current
worldwide financial and credit markets are difficult to
access.

    

    The
recent collapse of the worldwide financial and credit markets make it extremely
difficult to access source of capital or borrowings, Credit line facilities from
financial institutions, additional private equity investment or debt
arrangements may not be available to the Corporation for some time in the
future. No assurances can be given that the Corporation will be successful in
obtaining such additional financing on reasonable terms, or at all. If adequate
funds are not available on acceptable terms, or at all, the Corporation may be
unable to adequately fund the Corporation’s business plans and it could have a
negative effect on the Corporation’s business, results of operations and
financial condition.

    

    THE
SECURITIES TO BE ISSUED INVOLVE A HIGH DEGREE OF RISK AND MAY RESULT IN THE LOSS
OF ONE’S ENTIRE INVESTMENT. ANY PERSON CONSIDERING THE PURCHASE OF THESE
SECURITIES SHOULD BE AWARE OF THESE AND OTHER FACTORS AND SHOULD CONSULT WITH
HIS LEGAL, TAX AND FINANCIAL ADVISORS PRIOR TO EXECUTING THIS AGREEMENT. THE
SECURITIES SHOULD ONLY BE PURCHASED BY PERSONS WHO CAN AFFORD TO LOSE ALL OF
THEIR INVESTMENT.

    

    6.           Representations, Warranties,
Acknowledgments, of the Subscribers

    

    Each
Subscriber hereby represents, warrants, acknowledges, understands and agrees (as
the case may be) to the following, and acknowledges that the Corporation's
reliance on exemption from registration pursuant to a registration statement
under the Securities Act of 1933, as amended (the “Securities Act”) is predicated
upon the representations of each Subscriber set forth herein:

    
      
         

      

      
        -17-

        
          

        

      

      
         

      

    

    

    6.1           Authorization. The
Subscriber has full power and authority to enter into this Subscription
Agreement, and the Subscription Agreement has been duly executed by the
Subscriber, and such authorization constitutes a valid and legally binding
obligation of the Subscriber, enforceable in accordance with its
terms.

    

    6.2           Shares of Preferred A Stock
Not Registered. The Subscriber hereby acknowledges that the Purchased
Shares will not be issued by the Corporation  pursuant to a
registration statement under the Securities Act, and therefore the Subscriber
may be required to hold the Purchased Shares for an indeterminate
period.  The Purchased Shares are issued pursuant hereto in reliance
upon a specific exemption from the registration requirement of the Securities
Act which depends, in part, upon the accuracy of the representations,
warranties, and agreements of each Subscriber set forth in this Subscription
Agreement.

    

    6.3           Investment
Intent.  The Subscriber is acquiring the Purchased Shares for
the Subscriber’s own account as principal, not as a nominee or agent, for
investment purposes only, and not with a view to, or for, resale, distribution
or fractionalization thereof, in whole or in part, which resale, distribution or
fractionalization would violate the Securities Act.  The Subscriber
agrees that a legend to the foregoing effect may be placed upon any and all
certificates issued representing the Purchased Shares.  Further, the
Subscriber does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participations to such person or to
any third person, with respect to the Purchased Shares, for which the Subscriber
is purchasing.  The Subscriber acknowledges that he has been afforded
the opportunity to ask questions of, and to obtain any information from, the
Corporation and the Board of Directors as he or she deems necessary to determine
the suitability and advisability of, and the merits and risk of, the purchase of
the shares of Preferred A Stock pursuant hereto.

    

    6.4           Risk. The Subscriber
is aware that: (i) investment in the Corporation involves a high degree of risk,
may result in a lack liquidity, and places substantial restrictions on
transferability of interest; and (ii) no Federal or state agency has made any
finding or determination as to the fairness for investment by the public, nor
has made any recommendation or endorsement, of the Purchased
Shares.

    

    6.5           Financial
Ability.  The Subscriber has sufficient financial resources
available to support the loss of all or a portion of Subscriber’s investment in
the Corporation, has no need for liquidity in the investment in the Corporation,
and is able to bear the economic risk of the investment.  The
Subscriber is sophisticated and experienced in investment matters, and, as a
result, is in a position to evaluate an investment in the
Corporation.

    
      
         

      

      
        -18-

        
          

        

      

      
         

      

    

    

    6.6           Information.  The
Subscriber has been furnished with any and all materials that he has requested
relating to the Corporation or the offering of the Purchased Shares, and the
Subscriber has been afforded the opportunity to ask questions of the senior
management and directors of the Corporation concerning the terms and conditions
of the offering and to obtain any additional information necessary to verify the
accuracy of the information provided to the Subscriber.  The
Subscriber understands that such material is current information about the
Corporation and does not in any way guarantee future performance or the
completion of future proposed events discussed in such material.  The
Subscriber, either alone or with his professional advisors, has the capacity to
protect his own interests in connection with this transaction.

    

    6.7           Accredited Investor.
If the Subscriber is a U.S. person, (i) such Subscriber qualifies as an
“accredited investor” as such term is defined in Regulation D promulgated under
the Securities Act, and (ii) such Subscriber, if it is a corporation,
partnership, limited liability company, trust, or other business entity, has not
been organized for the purpose of purchasing the Purchased
Shares.   In this regard, the Subscriber represents and warrants
that:

    

    6.7.1           The
Subscriber is experienced in investment and business matters.

    

    6.7.2           The
Subscriber has made investments of a speculative nature and has purchased
non-registered securities of United States publicly-owned companies in the
past.

    

    6.7.3           The
Subscriber, 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 Corporation to evaluate the merits
and risks of and to make an informed investment decision with respect to the
purchase of the Purchased Shares.

    

    6.7.4           The
Subscriber is able to bear the risk of such investment for an indefinite period
and to afford a complete loss thereof.

    

    6.8           Regulation S
Exemption.  If the Subscriber is not a U.S. Person, the
Subscriber understands that that the Purchased Shares are being offered and sold
to him in reliance on an exemption from the registration requirements of United
States federal and the state securities laws under Regulation S promulgated
under the Securities Act, and that the Corporation is relying upon the truth and
accuracy of the representations, warranties, agreements, acknowledgments, and
understandings of the Subscriber set forth herein order to determine the
applicability of such exemptions and the suitability of the Subscriber to
acquire the Purchased Shares.  In this regard, the Subscriber
represents and warrants that:

    

    6.8.1           The
Subscriber is not a U.S. Person and is not acquiring the Purchased Shares for
the account or benefit of a U.S. Person.

    

    6.8.2           At
the time of the origination of contact concerning this Agreement and the date of
the execution and delivery of this Agreement, the undersigned was outside of the
United States.

    

    6.8.3           The
Subscriber will not, during the period commencing on the date of issuance of the
Purchased Shares and ending on the first anniversary of such date, or such
shorter period as may be permitted by Regulation S or other applicable
securities law (the "Restricted Period"), offer, sell, pledge or otherwise
transfer the Purchased Shares in the United States, or to a U.S. Person for the
account or for the benefit of a U.S. Person, or otherwise in a manner that is
not in compliance with Regulation S.

    
      
         

      

      
        -19-

        
          

        

      

      
         

      

    

    

    6.8.4           The
Subscriber will, after expiration of the Restricted Period, offer, sell pledge
or otherwise transfer the Purchased Shares only pursuant to registration under
the Securities Act or an available exemption therefrom, and, in accordance with
all applicable state foreign securities laws.

    

    6.8.5           The
Subscriber was not in the United States engaged in, and prior to the expiration
of the Restricted Period will not engage in, any short selling of or any hedging
transaction with respect to the Purchased Shares, including without limitation,
any put, call or other option transaction, option writing, or equity
swap.

    

    6.8.6           Neither
the Subscriber nor or any person acting on his behalf has engaged, nor will
engage, in any directed selling efforts to a U.S. Person with respect to the
Purchased Shares, and the Subscriber and any person acting on his behalf have
complied and will comply with the "offering restrictions" requirements of
Regulation S under the Securities Act.

    

    6.8.7           The
transactions contemplated by this Subscription Agreement have not been
pre-arranged with a buyer located in the United States or with a U.S. Person,
and are not part of a plan or scheme to evade the registration requirements of
the Securities Act.

    

    6.8.8           Neither
the Subscriber nor any person acting on his behalf has undertaken or carried out
any activity for the purpose of, or that could reasonably be expected to have
the effect of, conditioning the market in the United States, its territories or
possessions, for any of the Purchased Shares.  The Subscriber agrees
not to cause any advertisement of the Purchased Shares to be published in any
newspaper or periodical or posed in any public place and not to issue any
circular relating to the Purchased Shares, except such advertisements that
include the statements required by Regulation S under the Securities Act, and
only offshore and not in the U.S. or its territories, and only in compliance
with any local applicable securities laws.

    

    6.8.9           Compliance with Local
Laws. Any resale of the Purchased Shares during the “distribution
compliance period” as defined in Ruled 902(f) to Regulation S shall be made only
in compliance with exemptions from registration afforded by Regulation
S.  Further, any such sale of the Purchased Shares in any jurisdiction
outside of the United States will be made in compliance with the securities laws
of such jurisdiction.  The Subscriber will not offer to sell or sell
the Purchased Shares in any jurisdiction unless the Subscriber obtains all
required consents, if any.

    

    6.9           The
Subscriber consents to the Corporation making a notation on its records or
giving instructions to any transfer agent of the Corporation in order to
implement the restrictions on transfer of the Purchased Shares set forth in this
Section 6.

    

    6.10           Investor Questionnaire.
The Subscriber represents and warrants to the Corporation that all
information that the undersigned has provided to the Corporation, including,
without limitation, the information in the Investor Questionnaire attached
hereto as Exhibit
B, is complete and correct as of the date hereof.

    
      
         

      

      
        -20-

        
          

        

      

      
         

      

    

    

    6.11         Legend. The
certificates representing the Purchased Shares shall contain a legend
substantially as follows:

    

    “THE
SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL A REGISTRATION STATEMENT WITH
RESPECT THERETO IS DECLARED EFFECTIVE UNDER SUCH ACT, OR NEONODE, INC. RECEIVES
AN OPINION OF COUNSEL FOR THE HOLDER REASONABLY SATISFACTORY TO COUNSEL FOR
NEONODE, INC. THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT
IS AVAILABLE.”

     

    7.           Representations, Warranties
and Covenants of the Corporation

    

    The
Corporation hereby represents, warrants and covenants as follows:

    

    7.1           Organization and
Qualification.  The Corporation is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has the requisite corporate power to own its properties and to
carry on its business as it is now being conducted.

    

    7.2           Authorization,
Enforceability.  (i) The Corporation has the requisite
corporate power and authority to enter into this Subscription Agreement and to
perform its obligations hereunder  in accordance with the terms
hereof, (ii) the execution and delivery of this Subscription Agreement by the
Corporation and the consummation by it of the transactions contemplated hereby
have been duly authorized by the Corporation’s Board of Directors and further
consent or authorization of the Corporation by its Board of Directors is not
required; and (iii) upon the execution and delivery of this Subscription
Agreement by the Corporation, this Subscription Agreement will constitute valid
and binding obligations of the Corporation enforceable against the Corporation
in accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of creditors’
rights and remedies or by other equitable principles of general
application.

    

    7.3           Issuance of
Shares.  The Purchased Shares to be issued, sold and delivered
by the Corporation hereunder, when so issued, sold and delivered, will be duly
and validly issued, fully paid and nonassessable and will be issued in reliance
upon applicable exemptions from the registration and qualification provisions of
all applicable securities laws of the United States and each state whose
securities laws may be applicable thereto.  All Purchased Shares will
be issued free of any preemptive or similar right and free and clear of any
claim, lien, security interest or other encumbrance.  Assuming the
accuracy of the Subscribers’ representations and warranties hereunder, the
issuance to the Subscribers of the Purchased Shares will be exempt from the
registration requirements of the Securities Act and will be made in reliance
upon applicable exemptions from the registration and qualification provisions of
all applicable state securities laws.

    
      
         

      

      
        -21-

        
          

        

      

      
         

      

    

    

    8.           Miscellaneous

    

    8.1           Definition of
Terms.  All pronouns and any variations thereof used herein
shall be deemed to refer to the masculine, feminine, neuter, singular or plural
as the identity of the person or persons may require.

    

    8.2           Entire
Agreement.  This Subscription Agreement, together with the
documents referenced herein, constitute the entire understanding among the
parties with respect to the subject matter hereof, and supersede any prior
understanding and/or written or oral agreements among them.  This
Subscription Agreement may not be changed or modified, except by an agreement in
writing signed by each of the parties hereto.

    

    8.3           Binding Effect; Successors
and Assigns.  Each Subscriber agrees not to transfer or assign
this Subscription Agreement, or any of such Subscriber’s interest herein, and
further agrees that the transfer or assignment of the Purchased Shares shall be
made only in accordance with applicable laws and the terms of this Subscription
Agreement.  Subject to the foregoing, this Subscription Agreement
shall be binding upon and inure to the benefits of the parties hereto, their
successors and assigns.

    

    8.4           Governing
Law.  This Subscription Agreement shall be governed by the laws
of the state of Delaware applicable to contracts made and wholly performed in
that jurisdiction.

    

    8.5           Notices.  All
notices or other communications hereunder shall be in writing and shall be
delivered by hand or mailed by registered or certified mail, return receipt
requested, to each Subscriber at the addresses provided in Exhibit A and to the
Corporation at its registered office.  The Corporation and the
Subscribers may change their addresses for notices by written notice to each of
the Parties, as required.

    

    8.6           Counterparts. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.

    

    IN WITNESS WHEREOF, the
Parties have executed this Subscription Agreement on the date set forth
above.

    

    
      
        
          	
                  Neonode,
      Inc.

                
	 
      
	
                   

                
	
                  Name:

                
	
                  Title:

                
	
                  Date:

                

        

      

    

    
      
         

      

      
        -22-

        
          

        

      

      
         

      

    

    

    
      
        
          
            
              	
                      [Subscriber A]

                    	 
      	
                      [Subscriber
      B]

                    
	 
      	 
      	 
      
	
                       

                    	 
      	
                       

                    
	
                      Name:

                    	 
      	
                      Name:

                    
	
                      Title:

                    	 
      	
                      Title:

                    
	
                      Date:

                    	 
      	
                      Date:

                    
	 
      	 
      	 
      
	
                      [Subscriber
      C]

                    	 
      	 
      
	 
      	 
      	 
      
	
                       

                    	 
      	 
      
	
                      Name:

                    	 
      	 
      
	
                      Title:

                    	 
      	 
      
	
                      Date:

                    	 
      	 
      

            

          

        

      

    

     

    
      
         

      

      
        -23-

        
          

        

      

      
         

      

    

    EXHIBIT
A

    

    SUBSCRIBERS AND SUBCRIPTION
AMOUNTS

    

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              	
                                      Subscriber

                                    	 	
                                      Address

                                    	 	
                                      Subscription

                                      Amount

                                    	 	 	
                                      Purchased
      Shares

                                    	 
	 
      	 	 
      	 	 	 	 	 	 
	 
      	 	 
      	 	 	 	 	 	 
	 
      	 	 
      	 	 	 	 	 	 
	
                                      Total:

                                    	 	$	1,500,000	 	 	 	150,000	 

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

     

    
      
         

      

      
        -24-

        
          

        

      

      
         

      

    

    EXHIBIT
B

    

    FORM OF INVESTOR
QUESTIONNAIRE

    

    INVESTOR
QUESTIONNAIRE

    

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                	
                                        A

                                      	
                                        General Information

                                      	 	 
      
	 
      	 
      	 	 
      
	
                                        1.

                                      	
                                        Print
      Full Name of Investor:

                                      	 	
                                        Individual:

                                      
	 
      	 
      	 	
                                        __________________________________________________ 

                                      
	 
      	 
      	 	
                                        First,
      Middle, Last

                                      
	 
      	 
      	 	 
      
	 
      	 
      	 	
                                        Partnership,
      Corporation, Trust,

                                        Custodial
      Account, Other:

                                      
	 	 	 	 
	 
      	 
      	 	

                                        __________________________________________________ 
      

                                      
	 
      	 
      	 	
                                        __________________________________________________

                                      
	 
      	 
      	 	
                                        Name
      of Entity

                                      
	 
      	 
      	 	 
      
	
                                        2.

                                      	
                                        Address
      for Notices:

                                      	 	
                                        

                                          ______ ____________________________________________

                                        

                                      
	 
      	 
      	 	
                                        

                                          

                                            __________________________________________________

                                          

                                        

                                      
	 
      	 
      	 	
                                        

                                          __________________________________________________

                                        

                                      
	 
      	 
      	 	

                                        
                                          __________________________________________________

                                        

                                      
	 	 	 	

                                        
                                          __________________________________________________

                                        

                                      
	 	 	 	

                                        
                                           

                                        

                                      
	
                                        3.    

                                      	
                                        Name
      of Primary Contact Person:

                                      	 	
                                        

                                          __________________________________________________

                                        

                                      
	 	

                                        Title: 

                                      	 	__________________________________________________ 
	 
      	 
      	 	 
      
	
                                        4.

                                      	
                                        Telephone
      Number:

                                      	 	
                                        

                                          __________________________________________________ 

                                        

                                      
	 
      	 
      	 	 
	
                                        5.

                                      	
                                        Facsimile
      Number:

                                      	 	
                                        

                                          

                                            __________________________________________________ 

                                          

                                        

                                      
	 	 	 	 
	
                                        6.

                                      	
                                        Permanent
      Address:

                                      	 	
                                        

                                          __________________________________________________  

                                        

                                      
	 	

                                        (if
      different from Address for Notices above 

                                      	 	__________________________________________________  

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

    

    
      	
              7.

            	
              Authorized
      Signatory:

              Title:

            	
              

                ____________________________________________________________

              

              

                ____________________________________________________________

              

            
	 
      	
              Telephone
      Number:

            	
              

                ____________________________________________________________

              

            
	 
      	
              Facsimile
      Number:

               

            	
              

                ____________________________________________________________

              

            

    

     

    
      
         

      

      
        -25-

        
          

        

      

      
         

      

    

    

    B.           Accredited Investor
Status

    

    The
Investor represents and warrants that the Investor is an “accredited investor”
within the meaning of Rule 501 of Regulation D under the Securities Act of 1933,
as amended (the “Securities Act”), and has checked the box or boxes below which
are next to the categories under which the Investor qualifies as an accredited
investor:

     

    
      FOR
INDIVIDUALS:

      

      
        	
              	
                o

              	
                A
      natural person with individual net worth (or joint net worth with spouse)
      in excess of $1 million. For purposes of this item, “net worth” means the
      excess of total assets at fair market value, including home, home
      furnishings and automobiles (and including property owned by a spouse),
      over total liabilities.

              

      

      

      
        	
              	
                o

              	
                A
      natural person with individual income (without including any income of the
      Investor’s spouse) in excess of $200,000, or joint income with spouse of
      $300,000, in each of the two most recent years and who reasonably expects
      to reach the same income level in the current
  year.

              

      

      

      FOR
ENTITIES:

      

      
        	
              	
                o

              	
                A
      bank as defined in Section 3(a)(2) of the Securities Act or any savings
      and loan association or other institution as defined in Section 3(a)(5)(A)
      of the Securities Act, whether acting in its individual or fiduciary
      capacity.

              

      

      

      
        	
                
                

              	
                o

              	
                An
      insurance company as defined in Section 2(13) of the Securities
      Act.

              

      

      

      
        	
                
                

              	
                o

              	
                A
      broker-dealer registered pursuant to Section 15 of the Securities Exchange
      Act of 1934.

              

      

      

      
        	
              	
                o

              	
                An
      investment company registered under the Investment Company Act of 1940, as
      amended (the “Investment Company Act”). If an Investor has checked this
      box, please contact Steve Kronengold. at (718) 360-5351 for
      additional information that will be
required.

              

      

      

      
        	
              	
                o

              	
                A
      business development company as defined in Section 2(a)(48) of the
      Investment Company Act.

              

      

      

      
        	
              	
                o

              	
                A
      small business investment company licensed by the Small Business
      Administration under Section 301(c) or (d) of the Small Business
      Investment Act of 1958.

              

      

      

      
        
          
          

        

        
          -26-

          
            

          

        

        
          
          

        

      

       

      
        	
              	
                o

              	
                A
      private business development company as defined in Section 202(a)(22) of
      the Investment Advisers Act of 1940. If an Investor has checked this box,
      please contact Steve Kronengold at (718) 360-5351 for
      additional information that will be
required.

              

      

      

      
        	
              	
                o

              	
                An
      organization described in Section 501(c)(3) of the Internal Revenue Code,
      a corporation, Massachusetts or similar business trust, or partnership,
      not formed for the specific purpose of acquiring the Shares, with total
      assets in excess of $5 million.

              

      

      

      
        	
              	
                o

              	
                A
      trust with total assets in excess of $5 million not formed for the
      specific purpose of acquiring the Shares, whose purchase is directed by a
      person with such knowledge and experience in financial and business
      matters as to be capable of evaluating the merits and risks of an
      investment in the Company and the purchase of the
  Shares.

              

      

      

      
        	
              	
                o

              	
                An
      employee benefit plan within the meaning of ERISA if the decision to
      invest in the Shares is made by a plan fiduciary, as defined in Section
      3(21) of ERISA, which is either a bank, savings and loan association,
      insurance company, or registered investment adviser, or if the employee
      benefit plan has total assets in excess of $5 million or, if a
      self-directed plan, with investment decisions made solely by persons that
      are accredited investors.

              

      

      

      
        	
              	
                o

              	
                A
      plan established and maintained by a state, its political subdivisions, or
      any agency or instrumentality of a state or its political subdivisions,
      for the benefit of its employees, if the plan has total assets in excess
      of $5 million.

              

      

       

      
        	
              	
                o

              	
                An
      entity, including a grantor trust, in which all of the equity owners are
      accredited investors as determined under any of the foregoing paragraphs
      (for this purpose, a beneficiary of a trust is not an equity owner, but
      the grantor of a grantor trust is an equity
  owner).

              

      

    

    

    C.           Supplemental Data for
Entities

    

    1.           If
the Investor is not a natural person, furnish the following supplemental data
(natural persons may skip this Section C of the Investor
Questionnaire):

    

    Legal
form of entity (trust, corporation, partnership, etc.):
_________________________

    

    Jurisdiction
of organization:
________________________________________________

    
      
         

      

      
        -27-

        
          

        

      

      
         

      

    

    

    2.           Was
the Investor organized for the specific purpose of acquiring the
Shares?

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

    

    If the
answer to the above question is “Yes,” please contact Steve Kronengold at (718) 360-5351 for additional
information that will be required.

    

    3.           Are
shareholders, partners or other holders of equity or beneficial interest in the
Investor able to decide individually whether to participate, or the extent of
their participation, in the Investor’s investment in the Company (i.e., can
shareholders, partners or other holders of equity or beneficial interest in the
Investor determine whether their capital will form part of the capital invested
by the Investor in the Company)?

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

    

    If the
answer to the above question is “Yes,” please contact Steve Kronengold at (718) 360-5351 for additional
information that will be required.

    

    4(a).         Please
indicate whether or not the Investor is, or is acting on behalf of, (i) an
employee benefit plan within the meaning of Section 3(3) of ERISA, whether or not such plan is
subject to ERISA, or (ii) an entity which is deemed to hold the assets of
any such employee benefit plan pursuant to 29 C.F.R. § 2510.3-101. For example,
a plan which is maintained by a foreign corporation, governmental entity or
church, a Keogh plan covering no common-law employees and an individual
retirement account are employee benefit plans within the meaning of Section 3(3)
of ERISA but generally are not subject to ERISA (collectively, “Non-ERISA Plans”). In
general, a foreign or US entity which is not an operating company and which is
not publicly traded or registered as an investment company under the Investment
Company Act of 1940, as amended, and in which 25% or more of the value of any
class of equity interest is held by employee pension or welfare plans (including
an entity which is deemed to hold the assets of any such plan), would be deemed
to hold the assets of one or more employee benefit plans pursuant to 29 C.F.R. §
2510.3-101. However, if only Non-ERISA Plans were invested in such an entity,
the entity generally would not be subject to ERISA. For purposes of determining
whether this 25% threshold has been met or exceeded, the value of any equity
interest held by a person (other than such a plan or entity) who has
discretionary authority or control with respect to the assets of the entity, or
any person who provides investment advice for a fee (direct or indirect) with
respect to such assets, or any affiliate of such a person, is
disregarded.

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

    

    4(b).        If
the Investor is, or is acting on behalf of, such an employee benefit plan, or is
an entity deemed to hold the assets of any such plan or plans, please indicate
whether or not the Investor is subject to ERISA.

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

     

    
      
         

      

      
        -28-

        
          

        

      

      
         

      

    

    

    4(c.)           If
the Investor answered “Yes” to question 4.(b) and the Investor is investing the
assets of an insurance company general account, please indicate what percentage
of the Investor’s assets the purchase of the Shares is subject to ERISA.
___________%.

    

    5.           Does
the amount of the Investor’s subscription for the Shares in the Company exceed
40% of the total assets (on a consolidated basis with its subsidiaries) of the
Investor?

    

    
      	
               ̈   Yes

            	
               ̈   No

            

    

    

    If the
question above was answered “Yes,” please contact Steve Kronengold at (718) 360-5351 for additional
information that will be required.

    

    6(a).        Is
the Investor a private investment company which is not registered under the
Investment Company Act, in reliance on Section 3(c)(1) or Section 3(c)(7)
thereof?

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

    

    6(b).        If
the question above was answered “Yes,” was the Investor formed prior to April
30, 1996?

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

    

    If the
questions set forth in (a) and (b) above were both answered “Yes,” please
contact Steve Kronengold at (718)
360-5351 for additional information that will be required.

    

    7(a).         Is
the Investor a grantor trust, a partnership or an S-Corporation for US federal
income tax purposes?

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

    

    7(b).        If
the question above was answered “Yes,” please indicate whether or
not:

    

    (i) more
than 50 percent of the value of the ownership interest of any beneficial owner
in the Investor is (or may at any time during the term of the Company be)
attributable to the Investor’s (direct or indirect) interest in the Company;
or

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

    

    (ii) it
is a principal purpose of the Investor’s participation in the Company to permit
the Partnership to satisfy the 100 partner limitation contained in US Treasury
Regulation Section 1.7704-1(h)(3).

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

     

    
      
         

      

      
        -29-

        
          

        

      

      
         

      

    

    

    If either
question above was answered “Yes,” please contact Steve Kronengold at (718) 360-5351 for additional
information that will be required.

    

    8.           If
the Investor’s tax year ends on a date other than December 31, please indicate
such date below:

    

    
      
        
          
            
              	
                       

                    
	
                      (Date)

                    

            

          

        

      

    

    

    D.          Related
Parties

    

    1.           To
the best of the Investor’s knowledge, does the Investor control, or is the
Investor controlled by or under common control with, any other investor in the
Company?

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

    

    If the answer above was answered “Yes”,
please identify such related investor(s) below.

    

    Name(s) of related investor(s):
______________________________________________________________________________________________________________________________

    ____________________________________________________________________________________________________________________________________________________________

    ____________________________________________________________________________________________________________________________________________________________

    

    2.           Will
any other person or persons have a beneficial interest in the Shares to be
acquired hereunder (other than as a shareholder, partner, or other beneficial
owner of equity interest in the Investor)?

    

    
      	
               ̈  Yes

            	
               ̈  No

            

    

    

    If either question above was answered
“Yes”, please contact Steve Kronengold at (718) 360-5351 for additional
information that will be required.

    
      
         

      

      
        -30-

        
          

        

      

      
         

      

    

    The
Investor understands that the foregoing information will be relied upon by the
Company for the purpose of determining the eligibility of the Investor to
purchase the Shares. The Investor agrees to notify the Company immediately if
any representation or warranty contained in this Subscription Agreement,
including this Investor Questionnaire, becomes untrue at any time. The Investor
agrees to provide, if requested, any additional information that may reasonably
be required to substantiate the Investor’s status as an accredited investor or
to otherwise determine the eligibility of the Investor to purchase the Shares.
The Investor agrees to indemnify and hold harmless the Company and each officer,
director, shareholder, agent and representative of the Company and their
respective affiliates and successors and assigns from and against any loss,
damage or liability due to or arising out of a breach of any representation,
warranty or agreement of the Investor contained herein.

    

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  	INDIVIDUAL:
	 
      	 
      
	 
	 
      	
                                          (Signature)

                                        
	 
      	 
      
	 
	 
      	
                                          (Print
      Name)

                                        
	 
      	 
      
	
                                          PARTNERSHIP,
      CORPORATION,

                                          TRUST,
      CUSTODIAL ACCOUNT,

                                          OTHER:

                                        
	 
      	 
      
	 
	 
      	
                                          (Name
      of Entity)

                                        
	 
      	 
      
	
                                          By:

                                        	
                                           

                                        
	 
      	
                                          (Signature)

                                        
	 
      	 
      
	 
      	
                                           

                                        
	 
      	
                                          (Print
      Name and
Title)

                                        

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

     

    
      
         

      

      
        -31-

        
          

        

      

      
         

      

    

    Annex
1

    

    DEFINITION
OF “INVESTMENTS”

    

    The term
“investments” means:

    

    (1)           Securities,
other than securities of an issuer that controls, is controlled by, or is under
common control with, the Investor that owns such securities, unless the issuer
of such securities is:

    

    (i)           An
investment company or a company that would be an investment company but for the
exclusions or exemptions provided by the Investment Company Act, or a commodity
pool; or

    

    
      (ii)           a Public
Company (as defined below);

    

    

    (iii)           A
company with shareholders’ equity of not less than $50 million (determined in
accordance with generally accepted accounting principles) as reflected on the
company’s most recent financial statements, provided that such financial
statements present the information as of a date within 16 months preceding the
date on which the Investor acquires Shares;

    

    (2)           Real
estate held for investment purposes;

    

    (3)           Commodity
Shares (as defined below) held for investment purposes;

    

    (4)           Physical
Commodities (as defined below) held for investment purposes;

    

    (5)           To
the extent not securities, Financial Contracts (as defined below) entered into
for investment purposes;

    

    (6)           In
the case of an Investor that is a company that would be an investment company
but for the exclusions provided by Section 3(c)(1) or 3(c)(7) of the Investment
Company Act, or a commodity pool, any amounts payable to such Investor pursuant
to a firm agreement or similar binding commitment pursuant to which a person has
agreed to acquire an interest in, or make capital contributions to, the Investor
upon the demand of the Investor; and

    

    (7)           Cash
and cash equivalents held for investment purposes.

    

    Real Estate that is used by the owner
or a Related Person (as defined below) of the owner for personal purposes, or as
a place of business, or in connection with the conduct of the trade or business
of such owner or a Related Person of the owner, will NOT be considered Real
Estate held for investment purposes, provided that real estate owned by an
Investor who is engaged primarily in the business of investing, trading or
developing real estate in connection with such business may be deemed to be held
for investment purposes. However, residential real estate will not be deemed to
be used for personal purposes if deductions with respect to such real estate are
not disallowed by section 280A of the Internal Revenue Code of 1986, as
amended.

    
      
         

      

      
        -32-

        
          

        

      

      
         

      

    

    

    A Commodity Interest or Physical
Commodity owned, or a Financial Contract entered into, by the Investor who is
engaged primarily in the business of investing, reinvesting, or trading in
Commodity Shares, Physical Commodities or Financial Contracts in connection with
such business may be deemed to be held for investment purposes.

    

    “Commodity Shares” means commodity
futures contracts, options on commodity futures contracts, and options on
physical commodities traded on or subject to the rules of:

    

    (i)           Any
contract market designated for trading such transactions under the Commodity
Exchange Act and the rules thereunder; or

    

    (ii)           Any
board of trade or exchange outside the United States, as contemplated in Part 30
of the rules under the Commodity Exchange Act.

    

    “Public Company” means a company
that:

    

    (i)           files
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended; or

    

    (ii)           has
a class of securities that are listed on a Designated Offshore Securities
Market, as defined by Regulation S of the Securities Act.

    

    “Financial Contract” means any
arrangement that:

    

    (i)           takes
the form of an individually negotiated contract, agreement, or option to buy,
sell, lend, swap, or repurchase, or other similar individually negotiated
transaction commonly entered into by participants in the financial
markets;

    

    (ii)           is
in respect of securities, commodities, currencies, interest or other rates,
other measures of value, or any other financial or economic interest similar in
purpose or function to any of the foregoing; and

    

    (iii)           is
entered into in response to a request from a counter party for a quotation, or
is otherwise entered into and structured to accommodate the objectives of the
counterparty to such arrangement.

    

    “Physical Commodities” means any
physical commodity with respect to which a Commodity Interest is traded on a
market specified in the definition of Commodity Shares
above.

    
      
         

      

      
        -33-

        
          

        

      

      
         

      

    

    “Related Person” means a person who is
related to the Investor as a sibling, spouse or former spouse, or is a direct
lineal descendant or ancestor by birth or adoption of the Investor, or is a
spouse of such descendant or ancestor, provided that, in the case of a Family
Company, a Related Person includes any owner of the Family Company and any
person who is a Related Person of such an owner. “Family Company” means a
company that is owned directly or indirectly by or for two or more natural
persons who are related as siblings or spouse (including former spouses), or
direct lineal descendants by birth or adoption, spouses of such persons, the
estates of such persons, or foundations, charitable organizations or trusts
established for the benefit of such persons.

    

    For purposes of determining the amount
of investments owned by a company, there may be included investments owned by
majority-owned subsidiaries of the company and investments owned by a company
(“Parent Company”) of which the company is a majority-owned subsidiary, or by a
majority-owned subsidiary of the company and other majority-owned subsidiaries
of the Parent Company.

    

    In determining whether a natural person
is a qualified purchaser, there may be included in the amount of such person’s
investments any investment held jointly with such person’s spouse, or
investments in which such person shares with such person’s spouse a community
property or similar shared ownership interest. In determining whether spouses
who are making a joint investment in the Partnership are qualified purchasers,
there may be included in the amount of each spouse’s investments any investments
owned by the other spouse (whether or not such investments are held jointly).
There shall be deducted from the amount of any such investments any amounts
specified by paragraph 2(a) of Annex 2 incurred by such spouse.

    

    In determining whether a natural person
is a qualified purchaser, there may be included in the amount of such person’s
investments any investments held in an individual retirement account or similar
account the investments of which are directed by and held for the benefit of
such person.

    
      
         

      

      
        -34-

        
          

        

      

      
         

      

    

    Annex
2

    

    VALUATIONS
OF INVESTMENTS

    

    The general rule for determining the
value of investments in order to ascertain whether a person is a qualified
purchaser is that the value of the aggregate amount of investments owned and
invested on a discretionary basis by such person shall be their fair market
value on the most recent practicable date or their cost. This general rule is
subject to the following provisos:

    

    (1)           In
the case of Commodity Shares, the amount of investments shall be the value of
the initial margin or option premium deposited in connection with such Commodity
Shares; and

    

    (2)           In
each case, there shall be deducted from the amount of investments owned by such
person the following amounts:

    

    (i)           The
amount of any outstanding indebtedness incurred to acquire the investments owned
by such person.

    

    (ii)           A
Family Company, in addition to the amounts specified in paragraph (a) above,
shall have deducted from the value of such Family Company’s investments any
outstanding indebtedness incurred by an owner of the Family Company to acquire
such investments.

    
      
         

      

      
        -35-

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