Document:

Exhibit
10.1

SUBSCRIPTION
AGREEMENT

THIS SUBSCRIPTION AGREEMENT (this “Agreement”), dated as of March          ,
2007, by and among Sun New Media, Inc., a Minnesota corporation (the “Company”), and the subscribers identified
on the signature page hereto (each a “Subscriber”
and collectively “Subscribers”).

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

WHEREAS, the parties desire that, upon the terms and subject
to the conditions contained herein, the Company shall issue and sell to the
Subscribers, as provided herein, and the Subscribers, in the aggregate, shall
purchase up to One Million Five Hundred Thousand Dollars ($1,500,000) (the “Purchase Price”) of principal amount of
senior promissory notes of the Company (“Note”
or “Notes”), a form of which is
annexed hereto as Exhibit A,
convertible into shares of the Company’s common stock, $0.01 par value (the “Common Stock”) at a per share conversion
price set forth in the Note (“Conversion
Price”); and share purchase warrants (the “Warrants”), in the form annexed hereto as Exhibit B, to purchase shares of Common Stock (the “Warrant Shares”).  The Notes, shares of Common Stock issuable
upon conversion of the Notes (the “Shares”),
the Warrants and the Warrant Shares are collectively referred to herein as the “Securities”; and

WHEREAS, the aggregate
proceeds of the sale of the Notes and the Warrants contemplated hereby shall be
held in escrow pursuant to the terms of a Funds Escrow Agreement to be executed
by the parties substantially in the form attached hereto as Exhibit C (the “Escrow Agreement”).

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

1.             Conditions To Closing.  Subject to the satisfaction or waiver of the
terms and conditions of this Agreement, on the Closing Date, each Subscriber
shall purchase and the Company shall sell to each Subscriber a Note in the principal
amount designated on the signature page hereto. 
The aggregate amount of the Notes to be purchased by the Subscribers on
the Closing Date shall, in the aggregate, be equal to the Closing Purchase
Price.

2.             Closing Date.   The “Closing
Date” shall be the date that subscriber funds representing the net
amount due the Company from the Closing Purchase Price of the Offering is
transmitted by wire transfer or otherwise to or for the benefit of the
Company.   The consummation of the
transactions contemplated herein for all Closings shall take place at the
offices of Spectrum Law Group, LLP, 1900 Main Street, Suite 125, Irvine, CA
92614, upon the satisfaction of all conditions to Closing set forth in this
Agreement.

3.             Warrants.

(a)           Class A Warrants.   On the Closing Date, the Company will issue
and deliver Class A Warrants to the Subscribers.  One Class A Warrant will be issued for each
Share which would be issued on the Closing Date assuming the complete
conversion of the Notes issued on such Closing Date at the Conversion Price in
effect on the Closing Date assuming such Closing Date were a Conversion
Date.  The per Warrant Share Exercise
Price to acquire a Warrant Share upon exercise of a Class A Warrant shall be equal
to $1.00.  The Class A Warrants shall be
exercisable until five (5) years after the Closing Date.  The Class A Warrant will be exercisable on a
cashless basis as described in the

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Class
A Warrant.

(b)           Class B Warrants.   On the Closing Date, the Company will issue
and deliver Class B Warrants to the Subscribers.  One Class B Warrant will be issued for each
Share which would be issued on the Closing Date assuming the complete
conversion of the Notes issued on such Closing Date at the Conversion Price in
effect on the Closing Date assuming such Closing Date were a Conversion
Date.  The per Warrant Share Exercise
Price to acquire a Warrant Share upon exercise of a Class B Warrant shall be
equal to $1.50.  The Class B Warrants
shall be exercisable until five (5) years after the Closing Date.  The Class B Warrant will be exercisable on a
cashless basis as described in the Class B Warrant.

(c)           Class C Warrants.   Upon exercise of either the Class A Warrants
of the Class B Warrants, as applicable, Subscriber will be issued a Class C
Warrant.  One Class C Warrant will be
issued for each Class A or Class B Warrant exercised.  The per share Warrant Share Exercise Price to
acquire a Warrant Share upon exercise of a Class C Warrant shall be equal to
$2.00.  The Class C Warrants shall be
exercisable for a period of five (5) years after issuance.  The Class C Warrant will be exercisable on a
cashless basis as described in the Class C Warrant.

(d)           Collectively, the
Class A Warrants, Class B Warrants and Class C Warrants are referred to herein
as “Warrants”.

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

(a)           Organization and
Standing of the Subscribers.  If the
Subscriber is an entity, such Subscriber is a corporation, partnership or other
entity duly incorporated or organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization.

(b)           Authorization and
Power.  Each Subscriber has the
requisite power and authority to enter into and perform this Agreement and to
purchase the Notes and Warrants being sold to it hereunder.  The execution, delivery and performance of
this Agreement by such Subscriber and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate or partnership action, and no further consent or
authorization of such Subscriber or its Board of Directors, stockholders,
partners, members, as the case may be, is required.  This Agreement has been duly authorized,
executed and delivered by such Subscriber and constitutes, or shall constitute
when executed and delivered, a valid and binding obligation of the Subscriber
enforceable against the Subscriber in accordance with the terms thereof.

 (c)          No Conflicts. 
The execution, delivery and performance of this Agreement and the
consummation by such Subscriber of the transactions contemplated hereby or
relating hereto do not and will not (i) result in a violation of such Subscriber’s
charter documents or bylaws or other organizational documents or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of any agreement,
indenture or instrument or obligation to which such Subscriber is a party or by
which its properties or assets are bound, or result in a violation of any law,
rule, or regulation, or any order, judgment or decree of any court or
governmental agency applicable to such Subscriber or its properties (except for
such conflicts, defaults and violations as would not, individually or in the
aggregate, have a material adverse effect on such Subscriber).  Such Subscriber is not required to obtain any
consent, authorization or order of, or make any filing or registration with,
any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under this Agreement or to purchase the Notes or acquire
the Warrants in accordance with the terms hereof, provided that for purposes of
the representation made in this sentence, such Subscriber is assuming and
relying upon the accuracy of the relevant representations and agreements of the
Company herein.

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(d)           Information on
Company.   The Subscriber has been
furnished with or has had access at the EDGAR Website of the Commission to the
Company’s Form 10-KSB for the fiscal year ended March 31, 2006 and all periodic
reports as filed with the Commission (hereinafter referred to as the “Reports”).  In
addition, the Subscriber has received in writing from the Company such other
information concerning its operations, financial condition and other matters as
the Subscriber has requested in writing (such other information is
collectively, the “Other Written Information”),
and considered all factors the Subscriber deems material in deciding on the
advisability of investing in the Securities.

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

(f)            Purchase of
Notes and Warrants.  On the Closing
Date, the Subscriber will purchase the Notes and Warrants as principal for its
own account for investment only and not with a view toward, or for resale in
connection with, the public sale or any distribution thereof.

(g)           Compliance with
Securities Act.  The Subscriber
understands and agrees that the Securities have not been registered under the
1933 Act or any applicable state securities laws, by reason of their issuance
in a transaction that does not require registration under the 1933 Act (based
in part on the accuracy of the representations and warranties of Subscriber
contained herein), and that such Securities must be held indefinitely unless a
subsequent disposition is registered under the 1933 Act or any applicable state
securities laws or is exempt from such registration.

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

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

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

or similar legend:

“THIS WARRANT AND THE COMMON
SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. 
THIS

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WARRANT AND THE COMMON
SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR ANY APPLICABLE STATE SECURITIES
LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO [THE COMPANY] THAT SUCH
REGISTRATION IS NOT REQUIRED.”

(j)            Note Legend.  The Note shall bear the following legend:

“THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.  THIS NOTE AND THE COMMON SHARES ISSUABLE UPON
CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO [THE
COMPANY] THAT SUCH REGISTRATION IS NOT REQUIRED.”

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

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

(m)          Restricted
Securities.   Subscriber understands
that the Securities have not been registered under the 1933 Act and such
Subscriber will not sell, offer to sell, assign, pledge, hypothecate or
otherwise transfer any of the Securities unless pursuant to an effective
registration statement under the 1933 Act. 
Notwithstanding anything to the contrary contained in this Agreement,
such Subscriber may transfer (without restriction and without the need for an
opinion of counsel) the Securities to its Affiliates (as defined below)
provided that each such Affiliate is an “accredited investor” under Regulation
D and such Affiliate agrees to be bound by the terms and conditions of this
Agreement. For the purposes of this Agreement, an “Affiliate” of any person or entity means any other person or
entity directly or indirectly controlling, controlled by or under direct or
indirect common control with such person or entity.  Affiliate includes each subsidiary of the
Company.  For purposes of this
definition, “control” means the
power to direct the management and policies of such person or firm, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise.

(n)           No Governmental
Review.  Each Subscriber understands
that no United States federal or state agency or any other governmental or
state agency has passed on or made recommendations or endorsement of the
Securities or the suitability of the investment in the Securities nor

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have
such authorities passed upon or endorsed the merits of the offering of the
Securities.

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

(p)           Survival.  The foregoing representations and warranties
shall survive the Closing Date until three years after the Closing Date.

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

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

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

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

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

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(e)           Consents.  No consent, approval, authorization or order
of any court, governmental agency or body or arbitrator having jurisdiction
over the Company, or any of its Affiliates, any Principal Market, nor the
Company’s shareholders is required for the execution by the Company of the
Transaction Documents and compliance and performance by the Company of its
obligations under the Transaction Documents, including, without limitation, the
issuance and sale of the Securities.

(f)            No Violation or
Conflict.  Assuming the
representations and warranties of the Subscribers in Section 4 are true and
correct, neither the issuance and sale of the Securities nor the performance of
the Company’s obligations under this Agreement and all other agreements entered
into by the Company relating thereto by the Company will:

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

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

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

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

(g)           The Securities.  The Securities upon issuance:

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

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

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

(iv)          will not subject the holders thereof
to personal liability by reason of being such holders provided Subscriber’s
representations herein are true and accurate and Subscribers

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take no actions or fail to take any actions required for their purchase
of the Securities to be in compliance with all applicable laws and regulations;
and

(v)           will not result in a violation of
Section 5 under the 1933 Act.

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

(i)            Reporting
Company.  The Company is a
publicly-held company subject to reporting obligations pursuant to Section 13
of the Securities Exchange Act of 1934 (the “1934 Act”)
and has a class of common shares registered pursuant to Section 12(g) of the
1934 Act.  Pursuant to the provisions of
the 1934 Act, the Company has timely filed all reports and other materials
required to be filed thereunder with the Commission during the preceding twelve
months.

(j)            No Market
Manipulation.  The Company and its
Affiliates have not taken, and will not take, directly or indirectly, any
action designed to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Securities or affect the price at which the
Securities may be issued or resold, provided, however, that this provision
shall not prevent the Company from engaging in investor relations/public
relations activities consistent with past practices.

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

(l)            Stop Transfer.  The Company will not issue any stop transfer
order or other order impeding the sale, resale or delivery of any of the
Securities, except as may be required by any applicable federal or state
securities laws and unless contemporaneous notice of such instruction is given
to the Subscriber.

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

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(n)           Not an Integrated
Offering.  Neither the Company, nor
any of its Affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or solicited
any offers to buy any security under circumstances that would cause the offer
of the Securities pursuant to this Agreement to be integrated with prior
offerings by the Company for purposes of the 1933 Act or any applicable
stockholder approval provisions, including, without limitation, under the rules
and regulations of the OTC Bulletin Board (“Bulletin Board”)
any Principal Market which would impair the exemptions relied upon in this
Offering (as defined in Section 8) or the Company’s ability to timely comply
with its obligations hereunder.  Nor will
the Company or any of its Affiliates take any action or steps that would cause
the offer or issuance of the Securities to be integrated with other offerings
which would impair the exemptions relied upon in this Offering or the Company’s
ability to timely comply with its obligations hereunder.  The Company will not conduct any offering
other than the transactions contemplated hereby that will be integrated with
the offer or issuance of the Securities, which would impair the exemptions
relied upon in this Offering or the Company’s ability to timely comply with its
obligations hereunder.

(o)           No General
Solicitation.  Neither the Company,
nor any of its Affiliates, nor to its knowledge, any person acting on its or
their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the 1933 Act) in
connection with the offer or sale of the Securities.

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

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

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

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

(t)            Dilution.   The Company’s executive officers and
directors understand the nature of the Securities being sold hereby and
recognize that the issuance of the Securities will have a potential dilutive
effect on the equity holdings of other holders of the Company’s equity or
rights to receive equity of the Company. 
The board of directors of the Company has concluded, in its good faith
business judgment that the issuance of the Securities is in the best interests
of the Company.  The Company specifically
acknowledges that its obligation to issue the Shares upon conversion of the
Notes, and the Warrant Shares upon exercise of the Warrants is binding upon the
Company and enforceable regardless of

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the
dilution such issuance may have on the ownership interests of other
shareholders of the Company or parties entitled to receive equity of the
Company.

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

(v)           DTC Status.   The Company’s transfer agent is a
participant in and the Common Stock is eligible for transfer pursuant to the
Depository Trust Company Automated Securities Transfer Program. The name,
address, telephone number, fax number, contact person and email address of the
Company transfer agent is set forth on Schedule 5(v)
hereto.

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

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

(y)           Company Predecessor.   All representations made by or relating to
the Company of a historical or prospective nature and all undertaking described
in Sections 9(g) through 9(l) shall relate and refer to the Company, its
predecessors, and the Subsidiaries.

(z)            Solvency.   Based on the financial condition of the
Company as of the Closing Date after giving effect to the receipt by the
Company of the proceeds from the Offering (i) the Company’s fair saleable value
of its assets exceeds the amount that will be required to be paid on or in
respect of the Company’s existing debts and other liabilities (including known
contingent liabilities) as they mature; (ii) the Company’s assets do not
constitute unreasonably small capital to carry on its business for the current
fiscal year as now conducted and as proposed to be conducted including its
capital needs taking into account the particular capital requirements of the
business conducted by the Company, and projected capital requirements and
capital availability thereof; and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to liquidate all
of its assets, after taking into account all anticipated uses of the cash,
would be sufficient to pay all amounts on or in respect of its debt when such
amounts are required to be paid.  The
Company does not intend to incur debts beyond its ability to pay such debts as
they mature (taking into account the timing and amounts of cash to be payable
on or in respect of its debt).

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

(bb)         Survival.  The foregoing representations and warranties
shall survive each Closing Date until three years after the latest Closing
Date.

6.             Regulation
D Offering.  The offer and issuance
of the Securities to the Subscribers is being made pursuant to the exemption
from the registration provisions of the 1933 Act afforded by Section 4(2) or
Section 4(6) of the 1933 Act and/or Rule 506 of Regulation D promulgated
thereunder.  On the Closing Date, the
Company will provide an opinion reasonably acceptable to Subscriber from the
Company’s legal counsel opining on the availability of an exemption from
registration under the 1933 Act as it relates to the offer and issuance of the
Securities and other matters reasonably requested by Subscribers.  A form of the legal opinion is annexed hereto
as Exhibit D.  The Company will

 9
 

provide,
at the Company’s expense, such other legal opinions in the future as are
reasonably necessary for the issuance and resale of the Common Stock issuable
upon conversion of the Notes and exercise of the Warrants pursuant to an
effective registration statement.

7.1.          Conversion of Note.

(a)           Upon the conversion of a Note or part thereof, the Company
shall, at its own cost and expense, take all necessary action, including
obtaining and delivering, an opinion of counsel to assure that the Company’s
transfer agent shall issue stock certificates in the name of Subscriber (or its
nominee) or such other persons as designated by Subscriber and in such
denominations to be specified at conversion representing the number of shares
of Common Stock issuable upon such conversion. 
The Company warrants that no instructions other than these instructions
have been or will be given to the transfer agent of the Company’s Common Stock
and that, unless waived by the Subscriber, the Shares will be free-trading, and
freely transferable, and will not contain a legend restricting the resale or
transferability of the Shares provided the Shares are being sold pursuant to an
effective registration statement covering the Shares or are otherwise exempt
from registration.

(b)           Subscriber will give
notice of its decision to exercise its right to convert the Note, interest, any
sum due to the Subscriber under the Transaction Documents including Liquidated
Damages, or part thereof by telecopying an executed and completed Notice of Conversion (a form of which is annexed as Exhibit A to the Note) to the Company via
confirmed telecopier transmission or otherwise pursuant to Section 12(a) of
this Agreement.  The Subscriber will not
be required to surrender the Note until the Note has been fully converted or
satisfied.  Each date on which a Notice
of Conversion is telecopied to the Company in accordance with the provisions
hereof shall be deemed a Conversion Date.  The Company will itself or cause the Company’s
transfer agent to transmit the Company’s Common Stock certificates representing
the Shares issuable upon conversion of the Note to the Subscriber via express
courier for receipt by such Subscriber within three (3) business days after
receipt by the Company of the Notice of Conversion (such third day being the “Delivery Date”).  In the event the Shares are electronically
transferable, then delivery of the Shares must be made by electronic
transfer provided request for such electronic transfer has been made by the
Subscriber and the Subscriber has complied with all applicable securities laws
in connection with the sale of the Common Stock, including, without limitation,
the prospectus delivery requirements.   A
Note representing the balance of the Note not so converted will be provided by
the Company to the Subscriber if requested by Subscriber, provided the
Subscriber delivers  the original Note to
the Company. In the event that a Subscriber elects not to surrender a Note for
reissuance upon partial payment or conversion, the Subscriber hereby
indemnifies the Company against any and all loss or damage attributable to a
third-party claim in an amount in excess of the actual amount then due under
the Note.  “Business day” and “trading day” as employed in the Transaction Documents is a
day that the New York Stock Exchange is open for trading for three or more
hours.

(c)           The Company understands that a delay
in the delivery of the Shares in the form required pursuant to Section 7.1
hereof, or the Mandatory Redemption Amount described in Section 7.2 hereof,
respectively after the Delivery Date or the Mandatory Redemption Payment Date
(as hereinafter defined) could result in economic loss to the Subscriber.  As compensation to the Subscriber for such
loss, the Company agrees to pay (as liquidated damages and not as a penalty) to
the Subscriber for late issuance of Shares in the form required pursuant to
Section 7.1 hereof upon Conversion of the Note in the amount of $100 per
business day after the Delivery Date for each $10,000 of Note principal amount
being converted of the corresponding Shares which are not timely
delivered.  The Company shall pay any
payments incurred under this Section in immediately available funds upon
demand.  Furthermore, in addition to any
other remedies which may be available to the Subscriber, in the event that the
Company fails for any reason to effect delivery of the Shares by the Delivery
Date or make payment by the Mandatory Redemption Payment Date, the Subscriber
may revoke all or part of the relevant Notice of Conversion or rescind all or
part of the notice of Mandatory Redemption by delivery of a notice to such
effect to the Company whereupon the Company and the Subscriber shall each be
restored to their

 10
 

respective positions
immediately prior to the delivery of such notice, except that the liquidated
damages described above shall be payable through the date notice of revocation
or rescission is given to the Company.

(d)           Nothing contained herein or in any document referred to
herein or delivered in connection herewith shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum permitted by applicable law.  In
the event that the rate of interest or dividends required to be paid or other
charges hereunder exceed the maximum permitted by such law, any payments in
excess of such maximum shall be credited against amounts owed by the Company to
the Subscriber and thus refunded to the Company.

7.2.          Mandatory Redemption at Subscriber’s
Election.  In the event (i) the
Company is prohibited from issuing Shares, (ii) the Company fails to timely
deliver Shares on a Delivery Date, (iii) upon the occurrence of any other Event
of Default (as defined in the Note or in this Agreement), (iv) of the
liquidation, dissolution or winding up of the Company, or (v) a Change of
Control (as defined below) any of which that continues for more than ten days,
then at the Subscriber’s election, the Company must pay to the Subscriber ten
(10) business days after request by the Subscriber, at the Subscriber’s
election, a sum of money determined by (y) multiplying up to the outstanding
principal amount of the Note designated by the Subscriber by 120%, or (z)
multiplying the number of Shares otherwise deliverable upon conversion of an
amount of Note principal and/or interest designated by the Subscriber (with the
date of giving of such designation being a “Deemed
Conversion Date”) at the Conversion Price that would be in effect on
the Deemed Conversion Date by the highest closing price of the Common Stock on
the Principal Market for the period commencing on the Deemed Conversion Date
until the day prior to the receipt by the Subscriber of the Mandatory
Redemption Payment, whichever is greater, together with accrued but unpaid
interest thereon (“Mandatory Redemption
Payment”). The Mandatory Redemption Payment must be received by the
Subscriber on the same date as the Company Shares otherwise deliverable or
within ten (10) business days after request, whichever is sooner (“Mandatory Redemption Payment Date”). Upon
receipt of the Mandatory Redemption Payment, the corresponding Note principal
and interest will be deemed paid and no longer outstanding.  Liquidated damages calculated pursuant to
Section 7.1(c) hereof, that have been paid or accrued for the twenty day period
prior to the actual receipt of the Mandatory Redemption Payment by the Subscriber
shall be credited against the Mandatory Redemption Payment.   For purposes of this Section 7.2, “Change in Control” shall mean (i) the
Company no longer having a class of shares publicly traded or listed on a
Principal Market, (ii) the Company becoming a Subsidiary of another entity, (iii)
a majority of the board of directors of the Company as of the Closing Date no
longer serving as directors of the Company except due to natural causes, (iv)
if the holders of the Company’s Common Stock as of the Closing Date
beneficially own at any time after the Closing Date less than forty percent of
the Common stock owned by them on the Closing Date, and (v) the sale, lease or
transfer of substantially all the assets of the Company or Subsidiaries.

7.3.          Maximum Conversion.  The Subscriber shall not be entitled to
convert on a Conversion Date that amount of the Note in connection with that
number of shares of Common Stock which would be in excess of the sum of (i) the
number of shares of common stock beneficially owned by the Subscriber and its
Affiliates on a Conversion Date, and (ii) the number of shares of Common Stock
issuable upon the conversion of the Note with respect to which the
determination of this provision is being made on a Conversion Date, which would
result in beneficial ownership by the Subscriber and its Affiliates of more
than 4.99% of the outstanding shares of common stock of the Company on such
Conversion Date.  Beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulation 13d-3 thereunder.  Subject to the foregoing, the Subscriber
shall not be limited to aggregate conversions of only 4.99% and aggregate
conversions by the Subscriber may exceed 4.99%. 
The Subscriber may waive the conversion limitation described in this
Section 7.3, in whole or in part, upon and effective after 61 days prior
written notice to the Company.  The
Subscriber may decide whether to convert a Note or exercise Warrants to achieve
an actual 4.99% ownership position.

 11
 

7.4.          Injunction Posting of Bond.  In the event a Subscriber shall elect to
convert a Note or part thereof or exercise the Warrant in whole or in part, the
Company may not refuse conversion or exercise based on any claim that such
Subscriber or any one associated or affiliated with such Subscriber has been
engaged in any violation of law, or for any other reason, unless, an injunction
from a court, on notice, restraining and or enjoining conversion of all or part
of such Note or exercise of all or part of such Warrant shall have been sought
and obtained by the Company and the Company has posted a surety bond for
the benefit of such Subscriber in the amount of 120% of the outstanding
principal and interest of the Note, or aggregate purchase price of the Warrant
Shares which are sought to be subject to the injunction, which bond shall
remain in effect until the completion of arbitration/litigation of the dispute
and the proceeds of which shall be payable to such Subscriber to the extent
Subscriber obtains judgment.  Notwithstanding
the foregoing, if the Company receives an order restraining it from converting
from a court or administration agency of competent jurisdiction, it shall
comply without a bond requirement.

7.5.          Buy-In.  In addition to any other rights available to
the Subscriber, if the Company fails to deliver to the Subscriber such shares
issuable upon conversion of a Note by the Delivery Date and if after seven (7)
business days after the Delivery Date the Subscriber purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Subscriber of the Common Stock which the
Subscriber was entitled to receive upon such conversion (a “Buy-In”), then the Company shall pay in
cash to the Subscriber (in addition to any remedies available to or elected by
the Subscriber) the amount by which (A) the Subscriber’s total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (B) the aggregate principal and/or interest amount of the
Note for which such conversion was not timely honored, together with
interest thereon at a rate of 15% per annum, accruing until such amount and any
accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). 
For example, if the
Subscriber purchases shares of Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 of
note principal and/or interest, the Company shall be required to pay the
Subscriber $1,000, plus interest. The Subscriber shall provide the Company
written notice indicating the amounts payable to the Subscriber in respect of
the Buy-In.

7.6           Adjustments.   The Conversion Price, Warrant Exercise Price
and amount of Shares issuable upon conversion of the Notes and exercise of the
Warrants shall be adjusted as described in this Agreement, the Notes and
Warrants.

7.7.          Redemption.    The Note and Warrants shall not be
redeemable or mandatorily convertible except as described in the Note and
Warrants.

8.             Legal Fees. 
The Company shall
pay to Spectrum Law Group, LLP, a cash fee of $35,000 on the Closing Date (“Legal Fees”) as reimbursement for services rendered to the
Subscribers in connection with this Agreement and the purchase and sale of the
Notes and Warrants (the “Offering”).  The Legal Fees will be payable on the Closing
Date out of funds held pursuant to the Escrow Agreement.

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

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

(b)           Listing.  The
Company shall promptly secure the listing of the shares of Common Stock and the
Warrant Shares upon each national securities exchange, or electronic or
automated

 12
 

quotation system upon which
they are or become eligible for listing and shall maintain such listing so long
as any Notes or Warrants are outstanding. 
The Company will maintain the listing of its Common Stock on the
American Stock Exchange, Nasdaq SmallCap Market, Nasdaq National Market System,
Bulletin Board, or New York Stock Exchange (whichever of the foregoing is at
the time the principal trading exchange or market for the Common Stock (the “Principal Market”)), and will comply in all
respects with the Company’s reporting, filing and other obligations under the
bylaws or rules of the Principal Market, as applicable. The Company will
provide the Subscribers copies of all notices it receives notifying the Company
of the threatened and actual delisting of the Common Stock from any Principal
Market.  As of the date of this
Agreement, the Bulletin Board is the Principal Market.

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

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

(e)           Use of Proceeds. 
The proceeds of the Offering will be employed by the Company for the
purposes set forth on Schedule 9(e)
hereto.  Except as set forth on Schedule 9(e), the Purchase Price may not
and will not be used for accrued and unpaid officer and director salaries,
payment of financing related debt, redemption of outstanding notes or equity
instruments of the Company, litigation related expenses or settlements,
brokerage fees, nor non-trade obligations outstanding on a Closing Date.  For so long as any Notes are outstanding, the
Company will not prepay any financing related debt obligations nor redeem any
equity instruments of the Company.

(f)            Reservation.  
Prior to the Closing Date, the Company undertakes to reserve, pro
rata, on behalf of the Subscribers from its authorized but unissued
common stock, a number of common shares equal to 150% of the amount of Common
Stock necessary to allow each Subscriber to be able to convert all Notes
issuable pursuant to this Agreement, reserve 100% of the amount of Warrant
Shares issuable upon exercise of the Warrants and reserve 100% of the Interest
Shares (as defined in the Debenture) issuable at Closing.  Failure to have sufficient shares reserved
pursuant to this Section 9(f) for five (5) consecutive business days or fifteen
(15) days in the aggregate shall be a material default of the Company’s
obligations under this Agreement and an Event of Default under the Note.

 13
 

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

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

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

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

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

(l)            Properties. 
From the date of this Agreement and until the later of (i) two (2) years
after the Closing Date, or (ii) until all the Shares and Warrant Shares have
been resold or transferred by all the Subscribers pursuant to the Registration
Statement (as defined in Section 11.1(iv) hereof) or pursuant to Rule 144,
without regard to volume limitations, the Company will keep its properties in
good repair, working order and condition, reasonable wear and tear excepted,
and from time to time make all necessary and proper repairs, renewals,
replacements, additions and improvements thereto; and the Company will at all
times comply with each provision of all leases to which it is a party or under
which

 14
 

it occupies property if the
breach of such provision could reasonably be expected to have a Material
Adverse Effect.

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

(n)           Further
Registration Statements.   Except for
a registration statement filed on behalf of the Subscribers pursuant to Section
11 of this Agreement and as set forth on Schedule 11.1
hereto, the Company will not file any registration statements or amend any
already filed registration statement, including but not limited to Forms S-8,
with the Commission or with state regulatory authorities without the consent of
the Subscriber until the sooner of (i) the Registration Statement shall have
been current and available for use in connection with the resale of the
Registrable Securities (as defined in Section 11.1(i) for a period of 365 days,
or (ii) until all the Shares and Warrant Shares have been resold or transferred
by the Subscribers pursuant to the Registration Statement or Rule 144, without
regard to volume limitations (“Exclusion
Period”). The Exclusion Period will be tolled during the pendency of
an Event of Default as defined in the Note.

(o)           No Liens.  The Company covenants and agrees that while
any of the Notes are outstanding it will not create , incur, assume or suffer
to exist ny security interest, encumbrance, lien (including any judgment lien,
any contract lien, any lien arising or resulting from nonpayment of any tax,
assessment, charge or other imposition, and any lien arising or resulting from
nonpayment for labor, materials, or supplies), security agreement (including
any agreement that creates or provides for a security interest), deed of trust,
mortgage, grant, pledge, assignment, hypothecation, title retention contract,
or other arrangement for security purposes, and any agricultural lien
(including any agricultural lien within the definition of “agricultural lien”
in the Uniform Commercial Code, and including any of the foregoing arising by
operation of statute or other law or the application of equitable principles,
whether perfected or unperfected, avoidable or unavoidable, consensual or
nonconsensual, and any financing statement or other similar notice document,
whether or not filed, and any agreement to give a financing statement or other
similar notice document.

(p)           Blackout.    The Company undertakes and covenants that
until the end of the Exclusion Period, the Company will not enter into any
acquisition, merger, exchange or sale or other transaction that could have the
effect of delaying the effectiveness of any pending registration statement or
causing an already effective registration statement to no longer be effective
or current for a period ten (10) or more consecutive days nor more than twenty
(20) days during any consecutive three hundred and sixty-five (365) day period.

(q)           Non-Public
Information.  The Company covenants
and agrees that neither it nor any other person acting on its behalf will
provide any Subscriber or its agents or counsel with any information that the
Company believes constitutes material non-public information, unless prior
thereto such Subscriber shall have agreed in writing to receive such
information.  The Company understands and
confirms that each Subscriber shall be relying on the foregoing representations
in effecting transactions in securities of the Company.

 15

10.                                 Covenants of the Company and Subscriber
Regarding Indemnification.

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

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

(c)                                  In no event shall the
liability of any Subscriber or permitted successor hereunder or under any
Transaction Document or other agreement delivered in connection herewith be
greater in amount than the dollar amount of the net proceeds actually received
by such Subscriber upon the sale of Registrable Securities (as defined herein).

(d)                                 The procedures set forth in
Section 11.6 shall apply to the indemnification set forth in Sections 10(a) and
10(b) above.

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

(i)                                     On one occasion, for a
period commencing ninety-one (91) days after the Closing Date, but not later
than two (2) years after the Closing Date, upon a written request therefor from
any record holder or holders of more than 50% of the Shares issued and issuable
upon conversion of the outstanding Notes and outstanding Warrant Shares, the
Company shall prepare and file with the Commission a registration statement
under the 1933 Act registering the Registrable Securities, as defined in
Section 11.1(iv) hereof, which are the subject of such request for unrestricted
public resale by the holder thereof.  For
purposes of Sections 11.1(i) and 11.1(ii), Registrable Securities shall not
include Securities which are (A) registered for resale in an effective
registration statement, (B) included for registration in a pending registration
statement, or  (C) which have been issued
without further transfer restrictions after a sale or transfer pursuant to Rule
144 under the 1933 Act.  Upon the receipt
of such request, the Company shall promptly give written notice to all other
record holders of the Registrable Securities that such registration statement
is to be filed and shall include in such registration statement Registrable
Securities for which it has received written requests within ten (10) days
after the Company gives such written notice. 
Such other requesting record holders shall be deemed to have exercised
their demand registration right under this Section 11.1(i).

(ii)                                  If the Company at any time
proposes to register any of its securities under the 1933 Act for sale to the
public, whether for its own account or for the account of other security
holders or both, except with respect to registration statements on Forms S-4,
S-8 or another form not available for registering the Registrable
Securities for sale to the public, provided the Registrable Securities are not

 16
 

otherwise registered for
resale by the Subscribers or Holder pursuant to an effective registration
statement, each such time it will give at least fifteen (15) days’ prior
written notice to the record holder of the Registrable Securities of its
intention so to do. Upon the written request of the holder, received by the
Company within ten (10) days after the giving of any such notice by the
Company, to register any of the Registrable Securities not previously
registered, the Company will cause such Registrable Securities as to which
registration shall have been so requested to be included with the securities to
be covered by the registration statement proposed to be filed by the Company,
all to the extent required to permit the sale or other disposition of the
Registrable Securities so registered by the holder of such Registrable
Securities (the “Seller” or “Sellers”). In the event that any
registration pursuant to this Section 11.1(ii) shall be, in whole or in part,
an underwritten public offering of common stock of the Company, the number of
shares of Registrable Securities to be included in such an underwriting may be
reduced by the managing underwriter if and to the extent that the Company and
the underwriter shall reasonably be of the opinion that such inclusion would
adversely affect the marketing of the securities to be sold by the Company
therein; provided, however, that the Company shall notify the Seller in writing
of any such reduction. Notwithstanding the foregoing provisions, or Section
11.4 hereof, the Company may withdraw or delay or suffer a delay of any
registration statement referred to in this Section 11.1(ii) without thereby
incurring any liability to the Seller.

(iii)                               If, at the time any written
request for registration is received by the Company pursuant to Section
11.1(i), the Company has determined to proceed with the actual preparation and
filing of a registration statement under the 1933 Act in connection with the
proposed offer and sale for cash of any of its securities for the Company’s own
account and the Company actually does file such other registration statement,
such written request shall be deemed to have been given pursuant to Section
11.1(ii) rather than Section 11.1(i), and the rights of the holders of
Registrable Securities covered by such written request shall be governed by
Section 11.1(ii).

(iv)                              The Company shall file with
the Commission a Form SB-2 registration statement (the “Registration Statement”) (or such other
form that it is eligible to use) in order to register the Registrable
Securities for resale and distribution under the 1933 Act within forty-five
(45) calendar days after the Closing Date (the “Filing Date”), and cause to be declared effective not later
than ninety (90) calendar days after the Closing Date (the “Effective Date”).  The Company will register not less than a
number of shares of common stock in the aforedescribed registration statement
that is equal to 150% of the Shares issuable upon conversion of all of the
Notes issuable to the Subscribers, 100% of the Warrant Shares issuable pursuant
to this Agreement upon exercise of the Warrants and 100% of the Interest Shares
issued at Closing (collectively the “Registrable
Securities”). The Registrable Securities shall be reserved and set
aside exclusively for the benefit of each Subscriber and Warrant holder, pro
rata, and not issued, employed or reserved for anyone other than each
such Subscriber and Warrant holder.  The
Registration Statement will immediately be amended or additional registration
statements will be immediately filed by the Company as necessary to register
additional shares of Common Stock to allow the public resale of all Common
Stock included in and issuable by virtue of the Registrable Securities.  Except with the written consent of the
Subscriber, or as described on Schedule 11.1 hereto, no securities of the
Company other than the Registrable Securities will be included in the
Registration Statement. It shall be deemed a Non-Registration Event if at any
time after the date the Registration Statement is declared effective by the
Commission (“Actual Effective Date”)
the Company has registered for unrestricted resale on behalf of the Sellers
fewer than 125% of the amount of Common Shares issuable upon full conversion of
all sums due under the Notes and 100% of the Warrant Shares issuable upon
exercise of the Warrants.

11.2.                        Registration Procedures. If and whenever the Company is required by
the provisions of Section 11.1(i), 11.1(ii), or (iv) to effect the registration
of any Registrable Securities under the 1933 Act, the Company will, as
expeditiously as possible:

(a)                                  subject to the timelines
provided in this Agreement, prepare and file with the Commission a registration
statement required by Section 11, with respect to such securities and use its

 17
 

best efforts to cause such
registration statement to become and remain effective for the period of the
distribution contemplated thereby (determined as herein provided), promptly
provide to the holders of the Registrable Securities copies of all filings and
Commission letters of comment and notify Subscribers (by telecopier and by
e-mail addresses provided by Subscribers) and Spectrum Law Group, LLP (by
telecopier and by email to gcarney@spectrumlawgroup.com) on or before 6:00 PM EST
on the same business day that the Company receives notice that (i) the
Commission has no comments or no further comments on the Registration
Statement, and (ii) the registration statement has been declared effective
(failure to timely provide notice as required by this Section 11.2(a) shall be
a material breach of the Company’s obligation and an Event of Default as
defined in the Notes and a Non-Registration Event as defined in Section 11.4 of
this Agreement);

(b)                                 prepare and file with the
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective until such registration statement has been
effective for a period of two (2) years, and comply with the provisions of the
1933 Act with respect to the disposition of all of the Registrable Securities
covered by such registration statement in accordance with the Sellers’ intended
method of disposition set forth in such registration statement for such period;

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

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

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

(f)                                    notify the Subscribers
within two hours of the Company’s becoming aware that a prospectus relating
thereto is required to be delivered under the 1933 Act, of the happening of any
event of which the Company has knowledge as a result of which the prospectus
contained in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing or which becomes subject to a
Commission, state or other governmental order suspending the effectiveness of
the registration statement covering any of the Shares; and

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

11.3.                        Provision of Documents.  In
connection with each registration described in this Section 11, each Seller
will furnish to the Company in writing such information and representation
letters with respect to itself and the proposed distribution by it as
reasonably shall be necessary in order to assure compliance with federal and
applicable state securities laws.

 18
 

11.4.                        Non-Registration Events.  The Company and the Subscribers agree that
the Sellers will suffer damages if the Registration Statement is not filed by
the Filing Date and not declared effective by the Commission by the Effective
Date, and any registration statement required under Section 11.1(i) or 11.1(ii)
is not filed within 60 days after written request and declared effective by the
Commission within 90 days after such request, and maintained in the manner and
within the time periods contemplated by Section 11 hereof, and it would not be
feasible to ascertain the extent of such damages with precision.  Accordingly, if (A) the Registration Statement
is not filed on or before the Filing Date, (B) is not declared effective on or
before the Effective Date, (C) due to the action or inaction of the Company the
Registration Statement is not declared effective within 3 business days after
receipt by the Company or its attorneys of a written or oral communication from
the Commission that the Registration Statement will not be reviewed or that the
Commission has no further comments, (D) if the registration statement described
in Sections 11.1(i) or 11.1(ii) is not filed within 60 days after such written
request, or is not declared effective within 90 days after such written
request, or (E) any registration statement described in Sections 11.1(i),
11.1(ii) or 11.1(iv) is filed and declared effective but shall thereafter cease
to be effective without being succeeded within 15 business days by an effective
replacement or amended registration statement or for a period of time which
shall exceed 30 days in the aggregate per year (defined as a period of 365 days
commencing on the Actual Effective Date (each such event referred to in clauses
(A) through (E) of this Section 11.4 is referred to herein as a “Non-Registration Event”), then the Company shall deliver to
the holder of Registrable Securities, as Liquidated Damages, an amount equal to
two (2.0%) for each 30 days or part thereof of the Purchase Price of the Notes
remaining unconverted and purchase price of Shares issued upon conversion of
the Notes owned of record by such holder which are subject to such Non-Registration
Event.  Liquidated Damages payable in
connection with a Non-Registration Event described in clause (B) above shall
accrue from the 90th calendar day after the Closing Date.  The Company must pay the Liquidated Damages
in cash, except that the Subscriber may elect that such Liquidated Damages to
be paid with shares of Common Stock with such shares valued at sixty percent
(60%) of the Conversion Price in effect on each thirtieth day or sooner date
upon which Liquidated Damages have accrued. 
The Liquidated Damages must be paid within 10 days after the end of each
thirty (30) day period or shorter part thereof for which Liquidated Damages are
payable.  In the event a Registration
Statement is filed by the Filing Date but is withdrawn prior to being declared
effective by the Commission, then such Registration Statement will be deemed to
have not been filed.  All oral or written
comments received from the Commission relating to the Registration Statement
must be satisfactorily responded to within 30 days in connection with the
initial filing of the Registration Statement and within 10 days in connection
with amendments to the Registration Statement after receipt of such comments
from the Commission.  Failure to timely
respond to Commission comments is a Non-Registration Event for which Liquidated
Damages shall accrue and be payable by the Company to the holders of
Registrable Securities at the same rate set forth above.  Notwithstanding the foregoing, the Company
shall not be liable to the Subscriber under this Section 11.4 for any events or
delays occurring as a consequence of the acts or omissions of the Subscribers
contrary to the obligations undertaken by Subscribers in this Agreement.  Liquidated Damages will not accrue nor be
payable pursuant to this Section 11.4 nor will a Non-Registration Event be
deemed to have occurred for times during which Registrable Securities are
transferable by the holder of Registrable Securities pursuant to Rule 144(k)
under the 1933 Act.

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

 19
 

11.6.                        Indemnification and Contribution.

(a)                                  In the event of a
registration of any Registrable Securities under the 1933 Act pursuant to
Section 11, the Company will, to the extent permitted by law, indemnify and
hold harmless the Seller, each officer of the Seller, each director of the
Seller, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such Seller or underwriter within the meaning
of the 1933 Act, against any losses, claims, damages or liabilities, joint or
several, to which the Seller, or such underwriter or controlling person may
become subject under the 1933 Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any registration statement under which such Registrable
Securities was registered under the 1933 Act pursuant to Section 11, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances when made, and will subject to the provisions of Section 11.6(c)
reimburse the Seller, each such underwriter and each such controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company shall not be liable to the Seller to the
extent that any such damages arise out of or are based upon an untrue statement
or omission made in any preliminary prospectus if (i) the Seller failed to send
or deliver a copy of the final prospectus delivered by the Company to the
Seller with or prior to the delivery of written confirmation of the sale by the
Seller to the person asserting the claim from which such damages arise, (ii)
the final prospectus would have corrected such untrue statement or alleged
untrue statement or such omission or alleged omission, or (iii) to the extent
that any such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
so made in conformity with information furnished by any such Seller, or any
such controlling person in writing specifically for use in such registration
statement or prospectus.

(b)                                 In the event of a
registration of any of the Registrable Securities under the 1933 Act pursuant
to Section 11, each Seller severally but not jointly will, to the extent
permitted by law, indemnify and hold harmless the Company, and each person, if
any, who controls the Company within the meaning of the 1933 Act, each officer
of the Company who signs the registration statement, each director of the
Company, each underwriter and each person who controls any underwriter within
the meaning of the 1933 Act, against all losses, claims, damages or
liabilities, joint or several, to which the Company or such officer, director,
underwriter or controlling person may become subject under the 1933 Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the registration
statement under which such Registrable Securities were registered under the
1933 Act pursuant to Section 11, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse the Company and each such officer, director,
underwriter and controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action, provided, however, that the Seller will be
liable hereunder in any such case if and only to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with information pertaining to such Seller, as such,
furnished in writing to the Company by such Seller specifically for use in such
registration statement or prospectus, and provided, further, however, that the
liability of the Seller hereunder shall be limited to the net proceeds actually
received by the Seller from the sale of Registrable Securities covered by such
registration statement.

(c)                                  Promptly after receipt by an
indemnified party hereunder of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party hereunder, notify the indemnifying party in writing
thereof, but the

 20
 

omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
such indemnified party other than under this Section 11.6(c) and shall only
relieve it from any liability which it may have to such indemnified party under
this Section 11.6(c), except and only if and to the extent the indemnifying
party is prejudiced by such omission. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in and, to the extent it shall wish, to assume and undertake the defense
thereof with counsel satisfactory to such indemnified party, and, after notice
from the indemnifying party to such indemnified party of its election so to
assume and undertake the defense thereof, the indemnifying party shall not be
liable to such indemnified party under this Section 11.6(c) for any legal
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and of liaison
with counsel so selected, provided, however, that, if the defendants in any
such action include both the indemnified party and the indemnifying party and
the indemnified party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to
those available to the indemnifying party or if the interests of the
indemnified party reasonably may be deemed to conflict with the interests of
the indemnifying party, the indemnified parties, as a group, shall have the
right to select one separate counsel and to assume such legal defenses and otherwise
to participate in the defense of such action, with the reasonable expenses and
fees of such separate counsel and other expenses related to such participation
to be reimbursed by the indemnifying party as incurred.

(d)                                 In order to provide for just
and equitable contribution in the event of joint liability under the 1933 Act
in any case in which either (i) a Seller, or any controlling person of a
Seller, makes a claim for indemnification pursuant to this Section 11.6 but it
is judicially determined (by the entry of a final judgment or decree by a court
of competent jurisdiction and the expiration of time to appeal or the denial of
the last right of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that this Section 11.6 provides for
indemnification in such case, or (ii) contribution under the 1933 Act may be
required on the part of the Seller or controlling person of the Seller in
circumstances for which indemnification is not provided under this Section
11.6; then, and in each such case, the Company and the Seller will contribute
to the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion so that the Seller
is responsible only for the portion represented by the percentage that the
public offering price of its securities offered by the registration statement
bears to the public offering price of all securities offered by such
registration statement, provided, however, that, in any such case, (y) the
Seller will not be required to contribute any amount in excess of the public
offering price of all such securities sold by it pursuant to such registration
statement; and (z) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) will be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation.

11.7.                        Delivery of Unlegended Shares.

(a)                                  Within three (3) business
days (such third business day being the “Unlegended
Shares Delivery Date”) after the business day on which the Company
has received (i) a notice that Shares or Warrant Shares or any other Common
Stock held by a Subscriber have been sold pursuant to the Registration
Statement or Rule 144 under the 1933 Act, (ii) a representation that the
prospectus delivery requirements, or the requirements of Rule 144, as
applicable and if required, have been satisfied, and (iii) the original share
certificates representing the shares of Common Stock that have been sold, and
(iv) in the case of sales under Rule 144, customary representation letters of
the Subscriber and/or Subscriber’s broker regarding compliance with the
requirements of Rule 144, the Company at its expense, (y) shall deliver, and
shall cause legal counsel selected by the Company to deliver to its transfer
agent (with copies to Subscriber) an appropriate instruction and opinion of
such counsel, directing the delivery of shares of Common Stock without any
legends including the legend set forth in Section 4(h) above, reissuable
pursuant to any effective and current Registration Statement described in
Section 11 of this Agreement or pursuant to Rule 144 under the 1933 Act (the “Unlegended Shares”); and (z) cause the

 21
 

transmission of the certificates
representing the Unlegended Shares together with a legended certificate
representing the balance of the submitted Shares certificate, if any, to the
Subscriber at the address specified in the notice of sale, via express courier,
by electronic transfer or otherwise on or before the Unlegended Shares Delivery
Date.

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

(c)                                  The Company understands that a delay in the
delivery of the Unlegended Shares pursuant to Section 11 hereof later than two
business days after the Unlegended Shares Delivery Date could result in
economic loss to a Subscriber.  As
compensation to a Subscriber for such loss, the Company agrees to pay late
payment fees (as liquidated damages and not as a penalty) to the Subscriber for
late delivery of Unlegended Shares in the amount of $100 per business day after
the Delivery Date for each $10,000 of purchase price of the Unlegended Shares
subject to the delivery default.  If
during any 360 day period, the Company fails to deliver Unlegended Shares as
required by this Section 11.7 for an aggregate of thirty (30) days, then each
Subscriber or assignee holding Securities subject to such default may, at its
option, require the Company to redeem all or any portion of the Shares and
Warrant Shares subject to such default at a price per share equal to 120% of
the Purchase Price of such Common Stock and Warrant Shares (“Unlegended Redemption Amount”).  The amount of the aforedescribed liquidated
damages that have accrued or been paid for the twenty day period prior to the
receipt by the Subscriber of the Unlegended Redemption Amount shall be credited
against the Unlegended Redemption Amount. 
The Company shall pay any payments incurred under this Section in
immediately available funds upon demand.

(d)                                 In addition to
any other rights available to a Subscriber, if the Company fails to deliver to
a Subscriber Unlegended Shares as required pursuant to this Agreement, within
seven (7) business days after the Unlegended Shares Delivery Date and the
Subscriber purchases (in an open market transaction or otherwise) shares of
common stock to deliver in satisfaction of a sale by such Subscriber of the
shares of Common Stock which the Subscriber was entitled to receive from the
Company (a “Buy-In”), then the
Company shall pay in cash to the Subscriber (in addition to any remedies
available to or elected by the Subscriber) the amount by which (A) the
Subscriber’s total purchase price (including brokerage commissions, if any) for
the shares of common stock so purchased exceeds (B) the aggregate purchase
price of the shares of Common Stock delivered to the Company for reissuance as
Unlegended Shares together with interest thereon at a rate of 15% per
annum, accruing until such amount and any accrued interest thereon is paid in
full (which amount shall be paid as liquidated damages and not as a
penalty).  For example, if a Subscriber
purchases shares of Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to $10,000 of purchase price of shares of Common
Stock delivered to the Company for reissuance as Unlegended Shares, the Company
shall be required to pay the Subscriber $1,000, plus interest. The Subscriber
shall provide the Company written notice indicating the amounts payable to the
Subscriber in respect of the Buy-In.

(e)                                  In the event a Subscriber shall request
delivery of Unlegended Shares as described in Section 11.7 and the Company is
required to deliver such Unlegended Shares pursuant to Section 11.7, the
Company may not refuse to deliver Unlegended Shares based on any claim that
such Subscriber or any one associated or affiliated with such Subscriber has
been engaged in any violation of law, or for any other reason, unless, an
injunction or temporary restraining order from a court, on notice, restraining
and or enjoining delivery of such Unlegended Shares or exercise of all or part
of said Warrant shall have been sought and obtained and the Company has
posted a surety bond for the benefit of such

 22
 

Subscriber in the amount
of 120% of the amount of the aggregate purchase price of the Common Stock and
Warrant Shares which are subject to the injunction or temporary restraining
order, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be
payable to such Subscriber to the extent Subscriber obtains judgment in
Subscriber’s favor.

12.                                 (a)                                  Right of First Refusal.  
Until the end of the Exclusion Period, the Subscribers shall be given
not less than seven (7) business days prior written notice of any proposed sale
by the Company of its common stock or other securities or debt obligations, except
in connection with (i) full or partial consideration in connection with a
strategic merger, acquisition, consolidation or purchase of substantially all
of the securities or assets of corporation or other entity which holders of
such securities or debt are not at any time granted registration rights, (ii)
the Company’s issuance of securities in connection with strategic license
agreements and other partnering arrangements so long as such issuances are not
for the purpose of raising capital which holders of such securities or debt are
not at any time granted registration rights, (iii) the Company’s issuance of
Common Stock or the issuances or grants of options to purchase Common Stock
pursuant to stock option plans and employee stock purchase plans described on Schedule 5(d) hereto, (iv) as a result of the exercise of
Warrants or conversion of Notes which are granted or issued pursuant to this
Agreement, (v) the payment of any interest on the Notes and liquidated damages,
or damages pursuant to the Transaction Documents, and (vi) as has been described in the Reports or Other
Written Information filed with the Commission or delivered to the Subscribers
prior to the Closing Date (collectively the foregoing are “Excepted Issuances”).  The Subscribers who exercise their rights
pursuant to this Section 12(a) shall have the right during the seven (7)
business days following receipt of the notice to purchase such offered common
stock, debt or other securities in accordance with the terms and conditions set
forth in the notice of sale in the same proportion to each other as their
purchase of Notes in the Offering.  In
the event such terms and conditions are modified during the notice period, the
Subscribers shall be given prompt notice of such modification and shall have
the right during the seven (7) business days following the notice of
modification to exercise such right.

 (b)                              Favored Nations
Provision.   Other than
in connection with the Excepted Issuances, if at any time Notes or Warrants are
outstanding the Company shall offer, issue or agree to issue any common stock
or securities convertible into or exercisable for shares of common stock (or
modify any of the foregoing which may be outstanding) to any person or entity
at a price per share or conversion or exercise price per share which shall be
less than the Conversion Price in respect of the Shares, or if less than the
Warrant Exercise Price in respect of the Warrant Shares, without the consent of
each Subscriber holding Notes, Shares, Warrants, or Warrant Shares, then the
Company shall issue, for each such occasion, additional shares of Common Stock
to each Subscriber so that the average per share purchase price of the shares
of Common Stock issued to the Subscriber (of only the Common Stock or Warrant
Shares still owned by the Subscriber) is equal to such other lower price per
share and the Conversion Price and Warrant Exercise Price shall automatically
be adjusted as provided in the Notes and the Warrants.  The average Purchase Price of the Shares and
average exercise price in relation to the Warrant Shares shall be calculated
separately for the Shares and Warrant Shares. 
The foregoing calculation and issuance shall be made separately for
Shares received upon conversion and separately for Warrant Shares.  The delivery to the Subscriber of the
additional shares of Common Stock shall be not later than the closing date of
the transaction giving rise to the requirement to issue additional shares of
Common Stock.  The Subscriber is granted
the registration rights described in Section 11 hereof in relation to such
additional shares of Common Stock except that the Filing Date and Effective
Date vis-à-vis such additional common shares shall be, respectively, the
thirtieth (30th) and sixtieth
(60th) date after
the closing date giving rise to the requirement to issue the additional shares
of Common Stock.  For purposes of the
issuance and adjustment described in this paragraph, the issuance of any
security of the Company carrying the right to convert such security into shares
of Common Stock or of any warrant, right or option to purchase Common Stock
shall result in the issuance of the additional shares of Common Stock upon the
sooner of the agreement to or actual issuance of such convertible security,
warrant, right or option and again at any time upon any subsequent issuances of
shares of Common Stock upon exercise of such conversion or purchase rights if
such issuance is at a price lower than the Conversion Price or Warrant Exercise
Price in effect upon such

 23
 

issuance. 
In addition, if the Company issues or agrees to issue the aforementioned
securities at terms deemed by the Subscriber to be more favorable than the
terms contained in this Offering, then the Subscriber is granted the right, at
its election to modify any term of this Offering to match a more favorable term
provided by the Company is such future offering.  The rights of the Subscriber set forth in
this Section 12 are in addition to any other rights the Subscriber has pursuant
to this Agreement, the Note, any Transaction Document, and any other agreement
referred to or entered into in connection herewith.

(c)                                  Paid In Kind.   The Subscriber may demand that some or all
of the sums payable to the Subscriber pursuant to Sections 7.1(c), 7.2, 7.5,
11.4, 11.7(c), 11.7(d) and 11.7(e) that are not paid within ten business days
after the required payment date be paid in shares of Common Stock valued at the
Conversion Price in effect at the time Subscriber makes such demand or, at the
Subscriber’s election, at such other valuation described in the Transaction
Documents.  In addition to any other
rights granted to the Subscriber herein, the Subscriber is also granted the
registration rights set forth in Section 11.1(ii) hereof in relation to the
aforedescribed shares of Common Stock.

(d)                                 Maximum Exercise of Rights.   In the event the exercise of the rights
described in Sections 12(a), 12(b) and 12(c) would result in the issuance of an
amount of common stock of the Company that would exceed the maximum amount that
may be issued to a Subscriber calculated in the manner described in Section 7.3
of this Agreement, then the issuance of such additional shares of common stock
of the Company to such Subscriber will be deferred in whole or in part until
such time as such Subscriber is able to beneficially own such common stock
without exceeding the maximum amount set forth calculated in the manner
described in Section 7.3 of this Agreement. 
The determination of when such common stock may be issued shall be made
by each Subscriber as to only such Subscriber.

13.                                 Miscellaneous.

(a)                                  Notices.  All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile,
addressed as set forth below or to such other address as such party shall have
specified most recently by written notice. 
Any notice or other communication required or permitted to be given
hereunder shall be deemed effective (a) upon hand delivery or delivery by
facsimile, with accurate confirmation generated by the transmitting facsimile
machine, at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur.  The addresses for such communications shall
be: (i) if to the Company, to: Sun New Media, Inc., 1120 Avenue of the
Americas, 4th Floor, New York, NY 10036, Attn: Bruno Wu
Zheng, Chief Executive Officer, telecopier: +86 10 8518 9797 and (ii) if to the
Subscriber, to: the one or more addresses and telecopier numbers indicated on
the signature pages hereto, with an additional copy by telecopier only to:
Spectrum Law Group, LLP, 1900 Main Street, Suite 125, Irvine, CA 92614,
Attention: Gregory R. Carney, Esq., telecopier number: (949) 851-5940.

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

 24
 

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

(d)                                 Law Governing this Agreement.  This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without regard
to conflicts of laws principles that would result in the application of the
substantive laws of another jurisdiction. 
Any action brought by either party against the other concerning the
transactions contemplated by this Agreement shall be brought only in the civil
or state courts of New York or in the federal courts located in New York County.  The parties
and the individuals executing this Agreement and other agreements referred to
herein or delivered in connection herewith on behalf of the Company agree to
submit to the jurisdiction of such courts and waive trial by jury.  The prevailing party shall be entitled to
recover from the other party its reasonable attorney’s fees and costs.  In the event that any provision of this
Agreement or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law.  Any such provision which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision of any agreement.

(e)                                  Specific Enforcement,
Consent to Jurisdiction.  The
Company and Subscriber acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise
breached.  It is accordingly agreed that
the parties shall be entitled to one or more preliminary and final injunctions
to prevent or cure breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof, this being in addition to any
other remedy to which any of them may be entitled by law or equity.  Subject to Section 13(d) hereof, each of the
Company, Subscriber and any signator hereto in his personal capacity hereby
waives, and agrees not to assert in any such suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction in New York of such
court, that the suit, action or proceeding is brought in an inconvenient forum
or that the venue of the suit, action or proceeding is improper.  Nothing in this Section shall affect or limit
any right to serve process in any other manner permitted by law.

(f)                                    Damages.   In the event the Subscriber is entitled to
receive any liquidated damages pursuant to the Transactions, the Subscriber may
elect to receive the greater of actual damages or such liquidated damages.

(g)                                 Independent Nature of
Subscribers.     The Company
acknowledges that the obligations of each Subscriber under the Transaction
Documents are several and not joint with the obligations of any other
Subscriber, and no Subscriber shall be responsible in any way for the
performance of the obligations of any other Subscriber under the Transaction
Documents. The
Company acknowledges that each Subscriber has represented that the decision of
each Subscriber to purchase Securities has been made by such Subscriber
independently of any other Subscriber and independently of any information,
materials, statements or opinions as to the business, affairs, operations,
assets, properties, liabilities, results of operations, condition (financial or
otherwise) or prospects of the Company which may have been made or given by any
other Subscriber or by any agent or employee of any other Subscriber, and no
Subscriber or any of its agents or employees shall have any liability to any
Subscriber (or any other person) relating to or arising from any such
information, materials, statements or opinions.  The Company
acknowledges that nothing contained in any Transaction Document, and no action
taken by any Subscriber pursuant hereto or thereto (including, but not limited
to, the (i) inclusion of a Subscriber in the Registration Statement and (ii)
review by, and consent to, such Registration Statement by a Subscriber) shall
be deemed to constitute the Subscribers as a partnership, an association, a
joint venture or any other kind of entity, or create a

 25
 

presumption that the
Subscribers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction
Documents.  The Company acknowledges that each Subscriber shall be
entitled to independently protect and enforce its rights, including without
limitation, the rights arising out of the Transaction Documents, and
it shall not be necessary for any other Subscriber to be joined as an
additional party in any proceeding for such purpose.  The Company
acknowledges that it has elected to provide all Subscribers with the same terms
and Transaction Documents for the convenience of the Company and not because
Company was required or requested to do so by the Subscribers.  The
Company acknowledges that such procedure with respect to the Transaction
Documents in no way creates a presumption that the Subscribers are in any way
acting in concert or as a group with respect to the Transaction Documents or
the transactions contemplated thereby.

(h)                                 As used in the Agreement, “consent
of the Subscribers” or similar language means the consent of holders of not
less than 80% of the total of the Shares issued and issuable upon conversion of
outstanding Notes owned by Subscribers on the date consent is requested.

[THIS SPACE INTENTIONALLY LEFT BLANK]

 26

SIGNATURE
PAGE TO SUBSCRIPTION AGREEMENT (A)

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

	
   

  	
  SUN NEW MEDIA, INC.

  
	
   

  	
  a Minnesota corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Dated: March          ,
  2007

  
					

 

	
  SUBSCRIBER

  	
  NOTE PRINCIPAL

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  (Signature)

  	
   

  
	
  By:

  	
   

  
			

 

LIST OF
EXHIBITS AND SCHEDULES

	
  Exhibit A

  	
  Form of Note

  
	
   

  	
   

  
	
  Exhibit B

  	
  Form of Warrant

  
	
   

  	
   

  
	
  Exhibit C

  	
  Escrow Agreement

  
	
   

  	
   

  
	
  Exhibit D

  	
  Form of Legal Opinion

  
	
   

  	
   

  
	
  Exhibit E

  	
  Form of Form 8-K or Public Announcement

  
	
   

  	
   

  
	
  Schedule 5(a)

  	
  Subsidiaries

  
	
   

  	
   

  
	
  Schedule 5(d)

  	
  Additional Issuances / Capitalization

  
	
   

  	
   

  
	
  Schedule 5(q)

  	
  Undisclosed Liabilities

  
	
   

  	
   

  
	
  Schedule 5(v)

  	
  Transfer Agent

  
	
   

  	
   

  
	
  Schedule 9(e)

  	
  Use of Proceeds

  
	
   

  	
   

  
	
  Schedule 11.1

  	
  Other Registrable SecuritiesExhibit 10.2

THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.  THIS NOTE AND THE COMMON SHARES
ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY
TO SUN NEW MEDIA, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

	
  Principal Amount:

  	
   

  	
  Issue Date:
  March         , 2007

  

 

SENIOR CONVERTIBLE PROMISSORY NOTE

FOR VALUE RECEIVED, SUN NEW MEDIA, INC., a
Minnesota corporation (hereinafter called “Borrower”),
hereby promises to pay the “Holder” or its
registered assigns or successors in interest or order, without demand, the sum
of             (“Principal Amount”), on March         ,
2010 (the “Maturity Date”), if not sooner
paid.

This Note has been entered into
pursuant to the terms of a subscription agreement between the Borrower, the
Holder and certain other holders (the “Other Holders”)
of convertible promissory notes (the “Other Notes”), dated of even date
herewith (the “Subscription Agreement”), and
shall be governed by the terms of such Subscription Agreement.  Unless otherwise separately defined herein,
all capitalized terms used in this Note shall have the same meaning as is set
forth in the Subscription Agreement.  The
following terms shall apply to this Note:

ARTICLE I

INTEREST;
AMORTIZATION; SENIORITY

1.1.          Interest Rate.   Subject to Section 5.7 hereof, interest payable on this Note shall accrue at a rate per annum (the “Interest Rate”). All Interest due on this Note shall be prepaid on the Closing Date (as defined in the Subscription Agreement) and Holder shall receive, in full consideration of all Interest owed on this Note,       shares of Holder’s Common Stock (“Interest Shares”).  The Interest Shares shall contain a restrictive legend as set forth under Section 4(h) of the Subscription Agreement.
1.2.          Minimum Monthly Principal Payments.   Amortizing payments of the outstanding Principal Amount of this Note shall commence on the fifteen month anniversary date of this Note and on the same day of each month thereafter (each a “Repayment Date”) until the Principal Amount has been repaid in full, whether by the payment of cash or by the conversion of such Principal Amount and interest into Common Stock pursuant to the terms hereof. Subject to Section 2.1 and Article 3 below, on each Repayment Date the Borrower shall make payments to the Holder in an amount equal to one-twenty first of the initial Principal Amount, and any other amounts which are then owing under this Note that have not been paid (collectively, the “Monthly Amount”).  Amounts of conversions of Principal Amount and interest made by the Holder or Borrower pursuant to Section 2.1 or Article III, and amounts converted pursuant to Section 2.3 of this Note shall be applied first against outstanding fees and damages, then to Monthly Amounts commencing with the Monthly Amount first payable and then Monthly Amounts thereafter in chronological order.  Any Principal Amount and any other sum arising under this Note and

 1
 

the Subscription Agreement that remains outstanding on the Maturity Date shall be due and payable on the Maturity Date.
1.3           Seniority.  The indebtedness under this note shall rank senior to all current and future indebtedness of the Borrower and shall not be subordinated to any obligations of the Borrower.  For so long as this Note is outstanding, Borrower shall take all steps reasonably necessary to protect, preserve and maintain the senior status of the Notes, including the procurement of subordination agreements from any future debtholders of the Borrower.
ARTICLE II
CONVERSION REPAYMENT
2.1.          Payment of Monthly Amount in Cash or Common Stock.  Subject to Section 3.2 hereof, if either (A) the Market Price (as defined below) is less than the Fixed Conversion Price (as defined in Section 2.3) or (B) the Registration Statement is not effective, the Borrower shall pay the Monthly Amount in cash in an amount equal to 135% of the Principal Amount component of the Monthly Amount and 100% of all other components of the Monthly Amount, within three (3) business days after the applicable Repayment Date.  Amounts paid with shares of Common Stock must be delivered to the Holder not later than three (3) business days after the applicable Repayment Date.  The Borrower must send notice to the Holder by confirmed telecopier not later than 6:00 PM, New York City time on the last trading day preceding a Repayment Date notifying Holder of Borrower’s election to pay the Monthly Redemption Amount in cash or Common Stock.  Elections by the Borrower must be made to all Other Holders in proportion to the relative Note principal held by the Holder and the Other Holders.  If such notice is not timely sent or if the Monthly Redemption Amount is not timely delivered, then Holder shall have the right, instead of the Company, to elect within five trading days after the applicable Repayment whether to be paid in cash or Common Stock.  Such Holder’s election shall not be construed to be a waiver of any default by Borrower relating to non-timely compliance by Borrower with any of its obligations under this Note.  Subject to Section 3.2 hereof, if the Market Price is equal to or greater than the Fixed Conversion Price, then the Monthly Amount may be paid with registered Common Stock valued at the Fixed Conversion Price.  “Market Price” shall mean the average of the closing bid prices of the Common Stock as reported by Bloomberg L.P. for the Principal Market for the five trading days preceding the relevant Repayment Date.
2.2.          No Effective Registration.   Notwithstanding anything to the contrary herein, no amount payable hereunder may be paid in shares of Common Stock by the Borrower without the Holder’s consent unless (a) either (i) an effective current Registration Statement covering the shares of Common Stock to be issued in satisfaction of such obligations exists, or (ii) an exemption from registration of the Common Stock is available pursuant to Rule 144(k) of the 1933 Act, and (b) no Event of Default hereunder (or an event that with the passage of time or the giving of notice could become an Event of Default), exists and is continuing, unless such event or Event of Default is cured within any applicable cure period or is otherwise waived in writing by the Holder in whole or in part at the Holder’s option.
2.3.          Optional Redemption of Principal Amount.  Provided an Event of Default has not occurred, whether or not such Event of Default has been cured, the Borrower will have the option of prepaying the outstanding Principal Amount of this Note (“Optional Redemption”), in whole or in part, by paying to the Holder a sum of money equal to the Applicable Percentage (as defined below) multiplied by the Principal Amount to be redeemed, together with any and all other sums due, accrued or payable to the Holder arising under this Note or any Transaction Document through the Redemption Payment Date as defined below (the “Redemption Amount”).  “Applicable Percentage” shall mean: (A) 120%, for Optional Redemptions within 12 months of the Issue Date; (B) 135%, for Optional Redemptions occurring

 2
 

after the 12th month and before the end of the 24th month of the Issue Date; and (C) 150%, for Optional Redemptions occurring after the 24th month of the Issue Date.  Borrower’s election to exercise its right to prepay must be by notice in writing (“Notice of Redemption”).  The Notice of Redemption shall specify the date for such Optional Redemption (the “Redemption Payment Date”), which date shall be thirty (30) days after the date of the Notice of Redemption (the “Redemption Period”).  A Notice of Redemption shall not be effective with respect to any portion of the Principal Amount for which the Holder has a pending election to convert, or for conversions initiated or made by the Holder during the Redemption Period.   On the Redemption Payment Date, the Redemption Amount, less any portion of the Redemption Amount against which the Holder has exercised its conversion rights, shall be paid in good funds to the Holder. In the event the Borrower fails to pay the Redemption Amount on the Redemption Payment Date as set forth herein, then (i) such Notice of Redemption will be null and void, (ii) Borrower will have no right to deliver another Notice of Redemption, and (iii) Borrower’s failure may be deemed by Holder to be a non-curable Event of Default.
ARTICLE III
CONVERSION RIGHTS
3.1.          Holder’s Conversion Rights.   Subject to Section 3.2, the Holder shall have the right, but not the obligation, to convert all or any portion of the then aggregate outstanding Principal Amount of this Note, together fees due hereon, and any sum arising under the Subscription Agreement, and the Transaction Documents, including but not limited to Liquidated Damages, into shares of Common Stock, subject to the terms and conditions set forth in this Article III at the rate of $1.00 per share of Common Stock (“Fixed Conversion Price”) as same may be adjusted pursuant to this Note and the Subscription Agreement. The Holder may exercise such right by delivery to the Borrower of a written Notice of Conversion pursuant to Section 3.3.  After the occurrence of an Event of Default, the Fixed Conversion Price shall be 80% of the VWAP for the five trading days prior to a Conversion Date.
3.2.          Conversion Limitation.   The Holder shall not be entitled to convert on a Conversion Date that amount of the Note in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on a Conversion Date, (ii) any Common Stock issuable in connection with the unconverted portion of the Note, and (iii) the number of shares of Common Stock issuable upon the conversion of the Note with respect to which the determination of this provision is being made on a Conversion Date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock of the Borrower on such Conversion Date.  For the purposes of the provision to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder.  Subject to the foregoing, the Holder shall not be limited to aggregate conversions of only 4.99% and aggregate conversion by the Holder may exceed 4.99%.  The Holder shall have the authority and obligation to determine whether the restriction contained in this Section 3.2 will limit any conversion hereunder and to the extent that the Holder determines that the limitation contained in this Section applies, the determination of which portion of the Notes are convertible shall be the responsibility and obligation of the Holder.  The Holder may waive the conversion limitation described in this Section 3.2, in whole or in part, upon and effective after 61 days prior written notice to the Borrower.  The Holder may allocate decide whether to convert a Note or exercise Warrants to achieve an actual 4.99% ownership position.
3.3.          Mechanics of Holder’s Conversion.
(a)           In the event that the Holder elects to convert any amounts outstanding under this Note into Common Stock, the Holder shall give notice of such election by delivering an executed and

 3
 

completed notice of conversion (a “Notice of Conversion”) to the Borrower, which Notice of Conversion shall provide a breakdown in reasonable detail of the Principal Amount, accrued interest and amounts being converted.  The original Note is not required to be surrendered to the Borrower until all sums due under the Note have been paid.  On each Conversion Date (as hereinafter defined) and in accordance with its Notice of Conversion, the Holder shall make the appropriate reduction to the Principal Amount, accrued interest and fees as entered in its records.  Each date on which a Notice of Conversion is delivered or telecopied to the Borrower in accordance with the provisions hereof shall be deemed a “Conversion Date.” A form of Notice of Conversion to be employed by the Holder is annexed hereto as Exhibit A.
(b)           Pursuant to the terms of a Notice of Conversion, the Borrower will issue instructions to the transfer agent accompanied by an opinion of counsel, if so required by the Borrower’s transfer agent and shall cause the transfer agent to transmit the certificates representing the Conversion Shares to the Holder by crediting the account of the Holder’s designated broker with the Depository Trust Corporation (“DTC”) through its Deposit Withdrawal Agent Commission (“DWAC”) system within three (3) business days after receipt by the Borrower of the Notice of Conversion (the “Delivery Date”). In the case of the exercise of the conversion rights set forth herein the conversion privilege shall be deemed to have been exercised and the Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the date of receipt by the Borrower of the Notice of Conversion. The Holder shall be treated for all purposes as the record holder of such shares of Common Stock, unless the Holder provides the Borrower written instructions to the contrary.  Notwithstanding the foregoing to the contrary, the Borrower or its transfer agent shall only be obligated to issue and deliver the shares to the DTC on the Holder’s behalf via DWAC (or certificates free of restrictive legends) if the registration statement providing for the resale of the shares of Common Stock issuable upon the conversion of this Note is effective and the Holder has complied with all applicable securities laws in connection with the sale of the Common Stock, including, without limitation, the prospectus delivery requirements.  In the event that Conversion Shares cannot be delivered to the Holder via DWAC, the Borrower shall deliver physical certificates representing the Conversion Shares by the Delivery Date.
3.4.          Conversion Mechanics.
(a)           The number of shares of Common Stock to be issued upon each conversion of this Note pursuant to this Article III shall be determined by dividing that portion of the Principal Amount and interest and fees to be converted, if any, by the then applicable Fixed Conversion Price.

(b)           The Fixed Conversion Price and number and
kind of shares or other securities to be issued upon conversion shall be
subject to adjustment from time to time upon the happening of certain events
while this conversion right remains outstanding, as follows:

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

B.            Reclassification, etc.  If
the Borrower at any time shall, by reclassification or otherwise, change the
Common Stock into the same or a different number of securities of any class or

 4
 

classes,
this Note, as to the unpaid principal portion thereof and accrued interest
thereon, shall thereafter be deemed to evidence the right to purchase an adjusted
number of such securities and kind of securities as would have been issuable as
the result of such change with respect to the Common Stock immediately prior to
such reclassification or other change.

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

D.            Share Issuance.   So long as this Note is outstanding, if the
Borrower shall issue any Common Stock except for the Excepted Issuances (as
defined in the Subscription Agreement), prior to the complete conversion or
payment of this Note, for a consideration less than the Fixed Conversion Price
that would be in effect at the time of such issue, then, and thereafter
successively upon each such issuance, the Fixed Conversion Price shall be
reduced to such other lower issue price. 
For purposes of this adjustment, the issuance of any security or debt
instrument of the Borrower carrying the right to convert such security or debt
instrument into Common Stock or of any warrant, right or option to purchase
Common Stock shall result in an adjustment to the Fixed Conversion Price upon
the issuance of the above-described security, debt instrument, warrant, right,
or option and again upon the issuance of shares of Common Stock upon exercise
of such conversion or purchase rights if such issuance is at a price lower than
the then applicable Conversion Price. 
The reduction of the Fixed Conversion Price described in this paragraph
is in addition to the other rights of the Holder described in the Subscription
Agreement.

(c)           Whenever the Conversion Price is adjusted
pursuant to Section 3.4(b) above, the Borrower shall promptly mail to the
Holder a notice setting forth the Conversion Price after such adjustment and
setting forth a statement of the facts requiring such adjustment.

3.5.          Reservation.   During the period the conversion right
exists, Borrower will reserve from its authorized and unissued Common Stock not
less than one hundred seventy-five percent (175%) of the number of shares to
provide for the issuance of Common Stock upon the full conversion of this Note.
Borrower represents that upon issuance, such shares will be duly and validly
issued, fully paid and non-assessable. 
Borrower agrees that its issuance of this Note shall constitute full
authority to its officers, agents, and transfer agents who are charged with the
duty of executing and issuing stock certificates to execute and issue the
necessary certificates for shares of Common Stock upon the conversion of this
Note.

3.6           Issuance of Replacement Note.  Upon any partial conversion of this Note, a replacement Note containing the same date and provisions of this Note shall, at the written request of the Holder, be issued by the Borrower to the Holder for the outstanding Principal Amount of this Note and accrued interest which shall not have been converted or paid, provided Holder has surrendered an original Note to the Company. In the event that the Holder elects not to surrender a Note for reissuance upon partial payment or conversion, the Holder hereby indemnifies the Borrower against any and all loss or damage attributable to a third-party claim in an amount in excess of the actual amount then due under the Note.

 5
 

ARTICLE IV

EVENTS OF
DEFAULT

The occurrence of any of the following events of default (“Event of Default”) shall, at the option of the Holder
hereof, make all sums of principal and interest then remaining unpaid hereon
and all other amounts payable hereunder immediately due and payable, upon
demand, without presentment, or grace period, all of which hereby are expressly
waived, except as set forth below:

4.1       Failure to Pay Principal or Interest.  The
Borrower fails to pay any installment of Principal Amount, interest or other
sum due under this Note or any Transaction Document when due and such failure
continues for a period of 5 business days after the due date.

4.2       Breach of Covenant.  The
Borrower breaches any material covenant or other term or condition of the
Subscription Agreement, this Note or Transaction Document in any material
respect and such breach, if subject to cure, continues for a period of 10
business days after written notice to the Borrower from the Holder.

4.3       Breach of Representations and Warranties.  Any
material representation or warranty of the Borrower made herein, in the Subscription
Agreement, Transaction Document or in any agreement, statement or certificate
given in writing pursuant hereto or in connection herewith or therewith shall
be false or misleading in any material respect as of the date made and the
Closing Date.

4.4       Receiver or Trustee.  The
Borrower or any Subsidiary of Borrower shall make an assignment for the benefit
of creditors, or apply for or consent to the appointment of a receiver or
trustee for them or for a substantial part of their property or business; or
such a receiver or trustee shall otherwise be appointed.

4.5       Judgments.  Any money judgment, writ or
similar final process shall be entered or filed against Borrower or any
subsidiary of Borrower or any of their property or other assets for more than $50,000,
and shall remain unvacated, unbonded or unstayed for a period of 45 days.

4.6       Non-Payment.   The Borrower shall have
received a notice of default, which remains uncured for a period of more than
20 business days, on the payment of any one or more debts or obligations
aggregating in excess of $50,000 beyond any applicable grace period;

4.7       Bankruptcy.  Bankruptcy, insolvency,
reorganization or liquidation proceedings or other proceedings or relief under
any bankruptcy law or any law, or the issuance of any notice in relation to
such event, for the relief of debtors shall be instituted by or against the
Borrower or any Subsidiary of Borrower and if instituted against them are not
dismissed within 45 days of initiation.

4.8       Delisting.   Failure of the Common Stock
to be quoted or listed on the OTC Bulletin Board (“Bulletin
Board”) or other Principal Market; failure to comply with the
requirements for continued listing on the Bulletin Board for a period of seven
consecutive trading days; or notification from the Bulletin Board or any
Principal Market that the Borrower is not in compliance with the conditions for
such continued listing on the Bulletin Board or other Principal Market.

4.9       Stop Trade.  An SEC or judicial stop trade
order or Principal Market trading suspension with respect to Borrower’s Common
Stock that lasts for five or more consecutive trading days.

4.10     Failure to Deliver Common Stock or
Replacement Note.  Borrower’s failure to timely deliver Common
Stock to the Holder pursuant to and in the form required by this Note or the
Subscription Agreement, and, if requested by Borrower, a replacement Note, and
such failure continues for a period of 3 business days after the due date.

 6
 

4.11     Non-Registration
Event.  The occurrence of a Non-Registration Event as
described in the Subscription Agreement.

4.12     Reverse Splits.  The
Borrower effectuates a reverse split of its Common Stock without twenty days
prior written notice to the Holder.

4.13     Removal/Resignation of Officer. 
Bruno W. Zhong fails to serve, for any reason, as an officer or director
of the Borrower.

4.14     Cross Default.  A
default by the Borrower of a material term, covenant, warranty or undertaking
of any Transaction Document or other agreement to which the Borrower and Holder
are parties, or the occurrence of a material event of default under any such
other agreement which is not cured after any required notice and/or cure
period.

ARTICLE V

MISCELLANEOUS

5.1       Failure or Indulgence Not Waiver.  No
failure or delay on the part of Holder hereof in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.  All rights and remedies existing hereunder
are cumulative to, and not exclusive of, any rights or remedies otherwise
available.

5.2       Notices.  All notices, demands,
requests, consents, approvals, and other communications required or permitted
hereunder shall be in writing and, unless otherwise specified herein, shall be
(i) personally served, (ii) deposited in the mail, registered or certified,
return receipt requested, postage prepaid, (iii) delivered by reputable air
courier service with charges prepaid, or (iv) transmitted by hand delivery,
telegram, or facsimile, addressed as set forth below or to such other address
as such party shall have specified most recently by written notice.  Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand
delivery or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is
to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the second business day following the date
of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first
occur.  The addresses for such
communications shall be: (i) if to the Borrower to: Sun New Media, Inc., 1120
Avenue of the Americas, 4th Floor,
New York, NY 10036, Attn: Bruno Wu Zheng, Chief Executive Officer, telecopier:
+86 10 8518 9797, and (ii) if to Holder, to the name, address and telecopy
number set forth on the front page of this Note, with an additional copy by
telecopier only to: Spectrum Law Group, LLP, 1900 Main Street, Suite 125,
Irvine, CA 92614, Attention: Gregory R. Carney, Esq., telecopier number: (949)
851-5940.

5.3       Amendment Provision.  The
term “Note” and all reference thereto, as used throughout this instrument,
shall mean this instrument as originally executed, or if later amended or
supplemented, then as so amended or supplemented.

5.4       Assignability.  This
Note shall be binding upon the Borrower and its successors and assigns, and
shall inure to the benefit of the Holder and its successors and assigns.

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

 7
 

5.6           Governing Law.  This Note shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of laws principles that would result in the application of the substantive laws of another jurisdiction.  Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state of New York. Both parties and the individual signing this Note on behalf of the Borrower agree to submit to the jurisdiction of such courts. The prevailing party shall be entitled to recover from the other party its reasonable attorney’s fees and costs. In the event that any provision of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or unenforceability of any other provision of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking other legal action against the Borrower in any other jurisdiction to collect on the Borrower’s obligations to Holder, to realize on any collateral or any other security for such obligations, or to enforce a judgment or other court in favor of the Holder.

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

5.8.          Construction.   Each party acknowledges that its legal counsel participated in the preparation of this Note and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Note to favor any party against the other.

5.9           Redemption.  This Note may not be redeemed
or called without the consent of the Holder except as described in this Note.

5.10         Shareholder Status.  The
Holder shall not have rights as a shareholder of the Borrower with respect to
unconverted portions of this Note. 
However, the Holder will have the rights of a shareholder of the
Borrower with respect to the Shares of Common Stock to be received after
delivery by the Holder of a Conversion Notice to the Borrower.

 8
 

IN WITNESS WHEREOF, Borrower has caused this Note to be signed
in its name by an authorized officer as of the         
day of March, 2007.

	
   

  	
   

  	
  SUN NEW MEDIA, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
  Dr. Bruno Wu Zheng

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Chairman and Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  
	
  WITNESS:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
								

 

 9
 

NOTICE OF
CONVERSION

(To
be executed by the Registered Holder in order to convert the Note)

The undersigned hereby elects to convert $               
of the principal and $                
of the interest due on the Note issued by Sun New Media, Inc. on March           ,
2007 into Shares of Common Stock of Sun New Media, Inc. (the “Borrower”)
according to the conditions set forth in such Note, as of the date written
below.

	
  Date of Conversion:

  	
   

  
	
   

  
	
  Conversion Price:

  	
   

  
			

 

Number
of Shares of Common Stock Beneficially Owned on the Conversion Date: Less than
5% of the outstanding Common Stock of Sun New Media, Inc.

	
  Shares To Be Delivered:

  	
   

  
	
   

  
	
  Signature:

  	
   

  
	
   

  
	
  Print Name:

  	
   

  
	
   

  
	
  Address:

  	
   

  
	
   

  
	
   

  	
   

  
						

 

 10

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