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 EXHIBIT 4.8

SECURITIES PURCHASE AGREEMENT

AGREEMENT dated as of May 11, 2007, between HepaLife Technologies, Inc. (the “Company”) and GCA Strategic Investment Fund Limited (“Purchaser”).

R E C I T A L S:

WHEREAS, the Company desires to sell and issue to Purchaser, and Purchaser desires to purchase from the Company, $2,500,000 aggregate principal amount of the Company’s Convertible Note due two years from the date of issuance (the “Convertible Note”), with terms and conditions as set forth in the form of Convertible Note attached hereto as Exhibit A;

WHEREAS, the Convertible Note will be convertible into shares of the Company’s common stock, $0.001 par value per share (the “Common Stock”);

WHEREAS, in order to induce the Purchaser to enter into the transactions described in this Agreement, the Company desires to issue to the Purchaser warrants to purchase 670,000 shares of Common Stock on the terms and conditions described in the form of the common stock purchase warrant attached hereto as Exhibit F (the “Warrants”), and

WHEREAS, Purchaser will have certain registration rights with respect to such shares of Common Stock issuable as interest under, and upon conversion of, the Convertible Note (the “Note Shares”) and upon exercise of the Warrants (the “Warrant Shares,” the Note Shares and the Warrant Shares being collectively referred to herein as the “Conversion Shares”) as set forth in the Registration Rights Agreement in the form attached hereto as Exhibit B;

NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE 1.

  DEFINITIONS

ARTICLE 1.1

  Definitions.  The following terms, as used herein, have the following meanings:

“Additional Shares of Common Stock” has the meaning set forth in Section 11.6.

“Affiliate” means, with respect to any Person (the “Subject Person”), (i) any other Person (a “Controlling Person”) that directly, or indirectly through one or more intermediaries, Controls the Subject Person or (ii) any other Person (other than the Subject Person or a Consolidated Subsidiary of the Subject Person) which is Controlled by or is under common Control with a Controlling Person.

“Agreement” means this Securities Purchase Agreement, as amended, supplemented or otherwise modified from time to time in accordance with its terms.

“Asset Sale” has the meaning set forth in Section 8.4.

“Balance Sheet Date” has the meaning set forth in Section 4.7.

“Benefit Arrangement” means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by the Company.

“Benefit Plans” has the meaning set forth in Section 4.9(b).

“Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to close.

“Capital Reorganization” has the meaning set forth in Section 11.5.

“Change in Control” means (i) after the date of this Agreement, any person or group of persons (within the meaning of Sections 13 and 14 of the Exchange Act and the rules and regulations of the Commission relating to such sections) other than Purchaser shall have acquired beneficial ownership (within the meaning of Rules 13d-3 and 13d-5 promulgated by the Commission pursuant to the Exchange Act) of 33a% or more of the outstanding shares of Common Stock of the Company without the prior written consent of Purchaser; (ii) except as provided in Section 8.8 below, any sale or other disposition (other than by reason of death or disability) to any Person of more than 75,000 shares of Common Stock of the Company by any executive officers and/or employee directors of the Company without the prior written consent of Purchaser; (iii) individuals constituting the Board of Directors of the Company on the date hereof (together with any new Directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of at least 50.1% of the Directors still in office who are either Directors as of the date hereof or whose election or nomination for election was previously so approved), cease for any reason to constitute at least two-thirds of the Board of Directors of the Company then in office.

“Closing Bid Price” shall mean for any security as of any date, the lowest closing bid price as reported by Bloomberg, L.P. (“Bloomberg”) on the principal securities exchange or trading market where such security is listed or traded or, if the foregoing does not apply, the lowest closing bid price of such security in the over-the-counter market on the OTC Bulletin Board for such security as reported by Bloomberg, or, if no lowest trading price is reported for such security by Bloomberg, then the average of the bid prices of any market makers for such securities as reported in the “Pink Sheets” by the National Quotation Bureau, Inc.  If the lowest closing bid price cannot be calculated for such security on such date on any of the foregoing bases, the lowest closing bid price of such security on such date shall be the fair market value as mutually determined by Purchaser and the Company for which the calculation of the closing bid price requires, and in the absence of such mutual determination, as determined by the Board of Directors of the Company in good faith.

“Closing Date” means the date on which all of the conditions set forth in Sections 6.1 and 6.2 shall have been satisfied and Convertible Note in the aggregate principal amount of $2,500,000 are issued by the Company to Purchaser. 

“Code” means the Internal Revenue Code of 1986, as amended.

“Commission” means the Securities and Exchange Commission or any entity succeeding to all of its material functions.

“Common Stock” means common stock, $0.001 par value per share, of the Company.

“Company” means HepaLife Technologies, Inc., a Florida corporation, and its successors.

“Company Corporate Documents” means the certificate of incorporation and bylaws of the Company.

“Consolidated Net Worth” means at any date the total shareholder’s equity which would appear on a consolidated balance sheet of the Company prepared as of such date.

“Consolidated Subsidiary” means at any date with respect to any Person or Subsidiary or other entity, the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date.

“Control” (including, with correlative meanings, the terms “Controlling,” “Controlled by” and under “common Control with”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities, by contract or otherwise.

“Conversion Date” shall mean the date of delivery (including delivery via telecopy) of a Notice of Conversion for all or a portion of a Convertible Note by the holder thereof to the Company as specified in each Convertible Note.

“Conversion Price” has the meaning set forth in the Convertible Note.

“Conversion Shares” has the meaning set forth in the Recitals.

“Convertible Note” means the Company’s Convertible Note substantially in the form set forth as Exhibit A hereto.

“Deadline” has the meaning set forth in Section 10.1.

“Debt” of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, Notes, notes, or other similar instruments issued by such Person, (iii) all obligations of such Person as lessee 

which (y) are capitalized in accordance with GAAP or (z) arise pursuant to sale-leaseback transactions, (iv) all reimbursement obligations of such Person in respect of letters of credit or other similar instruments, (v) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person and (vi) all Debt of others Guaranteed by such Person.

“Default” means any event or condition which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default.

“Default Fee” has the meaning set forth in Section 10.4.

“Derivative Securities” has the meaning set forth in Section 8.6.

“Discounted Equity Offerings” has the meaning set forth in Section 8.6.

“Directors” means the individuals then serving on the Board of Directors or similar such management council of the Company.

“Environmental Laws” means any and all federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or other governmental restrictions relating to the environment or to emissions, discharges or releases of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes into the environment, including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic or hazardous substances or wastes or the cleanup or other remediation thereof.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute.

“ERISA Group” means the Company and each Subsidiary and all members of a controlled group of corporation and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any Subsidiary, are treated as a single employer under the Code.

“Event of Default” has the meaning set forth in Section 12.1 hereof.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Financing” means a public or private financing consummated (meaning closing and funding) through the issuance of debt or equity securities (or securities convertible into or exchangeable for debt or equity securities) of the Company, other than Permitted Financings.

“Fixed Price(s)” has the meaning set forth in Section 11.1.

“GAAP” has the meaning set forth in Section 1.2.

“Guarantee” by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing (whether by virtue of partnership arrangements, by agreement to keep well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain a minimum net worth, financial ratio or similar requirements, or otherwise) any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.  The term Guarantee used as a verb has a corresponding meaning.

“Hazardous Materials” means any hazardous materials, hazardous wastes, hazardous constituents, hazardous or toxic substances or petroleum products (including crude oil or any derivative or fraction thereof), defined or regulated as such in or under any Environmental Laws.

‘Intellectual Property” has the meaning set forth in Section 4.20.

“Investment” means any investment in any Person, whether by means of share purchase, partnership interest, capital contribution, loan, time deposit or otherwise.

“Lien” means any lien, mechanic’s lien, materialmen’s lien, lease, easement, charge, encumbrance, mortgage, conditional sale agreement, title retention agreement, agreement to sell or convey, option, claim, title imperfection, encroachment or other survey defect, pledge, restriction, security interest or other adverse claim, whether arising by contract or under law or otherwise (including, without limitation, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing).

“Listing Applications” has the meaning set forth in Section 4.4.

“Majority Holders” means (i) as of the Closing Date, Purchaser and (ii) at any time thereafter, the holders of more than 50% in aggregate principal amount of the Convertible Note outstanding at such time.

“Market Price” shall mean the Closing Bid Price of the Common Stock preceding the date of determination.

“Material Plan” means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $100,000.

“Maturity Date” shall mean the date of maturity of the Convertible Note.

“Maximum Number of Shares” shall mean that percentage that the Company may issue without shareholder approval under the applicable rules of the National Market or the OTC Bulletin Board or equivalent entity, of the then issued and outstanding shares of Common Stock of the Company as of the applicable date of determination, or such greater number of shares as the stockholders of the Company may have previously approved.

"NASD" has the meaning set forth in Section 7.10.

“Nasdaq Market” means the Nasdaq Stock Market’s National Market System.

“National Market” means the Nasdaq Market, the Nasdaq Small Cap Market, the New York Stock Exchange, Inc. or the American Stock Exchange, Inc..

“Net Cash Proceeds” means, with respect to any transaction, the total amount of cash proceeds received by the Company or any Subsidiary less (i) reasonable underwriters’ fees, brokerage commissions, reasonable professional fees and other customary out-of-pocket expenses payable in connection with such transaction, and (ii) in the case of dispositions of assets, (A) actual transfer taxes (but not income taxes) payable with respect to such dispositions, and (B) the amount of Debt, if any, secured by a Lien on the asset or assets disposed of and required to be, and actually repaid by the Company or any Subsidiary in connection therewith, and any trade payables specifically relating to such asset or assets sold by the Company or any Subsidiary that are not assumed by the purchaser of such asset or assets.

“Notice of Conversion” means the form to be delivered by a holder of a Convertible Note upon conversion of all or a portion thereof to the Company substantially in the form of Exhibit A to the form of Convertible Note.

“Officer’s Certificate” shall mean a certificate executed by the president, chief executive officer or chief financial officer of the Company in the form of Exhibit C attached hereto.

"OTC Bulletin Board" means the over-the-counter bulletin board operated by the NASD.

“Other Taxes” has the meaning set forth in Section 3.6(b).

“Out of Pocket Fee” has the meaning set forth in Section 13.4.

“PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.

“Permits” means all domestic and foreign licenses, franchises, grants, authorizations, permits, easements, variances, exemptions, consents, certificates, orders and approvals necessary to own, lease and operate the properties of, and to carry on the business of the Company and the Subsidiaries.

“Permitted Financings” has the meaning set forth in Section 8.6(a).

“Person” means an individual, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock Company, government (or any agency or political subdivision thereof) or other entity of any kind.

“Plan” means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under the Code and either (i) is maintained, or contributed to, by any member of the ERISA group for employees of any member of the ERISA group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA group for employees of the Person which was at such time a member of the ERISA Group.

“Purchase Price” means the purchase price for the Securities set forth in Section 2.2 hereof.

“Purchaser” means  the entity listed on the signature page hereto and its successors and assigns, including holders from time to time of the Convertible Note.

“Recourse Financing” means Debt of the Company or any Subsidiary which, by its terms, does not bar the lender thereof from action against the Company or any Subsidiary, as borrower or guarantor, if the security value of the project or asset pledged in respect thereof falls below the amount required to repay such Debt.

“Redemption Event” has the meaning set forth in Section 3.4.

“Registrable Securities” has the meaning set forth in Section 10.4(a).

“Registration Statement” has the meaning set forth in Section 10.4(b).

“Registration Rights Agreement” means the agreement between the Company and Purchaser dated the date hereof substantially in the form set forth in Exhibit B attached hereto.

“Reserved Amount” has the meaning set forth in Section 7.10(a).

“Rights Offering” has the meaning set forth in Section 11.3.

“Sale Event” has the meaning set forth in Section 3.4.

“SEC Reports” has the meaning set forth in Section 7.1(a).

“Securities” means the Convertible Note, the Warrants and, as applicable, the Conversion Shares.

“Securities Act” means the Securities Act of 1933, as amended.

“Share Reorganization” has the meaning set forth in Section 11.2.

“Special Distribution” has the meaning set forth in Section 11.4.

“Subsidiary” means, with respect to any Person, any corporation or other entity of which (x) a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the Board of Directors or other persons performing similar functions are at the time directly or indirectly owned by such Person or (y) the results of operations, the assets and the liabilities of which are consolidated with such Person under GAAP.

“Subsidiary Corporate Documents” means the certificates of incorporation and bylaws of each Subsidiary.

“Taxes” has the meaning set forth in Section 3.6.

“Trading Day” shall mean any Business Day in which the OTC Bulletin Board, National Market or other automated  quotation system or exchange on which the Common Stock is then traded is open for trading for at least four (4) hours.

“Transaction Agreements” means this Agreement, the Convertible Note, the Registration Rights Agreement, and the other agreements contemplated by this Agreement.

“Transfer” means any disposition of Securities that would constitute a sale thereof under the Securities Act.

“Unfunded Liabilities” means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA.

“VWAP” shall mean for any security as of any date, the volume weighted average price as reported by Bloomberg, L.P. (“Bloomberg”) on the principal securities exchange or trading market where such security is listed or traded or, if the foregoing does not apply, the volume weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no volume weighted average price is reported for such security by Bloomberg, then the average of the bid prices of any market makers for such securities as reported in the “Pink Sheets” by the National Quotation Bureau, Inc.  If the volume weighted average price cannot be calculated for such security on such date on any of the foregoing bases, the volume weighted average price of such security on such date shall be the fair market value as mutually determined by Purchaser and the Company for which the calculation of the volume weighted average price requires, and in the absence of such mutual determination, as determined by the Board of Directors of the Company in good faith.

“Warrant” means the Common Stock Purchase Warrants substantially in the form set forth in Exhibit F attached hereto.

ARTICLE 1.2

  Accounting Terms and Determinations.  Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with generally accepted accounting principles as in effect from time to time, applied on a consistent basis (except for changes concurred in by the Company’s independent public accountants) (“GAAP”).  All references to “dollars,” “Dollars” or “$” are to United States dollars unless otherwise indicated.

ARTICLE 2.

  PURCHASE AND SALE OF SECURITIES

ARTICLE 2.1

  Purchase and Sale of Convertible Note.

(a)

Subject to the terms and conditions set forth herein, the Company agrees to issue and sell to Purchaser, and Purchaser agrees to purchase from the Company, the Convertible Note.

(b)

Purchaser shall acquire Convertible Note on the Closing Date in an aggregate principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000.00).

ARTICLE 2.2

  Purchase Price.  The purchase price for the Convertible Note on the Closing Date shall be 85% of the principal amount thereof.  Therefore, the aggregate consideration payable by Purchaser to the Company for the Convertible Note on the Closing Date shall be Two Million One Hundred Twenty Five Thousand Dollars ($2,125,000.00) (the “Purchase Price”).

ARTICLE 2.3

  Closing and Mechanics of Payment.

(a)

The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds on or before 5:00 p.m. (EST).

(b)

The Convertible Note issued on the Closing Date shall be dated the date hereof.

ARTICLE 3.

  PAYMENT TERMS OF CONVERTIBLE NOTE

ARTICLE 3.1

  Payment of Principal and Interest; Payment Mechanics.  The Company will pay all amounts 

due on each Convertible Note by the method and at the address specified for such purpose by Purchaser in writing, without the presentation or surrender of any Convertible Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of this Convertible Note, the holder shall surrender the Convertible Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office.  Prior to any sale or other disposition of any Convertible Note, the holder thereof will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender the Convertible Note to the Company in exchange for a new Convertible Note or Convertible Notes.  The Company will afford the benefits of this Section 3.1 to any direct or indirect transferee of the Convertible Note purchased under this Agreement that has made the same agreement relating to this Convertible Note as Purchaser has in this Section 3.1; provided that such transferee is an “accredited investor” under Rule 501 of the Securities Act.

ARTICLE 3.2

. Intentionally Omitted.

ARTICLE 3.3

  Voluntary Prepayment.   For so long as no Event of Default shall have occurred and is continuing, the Company may, at its option, repay, in whole or in part, the Convertible Note, per the formula set forth in Section 5.1 of Exhibit A hereto, following at least five (5) Business Days prior written notice to Purchaser (the expiration of such five (5) Business Day period being referred to as the “prepayment date”); provided, however, that if such date is not a Business Day, the prepayment date shall be the next Business Day thereafter.  

ARTICLE 3.4

  Mandatory Prepayments.

(a)

Upon (i) the occurrence of a Change in Control of the Company, (ii) a transfer of all or substantially all of the assets of the Company to any Person in a single transaction or series of related transactions, (iii) a consolidation or merger of the Company with or into another Person in which the Company is not the surviving entity (other than a merger which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of Common Stock) (each of items (i), (ii) and (iii) being referred to as a “Sale Event”), or (iv) the occurrence of a Registration Default which continues uncured for a period of twenty (20) days, then, in each case, the Company shall, upon request of the Majority Holders, redeem the Convertible Note.  The redemption price payable upon any such redemption shall be the redemption price in Section 5 of the Convertible Note (referred to herein as the "Formula Price").

(b)

At the option of Purchaser, upon the consummation of one or more Financings, the Company shall use 25% of the Net Cash Proceeds therefrom (unless such Net Cash Proceeds from each such Financing is less than $250,000) to redeem the Convertible Note.

(c)

Upon the issuance of the Maximum Number of Shares, the receipt by the Company of Notice of Conversion requiring the issuance of shares of Common Stock in excess of the Maximum Number of Shares, and the failure within 70 days of such issuance to obtain shareholder approval to issue additional shares of Common Stock required to be issued in connection with such Notices of Conversion (the “Redemption Event”), the Company shall redeem the outstanding balance of each Convertible Note for the Formula Price.

(d)

In the event that there is an insufficient number of authorized, issuable, shares of Common Stock registered under the Registration Statement filed by the Company to allow Purchaser to fully convert the Convertible Note and exercise all Warrants held by Purchaser and sell such shares issued thereon, then the Company shall immediately file an amendment to the then current Registration Statement to register a sufficient number of such shares to convert said Convertible Note and Warrants.  Upon the failure within twenty (20) Trading Days measured from the date of filing the Registration Statement to register a sufficient number of such shares, the Company shall redeem the outstanding balance of each Convertible Note for the Formula Price.  In addition, failure of the Company to register a sufficient number of such shares to fully convert said Convertible Note and exercise such Warrants shall be a Registration Default under Section 10.4(e) from the date of the Notice of Conversion to the date of the earlier of (i) the redemption of the outstanding balance of the Convertible Note or (ii) full conversion of the Convertible Note and exercise of all such Warrants.

ARTICLE 3.5

  Prepayment Procedures.

(a)

Any permitted prepayment or redemption of the Convertible Note pursuant to Sections 3.3 or 3.4 above shall be deemed to be effective and consummated (for purposes of determining the Formula Price and the time at which Purchaser shall thereafter not be entitled to deliver a Notice of Conversion for the Convertible Note) as follows:

(i)

A prepayment pursuant to Section 3.3, the “prepayment date” specified therein;

(ii)

A redemption pursuant to Section 3.4(a), the date of consummation of the applicable Sale Event;

(iii)

A redemption pursuant to Section 3.4(b), three (3) Business Days following the date of consummation of the applicable Financing (meaning closing and funding); and

(iv)

A redemption pursuant to Section 3.4(c), the date specified in each Convertible Note.

(b)

On the Maturity Date and on the effective date of a repayment or redemption of the Convertible Note as specified in Section 3.5(a) above, the Company shall deliver by wire transfer of funds the repayment/redemption price to Purchaser of the Convertible Note subject to redemption in accordance with written directions to be provided by Purchaser.  Should Purchaser not receive payment of any amounts due on redemption of its Convertible Note by reason of the Company’s failure to make payment at the times prescribed above for any reason, the Company shall pay to the applicable holder on demand (x) interest on the sums not paid when due at an annual rate equal to the maximum lawful rate compounded at the end of each thirty (30) days, until the applicable holder is paid in full and (y) all costs of collection, including, but not limited to, reasonable attorneys’ fees and costs, whether or not suit or other formal proceedings are instituted.

(c)

The Company shall select the Convertible Note  to be redeemed in any redemption in which not all of the Convertible Note  are to be redeemed so that the ratio of the Convertible Note  of each holder selected for redemption to the total Convertible Note  owned by that holder shall be the same as the ratio of all such Convertible Note  selected for redemption bears to the total of all then outstanding Convertible Note .  Should any Convertible Note  required to be redeemed under the terms hereof not be redeemed solely by reason of limitations imposed by law, the applicable Convertible Note  shall be redeemed on the earliest possible dates thereafter to the maximum extent permitted by law.

(d)

Any Notice of Conversion delivered by Purchaser (including delivery via telecopy) to the Company prior to the (x) Maturity Date or (y) effective date of a voluntary repayment pursuant to Section 3.3 or a mandatory prepayment pursuant to Section 3.4 as specified in Section 3.5(a) above), shall be honored by the Company and the conversion of the Convertible Note shall be deemed effected on the Conversion Date.  In addition, between the effective date of a voluntary prepayment pursuant to Section 3.3 or a mandatory prepayment pursuant to Section 3.4 as specified in Section 3.5(a) above and the date the Company is required to deliver the redemption proceeds in full to Purchaser, Purchaser may deliver a Notice of Conversion to the Company.  Such notice will be (x) of no force or effect if the Company timely pays the redemption proceeds to Purchaser when due or (y) honored on or as of the date of the Notice of Conversion if the Company fails to timely pay the redemption proceeds to Purchaser when due.

ARTICLE 3.6

  Payment of Additional Amounts.

(a)

Any and all payments by the Company hereunder or under the Convertible Note to Purchaser and each “qualified assignee” thereof shall be made free and clear of and without deduction or withholding for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto (all such taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as “Taxes”) unless such Taxes are required by law or the administration thereof to be deducted or withheld.  If the Company shall be 

required by law or the administration thereof to deduct or withhold any Taxes from or in respect of any sum payable under the Convertible Note (i) the holders of the Convertible Note subject to such Taxes shall have the right, but not the obligation, for a period of thirty (30) days commencing upon the day it shall have received written notice from the Company that it is required to withhold Taxes to transfer all or any portion of the Convertible Note to a qualified assignee to the extent such transfer can be effected in accordance with the other provisions of this Agreement and applicable law; (ii) the Company shall make such deductions or withholdings; (iii) the sum payable shall be increased as may be necessary so that after making all required deductions or withholdings (including deductions or withholdings applicable to additional amounts paid under this Section 3.6) Purchaser receives an amount equal to the sum it would have received if no such deduction or withholding had been made; and (iv) the Company shall forthwith pay the full amount deducted or withheld to the relevant taxation or other authority in accordance with applicable.  A “qualified assignee” of a Purchaser is a Person that is organized under the laws of (i) the United States or (II) any jurisdiction other than the United States or any political subdivision thereof and that (y) represents and warrants to the Company that payments of the Company to such assignee under the laws in existence on the date of this Agreement would not be subject to any Taxes and (z) from time to time, as and when requested by the Company, executes and delivers to the Company and the Internal Revenue Service forms, and provides the Company with any information necessary to establish such assignee’s continued exemption from Taxes under applicable law.

(b)

The Company shall forthwith pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies (all such taxes, charges and levies hereinafter referred to as “Other Taxes”) which arise from any payment made under any of the Transaction Agreements or from the execution, delivery or registration of, or otherwise with respect to, this Agreement other than Taxes payable solely as a result of the transfer from Purchaser to a Person of any Security.  Anything herein to the contrary notwithstanding, Taxes or Other Taxes shall not include income taxes, if any, payable by Purchaser as a result of this Agreement, the Transaction Agreements or the transaction contemplated hereunder or thereunder.

(c)

The Company shall indemnify Purchaser, or qualified assignee, for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 3.6) paid by Purchaser, or qualified assignee, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted.  Payment under this indemnification shall be made within 30 days from the date Purchaser or assignee makes written demand therefor.  A certificate as to the amount of such Taxes or Other Taxes submitted to the Company by Purchaser or assignee shall be conclusive evidence of the amount due from the Company to such party.

(d)

Within 30 days after the date of any payment of Taxes, the Company will furnish to Purchaser the original or a certified copy of a receipt evidencing payment thereof.

(e)

Purchaser shall provide to the Company a form W-8, stating that it is a non-U.S. person, together with any additional tax forms which may be required under the Code, as amended after the date hereof, to allow interest payments to be made to it without  deduction.

ARTICLE 4.

  REPRESENTATIONS AND WARRANTIES

The Company represents and warrants to Purchaser, as of the Closing Date, the following:

ARTICLE 4.1

  Organization and Qualification.  The Company and each Subsidiary is a corporation (or other legal entity) duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, with full power and authority to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted.  The Company is qualified to conduct business as a foreign corporation and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except where such failure would not have a Material Adverse Effect.  A “Material Adverse Effect” means any material adverse effect on the operations, results of operations, properties, assets or condition  (financial or otherwise) of the Company or the Company and its Subsidiaries, taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith.

ARTICLE 4.2

  Authorization and Execution.

(a)

The Company has all requisite corporate power and authority to enter into and perform each Transaction Agreement and to consummate the transactions contemplated hereby and thereby and to issue the Securities in accordance with the terms hereof and thereof.

(b)

The execution, delivery and performance by the Company of each Transaction Agreement and the issuance by the Company of the Securities have been duly and validly authorized and no further consent or authorization of the Company, its Board of Directors or its shareholders is required.

(c)

This Agreement has been duly executed and delivered by the Company.

(d)

This Agreement constitutes, and upon execution and delivery thereof by the Company, each of the Transaction Agreements will constitute, a valid and binding agreement of the Company, in each case enforceable against the Company in accordance with its respective terms except as such enforceability may be limited by general principals of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to or affecting generally, the enforceability of creditor’s rights and remedies.

ARTICLE 4.3

  Capitalization .  As of the date hereof, the authorized, issued and outstanding capital stock of the Company is as set forth on Schedule 4.3 hereto and except as set forth on Schedule 4.3 no other shares of capital stock of the Company will be outstanding as of the Closing Date.  All of such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable.  No shares of capital stock of the Company are subject to preemptive rights or similar rights of the stockholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company.  Other than as set forth on Schedule 4.3 hereto, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries, and (ii) there are no agreements or arrangements under which the Company or any of its Subsidiaries are obligated to register the sale of any of its or their securities under the Securities Act (except pursuant to the Registration Rights Agreement) and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Convertible Note or Conversion Shares.  The Company has furnished to Purchaser true and correct copies of the Company’s Corporate Documents, and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto.

ARTICLE 4.4

  Governmental Authorization.  The execution and delivery by the Company of the Transaction Agreements does not and will not, the issuance and sale by the Company of the Securities does not and will not, and the consummation of the transactions contemplated hereby and by the other Transaction Agreements will not, require any action by or in respect of, or filing with, any governmental body, agency or governmental official except (a) such actions or filings that have been undertaken or made prior to the date hereof and that will be in full force and effect (or as to  which all applicable waiting periods have expired) on and as of the date hereof or which are not required to be filed on or prior to the Closing Date, (b) such actions or filings that, if not obtained, would not result in a Material Adverse Effect, (c) the filing of a “Form D” as described in Section 7.13 below and (d) the Registration Rights Agreement.

ARTICLE 4.5

  Issuance of Shares.  Upon conversion in accordance with the terms of the Convertible Note, the Conversion Shares shall be duly and 

validly issued and outstanding, fully paid and nonassessable, free and clear of any Taxes, Liens and charges with respect to issuance and shall not be subject to preemptive rights or similar rights of any other stockholders of the Company.  Assuming the representations and warranties of Purchaser herein are true and correct in all material respects, each of the Securities will have been issued in material compliance with all applicable U.S. federal and state securities laws.  The Company understands and acknowledges that, in certain circumstances, the issuance of Conversion Shares could dilute the ownership interests of other stockholders of the Company.  The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Convertible Note is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company.

ARTICLE 4.6

  No Conflicts.  Except as set forth on Schedule 4.6 hereto, the execution and delivery by the Company of the Transaction Agreements to which it is a party did not and will not, the issuance and sale by the Company of the Securities did not and will not and the consummation of the transactions contemplated hereby and by the other Transaction Agreements will not, contravene or constitute a default under or violation of (i) any provision of applicable law or regulation, (ii) the Company Corporate Documents, (iii) any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any Subsidiary or any of their respective assets, or result in the creation or imposition of any Lien on any asset of the Company or any Subsidiary.  The Company and each Subsidiary is in compliance with and conforms to all statutes, laws, ordinances, rules, regulations, orders, restrictions and all other legal requirements of any domestic or foreign government or any instrumentality thereof having jurisdiction over the conduct of its businesses or the ownership of its properties, except where such failure would not have a Material Adverse Effect.

ARTICLE 4.7

  Financial Information. Since December 31, 2006 (the “Balance Sheet Date”), except as disclosed in Schedule 4.7, there has been (x) no material adverse change in the assets or liabilities, or in the business or condition, financial or otherwise, or in the results of operations or prospects, of the Company and its Subsidiaries, whether as a result of any legislative or regulatory change, revocation of any license or rights to do business, fire, explosion, accident, casualty, labor  trouble, flood, drought, riot, storm, condemnation, act of God, public force or otherwise and (y) no material adverse change in the assets or liabilities, or in the business or condition, financial or otherwise, or in the results of operations or prospects, of the Company and its subsidiaries except in the ordinary course of business; and to the best of the Company’s knowledge, no fact or condition exists or is contemplated or threatened which might cause such a change in the future.  The audited consolidated balance sheets of the Company and its Subsidiaries for the periods ending December 31, 2004, December 31, 2005 and December 31, 2006, respectively, and the related consolidated statements of income, changes in stockholders’ equity and changes in cash flows for the periods then ended, including the footnotes thereto, except as indicated therein, (i) complied in all material respects with applicable accounting requirements and (ii) have been prepared in accordance with GAAP consistently applied throughout the periods indicated, except that the unaudited financial statements do not contain notes and may be subject to normal audit adjustments and normal annual adjustments.  Such financial statements fairly present the financial condition of the Company and its Consolidated Subsidiaries at the dates indicated and the consolidated results of their operations and cash flows for the periods then ended and, except 

as indicated therein, reflect all claims against and all Debts and liabilities of the Company and its Subsidiaries, fixed or contingent. 

ARTICLE 4.8

  Litigation.  Except as set forth on Schedule 4.8, there is no action, suit or proceeding pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary, before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or which challenges the validity of any Transaction Agreements.

ARTICLE 4.9

  Compliance with ERISA and other Benefit Plans.

(a)

Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code with respect to each Plan.  No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Code in respect of any Plan, (ii) failed to make any required contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which as resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA.

(b)

The benefit plans not covered under clause (a) above (including profit sharing, deferred compensation, stock option, employee stock purchase, bonus, retirement, health or insurance plans, collectively the “Benefit Plans”) relating to the employees of the Company are duly registered where required by, and are in good standing in all material respects under, all applicable laws.  All required employer and employee contributions and premiums under the Benefit Plans to the date hereof have been made, the respective fund or funds established under the Benefit Plans are funded in accordance with applicable laws, and no past service funding liabilities exist thereunder.

(c)

No Benefit Plans have any unfunded liabilities, either on a “going concern” or “winding up” basis and determined in accordance with all applicable laws and actuarial practices and using actuarial assumptions and methods that are reasonable in the circumstances.  No event has occurred and no condition exists with respect to any Benefit Plans that has resulted or could reasonably be expected to result in any pension plan having its registration revoked or wound up (in whole or in part) or refused for the purposes of any applicable laws or being placed under the administration of any relevant pension benefits regulatory authority or being required to pay any taxes or penalties (in any material amounts) under any applicable laws.

ARTICLE 4.10

  Environmental Matters.  Except as set forth on Schedule 4.10, the costs and liabilities associated with Environmental Laws (including the cost of compliance therewith) are unlikely to have a material adverse effect on the 

business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or any Subsidiary.  Each of the Company and the Subsidiaries conducts its businesses in compliance in all material respects with all applicable Environmental Laws.

ARTICLE 4.11

  Taxes.  All United States federal, state, county, municipality, local or foreign  income tax returns and all other material tax returns (including foreign tax returns) which are required to be filed by or on behalf of the Company and each Subsidiary have been filed and all material taxes due pursuant to such returns or pursuant to any assessment received by the Company and each Subsidiary through the date hereof have been paid except those being disputed in good faith and for which adequate reserves have been established.  The charges, accruals and reserves on the books of the Company and each Subsidiary in respect of taxes and other governmental charges have been established in accordance with GAAP.

ARTICLE 4.12

  Investments, Joint Ventures.  Other than as set forth in Schedule 4.12, the Company has no Subsidiaries or other direct or indirect Investment in any Person, and the Company is not a party to any partnership, management, shareholders’ or joint venture or similar agreement.

ARTICLE 4.13

  Not an Investment Company.  Neither the Company nor any Subsidiary is an “Investment Company” within the meaning of Investment Company Act of 1940, as amended.

ARTICLE 4.14

  Full Disclosure.  Except as set forth on Schedule 4.14, the information heretofore furnished by the Company to Purchaser for purposes of or in connection with this Agreement or any transaction contemplated hereby does not, and all such information hereafter furnished by the Company or any Subsidiary to Purchaser will not (in each case taken together and on the date as of which such information is furnished), contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they are made, not misleading.

ARTICLE 4.15

  No Solicitation; No Integration with Other Offerings.  Except as set forth on Schedule 4.15, no form of general solicitation or general advertising was used by the Company or, to the best of its actual knowledge, any other Person acting on behalf of the Company, in connection with the offer and sale of the Securities.  Neither the Company, nor, to its knowledge, any Person acting on behalf of the Company, has, either directly or indirectly, sold or offered for sale to any Person (other than Purchaser) any of the Securities or, within the six months prior to the date hereof, any other similar security of the Company except as contemplated by this Agreement, and the Company represents that neither itself nor any Person authorized to act on its behalf (except that the Company makes no representation as to Purchaser and their Affiliates) will sell or offer for sale any such security to, or solicit any offers to buy any such security from, or otherwise approach or negotiate in respect thereof with, any Person or Persons so as thereby to cause the issuance or sale of any of the Securities to be in violation of any of the provisions of Section 5 of the Securities Act. 

ARTICLE 4.16

  Permits.  (a) Each of the Company and its Subsidiaries has all material Permits; (b) all such Permits are in full force and effect, and each of the Company and its Subsidiaries has fulfilled and performed all material obligations with respect to such Permits; (c) no event has occurred which allows, or after notice of lapse of time would allow, revocation or termination by the issuer thereof or which results in any other material impairment of the rights of the holder of any such Permit; and (d) the Company has no reason to believe that any governmental body or agency is considering limiting, suspending or revoking any such Permit.

ARTICLE 4.17

  Leases.  Neither the Company nor any Subsidiary is a party to any capital lease obligation with a value greater than $100,000 or to any operating lease with an aggregate annual rental greater than $100,000 during the life of such lease.

ARTICLE 4.18

  Absence of Any Undisclosed Liabilities.  There are no liabilities of the Company or any Subsidiary of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which would reasonably be expected to result in such a liability, other than (i) those liabilities provided for in the financial statements delivered pursuant to Section 4.7 and (ii) other undisclosed liabilities which, individually or in the aggregate, would not have a Material Adverse Effect.

ARTICLE 4.19

  Public Utility Holding Company.  Neither the Company nor any Subsidiary is, or will be upon issuance and sale of the Securities and the use of the proceeds described herein, subject to regulation under the Public Utility Holding Company Act of 1935, as amended, the Federal Power Act, the Interstate Commerce Act or to any federal or state statute or regulation limiting its ability to issue and perform its obligations under any Transaction Agreement.

ARTICLE 4.20

  Intellectual Property Rights.  Except as set forth on Schedule 4.20 hereto, each of the Company and its Subsidiaries owns, or is licensed under, and has the rights to use, all material patents, trademarks, trade names, copyrights, technology, know-how and processes (collectively, “Intellectual Property”) used in, or necessary for the conduct of its business; no claims have been asserted by any Person to the use of any such Intellectual Property or challenging or questioning the validity or effectiveness of any license or agreement related thereto.  To the best of Company’s and its Subsidiaries’ knowledge, there is no valid basis for any such claim and the use of such Intellectual Property by the Company and its Subsidiaries will not infringe upon the rights of any Person.

ARTICLE 4.21

  Insurance.  The Company and its Subsidiaries maintain, with financially sound and reputable insurance companies, insurance in at least such amounts and against such risks such that any uninsured loss would not have a Material Adverse Effect.  All insurance coverages of the Company and its Subsidiaries are in full force and effect and there are no past due premiums in respect of any such insurance.

ARTICLE 4.22

  Title to Properties.  The Company and its Subsidiaries have good and marketable title to all their respective properties free and clear of all Liens.

ARTICLE 4.23

 Subsidiaries.  Except for the directly and indirectly owned subsidiaries of the Company as set forth on .  Neither the Company nor any of its Subsidiaries nor, to the Company’s knowledge, any employee or agent of the Company or any Subsidiary has made any payments of funds of the Company or Subsidiary, or received or retained any funds, in each case  in violation of any law, rule or regulation.

ARTICLE 4.26

  SEC Reports.  The Company has filed all reports, schedules, forms, statements and other documents required to be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Reports”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, as applicable, and none of the SEC Reports, when filed, contained any untrue 

statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in accordance with GAAP, except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.

ARTICLE 4.27

  Sarbanes-Oxley: Internal Accounting Controls.  The Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date.  The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  The Company’s certifying officers have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by the Company’s most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”).  The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no changes in the Company’s internal control over financial reporting (as such term is defined in the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ARTICLE 5.

  REPRESENTATIONS AND WARRANTIES OF PURCHASER

ARTICLE 5.1

  Purchaser.  Purchaser hereby represents and warrants to the Company that:

(a)

Purchaser is an “accredited investor” within the meaning of Rule 501(a) under the Securities Act and the Securities to be acquired by it pursuant to this 

Agreement are being acquired for its own account and, as of the date hereof, not with a view toward, or for sale in connection with, any distribution thereof except in compliance with applicable United States federal and state securities law; provided that the disposition of Purchaser’s property shall at all times be and remain within its control;

(b)

the execution, delivery and performance of this Agreement and the purchase of the Securities pursuant thereto are within Purchaser’s corporate or partnership powers, as applicable, and have been duly and validly authorized by all requisite corporate or partnership action;

(c)

this Agreement has been duly executed and delivered by Purchaser;

(d)

the execution and delivery by Purchaser of the Transaction Agreements to which it is a party does not, and the consummation of the transactions contemplated hereby and thereby will not, contravene or constitute a default under or violation of (i) any provision of applicable law or regulation, or (ii) any agreement, judgment, injunction, order, decree or other instrument binding upon Purchaser;

(e)

Purchaser understands that the Securities have not been registered under the Securities Act and may not be transferred or sold except as specified in this Agreement or the remaining Transaction Agreements;

(f)

this Agreement constitutes a valid and binding agreement of Purchaser enforceable in accordance with its terms, subject to (i) applicable bankruptcy, insolvency or similar laws affecting the enforceability of creditors rights generally and (ii) equitable principles of general applicability;

(g)

Purchaser has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Securities and Purchaser is capable of bearing the economic risks of such investment;

(h)

Purchaser is knowledgeable, sophisticated and experienced in business and financial matters; Purchaser has previously invested in securities similar to the Securities and fully understands the limitations on transfer described herein; Purchaser has been afforded access to information about the Company and the financial condition, results of operations, property, management and prospects of the Company sufficient to enable it to evaluate its investment in the Securities; Purchaser has been afforded the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and the risks of investing in the Securities; and Purchaser has been afforded the opportunity to obtain such additional information which the Company possesses or can acquire that is necessary to verify the accuracy and completeness of the information given to Purchaser concerning the Company.  The foregoing does not in any way relieve the Company of its representations and other undertakings hereunder, and shall not limit Purchaser’s ability to rely thereon;

(i)

no part of the source of funds used by Purchaser to acquire the Securities constitutes assets allocated to any separate account maintained by Purchaser in which any employee benefit plan (or its related trust) has any interest;

(j)

Purchaser agrees that for as long as this Securities Purchase Agreement is in effect or two years, whichever is longer, that Purchaser or any Affiliate of Purchaser will not short sell (either in a naked or covered short transaction) any common stock of Company. Any violation of this requirement would be considered a condition of default by Purchaser and would automatically void all restrictive covenants of Company imposed by Purchaser and Company; and

(k)

Purchaser is a corporation organized and duly existing under the laws of Bermuda.

ARTICLE 6.

  CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES

ARTICLE 6.1

  Conditions Precedent to Purchaser’s Obligations to Purchase.  The obligation of Purchaser hereunder to purchase the Convertible Note at the Closing is subject to the satisfaction, on or before the Closing Date, of each of the following conditions, provided that these conditions are for Purchaser’s sole benefit and may be waived by Purchaser at any time in its sole discretion:

(a)

The Company shall have duly executed this Agreement, the Warrant and the Registration Rights Agreement and delivered the same to Purchaser;

(b)

The Company shall have delivered to Purchaser duly executed Convertible Note in accordance with Section 2.3 hereof;

(c)

The representations and warranties of the Company contained in each Transaction Agreement shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at such time (except for representations and warranties that speak as of a specified date) and the Company shall have performed, satisfied and complied with all covenants, agreements and conditions required by such Transaction Agreements to be performed, satisfied or complied with by it at or prior to the Closing Date.  Purchaser shall have received an executed Officer’s Certificate, dated as of the Closing Date to the foregoing effect and as to such other matters as may be reasonably requested by Purchaser, including but not limited to certificates with respect to the Company Corporate Documents, resolutions relating to the transactions contemplated hereby and the incumbencies of certain officers and Directors of the Company.  The form of such certificate is attached hereto as Exhibit C;

(d)

The Company shall have received all governmental, Board of Directors, shareholders and third party consents and approvals necessary or desirable in connection 

with the issuance and sale of the Securities and the consummation of the transactions contemplated by the Transaction Agreements other than the Registration Rights Agreement;

(e)

All applicable waiting periods in respect to the issuance and sale of the Securities shall have expired without any action having been taken by any competent authority that could restrain, prevent or impose any materially adverse conditions thereon or that could seek or threaten any of the foregoing;

(f)

No law or regulation shall have been imposed or enacted that, in the judgment of Purchaser, could adversely affect the transactions set forth herein or in the other Transaction Agreements, and no law or regulation shall have been proposed that in the reasonable judgment of Purchaser could reasonably have any such effect;

(g)

Purchaser shall have received an opinion, dated the Closing Date, of counsel to the Company, in form and substance satisfactory to Purchaser;

(h)

All fees and expenses due and payable by the Company on or prior to the Closing Date shall have been paid;

(i)

The Company Corporate Documents and the Subsidiary Corporate Documents, if any, shall be in full force and effect and no term or condition thereof shall have been amended, waived or otherwise modified without the prior written consent of Purchaser;

(j)

There shall have occurred no material adverse change in the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or any Subsidiary since May 1, 2007;

(k)

There shall exist no action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental instrumentality that challenges the validity of or purports to affect this Agreement or any other Transaction Agreement, or other transaction contemplated hereby or thereby or that could reasonably be expected to have a Material Adverse Effect, or any material adverse effect on the enforceability of the Transaction Agreements or the Securities or the rights of the holders of the Securities or Purchaser hereunder;

(l)

Purchaser shall have confirmed the receipt of the Convertible Note  to be issued, duly executed by the Company in the denominations requested by Purchaser and registered in the name of Purchaser;

(m)

Immediately before and after the Closing Date, no Default or Event of Default shall have occurred and be continuing;

(n)

Purchaser shall have received all other opinions, resolutions, certificates, instruments, agreements or other documents as they shall reasonably request;

(o)

 

Company shall have delivered to Purchaser the Use of Proceeds Schedule 7.8.

ARTICLE 6.2

  Conditions to the Company’s Obligations.  The obligations of the Company to issue and sell the Securities to Purchaser pursuant to this Agreement are subject to the satisfaction, at or prior to the Closing Date, of the following conditions:

(a)

The representations and warranties of Purchaser contained herein shall be true and correct in all material respects on the Closing Date and Purchaser shall have performed and complied in all material respects with all agreements required by this Agreement to be performed or complied with by Purchaser at or prior to the Closing Date;

(b)

The issue and sale of the Securities by the Company shall not be prohibited by any applicable law, court order or governmental regulation;

(c)

Receipt by the Company of duly executed counterparts of this Agreement and the Registration Rights Agreement signed by Purchaser;

(d)

The Company shall have received payment of Purchase Price, less the Expense Reimbursement Fee.

ARTICLE 7.

  AFFIRMATIVE COVENANTS

The Company hereby agrees that, from and after the date hereof for so long as any Convertible Note remain outstanding and for the benefit of Purchaser:

ARTICLE 7.1

 Information.  The Company will deliver to each holder of the Convertible Note:

(a)

within two (2) days after the CEO or CFO of the Company obtains knowledge of a Default or Event of Default, or that any Person has given any notice or taken any action with respect to a claimed Default hereunder, a certificate of the chief financial officer of the Company setting forth the details thereof and the action which the Company is taking or proposed to take with respect thereto;

(b)

promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed and any other document generally distributed to shareholders;

(c)

at least two (2) Business Days prior to the consummation of any Financing or other event requiring a repayment of the Convertible Note under Section 3.4, notice 

thereof together with a summary of all material terms thereof and copies of all documents and instruments associated therewith;

(d)

notice promptly upon the occurrence of any event by which the Reserved Amount becomes less than the sum of (i) 1.5 times the maximum number of Conversion Shares issuable pursuant to the Transaction Agreements; and

(e)

promptly following the commencement thereof, notice and a description in reasonable detail of any litigation or proceeding to which the Company or any Subsidiary is a party in which the amount involved is $250,000 or more and not covered by insurance or in which injunctive or similar relief is sought.

ARTICLE 7.2

  Payment of Obligations.  The Company will, and will cause each Subsidiary to, pay and discharge, at or before maturity, all their respective material obligations, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings and will maintain, in accordance with GAAP, appropriate reserves for the accrual of any of the same.

ARTICLE 7.3

 Maintenance of Property; Insurance.  The Company will, and will cause each Subsidiary to, keep all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted.  In addition, the Company and each Subsidiary will maintain insurance in at least such amounts and against such risks as it has insured against as of the Closing Date.

ARTICLE 7.4

 Maintenance of Existence.  The Company will, and will cause each Subsidiary to, continue to engage in business of the same general type as now conducted by the Company and such Subsidiaries, and will preserve, renew and keep in full force and effect its respective corporate existence and their respective material rights, privileges and franchises necessary or desirable in the normal conduct of business.

ARTICLE 7.5

 Compliance with Laws.  The Company will, and will cause each Subsidiary to, comply, in all material respects, with all federal, state, municipal, local or foreign applicable laws, ordinances, rules, regulations, municipal by-laws, codes and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except (i) where compliance therewith is contested in good faith by appropriate proceedings or (ii) where non-compliance therewith could not reasonably be expected, in the aggregate, to have a material adverse effect on the business, condition (financial or otherwise), operations, performance, properties or prospects of the Company or such Subsidiary.

ARTICLE 7.6

  Inspection of Property, Books and Records.  The Company will, and will cause each Subsidiary to, keep proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to their respective businesses and activities; and will permit, during normal business hours, Purchaser’ Representative or an affiliate thereof, as representatives of Purchaser, to visit and inspect any of their respective properties, upon 

reasonable prior notice, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective executive officers and independent public accountants (and by this provision the Company authorizes its independent public accountants to disclose and discuss with Purchaser the affairs, finances and accounts of the Company and its Subsidiaries in the presence of a representative of the Company; provided, however, that such discussions will not result in any unreasonable expense to the Company, without Company consent), all at such reasonable times.

ARTICLE 7.7

  Investment Company Act.  The Company will not be or become an open-end investment trust, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act of 1940, as amended.

ARTICLE 7.8

 Use of Proceeds.  The proceeds from the issuance and sale of the Convertible Note by the Company shall be used in accordance with Schedule 7.8 attached hereto.  None of the proceeds from the issuance and sale of the Convertible Note by the Company pursuant to this Agreement will be used directly or indirectly for, (i) payment of any existing indebtedness of the Company to any officer, director or shareholder of the Company; or (ii) the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any “margin stock” within the meaning of Regulation G of the Board of Governors of the Federal Reserve System.

ARTICLE 7.9

  Compliance with Terms and Conditions of Material Contracts.  The Company will, and will cause each Subsidiary to, comply, in all respects, with all terms and conditions of all material contracts to which it is subject.

ARTICLE 7.10

  Reserved Shares.

(a)

The Company shall at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the full conversion of the outstanding Convertible Note and issuance of the Conversion Shares (based on the conversion price of the Convertible Note in effect from time to time) (the “Reserved Amount”).  The Company shall not reduce the Reserved Amount without the prior written consent of Purchaser.  With respect to all Securities which contain an indeterminate number of shares of Common Stock issuable in connection therewith (such as the Convertible Note), the Company shall include in the Reserve Amount, no less than two (2) times the number of shares that is then actually issuable upon conversion or exercise of such Securities.  If at any time the number of shares of Common Stock authorized and reserved for issuance is below the number of Conversion Shares issued or issuable upon conversion of the Convertible Note, the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, either (x) calling a special meeting of shareholders to authorize additional shares, in the case of an insufficient number of authorized shares or (y) in lieu thereof, consummating the immediate repurchase of the Convertible Note contemplated in Sections 3.4(c) hereof.

ARTICLE 7.11

  Transfer Agent Instructions.  Upon receipt of a Notice of Conversion or Notice of Exercise, as applicable, the Company shall immediately direct the Company's transfer agent to issue certificates, registered in the name of Purchaser or its nominee, for the Conversion Shares, in such amounts as specified from time to time by Purchaser to the Company upon proper conversion of the Convertible Note.  Upon conversion of any Convertible Note in accordance with their terms, the Company will, and will use its best lawful efforts to cause its transfer agent to, issue one or more certificates representing shares of Common Stock in such name or names and in such denominations specified by a Purchaser in a Notice of Conversion.  As long as the Registration Statement contemplated by the Registration Rights Agreement shall remain effective, the shares of Common Stock issuable upon conversion of any Convertible Note shall be issued to any transferee of such shares from Purchaser without any restrictive legend upon appropriate evidence of transfer in compliance with the Securities Act and the rules and regulations of the Commission; provided that for so long as the Registration Statement is effective, no opinion of counsel will be required to effect any such transfer.  The Company further warrants and agrees that no instructions other than these instructions have been or will be given to its transfer agent.  Nothing in this Section 7.11 shall affect in any way the Purchaser’s obligation to comply with all securities laws applicable to Purchaser upon resale of such shares of Common Stock, including any prospectus delivery requirements.

ARTICLE 7.12

  Maintenance of Reporting Status; Supplemental Information.  So long as any of the Securities are outstanding, the Company shall timely file all reports required to be filed with the Commission pursuant to the Exchange Act.  The Company shall not terminate its status as an issuer required to file reports under the Exchange Act, even if the Exchange Act or the rules and regulations thereunder would permit such termination.  If at anytime the Company is not subject to the requirements of Section 13 or 15(d) of the Exchange Act, the Company will promptly furnish at its expense, upon request, for the benefit of the holders from time to time of Securities, and prospective purchasers of Securities, information satisfying the information requirements of Rule 144 under the Securities Act.

ARTICLE 7.13

  Form D; Blue Sky Laws.  The Company agrees to file a “Form D” with respect to the Securities as required under Regulation D of the Securities Act and to provide a copy thereof to Purchaser promptly after such filing.  The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify the Securities for sale to Purchaser at the Closing pursuant to this Agreement under applicable securities or “blue sky” laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to Purchaser on or prior to the Closing Date.

ARTICLE 8.

  NEGATIVE COVENANTS

The Company hereby agrees that after the date hereof for so long as any Convertible Note remain outstanding and for the benefit of Purchaser:

ARTICLE 8.1

  Limitations on Debt or Other Liabilities.  Neither the Company nor any Subsidiary will create, incur, assume or suffer to exist (at any time after the Closing Date, after giving effect to the application of the proceeds of the issuance of the Securities) (i) any Debt except without the prior written consent of the Purchaser (x) Debt incurred in a Permitted Financing, (y) Debt incurred in connection with equipment leases to which the Company or its Subsidiaries are a party incurred in the ordinary course of business; and (z) Debt incurred in connection with trade accounts payable, imbalances and refunds arising in the ordinary course of business and (ii) any equity securities (including Derivative Securities) (other than those securities that are issuable (x) under or pursuant to stock option plans, warrants or other rights  programs that exist as of the date hereof, or (y) securities incurred in a Permitted Financing or (z) in connection with the acquisition (including by merger) of a business or of assets otherwise permitted under this Agreement), unless the Company complies with the mandatory prepayment terms of Section 3.4(b) hereof.

ARTICLE 8.2

  Transactions with Affiliates.  Except as set forth on Schedule 8.2 hereto, the Company and each Subsidiary will not, directly or indirectly, pay any funds to or for the account of, make any investment (whether by acquisition or stock or indebtedness, by loan, advance, transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, and Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with any joint enterprise or other joint arrangement with, any Affiliate, except, (1) pursuant to those agreements specifically identified on Schedule 8.2 attached hereto (with a copy of such agreements annexed to such Schedule 8.2) and (2) on terms to the Company or such Subsidiary no less favorable than terms that could be obtained by the Company or such Subsidiary from a Person that is not an Affiliate of the Company upon negotiation at arms’ length, as determined in good faith by the Board of Directors of the Company; provided that no determination of the Board of Directors shall be required with respect to any such transactions entered into in the ordinary course of business.

ARTICLE 8.3

  Merger or Consolidation.  The Company will not, in a single transaction or a series of related transactions (i) consolidate with or merge with or into any other Person, or (ii) permit any other Person to consolidate with or merge into it, unless the Company shall be the survivor of such merger or consolidation and (x) immediately before and immediately after given effect to such transaction (including any indebtedness incurred or anticipated to be incurred in connection with the transaction), no Default or Event of Default shall have occurred and be continuing; and (y) the Company has delivered to Purchaser an Officer’s Certificate stating that such consolidation, merger or transfer complies with this Agreement, and that all conditions precedent in this Agreement relating to such transaction have been satisfied.

ARTICLE 8.4

  Limitation on Asset Sales.  Neither the Company nor any Subsidiary will consummate an Asset Sale of material assets of the Company or any Subsidiary without the prior written consent of Purchaser, which consent shall not be unreasonably withheld.  As used herein, “Asset Sale” means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) or sales of capital stock of a Subsidiary (other than directors’ qualifying shares), property or other assets (each 

referred to for the purpose of this definition as a “disposition”), including any disposition by means of a merger, consolidation or similar transaction other than a disposition of property or assets at fair market value in the ordinary course of business.

ARTICLE 8.5

  Restrictions on Certain Amendments.  Neither the Company nor any Subsidiary will waive any provision of, amend, or suffer to be amended, any provision of such entity’s existing Debt, any material contract or agreement, any Company Corporate Document or Subsidiary Corporate Document if such amendment, in the Company’s reasonable judgment, would materially adversely affect Purchaser or the holders of the Securities without the prior written consent of Purchaser.

ARTICLE 8.6

  Restrictions on Issuances of Securities.

(a)

In addition to and not in lieu of the covenant specified in Section 8.1 above:

(1)

From the Closing Date and continuing until 180 days following the date on which the Registration Statement becomes effective, the Company agrees that it will not issue any of its equity securities (or securities convertible into or exchangeable or exercisable for equity securities (the “Derivative Securities”)) on terms that allow a holder thereof to acquire such equity securities (or Derivative Securities) at a discount to the Market Price of the Common Stock at the time of issuance or, in the case of Derivative Securities, at a conversion price based on any formula (other than standard anti-dilution provisions) based on the Market Price on a date later than the date of issuance which is below the Market Price on the date of issuance (each such event, a “Discounted Equity Offering”) other than (i) borrowings under conventional credit facilities existing as of the date hereof, (ii) stock issued or credit facilities to be established in connection with acquisitions, (iii) equity securities or Derivative Securities in connection with employee and director stock option and stock purchase plans, (iv) employee and director stock option and stock purchase plans, and (v) securities issued under the Convertible Note or Warrants.  In addition, the Company shall not issue any equity securities in connection with a strategic alliance entered into by the Company unless such securities are the subject of a one year statutory or contractual hold period or, if not subject to such a hold period, unless the Purchaser has fully converted all outstanding Convertible Note and exercised all Warrants.  As used herein, “discount” shall include, but not be limited to, (i) any warrant, right or other security granted or offered in connection with such issuance which, on the applicable date of grant, is offered with an exercise or conversion price, as the case may be, at less than the then current Market Price of the Common Stock or, if such security has an exercise or conversion price based on any formula (other than standard anti-dilution provisions) based on the Market Price on a date later than the date of issuance, then at a price below the Market Price on such date of exercise or conversion, as the case may be, or (ii) any commissions, fees or other allowances paid in 

connection with such issuances (other than customary underwriter or placement agent commissions, fees or allowances).  For the purposes of determining the Market Price at which Common Stock is acquired under this Section, normal underwriting commissions and placement fees (including underwriters’ warrants) shall be excluded.  Notwithstanding the foregoing, the Company may enter into the following types of transactions (collectively referred to as "Permitted Financings"):  (1) "permanent financing" transactions, which would include any form of debt or equity financing (other than an underwritten offering), which is followed by a reduction of the said financing commitment to zero and payment of all related fees and expenses; (2) "project financing" which provide for the issuance of recourse debt instruments in connection with the operation of the Company's business as presently conducted or as proposed to be conducted; (3) an underwritten offering of Common Stock, provided that such offering provides for the registration of the Conversion Shares if the Registration Statement has not been declared effective; and (4) other financing transactions specifically consented to in writing by the Purchaser.

(2)

The 180-day restrictive period set forth in paragraph (1) of this Section 8.6(a) shall be increased by one day for each day a Registration Default has occurred and not been cured by the Company. 

(b)

Until such time as all of the Convertible Note have been either redeemed or converted into Conversion Shares in full, the Company agrees it will not issue any of its equity securities (or Derivative Securities), unless any shares of Common Stock issued or issuable in connection therewith are “restricted securities.”  As used herein “restricted securities” shall mean securities which may not be sold prior to twelve (12) months following the date of issuance of such securities by virtue of contractual restrictions imposed by the Company or otherwise.

ARTICLE 8.7

  Limitation on Stock Repurchases.  Except as otherwise set forth in the Convertible Note and the Warrants, the Company shall not, without the written consent of the Majority Holders, redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) any shares of capital stock of the Company or any warrants, rights or options to purchase or acquire any such shares.

ARTICLE 8.8

  Limitation on Sales By Officers and Employee Directors.  For a period of 180 days following the date the Registration Statement is declared effective by the Commission, no executive officer or a employee director of the Company shall, individually, sell or otherwise dispose of (other than by reason of death or disability) to any Person an amount of Common Stock greater than that allowed by Rule 144, promulgated under the Securities Act: provided however, that the foregoing restriction, nor the limitation set forth in section (ii) of the definition of Change in Control, shall apply (i) once the outstanding principal balance of the Convertible Note is less than fifteen percent (15%) of the original face amount of the Convertible Note; or 

(ii) the VWAP of the Company’s Common Stock equals or exceeds $2.50 and average volume traded equals or exceeds 250,000 shares for 10 consecutive Trading Days.

ARTICLE 9.

  RESTRICTIVE LEGENDS

ARTICLE 9.1

  Restrictions on Transfer.  From and after their respective dates of issuance, none of the Securities shall be transferable except upon the conditions specified in this Article IX, which conditions are intended to ensure compliance with the provisions of the Securities Act in respect of the Transfer of any of such Securities or any interest therein.  Purchaser will use its best efforts to cause any proposed transferee of any Securities held by it to agree to take and hold such Securities subject to the provisions and upon the conditions specified in this Article IX.

ARTICLE 9.2

 Legends.  The Conversion Shares, upon resale by the Purchaser pursuant to the Registration Statement, shall be freely tradeable and unrestricted.

ARTICLE 9.3

  Notice of Proposed Transfers.  Prior to any proposed Transfer of the Securities (other than a Transfer (i) registered or exempt from registration under the Securities Act, (ii) to an  affiliate of a Purchaser which is an “accredited investor” within the meaning of Rule 501(a) under the Securities Act, provided that any such transferee shall agree to be bound by the terms of this Agreement and the Registration Rights Agreement, or (iii) to be made in reliance on Rule 144 under the Securities Act), the holder thereof shall give written notice to the Company of such holder’s intention to effect such Transfer, setting forth the manner and circumstances of the proposed Transfer, which shall be accompanied by (a) an opinion of counsel reasonably acceptable to the Company, confirming that such transfer does not give rise to a violation of the Securities Act, (B) representation letters in form and substance reasonably satisfactory to the Company to ensure compliance with the provisions of the Securities Act and (c) letters in form and substance reasonably satisfactory to the Company from each such transferee stating such transferee’s agreement to be bound by the terms of this Agreement and the Registration Rights Agreement.  Such proposed Transfer may be effected only if the Company shall have received such notice of transfer, opinion of counsel, representation letters and other letters referred to in the immediately preceding sentence, whereupon the holder of such Securities shall be entitled to Transfer such Securities in accordance with the terms of the notice delivered by the holder to the Company.

ARTICLE 10.

  ADDITIONAL AGREEMENTS AMONG THE PARTIES

ARTICLE 10.1

  Liquidated Damages.

(a)

The Company shall cause its transfer agent to, issue and deliver shares of Common Stock consistent with Section 7.11 hereof within three (3) Trading Days of delivery of a Notice of Conversion, as applicable (the “Deadline”) to Purchaser (or any party receiving Securities by transfer from Purchaser) at the address of Purchaser set forth in the Notice of Conversion.  The Company understands that a delay in the issuance of such certificates after the Deadline could result in economic loss to Purchaser.

(b)

Without in any way limiting Purchaser’s right to pursue other remedies, including actual damages and/or equitable relief, the Company agrees that if delivery of the Conversion Shares is more than one (1) Business Day after the Deadline (other than a failure due to the circumstances described in Section 4.3 of the Convertible Note, which failure shall be governed by such Section) the Company shall pay to Purchaser, as liquidated damages and not as a penalty, $500 for each $100,000 of Convertible Note then outstanding per day in cash, for each of the first ten (10) days beyond the Deadline, and $1,000 for each $100,000 of Convertible Note then outstanding per day in cash for each day thereafter that the Company fails to deliver such Common Stock.  Such cash amount shall be paid to Purchaser by the last day of the calendar week following the week in which it has accrued or, at the option of Purchaser (by written notice to the Company by the first day of the week following the week in which it has accrued), shall be added to the principal amount of the Convertible Note (if then outstanding) payable to Purchaser, in which event interest shall accrue thereon in accordance with the terms of the Convertible Note and such additional principal amount shall be convertible into Common Stock in accordance with the terms of the Convertible Note.

ARTICLE 10.2

  Conversion Notice.  The Company agrees that, in addition to any other remedies which may be available to Purchaser, including, but not limited to, the remedies available under Section 10.1, in the event the Company fails for any reason (other than as a result of actions taken by a Purchaser in breach of this Agreement) to effect delivery to a Purchaser of certificates with or without restrictive legends as contemplated by Article IX representing the shares of Common Stock on or prior to the Deadline after conversion of any Convertible Note, Purchaser will be entitled, if prior to the delivery of such certificates, to revoke the Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and Purchaser shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion.

ARTICLE 10.3

  Conversion Limit.  Notwithstanding the conversion rights under the Convertible Note, unless Purchaser delivers a waiver in accordance with the last sentence in this Section 10.3, in no event shall Purchaser be entitled to convert any portion of the Convertible Note, in excess of that portion of the Convertible Note, as applicable, of which the sum of (i) the number of shares of Common Stock beneficially owned by Purchaser and its Affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Convertible Note or other Derivative Securities convertible into or exchangeable for shares of Common Stock which contain a limitation similar to that set forth in this Section 10.3), and (ii) the number of shares of Common Stock issuable upon the conversion of the portion of the Convertible Note with respect to which this determination is being made, would result in beneficial ownership by Purchaser and its 

Affiliates of more than 4.99% of the outstanding shares of Common Stock.  For purposes of Section 10.3(i) beneficial ownership shall be determined in accordance with Rule 13d-3 of the Exchange Act and Regulations 13 D-G thereunder, except as otherwise provided in this Section 10.3.  Upon notification by written waiver, the foregoing limitation shall not apply and shall be of no further force or effect (i) immediately preceding and upon the occurrence of any voluntary or mandatory redemption or repayment transaction described herein or in the Convertible Note, (ii) immediately preceding and upon any Sale Event, (iii) on the Maturity Date or (iv) following the occurrence of any Event of Default which is not cured for a period of ten (10) calendar days.

ARTICLE 10.4

  Registration Rights.  

(a)

The Company shall grant Purchaser registration rights covering the Conversion Shares (the “Registrable Securities”) on the terms set forth in the Registration Rights Agreement and herein.

(b)

The Company shall prepare and file on or before the 45th day following the Closing Date (“Filing Date”), a registration statement or amendment thereto (the “Registration Statement”) covering the resale of the Registrable Securities with the Commission.  In the event the Company fails to file the Registration Statement by the Filing Date for any reason other than Purchaser’s failure to provide information requested by the Company for the completion and filing of the Registration Statement, the Company shall pay to Purchaser as liquidated damages (and not as a penalty) one percent (1%) of the then outstanding principal amount of Convertible Note, prorated, for each 30 day period until the Registration Statement is filed with the Commission.  The Company shall use its best efforts to cause the Registration Statement to be declared effective by the Commission or the earlier of (i) 120 days following the Closing Date, (ii) ten days following the receipt of a “No Review” Letter from the Commission or (iii) the first Business Day following the day the Commission determines the Registration Statement eligible to be declared effective (the “Required Effectiveness Date”).  The Company shall pay all expenses of registration (other than underwriting fees and discounts, if any, in respect of Registrable Securities offered and sold under the registration statement by Purchaser).  The Company agrees to file an initial written response to the Commission within twenty (20) calender days of receipt of any comments by  the Commission relating to the Registration Statement.

(c)

If the Registration Statement  is not declared effective by the Commission by the Required Effectiveness Date, the Company shall pay to Purchaser, as liquidated damages (and not as a penalty), an amount equal to 2% of the outstanding principal amount of the Convertible Note, prorated, for each 30 day period the Registration Statement is not declared effective by the Commission; provided however, that in the event the Commission issues written comments pertaining directly to the structure of the investment in relation to Rule 415, then and only in such event, the liquidated damages set forth herein shall be suspended for 10 days from the date of the Commission’s comments and the Company and Purchaser shall negotiate in good faith toward a resolution of the Commission’s comments so as to achieve effectiveness of the Registration Statement.  In the event the Company fails to obtain a valid registration 

statement by the 180th day following the Closing Date, the Company will redeem the Convertible Note and the Warrants as set forth in Section 5 of the Convertible Note and Section 13 of the Warrants, respectively.  Additionally, the Company will grant to Purchaser certain piggyback registration rights in the event the Company proposes to effect a registered offering of Common Stock or warrants or both prior to the filing of the Registration Statement referenced above.

(d)

Any such liquidated damages shall be paid in cash by the Company to Purchaser by wire transfer in immediately available funds on the last day of each calendar week following the event requiring its payment.

(e)

If, following the declaration of effectiveness of the Registration Statement, such registration statement (or any prospectus or supplemental prospectus contained therein) shall cease to be effective for any reason (including but not limited to the occurrence of any event that results in any prospectus or supplemental prospectus containing an untrue statement of a material fact or omitting a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading), the Company fails to file required amendments to the Registration Statement in order to allow the Purchaser to resell the Conversion Shares pursuant to the Registration Statement as unrestricted, unlegended, freely tradeable shares of Common Stock, or if for any reason there are insufficient shares of such shares of Common Stock registered under the then current Registration Statement to effect full conversion of the Convertible Note or exercise of the Warrants (a "Registration Default"), the Company shall immediately take all necessary steps to cause the Registration Statement to be amended or supplemented so as to cure such Registration Default.  Failure to cure a Registration Default within ten (10) Business Days shall result in the Company paying to Purchaser liquidated damages at the rate of one percent (1%) of the outstanding principal amount of Convertible Note for each 30 day period (prorated) (“Default Fee”), the Registration Default remains uncured.

ARTICLE 11.

  ADJUSTMENT OF FIXED PRICE

ARTICLE 11.1

  Reorganization.  The Conversion Price (the “Fixed Price”) shall be adjusted, as applicable, as hereafter provided.

ARTICLE 11.2

  Share Reorganization.  If and whenever the Company shall:

(i)

subdivide the outstanding shares of Common Stock into a greater number of shares;

(ii)

consolidate the outstanding shares of Common Stock into a smaller number of shares;

(iii)

issue Common Stock or securities convertible into or exchangeable for shares of Common Stock as a stock dividend to all or substantially all the holders of Common Stock; or

(iv)

make a distribution on the outstanding Common Stock to all or substantially all the holders of Common Stock payable in Common Stock or securities convertible into or exchangeable for Common Stock;

any of such events being herein called a “Share Reorganization,” then in each such case the applicable Fixed Price shall be adjusted, effective immediately after the record date at which the holders of Common Stock are determined for the purposes of the Share Reorganization or, if no record date is fixed, the effective date of the Share Reorganization, by multiplying the applicable Fixed Price in effect on such record or effective date, as the case may be, by a fraction of which:

(i)

the numerator shall be the number of shares of Common Stock outstanding on such record or effective date (without giving effect to the transaction); and

(ii)

the denominator shall be the number of shares of Common Stock outstanding after giving effect to such Share Reorganization, including, in the case of a distribution of securities convertible into or exchangeable for shares of Common Stock, the number of shares of Common Stock that would have been outstanding if such securities had been converted into or exchanged for Common Stock on such record or effective date.

ARTICLE 11.3

  Rights Offering.  If and whenever the Company shall issue to all or substantially all the holders of Common Stock, rights, options or warrants under which such holders are entitled, during a period expiring not more than 45 days after the record date of such issue, to subscribe for or purchase Common Stock (or Derivative Securities), at a price per share (or, in the case of securities convertible into or exchangeable for Common Stock, at an exchange or conversion price per share at the date of issue of such securities) of less than 95% of the Market Price of the Common Stock on such record date (any such event being herein called a “Rights Offering”), then in each such case the applicable Fixed Price shall be adjusted, effective immediately after the record date at which holders of Common Stock are determined for the purposes of the Rights Offering, by multiplying the applicable Fixed Price in effect on such record date by a fraction of which:

(i)

the numerator shall be the sum of:

(i)

the number of shares of Common Stock outstanding on such record date; and

(ii)

a number obtained by dividing:

(A)

either,

(x)

the product of the total number of shares of Common Stock so offered for subscription or purchase and the price at which such shares are so offered, or

(y)

the product of the maximum number of shares of Common Stock into or for which the convertible or exchangeable securities so offered for subscription or purchase may be converted or exchanged and the conversion or exchange price of such securities, or, as the case may be, by

(B)

the Market Price of the Common Stock on such record date; and

(ii)

the denominator shall be the sum of:

(i)

the number of shares of Common Stock outstanding on such record date; and

(ii)

the number of shares of Common Stock so offered for subscription or purchase (or, in the case of Derivative Securities, the maximum number of shares of Common Stock for or into which the securities so offered for subscription or purchase may be converted or exchanged).

To the extent that such rights, options or warrants are not exercised prior to the expiry time thereof, the applicable Fixed Price shall be readjusted effective immediately after such expiry time to the applicable Fixed Price which would then have been in effect upon the number of shares of Common Stock (or Derivative Securities) actually delivered upon the exercise of such rights, options or warrants.

ARTICLE 11.4

  Special Distribution.  If and whenever the Company shall issue or distribute to all or substantially all the holders of Common Stock:

(i)

shares of the Company of any class, other than Common Stock;

(ii)

rights, options or warrants; or

(iii)

any other assets (excluding cash dividends and equivalent dividends in shares paid in lieu of cash dividends in the ordinary course);

and if such issuance or distribution does not constitute a Share Reorganization or a Rights Offering (any such event being herein called a “Special Distribution”), then in each such case the applicable Fixed Price shall be adjusted, effective immediately after the record date at which the holders of Common Stock are determined for purposes of the Special Distribution, by multiplying the applicable Fixed Price in effect on such record date by a fraction of which:

(i)

the numerator shall be the difference between:

(A)

the product of the number of shares of Common Stock outstanding on such record date and the Market Price of the Common Stock on such date; and

(B)

the fair market value, as determined by the Directors (whose determination shall be conclusive), to the holders of Common Stock of the shares, rights, options, warrants, evidences of indebtedness or other assets issued or distributed in the Special Distribution (net of any consideration paid therefor by the holders of Common Stock), and

(ii)

the denominator shall be the product of the number of shares of Common Stock outstanding on such record date and the Market Price of the Common Stock on such date.

ARTICLE 12.5

 Capital Reorganization.  If and whenever there shall occur:

(i)

a reclassification or redesignation of the shares of Common Stock or any change of the shares of Common Stock into other shares, other than in a Share Reorganization;

(ii)

a consolidation, merger or amalgamation of the Company with, or into another body corporate; or

(iii)

the transfer of all or substantially all of the assets of the Company to another body corporate;

(any such event being herein called a “Capital Reorganization”), then in each such case the holder who exercises the right to convert Convertible Note after the effective date of such Capital Reorganization shall be entitled to receive and shall accept, upon the exercise of such right, in lieu of the number of shares of Common Stock to which such holder was theretofore entitled upon the exercise of the conversion privilege, the aggregate number of shares or other securities or property of the Company or of the body corporate resulting from such Capital Reorganization that such holder would have been entitled to receive as a result of such Capital Reorganization if, on the effective date thereof, such holders had been the holder of the number of shares of Common Stock to which such holder was theretofore entitled upon conversion; provided, however, that no such Capital Reorganization shall be consummated in effect unless all necessary steps shall have been taken so that such holders shall thereafter be entitled to receive such number of shares or other securities of the Company or of the body corporate resulting from such Capital Reorganization, subject to adjustment thereafter in accordance with provisions the same, as nearly as may be possible, as those contained above.

ARTICLE 12.6

  Purchase Price Adjustments.  In case at any time and from time to time the Company shall issue any shares of Common Stock or Derivative Securities convertible or exercisable for shares of Common Stock (the number of shares so issued, or issuable upon conversion or exercise of such Derivative Securities, as applicable, being referred to as “Additional Shares of Common Stock”) for consideration less than the then Market Price at the date of issuance of such shares of Common Stock or such Derivative Securities, in each such case the Conversion Price shall, concurrently with such issuance, be adjusted by multiplying the Conversion Price immediately prior to such event by a 

fraction: (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Shares of Common Stock plus the number of shares of Common Stock that the aggregate consideration received by the Company for the total number of such Additional Shares of Common Stock so issued would purchase at the Market Price and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to the issuance of Additional Shares of Common Stock plus the number of such Additional Shares of Common Stock so issued or sold.

ARTICLE 12.7

  Adjustment Rules. The following rules and procedures shall be applicable to adjustments made in this Article XI:

(a)

no adjustment in the applicable Fixed Price shall be required unless such adjustment would result in a change of at least 1% in the applicable Fixed Price then in effect, provided, however, that any adjustments which, but for the provisions of this clause would otherwise have been required to be made, shall be carried forward and taken into account in any subsequent adjustment;

(b)

if any event occurs of the type contemplated by the adjustment provisions of this Article XI but not expressly provided for by such provisions, the Company will give notice of such event as provided herein, and the Company’s board of directors will make an appropriate adjustment in the Fixed Price so that the rights of the holders of the applicable Security shall not be diminished by such event; and

(c)

if a dispute shall at any time arise with respect to any adjustment of the applicable Fixed Price, such dispute shall be conclusively determined by the auditors of the Company or, if they are unable or unwilling to act, by a firm of independent chartered accountants selected by the Directors and any such determination shall be binding upon the Company and Purchaser.

ARTICLE 12.8

  Certificate as to Adjustment.  The Company shall from time to time promptly after the occurrence of any event which requires an adjustment in the applicable Fixed Price deliver to Purchaser a certificate specifying the nature of the event requiring the adjustment, the amount of the adjustment necessitated thereby, the applicable Fixed Price after giving effect to such adjustment and setting forth, in reasonable detail, the method of calculation and the facts upon which such calculation is based.

ARTICLE 12.9

  Notice to Holders.  If the Company shall fix a record date for:

(a)

any Share Reorganization (other than the subdivision of outstanding Common Stock into a greater number of shares or the consolidation of outstanding Common Stock into a smaller number of shares),

(b)

any Rights Offering,

(c)

any Special Distribution,

(d)

any Capital Reorganization (other than a reclassification or redesignation of the Common Stock into other shares),

(e)

Sale Event; or

(f)

any cash dividend,

the Company shall, not less than 10 days prior to such record date or, if no record date is fixed, prior to the effective date of such event, give to Purchaser notice of the particulars of the proposed event or the extent that such particulars have been determined at the time of giving the notice.

ARTICLE 13.

  EVENTS OF DEFAULT

ARTICLE 13.5

  Events of Default.  If one or more of the following events (each an “Event of Default”) shall have occurred and be continuing:

(a)

failure by the Company to pay or repay when due, all or any part of the principal on any of the Convertible Note (whether by virtue of the agreements specified in this Agreement or the Convertible Note);

(b)

failure by the Company to pay (i) within five (5) Business Days of the due date thereof any interest on any Convertible Note or (ii) within five (5) Business Days following the delivery of notice to the Company of any fees or any other amount payable (not otherwise referred to in (a) above or this clause (b)) by the Company under this Agreement or any other Transaction Agreement;

(c)

failure by the Company to timely comply with the requirements of Section 7.11 or 10.1 hereof, which failure is not cured within five (5) Business Days of such failure;

(d)

failure on the part of the Company to observe or perform any covenant contained in Section 7.10 or Article VIII of this Agreement;

(e)

failure on the part of the Company to observe or perform any covenant or agreement contained in any Transaction Agreement (other than those covered by clauses (a), (b), (c) or (d) above) for 30 days from the date of such occurrence;

(f)

the trading in the Common Stock shall have been suspended by the Commission or any National Market (except for any suspension of trading of limited duration solely to permit dissemination of material information regarding the Company and except if, at the time there is any suspension on any National Market, the Common Stock is then listed and approved for trading on another  National Market within ten (10) Trading Days thereof);

(g)

if listed on a National Market, the Company shall have its Common Stock delisted from a National Market for at least ten (10) consecutive Trading Days and is unable to obtain a listing on a National Market within such ten (10) Trading Days;

(h)

the Registration Statement shall not have been declared effective by the Commission by the Required Effectiveness Date which results in the Company incurring liquidated damages or a default fee for a period in excess of 10 days;

(i)

the Company or any Subsidiary has commenced a voluntary case or other proceeding seeking liquidation, winding-up, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency, moratorium or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or has consented to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or has made a general assignment for the benefit of creditors, or has failed generally to pay its debts as they become due, or has taken any corporate action to authorize any of the foregoing;

(j)

an involuntary case or other proceeding has been commenced against the Company or any Subsidiary seeking liquidation, winding-up, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency, moratorium or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days, or an order for relief has been entered against the Company or any Subsidiary under the federal bankruptcy laws as now or hereafter in effect;

(k)

default in any provision (including payment) or any agreement governing the terms of any Debt of the Company or any Subsidiary in excess of $100,000, which has not been cured within any applicable period of grace associated therewith;

(l)

judgments or orders for the payment of money which in the aggregate at any one time exceed $100,000 and are not covered by insurance have been rendered against the Company or any Subsidiary by a court of competent jurisdiction and such judgments or orders shall continue unsatisfied and unstayed for a period of 60 days; or

(m)

any representation, warranty, certification or statement made by the Company in any Transaction Agreement or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with any Transaction Agreement shall prove to have been untrue in any material respect when made.

then, and in every such occurrence, Purchaser may, with respect to an Event of Default specified in paragraphs (a) or (b), and the Majority Holders may, with respect to any other Event of 

Default, by notice to the Company, declare the Convertible Note to be, and the Convertible Note shall thereon become immediately due and payable; provided that in the case of any of the Events of Default specified in paragraph (i) or (j) above with respect to the Company or any Subsidiary, then, without any notice to the Company or any other act by Purchaser, the entire amount of the Convertible Note shall become immediately due and payable, provided, further, if any Event of Default has occurred and is continuing, and irrespective of whether any Convertible Note has been declared immediately due and payable hereunder, any Purchaser of Convertible Note may proceed to protect and enforce the rights of Purchaser by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Convertible Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise, and provided further, in the case of any Event of Default, the amount declared due and payable on the Convertible Note shall be the Formula Price thereof.

ARTICLE 13.6

  Powers and Remedies Cumulative.  No right or remedy herein conferred upon or reserved to Purchaser is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now hereafter existing at law or in equity or otherwise.  The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.  Every power and remedy given by the Convertible Note or by law may be exercised from time to time, and as often as shall be deemed expedient, by Purchaser.

ARTICLE 14.

  MISCELLANEOUS

ARTICLE 14.5

  Notices.  All notices, demands and other communications to any party hereunder shall be in writing (including telecopier or similar writing) and shall be given to such party at its address set forth on the signature pages hereof, or such other address as such party may hereafter specify for the purpose to the other parties.  Each such notice, demand or other communication shall be effective (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified on the signature page hereof, (ii) if given by mail, four days after such  communication is deposited in the mail with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in or pursuant to this Section.

ARTICLE 14.6

  No Waivers; Amendments.

(a)

No failure or delay on the part of any party in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy.

(b)

Any provision of this Agreement may be amended, supplemented or waived if, but only if, such amendment, supplement or waiver is in writing and is signed 

by the Company and the Majority Holders; provided, that without the consent of each holder of any Convertible Note affected thereby, an amendment or waiver may not (a) reduce the aggregate principal amount of Convertible Note whose holders must consent to an amendment or waiver, (b) reduce the rate or extend the time for payment of interest on any Convertible Note, (c) reduce the principal amount of or extend the stated maturity of any Convertible Note or (d) make any Convertible Note payable in money or property other than as stated in such Convertible Note.  In determining whether the holders of the requisite principal amount of Convertible Note have concurred in any direction, consent, or waiver as provided in any Transaction Agreement, Convertible Note which are owned by the Company or any other obligor on or guarantor of the convertible Note, or by any Person Controlling, Controlled by, or under common Control with any of the foregoing, shall be disregarded and deemed not to be outstanding for the purpose of any such determination; and provided further that no such amendment, supplement or waiver which affects the rights of Purchaser and their affiliates otherwise than solely in their capacities as holders of Convertible Note shall be effective with respect to them without their prior written consent.

ARTICLE 14.7

  Indemnification by Company.

(a)

The Company agrees to indemnify and hold harmless Purchaser, its Affiliates, and each Person, if any, who controls Purchaser, or any of its Affiliates, within the meaning of the Securities Act or the Exchange Act (each, a “Controlling Person”), and the respective partners, agents, employees, officers and Directors of Purchaser, their Affiliates and any such Controlling Person (each an “Indemnified Party”) and collectively, the “Indemnified Parties”), from and against any and all losses, claims, damages, liabilities and expenses (including, without limitation and as incurred, reasonable costs of investigating, preparing or defending any such claim or action, whether or not such Indemnified Party is a party thereto, provided that the Company shall not be obligated to advance such costs to any Indemnified Party other than Purchaser unless it has received from such Indemnified Party an undertaking to repay to the Company the costs so advanced if it should be determined by final judgment of a court of competent jurisdiction that such Indemnified Party was not entitled to indemnification hereunder with respect to such costs) which may be incurred by such Indemnified Party in connection with any investigative, administrative or judicial proceeding brought or threatened that relates to or arises out of, or is in connection with any activities contemplated by any Transaction Agreement or any other services rendered in connection herewith; provided that the Company will not be responsible for any claims, liabilities, losses, damages or expenses that are determined by final judgment of a court of competent jurisdiction to result from such Indemnified Party’s gross negligence, willful misconduct or bad faith.

(b)

If any action shall be brought against an Indemnified Party with respect to which indemnity may be sought against the Company under this Agreement, such Indemnified Party shall promptly notify the Company in writing and the Company, at its option, may, assume the defense thereof, including the employment of counsel 

reasonably satisfactory to such Indemnified Party and payment of all reasonable fees and expenses.  The failure to so notify the Company shall not affect any obligations the Company may have to such Indemnified Party under this Agreement or otherwise unless the Company is materially adversely affected by such failure.  Such Indemnified Party shall have the right to employ separate counsel in such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party, unless (i) the Company has failed to assume the defense and employ counsel or (ii) the named parties to any such action (including any impleaded parties) include such Indemnified Party and the Company, and such Indemnified Party shall have been advised by counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the Company, in which case, if such Indemnified Party notifies the Company in writing that it elects to employ separate counsel at the expense of the Company, the Company shall not have the right to assume the defense of such action or proceeding on behalf of such Indemnified Party, provided, however, that the Company shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be responsible hereunder for the reasonable fees and expenses of more than one such firm of separate counsel, in addition to any local counsel, which counsel shall be designated by Purchaser.  The Company shall not be liable for any settlement of any such action effected without the written consent of the Company (which shall not be unreasonably withheld) and the Company agrees to indemnify and hold harmless each Indemnified Party from and against any loss or liability by reason of settlement of any action effected with the consent of the Company.  In addition, the Company will not, without the prior written consent of Purchaser, settle or compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action, claim, suit or proceeding in respect to which indemnification or contribution may be sought hereunder (whether or not any Indemnified Party is a party thereto) unless such settlement, compromise, consent or termination includes an express unconditional release of Purchaser and the other Indemnified Parties, satisfactory in form and substance to Purchaser, from all liability arising out of such action, claim, suit or proceeding.

(c)

If for any reason the foregoing indemnity is unavailable (otherwise than pursuant to the express terms of such indemnity) to an Indemnified Party or insufficient to hold an Indemnified Party harmless, then in lieu of indemnifying such Indemnified Party, the Company shall contribute to the amount paid or payable by such Indemnified Party as a result of such claims, liabilities, losses, damages, or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and by Purchaser on the other from the transactions contemplated by this Agreement or (ii) if the allocation provided by clause (i) is not permitted under applicable law, in such proportion as is appropriate to reflect not only the relative benefits received by the Company on the one hand and Purchaser on the other, but also the relative fault of the Company and Purchaser as well as any other relevant equitable considerations.  Notwithstanding the provisions of this Section 13.3, the aggregate contribution of all Indemnified Parties shall not exceed the amount of interest and fees actually received by Purchaser pursuant to this Agreement.  It is hereby further agreed that the relative 

benefits to the Company on the one hand and Purchaser on the other with respect to the transactions contemplated hereby shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of material fact or the omission or alleged omission to state a material fact related to information supplied by the Company or by Purchaser and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.  No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation.

(d)

The indemnification, contribution and expense reimbursement obligations set forth in this Section 13.3 (i) shall be in addition to any liability the Company may have to any Indemnified Party at common law or otherwise; (ii) shall survive the termination of this Agreement and the other Transaction Agreements and the payment in full of the Convertible Note and (iii) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of Purchaser or any other Indemnified Party.

ARTICLE 14.8

  Indemnification by Purchaser.  The Purchaser agrees to indemnify and hold the Company and its directors, officers, employees and agents (each a “Company Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Company Party may suffer or incur as a direct result of any breach by Purchaser of any of the representations, warranties or agreements made by the Purchaser in this Agreement or in the other Transaction Agreements.

ARTICLE 14.9

  Expenses:  Documentary Taxes.  The Company agrees to pay to Global Capital Advisors, LLC (“GCA”), on the Closing Date, a fee equal to $15,000.00 (the “Out of Pocket Fee”) in full satisfaction of all obligations of the Company to Purchaser and its agents in connection with the negotiation and preparation of the Transaction Agreements, relevant due diligence, and fees and disbursements of legal counsel.  The Company has paid earnest money of $7,500 which shall be applied toward the Out of Pocket Fee on the Closing Date.  In addition, the Company agrees to pay any and all stamp, transfer and other similar taxes, assessments or charges payable in connection with the execution and delivery of any Transaction Agreement or the issuance of the Securities to Purchaser, excluding their assigns.

ARTICLE 14.10

  Payment.  The Company agrees that, so long as Purchaser shall own any Convertible Note purchased by it from the Company hereunder, the Company will make payments to Purchaser of all amounts due thereon by wire transfer by 4:00 P.M. (E.S.T.).

ARTICLE 14.11

  Successors and Assigns.  This Agreement shall be binding upon the Company and upon Purchaser and its respective successors 

and assigns; provided that the Company shall not assign or otherwise transfer its rights or obligations under this Agreement to any other Person without the prior written consent of the Majority Holders.  All provisions hereunder purporting to give rights to Purchaser and its affiliates or to holders of Securities are for the express benefit of such Persons and their successors and assigns.

ARTICLE 14.12

  Brokers.  Except for Equinox Securities, Inc. and Michael Draper (the “Brokers”), the Company represents and warrants that it has not employed any broker, finder, financial advisor or investment banker who would be entitled to any brokerage, finder’s or other fee or commission payable by the Company or Purchaser in connection with the sale of the Securities.  The Company represents and warrants that it is solely responsible for any fees due Brokers.

ARTICLE 14.13

 Florida Law; Submission to Jurisdiction; Waiver of Jury Trial; Appointment of Agent.  THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF FLORIDA.  EACH PARTY HERETO HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE STATE OF FLORIDA AND OF ANY FEDERAL DISTRICT COURT SITTING IN TALLAHASSEE, FLORIDA FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.  EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY TO THIS AGREEMENT IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PARTY AT ITS ADDRESS SET FORTH HEREIN.  NOTHING HEREIN SHALL AFFECT THE RIGHT OF ANY PARTY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.  EACH PARTY WAIVES ITS RIGHT TO A TRIAL BY JURY.

ARTICLE 14.14

Entire Agreement.  This Agreement, the Exhibits or Schedules hereto, which include, but are not limited to the Convertible Note and the Registration Rights Agreement, set forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. The terms and conditions of all Exhibits and Schedules to this Agreement are incorporated herein by this reference and shall constitute part of this Agreement as is fully set forth herein.

ARTICLE 14.15

Survival; Severability. The representations, warranties, covenants and agreements of the parties hereto shall survive the closing hereunder. In the event that any provision of this Agreement becomes or is declared by a 

court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party.

ARTICLE 14.16

Title and Subtitles.  The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 

ARTICLE 14.17

Reporting Entity for the Common Stock.  The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement and all Exhibits shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of Purchaser and the Company shall be required to employ any other reporting entity. 

ARTICLE 14.18

Publicity.  The Company and the Purchaser shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions 

contemplated hereby and no party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other parties, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other parties with prior notice of such public statement.  Notwithstanding the foregoing, the Company shall not publicly disclose the name of Purchaser without the prior written consent of Purchaser, except to the extent required by law, in which case the Company shall provide Purchaser with prior written notice of such public disclosure.

[signature page follows]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers, as of the date first above written.

HepaLife Technologies, Inc.

By:

/s/ Frank Menzler

Name:

Frank Menzler

Title:

CEO and President

        

Address:

HepaLife Technologies, Inc.

60 State Street

Suite 700

Boston, MA 02109

Fax:  617-371-2950

Tel.:  617-878-2051

GCA STRATEGIC INVESTMENT FUND LIMITED

By:

/s/ Lewis N. Lester

  Name:  Lewis N. Lester

Title:  Director

Address:

c/o Prime Management Limited

 

Mechanics Building

 

12 Church Street

 

Hamilton HM II, Bermuda

Fax:

441-295-3926

Tel.:

441-295-0329

TABLE OF CONTENTS

ARTICLE I.  DEFINITIONS

1

Section 1.1  Definitions

1

Section 1.2  Accounting Terms and Determinations

9

ARTICLE II.  PURCHASE AND SALE OF SECURITIES

10

Section 2.1  Purchase and Sale of Convertible Note

10

Section 2.2  Purchase Price

10

Section 2.3  Closing and Mechanics of Payment

10

ARTICLE III.  PAYMENT TERMS OF CONVERTIBLE Note

10

Section 3.1  Payment of Principal and Interest; Payment Mechanics

10

Section 3.2

11

Section 3.3  Voluntary Prepayment

11

Section 3.4  Mandatory Prepayments

11

Section 3.5  Prepayment Procedures

12

Section 3.6  Payment of Additional Amounts

13

ARTICLE IV.  REPRESENTATIONS AND WARRANTIES

15

Section 4.1  Organization and Qualification

15

Section 4.2  Authorization and Execution

15

Section 4.3  Capitalization 

15

Section 4.4  Governmental Authorization

16

Section 4.5  Issuance of Shares

16

Section 4.6  No Conflicts

16

Section 4.7  Financial Information

17

Section 4.8  Litigation

17

Section 4.9  Compliance with ERISA and other Benefit Plans

17

Section 4.10  Environmental Matters

18

Section 4.11  Taxes

18

Section 4.12  Investments, Joint Ventures

19

Section 4.13  Not an Investment Company

19

Section 4.14  Full Disclosure

19

Section 4.15  No Solicitation; No Integration with Other Offerings

19

Section 4.16  Permits

19

Section 4.17  Leases

19

Section 4.18  Absence of Any Undisclosed Liabilities or Capital Calls

20

Section 4.19  Public Utility Holding Company

20

Section 4.20  Intellectual Property Rights

20

Section 4.21  Insurance

20

Section 4.22  Title to Properties

20

Section 4.23  Internal Accounting Controls

20

Section 4.24 Subsidiaries

21

Section 4.25  Foreign Practices

21

Section 4.26  SEC Reports

21

Section 4.27  Sarbanes-Oxley: Internal Accounting Controls

22

ARTICLE V.  REPRESENTATIONS AND WARRANTIES OF PURCHASER

22

Section 5.1  Purchaser

22

ARTICLE VI.  CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES

24

Section 6.1  Conditions Precedent to Purchaser’s Obligations to Purchase

24

Section 6.2  Conditions to the Company’s Obligations

26

ARTICLE VII.  AFFIRMATIVE COVENANTS

26

Section 7.1 Information

26

Section 7.2  Payment of Obligations

27

Section 7.3 Maintenance of Property; Insurance

27

Section 7.4 Maintenance of Existence

27

Section 7.5 Compliance with Laws

27

Section 7.6  Inspection of Property, Books and Records

27

Section 7.7  Investment Company Act

28

Section 7.8 Use of Proceeds

28

Section 7.9  Compliance with Terms and Conditions of Material Contracts

28

Section 7.10  Reserved Shares

28

Section 7.11  Transfer Agent Instructions

29

Section 7.12  Maintenance of Reporting Status; Supplemental Information

29

Section 7.13  Form D; Blue Sky Laws

29

ARTICLE VIII.  NEGATIVE COVENANTS

29

Section 8.1  Limitations on Debt or Other Liabilities

30

Section 8.2  Transactions with Affiliates

30

Section 8.3  Merger or Consolidation

30

Section 8.4  Limitation on Asset Sales

30

Section 8.5  Restrictions on Certain Amendments

31

Section 8.6  Restrictions on Issuances of Securities

31

Section 8.7  Limitation on Stock Repurchases

32

Section 8.8  Limitation on Sales By Officers and Employee Directors

32

ARTICLE IX.  RESTRICTIVE LEGENDS

33

Section 9.1  Restrictions on Transfer

33

Section 9.2 Legends.

33

Section 9.3  Notice of Proposed Transfers

33

ARTICLE X.  ADDITIONAL AGREEMENTS AMONG THE PARTIES

34

Section 10.1  Liquidated Damages

34

Section 10.2  Conversion Notice

34

Section 10.3  Conversion Limit

34

Section 10.4  Registration Rights

35

ARTICLE XI.  ADJUSTMENT OF FIXED PRICE

36

Section 11.1  Reorganization

36

Section 11.2  Share Reorganization

37

Section 11.3  Rights Offering

37

Section 11.4  Special Distribution

38

Section 11.5 Capital Reorganization

39

Section 11.6  Purchase Price Adjustments

40

Section 11.7  Adjustment Rules

40

Section 11.8  Certificate as to Adjustment

41

Section 11.9  Notice to Holders

41

ARTICLE XII.  EVENTS OF DEFAULT

41

Section 12.1  Events of Default.

41

Section 12.2  Powers and Remedies Cumulative

43

ARTICLE XIII.  MISCELLANEOUS

44

Section 13.1  Notices

44

Section 13.2  No Waivers; Amendments

44

Section 13.3  Indemnification by Company

45

Section 13.4  Indemnification by Purchaser

47

Section 13.5  Expenses:  Documentary Taxes

47

Section 13.6  Payment

47

Section 13.7  Successors and Assigns

47

Section 13.8  Brokers

47

Section 13.9 Florida Law; Submission to Jurisdiction; Waiver of Jury Trial; Appointment of Agent  47

Section 13.10  Entire Agreement

48

Section 13.11  Survival; Severability.

48

Section 13.12  Title and Subtitles

48

Section 13.13  Reporting Entity for the Common Stock.  

48

Section 13.14  Publicity.

49

LIST OF SCHEDULES

Schedule 4.3

Capitalization

Schedule 4.6

No Conflicts

Schedule 4.7

Financial Information 

Schedule 4.8

Litigation

Schedule 4.10

Environmental Matters

Schedule 4.12

Investments, Joint Ventures

Schedule 4.14

Full Disclosure

Schedule 4.15

No Solicitation; No Integration with Other Offerings

Schedule 4.20

Intellectual Property Rights

Schedule 7.8

Use of Proceeds

Schedule 8.2

Transactions with Affiliates

LIST OF EXHIBITS

Exhibit A

Form of Convertible Note

Exhibit B

Form of Registration Rights Agreement

Exhibit C

Form of Officer’s Certificate

SECURITIES PURCHASE AGREEMENT

dated as of

May 11, 2007

by and between

HepaLife Technologies, Inc.

as the Issuer,

and

GCA Strategic Investment Fund Limited

as PurchaserConverted by EDGARwiz

EXHIBIT 4.9

FORM OF CONVERTIBLE NOTE

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”).  THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES AGREES FOR THE BENEFIT OF THE COMPANY THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE COMPANY, (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, OR (C) IF REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.  IN ADDITION, A SECURITIES PURCHASE AGREEMENT, DATED AS OF THE DATE HEREOF, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, CONTAINS CERTAIN ADDITIONAL AGREEMENTS AMONG THE PARTIES, INCLUDING, WITHOUT LIMITATION, PROVISIONS WHICH (A) LIMIT THE CONVERSION RIGHTS OF THE HOLDER, (B) SPECIFY VOLUNTARY AND MANDATORY REPAYMENT, PREPAYMENT AND REDEMPTION RIGHTS AND OBLIGATIONS AND (C) SPECIFY EVENTS OF DEFAULT FOLLOWING WHICH THE REMAINING BALANCE DUE AND OWING HEREUNDER MAY BE ACCELERATED.

No.  1

$2,500,000

CONVERTIBLE NOTE

of

HepaLife Technologies, Inc.

HepaLife Technologies, Inc., a Florida corporation (together with its successors, the “Company”), for value received hereby promises to pay to:

GCA Strategic Investment Fund Limited

(the “Holder”) and registered assigns, the principal sum of Two Million Five Hundred Thousand ($2,500,000) or, if less, the principal amount of this Note then outstanding, on the Maturity Date by wire transfer of immediately available funds to the Holder in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts.  The Maturity Date is May 11, 2009.

Upon an Event of Default, and until such Default has been cured, interest shall accrue at a rate of 18% per annum (“Default Interest”).  All payments of principal and interest hereunder shall be made for the benefit of the Holder pursuant to the terms of the Agreement (hereafter defined). 

This Convertible Note (this “Convertible Note”) is issued by the Company pursuant to that certain Securities Purchase Agreement dated as of the date hereof between the Company and the Purchaser named therein (the “Agreement”).  The Agreement contains certain additional agreements among the parties with respect to the terms of this Convertible Note, including, 

1

without limitation, provisions which (A) limit the conversion rights of the Holder, (B) specify voluntary and mandatory redemption rights and obligations and (C) specify Events of Default following which the remaining balance due and owing hereunder may be accelerated.  All such provisions are an integral part of this Convertible Note and are incorporated herein by reference.  This Convertible Note is transferable and assignable to one or more Persons, in accordance with the limitations set forth in the Agreement.

The Company shall keep a register (the “Register”) in which shall be entered the names and addresses of the registered holder of this Convertible Note and particulars of this Convertible Note held by such holder and of all transfers of this Convertible Note.  References to the Holder or “Holders” shall mean the Person listed in the Register as registered holder of such Convertible Notes.  The ownership of this Convertible Note shall be proven by the Register.

1.

 

Certain Terms Defined.  All terms defined in the Agreement and not otherwise defined herein shall have for purposes hereof the meanings provided for in the Agreement.

2.

 

Covenants.  The Company covenants and agrees to observe and perform each of its covenants, obligations and undertakings contained in the Agreement, which obligations and undertakings are expressly assumed herein by the Company and made for the benefit of the holder hereof.

3.

 

Payment of Principal.   

3.1

Prepayment of Note.  For so long as no Event of Default shall have occurred and is continuing and the Company is not in receipt of a Notice of Conversion from the Holder of the Note, the Company may, at its option, prepay, in whole or in part, this Convertible Note for a pre-payment price (the “Prepayment Price”) equal to the greater of (A) the outstanding principal amount of the Note plus all accrued and unpaid interest if any, and any outstanding liquidated damages, if any, and (B)(x) the number of shares of Common Stock into which this Convertible Note is then convertible, times (y) the VWAP, as reported by Bloomberg L.P., of the Common Stock for the five (5) Trading Days immediately preceding the date that this Convertible Note is noticed for prepayment, plus accrued and unpaid interest.  Any partial prepayment of the Convertible Note, at any time after issuance, shall be credited to the principal amount of the Convertible Note on a dollar for dollar basis.  The Company shall not be entitled to send any notice of prepayment and begin the prepayment procedure unless it has (i) the appropriate Prepayment Price, in cash, available in a demand or other immediately available account in a bank or similar financial institution or equivalent means acceptable to Holder or (ii) immediately available credit facilities, in the amount of the appropriate Prepayment Price, with a bank or similar financial institution on the date the prepayment notice is sent to the Holders of this Convertible Note.  Provided, however, the Company will process any Notice of Conversion received prior to the issuance of a notice of prepayment; and further provided that, after a notice of prepayment has been 

2

issued, the Holder may issue a Notice of Conversion which will not be honored unless the Company fails to make the prepayment payment when due.  In the event of such failure, the Notice of Conversion will be honored as of the date of the Notice of Conversion.  

3.2

Payment on Maturity Date.  The Company shall repay the remaining unpaid balance of this Convertible Note on the Maturity Date. 

4.

 

Conversion.

4.1

 

Conversion of Convertible Note.   Subject to Section 5 hereof, the Holder shall have the right, at its option, at any time from and after the date of this Convertible Note, to convert the outstanding principal amount of the Convertible Note.  This Convertible Note shall be convertible into that number of fully paid and nonassessable shares of Common Stock (as such shares shall then be constituted) determined pursuant to this Section 4.1.  The number of shares of Common Stock to be issued upon each conversion of this Convertible Note shall be determined by dividing the Conversion Amount (as defined below) by the Conversion Price in effect on the date (the “Conversion Date”) a Notice of Conversion is delivered to the Company, as applicable, by the Holder by facsimile or other reasonable means of communication dispatched prior to 5:00 p.m., E.S.T.  The term “Conversion Amount” means, with respect to any conversion of this Convertible Note, the sum of (1) the principal amount of this Convertible Note to be converted in such conversion plus (2) accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Convertible Note to the Conversion Date plus (3) Default Interest, if any, on the interest referred to in the immediately preceding clause (2) plus (4) at the Holder’s option, any amounts owed to the Holder pursuant to Section 4.3 hereof, Section 10.1 of the Agreement or Section 10.4 of the Agreement.

4.2

 

Conversion Price.  At the option of the Holder, any portion or all of the outstanding principal amount of this Convertible Note shall be converted into a number of shares of Common Stock at the conversion price (the “Conversion Price”) equal to 95% of the volume weighted average prices (“VWAP”), as reported on Bloomberg, L.P., or any third party quotation service, for the five (5) trading days immediately prior to the date of the related notice of conversion.

4.3

 

Authorized Shares.

(a)

 

Consistent with Section 7.11 of the Agreement, the Company (i) shall promptly irrevocably instruct the Company's transfer agent to issue certificates for the Common Stock issuable upon conversion of this Convertible Note and (ii) agrees that its issuance of this Convertible Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Convertible Note.

3

(b)

 

If at any time the Holder submits a Notice of Conversion and (x) the Company does not have sufficient authorized but unissued shares of Common stock available to effect such conversion in full in accordance with Article 4 or (y) the Company is prohibited by the OTC Bulletin Board or the Market on which the Common Shares are listed and traded at that time to effect such conversion in full, without shareholder approval, the Company shall issue to the Holder all of the shares of Common Stock which are then available to effect such conversion.  The portion of this Convertible Note which the Holder included in its Conversion Notice and which exceeds the amount which is then convertible into available shares of Common Stock (the “Excess Amount”) shall, notwithstanding anything to the contrary contained herein, not be convertible into Common Stock until the date additional shares of Common Stock are authorized by the Company, or its shareholders, as applicable.  The Company shall use its best efforts to authorize, or cause its shareholders to authorize within 70 days of the submission of the Conversion Notice, a sufficient number of shares of Common Stock to effect the full conversion set forth in the Conversion Notice.

(c)

In no event shall the Company issue upon conversion of this Convertible Note more than the maximum number of shares allowable without shareholder approval under the applicable rules of the OTC Bulletin Board or the Market on which the Common Shares are listed and traded unless the Company shall have obtained approval by the shareholders of the Company or a waiver of such requirement.  Once the maximum number of shares has been issued (the date of which is hereinafter referred to as the “Maximum Conversion Date”), unless the Company shall have obtained shareholder approval or a waiver of such requirement within 70 days of the Maximum Conversion Date, the Company shall pay to the Fund the Redemption Price.

(d) 

The Maximum Number of Shares shall be subject to adjustment from time to time for stock splits, stock dividends, combinations, capital reorganizations and similar events relating to the Common Stock occurring after the date hereof as contemplated by Article XI of the Agreement.  In the event that the Company obtains Stockholder Approval, approval of the OTC Bulletin Board or the Market on which the Common Shares are listed and traded at that time, or otherwise is able to increase the number of shares to be issued above the Maximum Number of Shares (such increased number being the “New Maximum Number of Shares”), the references to Maximum Number of Shares above shall be deemed to be, instead, references to the New Maximum Number of Shares.

4.4

 Method of Conversion.

(a) 

Notwithstanding anything to the contrary set forth herein, upon conversion of this Convertible Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Convertible Note to the Company unless the entire unpaid principal amount of this Convertible Note is so converted.  Rather, records showing the principal amount converted (or otherwise repaid) and the date of such conversion or repayment shall be maintained on a ledger substantially in the form of Annex A attached hereto (a copy of which shall be delivered to the Company or transfer 

4

agent with each Notice of Conversion).  It is specifically contemplated that the Holder hereof shall act as the calculation agent for conversions and repayments.  In the event of any dispute or discrepancies, such records maintained by the Holder shall be controlling and determinative in the absence of manifest error or failure of Holder to record the principal amount converted (or otherwise repaid) from time to time, in which events the record of the Company shall be controlling and determinative.  The Holder and any assignee, by acceptance of this Convertible Note, acknowledge and agree that, by reason of the provisions of this paragraph, following a conversion of a portion of this Convertible Note, the principal amount represented by this Convertible Note will be the amount indicated on Annex A attached hereto (which may be less than the amount stated on the face hereof).

(b) 

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

(c) 

Subject to Section 5 hereof, upon receipt by the Company of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on this Convertible Note shall be deemed reduced to reflect such conversion, and, unless the Company defaults on its obligations under this Article 4, all rights with respect to the portion of this Convertible Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion.  Subject to Section 5 hereof, if the Holder shall have given a Notice of Conversion as provided herein, the Company’s obligation to issue and deliver the certificates for shares of Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the Holder to enforce the same, any waiver or consent with respect to any provisions thereof, the recovery of any judgment against any person or any action by the Holder to enforce the same, any failure or delay in the enforcement of any other obligation of the Company to the Holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Company, and subject to Section 4.4(a) irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with such conversion.  The date of receipt (including receipt via telecopy) of such Notice of Conversion shall be the Conversion Date so long as it is received before 5:00 p.m., E.S.T., on such date.

(d) 

Notwithstanding the foregoing, if a Holder has not received certificates for all shares of Common Stock prior to the expiration of the Deadline with respect to a conversion of any portion of this Convertible Note for any reason, then (unless the 

5

Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Company), the Holder shall regain the rights of a Holder of this Convertible Note with respect to such unconverted portions of this Convertible Note and the Company shall, as soon as practicable, return such unconverted Convertible Note to the holder or, if the Convertible Note has not been surrendered, adjust its records to reflect that such portion of this Convertible Note not been converted.  In all cases, the Holder shall retain all of its rights and remedies including, without limitation, the right to receive Conversion Default Payments to the extent required thereby for such Conversion Default and any subsequent Conversion Default.

(e) 

In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Company’s transfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program, upon request of the Holder and its compliance with the provisions contained in Section 4.1 and in this Section 4.4, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission System.

5.

 

Redemption by Company.  

5.1

 

Mandatory Redemption.  In accordance with the provisions of the Agreement, the Company may be required under certain circumstances, to redeem in whole or in part, the remaining unpaid principal amount of this Convertible Note, for cash at a redemption price (the “Redemption Price”) equal to the outstanding principal amount of the note plus all accrued and unpaid interest including Default Interest, if any, and any outstanding liquidated damages, if any. 

5.2

 

Mechanics of Redemption.  The Company shall effect each such redemption within seven business days of giving notice of its election to redeem by facsimile with a copy by either overnight or 2-day courier to the Holder of this Convertible Note to be redeemed at the address and facsimile number of such Holder appearing in the Company’s register for the Convertible Note.  Such redemption notice shall indicate whether the Company will redeem all or part of such portion of the Convertible Note to be redeemed and the applicable Redemption Price.  The Company shall not be entitled to send any notice of redemption and begin the redemption procedure unless it has (i) the full amount of the Redemption Price, in cash, available in a demand or other immediately available account in a bank or similar financial institution or (ii) immediately available credit facilities, in the full amount of the Redemption Price, with a bank or similar financial institution on the date the redemption notice is sent to the Holder of this Convertible Note.  Provided, however, the Company will process any Notice of Conversion received prior to the issuance of a notice of redemption; and further provided that, after a notice of redemption has been issued, the Holder may issue a Notice of Conversion which will not be honored unless the Company fails to make the redemption payment when due.  In the event of such failure, the Notice of Conversion will be honored as of the date of the Notice of Conversion.  Additionally, if the Company fails to 

6

make full payment of the Redemption Price of this Convertible Note being redeemed by the seventh day following the notice of redemption, then the Company waives its right to redeem any of the remaining then outstanding Notes, unless approved by the Holder.

5.3

 

Payment of Redemption Price.  The Redemption Price shall be paid to the Holder of this Convertible Note within seven business days of the delivery of the notice of such redemption to such Holder.

6.

Miscellaneous.  This Convertible Note shall be deemed to be a contract made under the laws of the State of Florida, and for all purposes shall be governed by and construed in accordance with the laws of said State.  The parties hereto, including all guarantors or endorsers, hereby waive presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Convertible Note, except as specifically provided herein, and asset to extensions of the time of payment, or forbearance or other indulgence without notice.  The Company hereby submits to the exclusive jurisdiction of the United States District Court for the State of Florida and any state court sitting in Tallahassee, Florida for purposes of all legal proceedings arising out of or relating to this Convertible Note.  The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.  The Company hereby irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Convertible Note.

The Holder of this Convertible Note by acceptance of this Convertible Note agrees to be bound by the provisions of this Convertible Note which are expressly binding on such Holder.

Signature Page Follows

7

IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

Dated: May 11, 2007

HEPALIFE TECHNOLOGIES, INC.

By: /s/ Frank Menzler

Name:  Frank Menzler

Title:  CEO and President

Convertible Note

ANNEX A

CONVERSION AND REPAYMENT LEDGER

							
	

Date

	

Principal Balance

	Interest Converted or Paid

	Principal Converted or Paid

	

New Principal Balance

	

Issuer Initials

	

Holder Initials

	

	 
	 
	 
	 
	 
	 

	

	 
	 
	 
	 
	 
	 

	

	 
	 
	 
	 
	 
	 

	

	 
	 
	 
	 
	 
	 

	

	 
	 
	 
	 
	 
	 

	

	 
	 
	 
	 
	 
	 

	

	 
	 
	 
	 
	 
	 

	

	 
	 
	 
	 
	 
	 

FULL NAME AND ADDRESS OF SUBSCRIBER FOR REGISTRATION PURPOSES:

NAME:

ADDRESS:

TEL NO:

FAX NO:

CONTACT 

NAME:

DELIVERY INSTRUCTIONS (IF DIFFERENT FROM REGISTRATION NAME):

NAME:

ADDRESS:

TEL NO:

FAX NO:

CONTACT 

NAME:

SPECIAL INSTRUCTIONS:

NOTICE OF CONVERSION

(To be Executed by the Registered Holder

in order to Convert the Convertible Note)

The undersigned hereby irrevocably elects to convert $________ of the principal balance of the Convertible Note into shares of Common Stock, ____ par value per share (the “Common Stock”), of HepaLife Technologies, Inc. (the “Company”) according to the conditions hereof, as of the date written below.  No fee will be charged to the Holder for any conversion, except for transfer taxes, if any.  The undersigned, as contemplated by Section 5.1 of the Securities Purchase Agreement pursuant to which the Convertible Note was issued, hereby states that the representations and warranties of the undersigned set forth therein are true and correct in all material respects as of the date hereof (provided, the undersigned makes no representations concerning its investment intent with respect to the Common Stock received upon this conversion).

Conversion calculations:

Date of Conversion

Applicable Conversion Price

Number of Shares

Name/Signature

Address:

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