Document:

Exhibit 10.3 (Note and Warrant Purchase Agreement)

    Exhibit
      10.3

    

    NOTE
      AND WARRANT PURCHASE

    

    AGREEMENT

    

    

    

    

    Dated
      as of September 30, 2005

    

    

    

    

    by
      and among

    

    

    

    

    QUEST
      OIL CORPORATION

    

    

    

    and

    

    

    

    THE
      PURCHASERS LISTED ON EXHIBIT A

    

    

    
      
        
          KL2:2407594.9

        

        
        

      

      
        
        

        
          

        

      

      
        
        

        
        

      

    

     

    ARTICLE
      I Purchase
      and Sale of Notes and Warrants                                                                                   Page

    
      	 	
              Section
                1.1

            	
              Purchase
                and Sale of Notes and Warrants.     

            	 2     
              

    

    
      	 	
              Section
                1.2

            	
              Purchase
                Price and Closing   

            	 2   
              

    

    
      	 	
              Section
                1.3

            	
              Conversion
                Shares / Warrant Shares   

            	
              2   
                   

            

    

    
      	 	
              Section
                1.4

            	
              Additional
                Investment Right 

            	
              2    
                

            

    

     

    ARTICLE
      II Representations
      and Warranties

    
      	 	
              Section
                2.1

            	
              Representations
                and Warranties of the Company

            	 3-6   
              

    

    
      	 	
              Section
                2.2

            	
              Representations
                and Warranties of the
                Purchasers         
                

            	 6-7    
              

    

     

    ARTICLE
      III Covenants

    
      	 	
              Section
                3.1

            	
              Securities
                Compliance      

            	
              7   
                

            

    

    
      	 	
              Section
                3.2

            	
              Registration
                and
                Listing                                                            
                

            	7 
                      

    

    
      	 	
              Section
                3.3

            	
              Inspection
                Rights                                                               
                

            	7   
                    

    

    
      	 	
              Section
                3.4

            	
              Compliance
                with
                Laws                                              
                

            	
              8        
                

            

    

    
      	 	
              Section
                3.5

            	
              Keeping
                of Records and Books of
                Account                                  
                

            	8     
                    

    

    
      	 	
              Section
                3.6

            	
              Reporting
                Requirements                                                   
                

            	8   
                    

    

    
      	 	
              Section
                3.7

            	
              Other
                Agreements                                                     
                

            	8    
                  

    

    
      	 	
              Section
                3.8

            	
              Use
                of
                Proceeds                                
                

            	
              8   
                  

            

    

    
      	 	
              Section
                3.9

            	
              Reporting
                Status                               
                

            	
              8 
                    

            

    

    
      	 	
              Section
                3.10

            	
              Disclosure
                of
                Transaction                                        
                

            	
              8      
                  

            

    

    
      	 	
              Section
                3.11

            	
              Disclosure
                of Material
                Information                                 
                

            	
              8  
                      

            

    

    
      	 	
              Section
                3.12

            	
              Pledge
                of
                Securities                          
                

            	
              8     
                

            

    

    
      	 	
              Section
                3.13

            	
              Amendments                             
                

            	
              8    
                

            

    

    
      	 	
              Section
                3.14

            	
              Distributions                     
                

            	
              8   
                

            

    

    
      	 	
              Section
                3.15

            	
              Reservation
                of
                Shares             
                

            	
              8    
                

            

    

    
      	 	
              Section
                3.16

            	
              Transfer
                Agent
                Instructions          
                

            	
              8     
                

            

    

    
      	 	
              Section
                3.17

            	
              Disposition
                of
                Assets                     
                

            	
              9   
                  

            

    

    
      	 	
              Section
                3.18

            	
              Form
                SB-2
                Eligibility                  
                

            	
              9    
                

            

    

    
      	 	
              Section
                3.19

            	
              Restrictions
                on Certain Issuances of
                Securities         
                

            	
              9  
                       

            

    

    
      	 	
              Section
                3.20

            	
              Increase
                in Authorized Shares of Common
                Stock                      
                

            	
              9   
                       

            

    

    
      	 	
              Section
                3.21

            	
              Acquisition
                of
                Assets            
                

            	
              9    
                

            

    

    
      	 	
              Section
                3.22

            	
              Subsequent
                Financings                    
                

            	
              9      
                

            

    

     

    ARTICLE
      IV Conditions

    
      	 	
              Section
                4.1

            	
              Conditions
                Precedent to the Obligation of the Company to Close and to Sell the
                Securities             
                

            	 9        
                       
              

    

    
      	 	
              Section
                4.2

            	
              Conditions
                Precedent to the Obligation of the Purchasers to Close and to Purchase
                the
                Securities  

            	10  
                
                         
              

    

    
      	 	
              Section
                4.3

            	
              Conditions
                Precedent to the Obligation of the Purchasers to Close and to Purchase
                the
                Option Notes   

            	
              10          
                       

            

    

     

    ARTICLE
      V Certificate
      Legend

    
      	 	
              Section
                5.1

            	
              Legend                                      
                

            	
              11  
                

            

    

     

    ARTICLE
      VI Indemnification

    
      	 	
              Section
                6.1

            	
              General
                Indemnity.                     
                

            	 12 
              

    

    
      	 	
              Section
                6.2

            	
              Indemnification
                Procedure                
                

            	 12  
              

    

     

    ARTICLE
      VII Miscellaneous

    
      	 	
              Section
                7.1

            	
              Fees
                and
                Expenses                      
                

            	12  
              

    

    
      	 	
              Section
                7.2

            	
              Specific
                Performance; Consent to Jurisdiction;
                Venue.                               
                

            	12  
                      

    

    
      	 	
              Section
                7.3

            	
              Entire
                Agreement;
                Amendment                           
                

            	12   
                

    

    
      	 	
              Section
                7.4

            	
              Notices                                          
                

            	13  
              

    

    
      	 	
              Section
                7.5

            	
              Waivers                                         
                

            	13  
              

    

    
      	 	
              Section
                7.6

            	
              Headings                                       
                

            	13  
              

    

    
      	 	
              Section
                7.7

            	
              Successors
                and
                Assigns            
                

            	13  
              

    

    
      	 	
              Section
                7.8

            	
              No
                Third Party Beneficiaries      
                

            	13  
              

    

    
      	 	
              Section
                7.9

            	
              Governing
                Law                             
                

            	13  
              

    

    
      	 	
              Section
                7.10

            	
              Survival                                         
                

            	13  
              

    

    
      	 	
              Section
                7.11

            	
              Counterparts                                 
                

            	13  
              

    

    
      	 	
              Section
                7.12

            	
              Publicity                                        
                

            	13  
              

    

    
      	 	
              Section
                7.13

            	
              Severability                                  
                

            	13  
              

    

    
      	 	
              Section
                7.14

            	
              Further
                Assurances                             
                

            	13 
               

    

    

    
      
        
          

          KL2:2407594.9

        

        
        

      

      
        1

        
          

        

      

      
        
        

        
        

      

    

    NOTE
      AND WARRANT PURCHASE AGREEMENT

    

    This
      NOTE
      AND WARRANT PURCHASE AGREEMENT dated as of September 30, 2005 (this
“Agreement”)
      by and
      among Quest Oil Corporation, a Nevada corporation (the "Company"),
      and
      each of the purchasers of the senior secured convertible promissory notes of
      the
      Company whose names are set forth on Exhibit
      A
      attached
      hereto (each a "Purchaser"
      and
      collectively, the "Purchasers").
      

    

    The
      parties hereto agree as follows:

     

    ARTICLE
      I  

     

    PURCHASE
      AND SALE OF NOTES AND WARRANTS

     

    Section
      1.1  Purchase
      and Sale of Notes and Warrants. 

     

    (a)  Upon
      the
      following terms and conditions, the Company shall issue and sell to the
      Purchasers, and the Purchasers shall purchase from the Company, (i) 10% senior
      secured convertible promissory notes in the aggregate principal amount of up
      to
      Eight Million Dollars ($8,000,000), convertible into shares of the Company's
      common stock, par value $0.001 per share (the “Common
      Stock”),
      in
      substantially the form attached hereto as Exhibit
      B-1
      (the
      "10%
      Notes"),
      and
      (ii) zero coupon senior secured convertible promissory notes in the aggregate
      principal amount of up to Four Hundred Thousand Dollars ($400,000), convertible
      into shares of the company’s Common Stock, in substantially the form attached
      hereto as Exhibit
      B-2
      (the
“Zero
      Coupon Note”,
      together with the 10% Notes, the “Notes”).
      The
      Company and the Purchasers are executing and delivering this Agreement in
      accordance with and in reliance upon the exemption from securities registration
      afforded by Section 4(2) of the U.S. Securities Act of 1933, as amended, and
      the
      rules and regulations promulgated thereunder (the "Securities
      Act"),
      including Regulation D ("Regulation
      D"),
      and/or upon such other exemption from the registration requirements of the
      Securities Act as may be available with respect to any or all of the investments
      to be made hereunder. 

     

    (b)  Upon
      the
      following terms and conditions, the Purchasers shall be issued (i) Series A
      Warrants, in substantially the form attached hereto as Exhibit
      C
      (the
      "Series
      A Warrants"),
      to
      purchase a number of shares of Common Stock equal to one hundred percent (100%)
      of the number of Conversion Shares issuable upon conversion of such Purchaser’s
      10% Note at an exercise price per share equal to the Warrant Price (as defined
      in the Series A Warrants) and a term of three (3) years following the Closing
      Date; (ii) Series B Warrants, in substantially the form attached hereto as
      Exhibit
      D
      (the
      "Series
      B Warrants"),
      to
      purchase a number of shares of Common Stock equal to fifty percent (50%) of
      the
      number of Conversion Shares issuable upon conversion of such Purchaser’s 10%
      Note at an exercise price per share equal to the Warrant Price (as defined
      in
      the Series B Warrants) and a term of two (2) years following the Effective
      Date
      (as defined in Section 1.4 hereof); and (iii) Series C Warrants, in
      substantially the form attached hereto as Exhibit
      E
      (the
“Series
      C Warrants”
      and,
      together with the Series A Warrants and the Series B Warrants, the “Warrants”),
      to
      purchase a number of shares of Common Stock equal to fifty percent (50%) of
      the
      number of Conversion Shares issuable upon conversion of such Purchaser’s 10%
      Note at an exercise price per share equal to the Warrant Price (as defined
      in
      the Series C Warrants) and a term of seven (7) years following the Closing
      Date.
      The Series C Warrants may only be exercised for a number of shares of Common
      Stock that is equal to the number of shares of Common Stock that are exercised
      pursuant to the Series B Warrants. The number of shares of Common Stock issuable
      upon exercise of the Warrants issuable to each Purchaser is set forth opposite
      such Purchaser’s name on Exhibit
      A
      attached
      hereto.

     

    Section
      1.2  Purchase
      Price and Closing.
      Subject
      to the terms and conditions hereof, the Company agrees to issue and sell to
      the
      Purchasers and, in consideration of and in express reliance upon the
      representations, warranties, covenants, terms and conditions of this Agreement,
      the Purchasers, severally but not jointly, agree to purchase the Notes and
      Warrants for an aggregate purchase price of up to Eight Million Dollars
      ($8,000,000) (the “Purchase
      Price”).
      The
      Notes and Warrants shall be sold and funded in two separate closings (each,
      a
“Closing”).
      The
      initial closing under this Agreement (the “Initial
      Closing”)
      shall
      take place on or before October 7, 2005 (the “Initial
      Closing Date”)
      and
      shall be funded in the amount of up to $6,000,000.00. The second closing under
      this Agreement (the “Second
      Closing”)
      shall
      take place no later than five (5) business days (the “Second
      Closing Date”,
      and
      together with the Initial Closing Date, each a “Closing
      Date”)
      after
      the Securities and Exchange Commission (the “Commission”)
      declares the Registration Statement (as defined in the Registration Rights
      Agreement) effective (the “Effectiveness
      Date”)
      and
      shall be funded in the amount of up to $2,000,000.00. Each closing of the
      purchase and sale of the Notes and Warrants to be acquired by the Purchasers
      from the Company under this Agreement shall take place at the offices of Kramer
      Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, New
      York 10036 at 10:00 a.m., New York time; provided,
      that
      all of the conditions set forth in Article IV hereof and applicable to each
      Closing shall have been fulfilled or waived in accordance herewith. Subject
      to
      the terms and conditions of this Agreement, at each Closing the Company shall
      deliver or cause to be delivered to each Purchaser (x) its Notes for the
      principal amount set forth opposite the name of such Purchaser on Exhibit
      A
      hereto
      and (y) the Warrants to purchase such number of shares of Common Stock as is
      set
      forth opposite the name of such Purchaser on Exhibit
      A
      attached
      hereto. At each Closing, each Purchaser shall deliver its Purchase Price by
      wire
      transfer of immediately available funds to an account
      designated by the Company. 

     

    Section
      1.3  Conversion
      Shares / Warrant Shares.
      The
      Company has authorized and has reserved and covenants to continue to reserve,
      free of preemptive rights and other similar contractual rights of stockholders,
      a number of its authorized but unissued shares of Common Stock equal to one
      hundred twenty percent (120%) of (a) the aggregate number of shares of Common
      Stock to effect the conversion of the Notes and any interest accrued and
      outstanding thereon and exercise of the Warrants as of the Second Closing Date
      and (b) upon exercise of the Purchaser Option (as defined in Section 1.4
      hereof), the aggregate number of shares of Common Stock to effect the conversion
      of the Option Notes (as defined in Section 1.4 hereof) and any interest accrued
      and outstanding thereon and exercise of the Additional Warrants (as defined
      in
      Section 1.4 hereof) as of the Second Closing Date. Any shares of Common Stock
      issuable upon conversion of the Notes and the Option Notes and any interest
      accrued and outstanding on the Notes and the Option Notes are herein referred
      to
      as the “Conversion
      Shares”.
      Any
      shares of Common Stock issuable upon exercise of the Warrants (and such shares
      when issued) are herein referred to as the "Warrant
      Shares".
      The
      Notes, the Option Notes, the Warrants, the Additional Warrants (as defined
      in
      Section 1.4 hereof), the Conversion Shares and the Warrant Shares are sometimes
      collectively referred to herein as the "Securities".

     

    Section
      1.4  Additional
      Investment Right.
      Commencing on the Effective Date (as defined below) of the Registration
      Statement (as defined in the Registration Rights Agreement), each Purchaser
      shall have the option to purchase from the Company, and the Company shall issue
      and sell to each such Purchaser who exercises such option, a 10% Note for the
      principal amount of up to twenty-five percent (25%) of such Purchaser’s pro rata
      portion of the Purchase Price pursuant to the terms hereof (the “Purchaser
      Option”).
      For
      purposes of this Agreement, “Effective
      Date”
      means
      the date that the Commission declares the Registration Statement effective.
      If
      any
      Purchaser elects not to exercise its Purchase Option, each other Purchaser
      may
      exercise its Purchaser Option on a pro-rata basis so long as such participation
      in the aggregate does not exceed the aggregate Purchase Price hereunder.
For
      purposes of this Section 1.4, all references to “pro rata” means, for any
      Purchaser electing to exercise its Purchaser Option, the percentage obtained
      by
      dividing (x) the principal amount of the Notes purchased by such Purchaser
      at
      each Closing by (y) the total principal amount of all of the Notes purchased
      by
      each Purchaser exercising its Purchaser Option. Upon the Purchaser Option being
      exercised, each Purchaser exercising its Purchase Option shall receive
      additional Series A Warrants, Series B Warrants and Series C Warrants
      (collectively, the “Additional
      Warrants”)
      to
      purchase a number of shares of Common Stock in accordance with the terms and
      provisions of Section 1.1(b) hereof. The Purchaser Option shall expire sixty
      (60) days following the Effective Date. Each Purchaser exercising the Purchaser
      Option shall deliver to the Company an Exercise Form in the form attached hereto
      as Exhibit
      F.
      Within
      five (5) days of receipt of such Exercise Form, the Company shall deliver to
      the
      Purchaser exercising such Purchaser Option a 10% Note representing the principal
      amount purchased pursuant to the Purchaser Option (the “Option
      Notes”)
      and
      the Purchaser’s Additional Warrants. 

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      II  

     

    REPRESENTATIONS
      AND WARRANTIES

     

    Section
      2.1  Representations
      and Warranties of the Company.
      The
      Company hereby represents and warrants to the Purchasers, as of the date hereof
      and each Closing Date (except as set forth on the Schedule of Exceptions
      attached hereto with each numbered Schedule corresponding to the section number
      herein), as follows:

     

    (a)  Organization,
      Good Standing and Power.
      The
      Company is a corporation duly incorporated, validly existing and in good
      standing under the laws of the State of Nevada and has the requisite corporate
      power to own, lease and operate its properties and assets and to conduct its
      business as it is now being conducted. The Company does not have any
      Subsidiaries (as defined in Section 2.1(g)) or own securities of any kind in
      any
      other entity except as set forth on Schedule
      2.1(g)
      hereto.
      The Company and each such Subsidiary (as defined in Section 2.1(g)) is duly
      qualified as a foreign corporation to do business and is in good standing in
      every jurisdiction in which the nature of the business conducted or property
      owned by it makes such qualification necessary except for any jurisdiction(s)
      (alone or in the aggregate) in which the failure to be so qualified will not
      have a Material Adverse Effect. For the purposes of this Agreement,
      "Material
      Adverse Effect"
      means
      any material adverse effect on the business, operations, properties, prospects,
      or financial condition of the Company and its Subsidiaries and/or any condition,
      circumstance, or situation that would prohibit or otherwise materially interfere
      with the ability of the Company to perform any of its obligations under this
      Agreement in any material respect.

     

    (b)  Authorization;
      Enforcement.
      The
      Company has the requisite corporate power and authority to enter into and
      perform this Agreement, the Notes, the Warrants, the Registration Rights
      Agreement by and among the Company and the Purchasers, dated as of the date
      hereof, substantially in the form of Exhibit
      G
      attached
      hereto (the “Registration
      Rights Agreement”),
      the
      Security Agreement by and among the Company and its wholly owned subsidiaries,
      on the one hand, and the Purchasers, on the other hand, dated as of the date
      hereof, substantially in the form of Exhibit
      H
      attached
      hereto (the “Security
      Agreement”),
      the
      Debenture by and among Quest Canada Corp. and the Purchasers, dated as of the
      date hereof, substantially in the form of Exhibit
      I
      attached
      hereto (the “Debenture”),
      the
      Guarantee and Indemnity to be delivered by Quest Canada Corp., dated as of
      the
      date hereof, substantially in the form of Exhibit
      J
      attached
      hereto (the “Guarantee”),
      the
      Pledge to be delivered by Quest Canada Corp., dated as of the date hereof,
      substantially in the form of Exhibit
      K
      attached
      hereto (the “Pledge”),
      the
      Officer’s Certificate to be delivered by Quest Canada Corp., dated as of the
      Closing Date, substantially in the form of Exhibit
      L
      attached
      hereto (the “Canadian
      Officer’s Certificate”),
      the
      Deed of Trust, Security Agreement, Financing Statement, and Assignment of Rents
      and Leases to be delivered by the Company and Wallstin Petroleum, LLC, dated
      as
      of the date hereof, substantially in the form of Exhibit
      M
      attached
      hereto (the “Deed
      of Trust”),
      and
      the Irrevocable Transfer Agent Instructions (as defined in Section 3.16 hereof)
      (collectively, the "Transaction
      Documents")
      and to
      issue and sell the Securities in accordance with the terms hereof. The
      execution, delivery and performance of the Transaction Documents by the Company
      and the consummation by it of the transactions contemplated thereby have been
      duly and validly authorized by all necessary corporate action, and, except
      as
      set forth on Schedule
      2.1(b),
      no
      further consent or authorization of the Company, its Board of Directors or
      stockholders is required. When executed and delivered by the Company, each
      of
      the Transaction Documents shall constitute a valid and binding obligation of
      the
      Company enforceable against the Company in accordance with its terms, except
      as
      such enforceability may be limited by applicable bankruptcy, reorganization,
      moratorium, liquidation, conservatorship, receivership or similar laws relating
      to, or affecting generally the enforcement of, creditor's rights and remedies
      or
      by other equitable principles of general application.

     

    (c)  Capitalization.
      The
      authorized capital stock and the issued and outstanding shares of capital stock
      of the Company as of the Initial Closing Date is set forth on Schedule
      2.1(c)
      hereto.
      All of the outstanding shares of the Common Stock and any other outstanding
      security of the Company have been duly and validly authorized. Except as set
      forth in this Agreement, the Commission Documents (as defined in Section 2.1(f))
      or as set forth on Schedule
      2.1(c)
      hereto,
      no shares of Common Stock or any other security of the Company are entitled
      to
      preemptive rights or registration rights and there are no outstanding options,
      warrants, scrip, rights to subscribe to, call or commitments of any character
      whatsoever relating to, or securities or rights convertible into, any shares
      of
      capital stock of the Company. Furthermore, except as set forth in this Agreement
      and as set forth on Schedule
      2.1(c)
      hereto,
      there are no contracts, commitments, understandings, or arrangements by which
      the Company is or may become bound to issue additional shares of the capital
      stock of the Company or options, securities or rights convertible into shares
      of
      capital stock of the Company. Except for customary transfer restrictions
      contained in agreements entered into by the Company in order to sell restricted
      securities or as provided on Schedule
      2.1(c)
      hereto,
      the Company is not a party to or bound by any agreement or understanding
      granting registration or anti-dilution rights to any person with respect to
      any
      of its equity or debt securities. Except as set forth on Schedule
      2.1(c),
      the
      Company is not a party to, and it has no knowledge of, any agreement or
      understanding restricting the voting or transfer of any shares of the capital
      stock of the Company. 

     

    (d)  Issuance
      of Securities.
      The
      Notes and the Warrants to be issued at each Closing have been duly authorized
      by
      all necessary corporate action and, when paid for or issued in accordance with
      the terms hereof, the Notes shall be validly issued and outstanding, free and
      clear of all liens, encumbrances and rights of refusal of any kind. When the
      Conversion Shares and Warrant Shares are issued and paid for in accordance
      with
      the terms of this Agreement and as set forth in the Notes and Warrants, such
      shares will be duly authorized by all necessary corporate action and validly
      issued and outstanding, fully paid and nonassessable, free and clear of all
      liens, encumbrances and rights of refusal of any kind and the holders shall
      be
      entitled to all rights accorded to a holder of Common Stock. When the Option
      Notes are issued in accordance with the terms of this Agreement, such Option
      Notes will be duly authorized by all necessary corporate action and validly
      issued and outstanding, free and clear of all liens, encumbrances and rights
      of
      refusal of any kind.

     

    (e)  No
      Conflicts.
      The
      execution, delivery and performance of the Transaction Documents by the Company,
      the performance by the Company of its obligations under the Notes and the
      consummation by the Company of the transactions contemplated hereby and thereby,
      and the issuance of the Securities as contemplated hereby, do not and will
      not
      (i) violate or conflict with any provision of the Company's Articles of
      Incorporation (the “Articles”)
      or
      Bylaws (the “Bylaws”),
      each
      as amended to date, or any Subsidiary's comparable charter documents, (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,
      mortgage, deed of trust, indenture, note, bond, license, lease agreement,
      instrument or obligation to which the Company or any of its Subsidiaries is
      a
      party or by which the Company or any of its Subsidiaries' respective properties
      or assets are bound, or (iii) result in a violation of any federal, state,
      local
      or foreign statute, rule, regulation, order, judgment or decree (including
      federal and state securities laws and regulations) applicable to the Company
      or
      any of its Subsidiaries or by which any property or asset of the Company or
      any
      of its Subsidiaries are bound or affected, except, in all cases, for such
      conflicts, defaults, terminations, amendments, acceleration, cancellations
      and
      violations as would not, individually or in the aggregate, have a Material
      Adverse Effect (other than violations pursuant to clauses (i) or (iii) (with
      respect to federal and state securities laws)). Neither
      the Company nor any of its Subsidiaries is required under federal, state,
      foreign or local law, rule or regulation 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 the Transaction Documents or issue and sell the Securities in accordance
      with the terms hereof (other than any filings, consents and approvals which
      may
      be required to be made by the Company under applicable state and federal
      securities laws, rules or regulations or any registration provisions provided
      in
      the Registration Rights Agreement).

     

    (f)  Commission
      Documents, Financial Statements.
      The
Common
      Stock of the Company is registered pursuant to Section 12(b) or 12(g) of the
      Securities Exchange Act of 1934, as amended (the "Exchange
      Act"),
      and
      the Company
      has timely filed all reports, schedules, forms, statements and other documents
      required to be filed by it with the Commission pursuant to the reporting
      requirements of the Exchange Act (all of the foregoing including filings
      incorporated by reference therein being referred to herein as the "Commission
      Documents").
      At
      the times of their respective filings, the Form 10-QSB for the fiscal quarters
      ended June 30, 2005, December 31, 2004 and September 30, 2004 (collectively,
      the
      "Form
      10-QSB")
      and
      the Form 10-KSB for the fiscal year ended March 31, 2005 (the “Form
      10-KSB”)
      complied in all material respects with the requirements of the Exchange Act
      and
      the rules and regulations of the Commission promulgated thereunder and other
      federal, state and local laws, rules and regulations applicable to such
      documents, and the Form 10-QSB and Form 10-KSB did not contain any untrue
      statement of a material fact or omit to state a material fact required to be
      stated therein or necessary in order to make the statements therein, in light
      of
      the circumstances under which they were made, not misleading. As of their
      respective dates, the financial statements of the Company included in the
      Commission Documents complied as to form in all material respects with
      applicable accounting requirements and the published rules and regulations
      of
      the Commission or other applicable rules and regulations with respect thereto.
      Such financial statements have been prepared in accordance with generally
      accepted accounting principles ("GAAP")
      applied on a consistent basis during the periods involved (except (i) as may
      be
      otherwise indicated in such financial statements or the notes thereto or (ii)
      in
      the case of unaudited interim statements, to the extent they may not include
      footnotes or may be condensed or summary statements), and fairly present in
      all
      material respects the financial position of the Company and its Subsidiaries
      as
      of the dates thereof and the results of operations and cash flows for the
      periods then ended (subject, in the case of unaudited statements, to normal
      year-end audit adjustments). 

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    (g)  Subsidiaries.
      Schedule
      2.1(g)
      hereto
      sets forth each Subsidiary of the Company, showing the jurisdiction of its
      incorporation or organization and showing the percentage of each person's
      ownership of the outstanding stock or other interests of such Subsidiary. For
      the purposes of this Agreement, "Subsidiary"
      shall
      mean any corporation or other entity of which at least a majority of the
      securities or other ownership interest having ordinary voting power (absolutely
      or contingently) for the election of directors or other persons performing
      similar functions are at the time owned directly or indirectly by the Company
      and/or any of its other Subsidiaries. All of the outstanding shares of capital
      stock of each Subsidiary have been duly authorized and validly issued, and
      are
      fully paid and nonassessable. Except as set forth on Schedule
      2.1(g)
      hereto,
      there are no outstanding preemptive, conversion or other rights, options,
      warrants or agreements granted or issued by or binding upon any Subsidiary
      for
      the purchase or acquisition of any shares of capital stock of any Subsidiary
      or
      any other securities convertible into, exchangeable for or evidencing the rights
      to subscribe for any shares of such capital stock. Neither the Company nor
      any
      Subsidiary is subject to any obligation (contingent or otherwise) to repurchase
      or otherwise acquire or retire any shares of the capital stock of any Subsidiary
      or any convertible securities, rights, warrants or options of the type described
      in the preceding sentence except as set forth on Schedule
      2.1(g)
      hereto.
      Neither the Company nor any Subsidiary is party to, nor has any knowledge of,
      any agreement restricting the voting or transfer of any shares of the capital
      stock of any Subsidiary.

     

    (h)  No
      Material Adverse Change.
      Since
      June 30, 2005, the Company has not experienced or suffered any Material Adverse
      Effect, except as disclosed on Schedule
      2.1(h)
      hereto.

     

    (i)  No
      Undisclosed Liabilities.
      Except
      as disclosed on Schedule
      2.1(i)
      hereto,
      neither the Company nor any of its Subsidiaries has incurred any liabilities,
      obligations, claims or losses (whether liquidated or unliquidated, secured
      or
      unsecured, absolute, accrued, contingent or otherwise) other than those incurred
      in the ordinary course of the Company's or its Subsidiaries respective
      businesses or which, individually or in the aggregate, are not reasonably likely
      to have a Material Adverse Effect.

     

    (j)  No
      Undisclosed Events or Circumstances.
      Since
      June 30, 2005, except as disclosed on Schedule
      2.1(j)
      hereto,
      no event or circumstance has occurred or exists with respect to the Company
      or
      its Subsidiaries or their respective businesses, properties, prospects,
      operations or financial condition, which, under applicable law, rule or
      regulation, requires public disclosure or announcement by the Company but which
      has not been so publicly announced or disclosed. 

     

    (k)  Indebtedness.
      Schedule
      2.1(k)
      hereto
      sets forth as of the date hereof all outstanding secured and unsecured
      Indebtedness of the Company or any Subsidiary, or for which the Company or
      any
      Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness”
      shall mean (a) any liabilities for borrowed money or amounts owed in excess
      of
      $100,000 (other than trade accounts payable incurred in the ordinary course
      of
      business), (b) all guaranties, endorsements and other contingent obligations
      in
      respect of Indebtedness of others, whether or not the same are or should be
      reflected in the Company’s balance sheet (or the notes thereto), except
      guaranties by endorsement of negotiable instruments for deposit or collection
      or
      similar transactions in the ordinary course of business; and (c) the present
      value of any lease payments in excess of $25,000 due under leases required
      to be
      capitalized in accordance with GAAP. Neither the Company nor any Subsidiary
      is
      in default with respect to any Indebtedness.

     

    (l)  Title
      to Assets.
      Each of
      the Company and the Subsidiaries has good and valid title to all of its real
      and
      personal property reflected in the Commission Documents, free and clear of
      any
      mortgages, pledges, charges, liens, security interests or other encumbrances,
      except for those indicated on Schedule
      2.1(l)
      hereto
      or such that, individually or in the aggregate, do not cause a Material Adverse
      Effect. Any leases of the Company and each of its Subsidiaries are valid and
      subsisting and in full force and effect.

     

    (m)  Actions
      Pending.
      There
      is no action, suit, claim, investigation, arbitration, alternate dispute
      resolution proceeding or other proceeding pending or, to the knowledge of the
      Company, threatened against the Company or any Subsidiary which questions the
      validity of this Agreement or any of the other Transaction Documents or any
      of
      the transactions contemplated hereby or thereby or any action taken or to be
      taken pursuant hereto or thereto. Except as set forth in the Commission
      Documents or on Schedule
      2.1(m)
      hereto,
      there is no action, suit, claim, investigation, arbitration, alternate dispute
      resolution proceeding or other proceeding pending or, to the knowledge of the
      Company, threatened against or involving the Company, any Subsidiary or any
      of
      their respective properties or assets, which individually or in the aggregate,
      would reasonably be expected, if adversely determined, to have a Material
      Adverse Effect. There are no outstanding orders, judgments, injunctions, awards
      or decrees of any court, arbitrator or governmental or regulatory body against
      the Company or any Subsidiary or any officers or directors of the Company or
      Subsidiary in their capacities as such, which individually or in the aggregate,
      could reasonably be expected to have a Material Adverse Effect. 

     

    (n)  Compliance
      with Law.
      The
      business of the Company and the Subsidiaries has been and is presently being
      conducted in accordance with all applicable federal, state and local
      governmental laws, rules, regulations and ordinances, except as set forth in
      the
      Commission Documents or on Schedule
      2.1(n)
      hereto
      or such that, individually or in the aggregate, the noncompliance therewith
      could not reasonably be expected to have a Material Adverse Effect. The Company
      and each of its Subsidiaries have all franchises, permits, licenses, consents
      and other governmental or regulatory authorizations and approvals necessary
      for
      the conduct of its business as now being conducted by it unless the failure
      to
      possess such franchises, permits, licenses, consents and other governmental
      or
      regulatory authorizations and approvals, individually or in the aggregate,
      could
      not reasonably be expected to have a Material Adverse Effect.

     

    (o)  Taxes.
      The
      Company and each of the Subsidiaries has accurately prepared and filed all
      federal, state and other tax returns required by law to be filed by it, has
      paid
      or made provisions for the payment of all taxes shown to be due and all
      additional assessments, and adequate provisions have been and are reflected
      in
      the financial statements of the Company and the Subsidiaries for all current
      taxes and other charges to which the Company or any Subsidiary is subject and
      which are not currently due and payable. Except as disclosed on Schedule
      2.1(o)
      hereto
      or in the Commission Documents, none of the federal income tax returns of the
      Company or any Subsidiary have been audited by the Internal Revenue Service.
      The
      Company has no knowledge of any additional assessments, adjustments or
      contingent tax liability (whether federal or state) of any nature whatsoever,
      whether pending or threatened against the Company or any Subsidiary for any
      period, nor of any basis for any such assessment, adjustment or
      contingency.

     

    (p)  Certain
      Fees.
      Except
      as set forth on Schedule
      2.1(p)
      hereto,
      the Company has not employed any broker or finder or incurred any liability
      for
      any brokerage or investment banking fees, commissions, finders' structuring
      fees, financial advisory fees or other similar fees in connection with the
      Transaction Documents.

     

    (q)  Disclosure.
      Except
      for the transactions contemplated by this Agreement, the Company confirms that
      neither it nor any other person acting on its behalf has provided any of the
      Purchasers or their agents or counsel with any information that constitutes
      or
      might constitute material, nonpublic information. To the best of the Company's
      knowledge, neither this Agreement or the Schedules hereto nor any other
      documents, certificates or instruments furnished to the Purchasers by or on
      behalf of the Company or any Subsidiary in connection with the transactions
      contemplated by this Agreement contain any untrue statement of a material fact
      or omit to state a material fact necessary in order to make the statements
      made
      herein or therein, in the light of the circumstances under which they were
      made
      herein or therein, not misleading.

     

    (r)  Operation
      of Business.
      Except
      as set forth on Schedule
      2.1(r)
      hereto,
      the Company and each of the Subsidiaries owns or possesses the rights to all
      patents, trademarks, domain names (whether or not registered) and any patentable
      improvements or copyrightable derivative works thereof, websites and
      intellectual property rights relating thereto, service marks, trade names,
      copyrights, licenses and authorizations which are necessary for the conduct
      of
      its business as now conducted without any conflict with the rights of
      others.

     

    (s)  Environmental
      Compliance.
      To the
      best knowledge of the Company, except as set forth on Schedule
      2.1(s)
      hereto
      or in the Commission Documents, the Company and each of its Subsidiaries have
      obtained all material approvals, authorization, certificates, consents,
      licenses, orders and permits or other similar authorizations of all governmental
      authorities, or from any other person, that are required under any Environmental
      Laws. “Environmental Laws” shall mean all applicable laws relating to the
      protection of the environment including, without limitation, all requirements
      pertaining to reporting, licensing, permitting, controlling, investigating
      or
      remediating emissions, discharges, releases or threatened releases of hazardous
      substances, chemical substances, pollutants, contaminants or toxic substances,
      materials or wastes, whether solid, liquid or gaseous in nature, into the air,
      surface water, groundwater or land, or relating to the manufacture, processing,
      distribution, use, treatment, storage, disposal, transport or handling of
      hazardous substances, chemical substances, pollutants, contaminants or toxic
      substances, material or wastes, whether solid, liquid or gaseous in nature.
      To
      the best of the Company’s knowledge, the Company has all necessary governmental
      approvals required under all Environmental Laws as necessary for the Company’s
      business or the business of any of its subsidiaries. To the best of the
      Company’s knowledge, the Company and each of its subsidiaries are also in
      compliance with all other limitations, restrictions, conditions, standards,
      requirements, schedules and timetables required or imposed under all
      Environmental Laws. Except for such instances as would not individually or
      in
      the aggregate have a Material Adverse Effect, there are no past or present
      events, conditions, circumstances, incidents, actions or omissions relating
      to
      or in any way affecting the Company or its Subsidiaries that violate or may
      violate any Environmental Law after the Initial Closing Date or that may give
      rise to any environmental liability, or otherwise form the basis of any claim,
      action, demand, suit, proceeding, hearing, study or investigation (i) under
      any
      Environmental Law, or (ii) based on or related to the manufacture, processing,
      distribution, use, treatment, storage (including without limitation underground
      storage tanks), disposal, transport or handling, or the emission, discharge,
      release or threatened release of any hazardous substance. 

     

    (t)  Books
      and Records; Internal Accounting Controls.
      The
      records and documents of the Company and its Subsidiaries accurately reflect
      in
      all material respects the information relating to the business of the Company
      and the Subsidiaries, the location and collection of their assets, and the
      nature of all transactions giving rise to the obligations or accounts receivable
      of the Company or any Subsidiary. The Company and each of its Subsidiaries
      maintain a system of internal accounting controls sufficient, in the judgment
      of
      the Company's board of directors, to provide reasonable assurance that (i)
      transactions are executed in accordance with management's general or specific
      authorizations, (ii) transactions are recorded as necessary to permit
      preparation of financial statements in conformity with generally accepted
      accounting principles and to maintain asset accountability, (iii) access to
      assets is permitted only in accordance with management's general or specific
      authorization and (iv) the recorded accountability for assets is compared with
      the existing assets at reasonable intervals and appropriate actions are taken
      with respect to any differences.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    (u)  Material
      Agreements.
      Except
      for the Transaction Documents (with respect to clause (i) only), as disclosed
      in
      the Commission Documents or as set forth on Schedule
      2.1(u)
      hereto,
      or as would not be reasonably likely to have a Material Adverse Effect, (i)
      the
      Company and each of its Subsidiaries have performed all obligations required
      to
      be performed by them to date under any written or oral contract, instrument,
      agreement, commitment, obligation, plan or arrangement, filed or required to
      be
      filed with the Commission (the "Material
      Agreements"),
      (ii)
      neither the Company nor any of its Subsidiaries has received any notice of
      default under any Material Agreement and, (iii) to the best of the Company's
      knowledge, neither the Company nor any of its Subsidiaries is in default under
      any Material Agreement now in effect. 

     

    (v)  Transactions
      with Affiliates.
      Except
      as set forth on Schedule
      2.1(v)
      hereto
      and in the Commission Documents, there are no loans, leases, agreements,
      contracts, royalty agreements, management contracts or arrangements or other
      continuing transactions between (a) the Company, any Subsidiary or any of their
      respective customers or suppliers on the one hand, and (b) on the other hand,
      any officer, employee, consultant or director of the Company, or any of its
      Subsidiaries, or any person owning at least 5% of the outstanding capital stock
      of the Company or any Subsidiary or any member of the immediate family of such
      officer, employee, consultant, director or stockholder or any corporation or
      other entity controlled by such officer, employee, consultant, director or
      stockholder, or a member of the immediate family of such officer, employee,
      consultant, director or stockholder which, in each case, is required to be
      disclosed in the Commission Documents or in the Company’s most recently filed
      definitive proxy statement on Schedule 14A, that is not so disclosed in the
      Commission Documents or in such proxy statement.

     

    (w)  Securities
      Act of 1933.
      Based
      in material part upon the representations herein of the Purchasers, the Company
      has complied and will comply with all applicable federal and state securities
      laws in connection with the offer, issuance and sale of the Securities
      hereunder. Neither the Company nor anyone acting on its behalf, directly or
      indirectly, has or will sell, offer to sell or solicit offers to buy any of
      the
      Securities or similar securities to, or solicit offers with respect thereto
      from, or enter into any negotiations relating thereto with, any person, or
      has
      taken or will take any action so as to bring the issuance and sale of any of
      the
      Securities under the registration provisions of the Securities Act and
      applicable state securities laws, and neither the Company nor any of its
      affiliates, nor any person acting on its or their behalf, has engaged in any
      form of general solicitation or general advertising (within the meaning of
      Regulation D under the Securities Act) in connection with the offer or sale
      of
      any of the Securities.

     

    (x)  Employees.
      Neither
      the Company nor any Subsidiary has any collective bargaining arrangements or
      agreements covering any of its employees, except as set forth on Schedule
      2.1(x)
      hereto.
      Except as set forth on Schedule
      2.1(x)
      hereto,
      neither the Company nor any Subsidiary has any employment contract, agreement
      regarding proprietary information, non-competition agreement, non-solicitation
      agreement, confidentiality agreement, or any other similar contract or
      restrictive covenant, relating to the right of any officer, employee or
      consultant to be employed or engaged by the Company or such Subsidiary required
      to be disclosed in the Commission Documents that is not so disclosed. No
      officer, consultant or key employee of the Company or any Subsidiary whose
      termination, either individually or in the aggregate, would be reasonably likely
      to have a Material Adverse Effect, has terminated or, to the knowledge of the
      Company, has any present intention of terminating his or her employment or
      engagement with the Company or any Subsidiary.

     

    (y)  Absence
      of Certain Developments.
      Except
      as set forth in the Commission Documents or provided on Schedule
      2.1(y)
      hereto,
      since June 30, 2005, neither the Company nor any Subsidiary has:

    

    (i)  issued
      any stock, bonds or other corporate securities or any right, options or warrants
      with respect thereto;

     

    (ii)  borrowed
      any amount in excess of $100,000 or incurred or become subject to any other
      liabilities in excess of $100,000 (absolute or contingent) except current
      liabilities incurred in the ordinary course of business which are comparable
      in
      nature and amount to the current liabilities incurred in the ordinary course
      of
      business during the comparable portion of its prior fiscal year, as adjusted
      to
      reflect the current nature and volume of the business of the Company and its
      Subsidiaries;

     

     

    (iii)  discharged
      or satisfied any lien or encumbrance in excess of $100,000 or paid any
      obligation or liability (absolute or contingent) in excess of $100,000, other
      than current liabilities paid in the ordinary course of business;

     

     

    (iv)  declared
      or made any payment or distribution of cash or other property to stockholders
      with respect to its stock, or purchased or redeemed, or made any agreements
      so
      to purchase or redeem, any shares of its capital stock, in each case in excess
      of $50,000 individually or $100,000 in the aggregate;

     

     

    (v)  sold,
      assigned or transferred any other tangible assets, or canceled any debts or
      claims, in each case in excess of $100,000, except in the ordinary course of
      business;

     

     

    (vi)  sold,
      assigned or transferred any patent rights, trademarks, trade names, copyrights,
      trade secrets or other intangible assets or intellectual property rights in
      excess of $100,000, or disclosed any proprietary confidential information to
      any
      person except to customers in the ordinary course of business or to the
      Purchasers or their representatives;

     

     

    (vii)  suffered
      any material losses or waived any rights of material value, whether or not
      in
      the ordinary course of business, or suffered the loss of any material amount
      of
      prospective business;

     

     

    (viii)  made
      any
      changes in employee compensation except in the ordinary course of business
      and
      consistent with past practices;

     

     

    (ix)  made
      capital expenditures or commitments therefor that aggregate in excess of
      $100,000;

     

     

    (x)  entered
      into any material transaction, whether or not in the ordinary course of
      business;

     

     

    (xi)  made
      charitable contributions or pledges in excess of $10,000;

     

     

    (xii)  suffered
      any material damage, destruction or casualty loss, whether or not covered by
      insurance;

     

     

    (xiii)  experienced
      any material problems with labor or management in connection with the terms
      and
      conditions of their employment; or 

     

     

    (xiv)  entered
      into an agreement, written or otherwise, to take any of the foregoing
      actions.

     

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    (z)  Public
      Utility Holding Company Act and Investment Company Act Status.
      The
      Company is not a “holding company” or a “public utility company” as such terms
      are defined in the Public Utility Holding Company Act of 1935, as amended.
      The
      Company is not, and as a result of and immediately upon the Closing will not
      be,
      an “investment company” or a company “controlled” by an “investment company,”
      within the meaning of the Investment Company Act of 1940, as
      amended.

     

    (aa)  ERISA.
      No
      liability to the Pension Benefit Guaranty Corporation has been incurred with
      respect to any Plan by the Company or any of its Subsidiaries which is or would
      be materially adverse to the Company and its Subsidiaries. The execution and
      delivery of this Agreement and the issuance and sale of the Securities will
      not
      involve any transaction which is subject to the prohibitions of Section 406
      of
      the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or in
      connection with which a tax could be imposed pursuant to Section 4975 of the
      Internal Revenue Code of 1986, as amended, provided that, if any of the
      Purchasers, or any person or entity that owns a beneficial interest in any
      of
      the Purchasers, is an “employee pension benefit plan” (within the meaning of
      Section 3(2) of ERISA) with respect to which the Company is a “party in
      interest” (within the meaning of Section 3(14) of ERISA), the requirements of
      Sections 407(d)(5) and 408(e) of ERISA, if applicable, are met. As used in
      this
      Section 2.1(aa), the term “Plan” shall mean an “employee pension benefit plan”
      (as defined in Section 3 of ERISA) which is or has been established or
      maintained, or to which contributions are or have been made, by the Company
      or
      any Subsidiary or by any trade or business, whether or not incorporated, which,
      together with the Company or any Subsidiary, is under common control, as
      described in Section 414(b) or (c) of the Code.

     

    (bb)  Independent
      Nature of Purchasers.
      The
      Company acknowledges that the obligations of each Purchaser under the
      Transaction Documents are several and not joint with the obligations of any
      other Purchaser, and no Purchaser shall be responsible in any way for the
      performance of the obligations of any other Purchaser under the Transaction
      Documents. The Company acknowledges that the decision of each Purchaser to
      purchase Securities pursuant to this Agreement has been made by such Purchaser
      independently of any other purchase 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 or of its Subsidiaries which may have
      made or given by any other Purchaser or by any agent or employee of any other
      Purchaser, and no Purchaser or any of its agents or employees shall have any
      liability to any Purchaser (or any other person) relating to or arising from
      any
      such information, materials, statements or opinions. The Company acknowledges
      that nothing contained herein, or in any Transaction Document, and no action
      taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute
      the Purchasers as a partnership, an association, a joint venture or any other
      kind of entity, or create a presumption that the Purchasers 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 for reasons of administrative convenience only, the Transaction Documents
      have been prepared by counsel for one of the Purchasers and such counsel does
      not represent all of the Purchasers but only such Purchaser and the other
      Purchasers have retained their own individual counsel with respect to the
      transactions contemplated hereby.  The Company acknowledges that it
      has
      elected to provide all Purchasers with the same terms and Transaction Documents
      for the convenience of the Company and not because it was required or requested
      to do so by the Purchasers. The Company acknowledges that such procedure with
      respect to the Transaction Documents in no way creates a presumption that the
      Purchasers are in any way acting in concert or as a group with respect to the
      Transaction Documents or the transactions contemplated hereby or
      thereby.

     

    (cc)  No
      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 offering of the Securities pursuant to this Agreement to be integrated
      with
      prior offerings by the Company for purposes of the Securities Act which would
      prevent the Company from selling the Securities pursuant to Regulation D and
      Rule 506 thereof under the Securities Act, or any applicable exchange-related
      stockholder approval provisions, nor will the Company or any of its affiliates
      or subsidiaries take any action or steps that would cause the offering of the
      Securities to be integrated with other offerings.
      The
      Company does not have any registration statement pending before the Commission
      or currently under the Commission’s review and except as set forth on
Schedule
      2.1(cc)
      hereto,
      since February 1, 2005, the Company has not offered or sold any of its equity
      securities or debt securities convertible into shares of Common
      Stock.

     

    (dd)  Sarbanes-Oxley
      Act

     

    . 
      The Company is in compliance with the applicable provisions of the
      Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
      Act”),
      and
      the rules and regulations promulgated thereunder, that are effective and intends
      to comply with other applicable provisions of the Sarbanes-Oxley Act, and the
      rules and regulations promulgated thereunder, upon the effectiveness of such
      provisions.

    

    (ee)  Dilutive
      Effect.
      The
      Company understands and acknowledges that its obligation to issue Conversion
      Shares upon conversion of the Notes in accordance with this Agreement and the
      Notes and its obligations to issue the Warrant Shares upon the exercise of
      the
      Warrants in accordance with this Agreement and the Warrants, is, in each case,
      absolute and unconditional regardless of the dilutive effect that such issuance
      may have on the ownership interest of other stockholders of the
      Company.

     

    (ff)  DTC
      Status.
      Except
      as set forth on Schedule
      2.1(ff)
      hereto,
      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 of the Company transfer agent is set forth on
Schedule
      2.1(ff)
      hereto.

     

    (gg)  Acknowledgement
      Regarding Purchasers’ Trading Activity.
      The
      Company understands and acknowledges that, one or more Purchasers may engage
      in
      hedging activities at various times during the period that the Securities are
      outstanding, including, without limitation, during the periods that the value
      of
      the Conversion Shares and the Warrant Shares deliverable with respect to
      Securities are being determined.

     

    Section
      2.2  Representations
      and Warranties of the Purchasers.
      Each of
      the Purchasers hereby represents and warrants to the Company with respect solely
      to itself and not with respect to any other Purchaser as follows as of the
      date
      hereof and as of each Closing Date:

     

    (a)  Organization
      and Standing of the Purchasers.
      If the
      Purchaser is an entity, such Purchaser is a corporation, limited liability
      company or partnership 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
      Purchaser has the requisite power and authority to enter into and perform the
      Transaction Documents and to purchase the Securities being sold to it hereunder.
      The execution, delivery and performance of the Transaction Documents by each
      Purchaser and the consummation by it of the transactions contemplated hereby
      have been duly authorized by all necessary corporate or partnership action,
      and
      no further consent or authorization of such Purchaser or its Board of Directors,
      stockholders, or partners, as the case may be, is required. When executed and
      delivered by the Purchasers, the other Transaction Documents shall constitute
      valid and binding obligations of each Purchaser enforceable against such
      Purchaser in accordance with their terms, except as such enforceability may
      be
      limited by applicable bankruptcy, insolvency, reorganization, moratorium,
      liquidation, conservatorship, receivership or similar laws relating to, or
      affecting generally the enforcement of, creditor's rights and remedies or by
      other equitable principles of general application.

     

    (c)  No
      Conflict.
      The
      execution, delivery and performance of the Transaction Documents by the
      Purchaser and the consummation by the Purchaser of the transactions contemplated
      thereby and hereby do not and will not (i) violate any provision of the
      Purchaser’s charter or organizational documents, (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, mortgage, deed of
      trust, indenture, note, bond, license, lease agreement, instrument or obligation
      to which the Purchaser is a party or by which the Purchaser’s respective
      properties or assets are bound, or (iii) result in a violation of any federal,
      state, local or foreign statute, rule, regulation, order, judgment or decree
      (including federal and state securities laws and regulations) applicable to
      the
      Purchaser or by which any property or asset of the Purchaser are bound or
      affected, except, in all cases, other than violations pursuant to clauses (i)
      or
      (iii) (with respect to federal and state securities laws) above, except, for
      such conflicts, defaults, terminations, amendments, acceleration, cancellations
      and violations as would not, individually or in the aggregate, materially and
      adversely affect the Purchaser’s ability to perform its obligations under the
      Transaction Documents. 

     

    (d)  Acquisition
      for Investment.
      Each
      Purchaser is purchasing the Securities solely for its own account and not with
      a
      view to or for sale in connection with distribution. Each Purchaser does not
      have a present intention to sell any of the Securities, nor a present
      arrangement (whether or not legally binding) or intention to effect any
      distribution of any of the Securities to or through any person or entity;
provided,
      however,
      that by
      making the representations herein, such Purchaser does not agree to hold the
      Securities for any minimum or other specific term and reserves the right to
      dispose of the Securities at any time in accordance with Federal and state
      securities laws applicable to such disposition. Each Purchaser acknowledges
      that
      it (i) has such knowledge and experience in financial and business matters
      such
      that Purchaser is capable of evaluating the merits and risks of Purchaser's
      investment in the Company, (ii) is able to bear the financial risks associated
      with an investment in the Securities and (iii) has been given full access to
      such records of the Company and the Subsidiaries and to the officers of the
      Company and the Subsidiaries as it has deemed necessary or appropriate to
      conduct its due diligence investigation.

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    (e)  Rule
      144.
      Each
      Purchaser understands that the Securities must be held indefinitely unless
      such
      Securities are registered under the Securities Act or an exemption from
      registration is available. Each Purchaser acknowledges that such person is
      familiar with Rule 144 of the rules and regulations of the Commission, as
      amended, promulgated pursuant to the Securities Act ("Rule
      144"),
      and
      that such Purchaser has been advised that Rule 144 permits resales only under
      certain circumstances. Each Purchaser understands that to the extent that Rule
      144 is not available, such Purchaser will be unable to sell any Securities
      without either registration under the Securities Act or the existence of another
      exemption from such registration requirement.

     

    (f)  General.
      Each
      Purchaser understands that the Securities are being offered and sold in reliance
      on a transactional exemption from the registration requirements of federal
      and
      state securities laws and the Company is relying upon the truth and accuracy
      of
      the representations, warranties, agreements, acknowledgments and understandings
      of such Purchaser set forth herein in order to determine the applicability
      of
      such exemptions and the suitability of such Purchaser to acquire the Securities.
      Each Purchaser understands that no United States federal or state agency or
      any
      government or governmental agency has passed upon or made any recommendation
      or
      endorsement of the Securities. Commencing on the date that the Purchasers were
      initially contacted regarding an investment in the Securities, none of the
      Purchasers has engaged in any short sale of the Common Stock and will not engage
      in any short sale of the Common Stock prior to the consummation of the
      transactions contemplated by this Agreement.

     

    (g)  No
      General Solicitation.
      Each
      Purchaser acknowledges that the Securities were not offered to such Purchaser
      by
      means of any form of general or public solicitation or general advertising,
      or
      publicly disseminated advertisements or sales literature, including (i) any
      advertisement, article, notice or other communication published in any
      newspaper, magazine, or similar media, or broadcast over television or radio,
      or
      (ii) any seminar or meeting to which such Purchaser was invited by any of the
      foregoing means of communications. Each Purchaser, in making the decision to
      purchase the Securities, has relied upon independent investigation made by
      it
      and has not relied on any information or representations made by third
      parties.

     

    (h)  Accredited
      Investor.
      Each
      Purchaser is an “accredited investor” (as defined in Rule 501 of Regulation D),
      and such Purchaser has such experience in business and financial matters that
      it
      is capable of evaluating the merits and risks of an investment in the
      Securities. Such Purchaser is not required to be registered as a broker-dealer
      under Section 15 of the Exchange Act and such Purchaser is not a broker-dealer.
      Each Purchaser acknowledges that an investment in the Securities is speculative
      and involves a high degree of risk. 

     

    (i)  Certain
      Fees.
      The
      Purchasers have not employed any broker or finder or incurred any liability
      for
      any brokerage or investment banking fees, commissions, finders' structuring
      fees, financial advisory fees or other similar fees in connection with the
      Transaction Documents.

     

    (j)  Independent
      Investment.
      No
      Purchaser has agreed to act with any other Purchaser for the purpose of
      acquiring, holding, voting or disposing of the Securities purchased hereunder
      for purposes of Section 13(d) under the Exchange Act, and each Purchaser is
      acting independently with respect to its investment in the Securities.

     

    (k)  Regulation
      M. 
      Each Purchaser has complied and will comply with Regulation M promulgated under
      the Exchange Act with respect to the transactions contemplated by this
      Agreement. 

     

     

    ARTICLE
      III

     

    COVENANTS

     

    The
      Company covenants with each Purchaser as follows, which covenants are for the
      benefit of each Purchaser and their respective permitted assignees.

     

    Section
      3.1  Securities
      Compliance.
      The
      Company shall notify the Commission in accordance with its rules and
      regulations, of the transactions contemplated by any of the Transaction
      Documents 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 Purchasers, or their respective
      subsequent holders.

     

    Section
      3.2  Registration
      and Listing.
      The
      Company shall cause its Common Stock to continue to be registered under Sections
      12(b) or 12(g) of the Exchange Act, to comply in all respects with its reporting
      and filing obligations under the Exchange Act, to comply with all requirements
      related to any registration statement filed pursuant to this Agreement, and
      to
      not take any action or file any document (whether or not permitted by the
      Securities Act or the rules promulgated thereunder) to terminate or suspend
      such
      registration or to terminate or suspend its reporting and filing obligations
      under the Exchange Act or Securities Act, except as permitted herein. The
      Company will take all action necessary to continue the listing or trading of
      its
      Common Stock on the OTC Bulletin Board or other exchange or market on which
      the
      Common Stock is trading. If required, the Company will promptly file the
“Listing Application” for, or in connection with, the issuance and delivery of
      the Shares and the Warrant Shares. Subject to the terms of the Transaction
      Documents, the Company further covenants that it will take such further action
      as the Purchasers may reasonably request, all to the extent required from time
      to time to enable the Purchasers to sell the Securities without registration
      under the Securities Act within the limitation of the exemptions provided by
      Rule 144 promulgated under the Securities Act. Upon the request of the
      Purchasers, the Company shall deliver to the Purchasers a written certification
      of a duly authorized officer as to whether it has complied with such
      requirements.

     

    Section
      3.3  Inspection
      Rights.
      Provided
      same would not be in violation of Regulation FD, the Company shall permit,
      during normal business hours and upon reasonable request and reasonable notice,
      each Purchaser or any employees, agents or representatives thereof, so long
      as
      such Purchaser shall be obligated hereunder to purchase the Notes or shall
      beneficially own any Conversion Shares or Warrant Shares, for purposes
      reasonably related to such Purchaser's interests as a stockholder, to examine
      the publicly available, non-confidential records and books of account of, and
      visit and inspect the properties, assets, operations and business of the Company
      and any Subsidiary, and to discuss the publicly available, non-confidential
      affairs, finances and accounts of the Company and any Subsidiary with any of
      its
      officers, consultants, directors, and key employees.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    Section
      3.4  Compliance
      with Laws.
      The
      Company shall comply, and cause each Subsidiary to comply, with all applicable
      laws, rules, regulations and orders, noncompliance with which would be
      reasonably likely to have a Material Adverse Effect.

     

    Section
      3.5  Keeping
      of Records and Books of Account.
      The
      Company shall keep and cause each Subsidiary to keep adequate records and books
      of account, in which complete entries will be made in accordance with GAAP
      consistently applied, reflecting all financial transactions of the Company
      and
      its Subsidiaries, and in which, for each fiscal year, all proper reserves for
      depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
      purposes in connection with its business shall be made.

     

    Section
      3.6  Reporting
      Requirements.
      If the
      Company ceases to file its periodic reports with the Commission, or if the
      Commission ceases making these periodic reports available via the Internet
      without charge, then the Company shall furnish the following to each Purchaser
      so long as such Purchaser shall be obligated hereunder to purchase the
      Securities or shall beneficially own Securities:

     

    (a)  Quarterly
      Reports filed with the Commission on Form 10-QSB as soon as practical after
      the
      document is filed with the Commission, and in any event within five (5) days
      after the document is filed with the Commission;

     

    (b)  Annual
      Reports filed with the Commission on Form 10-KSB as soon as practical after
      the
      document is filed with the Commission, and in any event within five (5) days
      after the document is filed with the Commission; and

     

    (c)  Copies
      of
      all notices, information and proxy statements in connection with any meetings,
      that are, in each case, provided to holders of shares of Common Stock,
      contemporaneously with the delivery of such notices or information to such
      holders of Common Stock.

     

    Section
      3.7  Other
      Agreements.
      The
      Company shall not enter into any agreement in which the terms of such agreement
      would restrict or impair the right or ability to perform of the Company or
      any
      Subsidiary under any Transaction Document.

     

    Section
      3.8  Use
      of
      Proceeds.
      The net
      proceeds from the sale of the Securities hereunder shall be used by the Company
      for working capital and general corporate purposes, including, but not limited
      to, growth and capital initiatives, investor and public relations, acquisitions
      and drilling activities, and not to redeem any Common Stock or securities
      convertible, exercisable or exchangeable into Common Stock or to settle any
      outstanding litigation.

    

    Section
      3.9  Reporting
      Status. So
      long
      as a Purchaser beneficially owns any of the Securities, the Company shall timely
      file all reports required to be filed with the Commission pursuant to the
      Exchange Act, and the Company shall not terminate its status as an issuer
      required to file reports under the Exchange Act even if the Exchange Act or
      the
      rules and regulations thereunder would permit such termination. 

    

    Section
      3.10  Disclosure
      of Transaction.
      The
      Company shall issue a press release describing the material terms of the
      transactions contemplated hereby (the “Press
      Release”)
      on the
      day of the Initial Closing but in no event later than one hour after the
      Closing; provided,
      however,
      that if
      such Closing occurs after 4:00 P.M. Eastern Time on any Trading Day, the Company
      shall issue the Press Release no later than 9:00 A.M. Eastern Time on the first
      Trading Day following the Initial Closing Date. The Company shall also file
      with
      the Commission a Current Report on Form 8-K (the “Form
      8-K”)
      describing the material terms of the transactions contemplated hereby (and
      attaching as exhibits thereto this Agreement, each form of Note, the
      Registration Rights Agreement, the Security Agreement, each series of Warrant
      and the Press Release) as soon as practicable following the Initial Closing
      Date
      but in no event more than two (2) Trading Days following the Initial Closing
      Date, which Press Release and Form 8-K shall be subject to prior review and
      comment by the Purchasers. "Trading
      Day"
      means
      any day during which the principal exchange on which the Common Stock is traded
      shall be open for trading. 

     

    Section
      3.11  Disclosure
      of Material Information.
      The
      Company covenants and agrees that neither it nor any other person acting on
      its
      behalf has provided or will provide any Purchaser or its agents or counsel
      with
      any information that the Company believes constitutes material non-public
      information, unless prior thereto such Purchaser shall have executed a written
      agreement regarding the confidentiality and use of such information. 
      The
      Company understands and confirms that each Purchaser shall be relying on the
      foregoing representations in effecting transactions in securities of the
      Company.

     

    Section
      3.12  Pledge
      of Securities.
      The
      Company acknowledges that the Securities may be pledged by a Purchaser in
      connection with a bona fide
      margin
      agreement or other loan or financing arrangement that is secured by the
      Securities. The pledge of Securities shall not be deemed to be a transfer,
      sale
      or assignment of the Securities hereunder, and no Purchaser effecting a pledge
      of the Securities shall be required to provide the Company with any notice
      thereof or otherwise make any delivery to the Company pursuant to this Agreement
      or any other Transaction Document; provided that a Purchaser and its pledgee
      shall be required to comply with the provisions of Article V hereof in order
      to
      effect a sale, transfer or assignment of Securities to such pledgee. At the
      Purchasers' expense, the Company hereby agrees to execute and deliver such
      documentation as a pledgee of the Securities may reasonably request in
      connection with a pledge of the Securities to such pledgee by a
      Purchaser.

     

    Section
      3.13  Amendments.
      The
      Company shall not amend or waive any provision of the Articles or Bylaws of
      the
      Company in any way that would adversely affect exercise rights, voting rights,
      conversion rights, prepayment rights or redemption rights of the holder of
      the
      Notes.

     

    Section
      3.14  Distributions.
      So long
      as any Notes or Warrants remain outstanding, the Company agrees that it shall
      not (i) declare
      or pay any dividends or make any distributions to any holder(s) of Common Stock
      or (ii) purchase or otherwise acquire for value, directly or indirectly, any
      Common Stock or other equity security of the Company.

     

    Section
      3.15  Reservation
      of Shares.
      So long
      as any of the Notes or Warrants remain outstanding, the Company shall take
      all
      action necessary to at all times have authorized and reserved for the purpose
      of
      issuance, one hundred twenty percent (120%) of the aggregate number of shares
      of
      Common Stock needed to provide for the issuance of the Conversion Shares and
      the
      Warrant Shares.

     

    Section
      3.16  Transfer
      Agent Instructions.
      The
      Company shall issue irrevocable instructions to its transfer agent, and any
      subsequent transfer agent, to issue certificates, registered in the name of
      each
      Purchaser or its respective nominee(s), for the Conversion Shares and the
      Warrant Shares in such amounts as specified from time to time by each Purchaser
      to the Company upon conversion of the Notes or exercise of the Warrants in
      the
      form of Exhibit
      N
      attached
      hereto (the “Irrevocable
      Transfer Agent Instructions”).
      Prior
      to registration of the Conversion Shares and the Warrant Shares under the
      Securities Act, all such certificates shall bear the restrictive legend
      specified in Section 5.1 of this Agreement. The Company warrants that no
      instruction other than the Irrevocable Transfer Agent Instructions referred
      to
      in this Section 3.16 will be given by the Company to its transfer agent and
      that
      the Conversion Shares and Warrant Shares shall otherwise be freely transferable
      on the books and records of the Company as and to the extent provided in this
      Agreement and the Registration Rights Agreement. Nothing in this Section 3.16
      shall affect in any way each Purchaser’s obligations and agreements set forth in
      Section 5.1 to comply with all applicable prospectus delivery requirements,
      if
      any, upon resale of the Conversion Shares and the Warrant Shares. If a Purchaser
      provides the Company with an opinion of counsel, in a generally acceptable
      form,
      to the effect that a public sale, assignment or transfer of the Conversion
      Shares or Warrant Shares may be made without registration
      under the Securities Act or the Purchaser provides the Company with reasonable
      assurances that the Conversion Shares or Warrant Shares can be sold pursuant
      to
      Rule 144 without any restriction as to the number of securities acquired as
      of a
      particular date that can then be immediately sold, the Company shall permit
      the
      transfer, and, in the case of the Conversion Shares and the Warrant Shares,
      promptly instruct its transfer agent to issue one or more certificates in such
      name and in such denominations as specified by such Purchaser and without any
      restrictive legend. The Company acknowledges that a breach by it of its
      obligations under this Section 3.16 will cause irreparable harm to the
      Purchasers by vitiating the intent and purpose of the transaction contemplated
      hereby. Accordingly, the Company acknowledges that the remedy at law for a
      breach of its obligations under this Section 3.16 will be inadequate
      and
      agrees, in the event of a breach or threatened breach by the Company of the
      provisions of this Section 3.16, that the Purchasers shall be entitled, in
      addition to all other available remedies, to an order and/or injunction
      restraining any breach and requiring immediate issuance and transfer, without
      the necessity of showing economic loss and without any bond or other security
      being required. 

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    Section
      3.17  Disposition
      of Assets.
      So long
      as the Notes remain outstanding, neither the Company nor any subsidiary shall
      sell, transfer or otherwise dispose of any of its properties, assets and rights
      including, without limitation, its software and intellectual property, to any
      person except for sales of obsolete assets and sales to customers in the
      ordinary course of business or with the prior written consent of the holders
      of
      a majority of the principal amount of the Notes then outstanding.

     

    Section
      3.18  Form
      SB-2 Eligibility. The
      Company currently meets, and will take all necessary action to continue to
      meet,
      the "registrant eligibility" and transaction requirements set forth in the
      general instructions to Form SB-2 applicable to "resale" registrations on
      Form SB-2 during the Effectiveness Period (as defined in the Registration
      Rights Agreement) and the
      Company shall file all reports required to be filed by the Company with the
      Commission in a timely manner so as to maintain such eligibility for the use
      of
      Form SB-2.

     

    Section
      3.19  Restrictions
      on Certain Issuances of Securities.
      So long
      as at least fifty percent (50%) of the aggregate principal amount of the Notes
      purchased pursuant to this Agreement remains outstanding, the Company shall
      not
      issue any securities that rank pari passu or senior to the Notes without the
      prior written consent of at least seventy-five percent (75%) of the principal
      amount of the Notes outstanding at such time.

     

    Section
      3.20  Increase
      in Authorized Shares.
      The
      Company shall increase the number of its authorized shares of Common Stock
      from
      95,000,000 to 450,000,000 within forty-five (45) days of the Initial Closing
      Date.

     

    Section
      3.21  Acquisition
      of Assets.
      In the
      event the Company or any Subsidiary acquires any assets or other properties,
      such assets or properties shall constitute a part of the Collateral (as defined
      in the Security Agreement) and the Company shall take all action necessary
      to
      perfect the Purchasers’ security interest in such assets or properties pursuant
      to the Security Agreement. 

     

    Section
      3.22  Subsequent
      Financings.
      

     

    (a)    Subject
      to
      the right of first refusal of the existing investors of the Company who
      participated in the financing that closed in May 2005, for a period of one
      (1)
      year following the Second Closing Date so
      long as
      the Notes remain outstanding,
      the
      Company covenants and agrees to promptly notify (in no event later than five
      (5)
      days after making or receiving an applicable offer) in writing (a "Rights
      Notice")
      the
      Purchasers of the terms and conditions of any proposed offer or sale to, or
      exchange with (or other type of distribution to) any third party (a
“Subsequent
      Financing”),
      of
      Common Stock or any securities convertible, exercisable or exchangeable into
      Common Stock, including convertible debt securities (collectively, the
      "Financing
      Securities").
      The
      Rights Notice shall describe, in reasonable detail, the proposed Subsequent
      Financing, the names and investment amounts of all investors participating
      in
      the Subsequent Financing, the proposed closing date of the Subsequent Financing,
      which shall be within twenty (20) calendar days from the date of the Rights
      Notice, and all of the terms and conditions thereof
      and
      proposed definitive documentation to be entered into in connection
      therewith.
      The
      Rights Notice shall provide each Purchaser an option (the “Rights
      Option”)
      during
      the ten (10) Trading Days following delivery of the Rights Notice (the
“Option
      Period”)
      to
      inform the Company whether such Purchaser will purchase up
      to its
      pro rata portion of the securities being
      offered in such Subsequent Financing on the same, absolute terms and conditions
      as contemplated by such Subsequent Financing. If
      any
      Purchaser elects not to participate in such Subsequent Financing, the other
      Purchasers may participate on a pro-rata basis so long as such participation
      in
      the aggregate does not exceed the total Purchase Price hereunder. For
      purposes of this Section, all references to “pro rata” means, for any Purchaser
      electing to participate in such Subsequent Financing, the percentage obtained
      by
      dividing (x) the principal amount of the Notes purchased by such Purchaser
      at
      each Closing by (y) the total principal amount of all of the Notes purchased
      by
      all of the participating Purchasers at each Closing. Delivery
      of any Rights Notice constitutes a representation and warranty by the Company
      that there are no other material terms and conditions, arrangements, agreements
      or otherwise except for those disclosed in the Rights Notice, to provide
      additional compensation to any party participating in any proposed Subsequent
      Financing, including, but not limited to, additional compensation based on
      changes in the Purchase Price or any type of reset or adjustment of a purchase
      or conversion price or to issue additional securities at any time after the
      closing date of a Subsequent Financing. If the Company does not receive notice
      of exercise of the Rights Option from the Purchasers within the Option Period,
      the Company shall have the right to close the Subsequent Financing on the
      scheduled closing date with a third party; provided
      that all
      of the material terms and conditions of the closing are substantially the same
      as those provided to the Purchasers in the Rights Notice. If the closing of
      the
      proposed Subsequent Financing does not occur on that date, any closing of the
      contemplated Subsequent Financing or any other Subsequent Financing shall be
      subject to all of the provisions of this Section 3.22(a), including, without
      limitation, the delivery of a new Rights Notice. The provisions of this Section
      3.22(a) shall not apply to issuances of securities in a Permitted
      Financing. 

     

    (b)    For
      purposes
      of this Agreement, a Permitted Financing (as defined hereinafter) shall not
      be
      considered a Subsequent Financing. A "Permitted
      Financing"
      shall
      mean (i) securities issued (other than for cash) in connection with a merger,
      acquisition, or consolidation, (ii) securities issued pursuant to a bona fide
      firm underwritten public offering of the Company’s securities, (iii) securities
      issued pursuant to the conversion or exercise of convertible or exercisable
      securities issued or outstanding on or prior to the date hereof or issued
      pursuant to this Agreement and the Notes, (iv) the Warrant Shares, (v)
      securities issued in connection with bona fide strategic license agreements
      or
      other partnering arrangements so long as such issuances are not for the purpose
      of raising capital, (vi) Common Stock issued or options to purchase Common
      Stock
      granted or issued pursuant to the Company’s employee stock purchase plans as
      they now exist and stock incentive plans as they now exist or as may be amended
      so long as the aggregate number of shares of Common Stock issued pursuant to
      such stock incentive plans does not exceed 8,000,000, and (vii) any warrants
      issued to the placement agent and its designees for the transactions
      contemplated by this Agreement, and (viii) the
      payment of any principal and accrued interest in shares of Common Stock pursuant
      to the Notes.

    

    (c)    So
      long
      as the Notes are outstanding, if the Company enters into any Subsequent
      Financing on terms more favorable than the terms governing the Notes, then
      the
      Purchasers in their sole discretion may exchange the Notes, valued at their
      stated value, together with accrued but unpaid interest (which interest payments
      shall be payable, at the sole option of the Purchasers, in cash or in the form
      of the new securities to be issued in the Subsequent Financing), for the
      securities issued or to be issued in the Subsequent Financing. The Company
      covenants and agrees to promptly notify in writing the Purchasers of the terms
      and conditions of any such proposed Subsequent Financing. 

    

     

    ARTICLE
      IV

     

    CONDITIONS

     

    Section
      4.1  Conditions
      Precedent to the Obligation of the Company to Close and to Sell the
      Securities.
      The
      obligation hereunder of the Company to close and issue and sell the Securities
      to the Purchasers at each Closing is subject to the satisfaction or waiver,
      at
      or before each Closing of the conditions set forth below. These conditions
      are
      for the Company's sole benefit and may be waived by the Company at any time
      in
      its sole discretion.

     

    (a)  Accuracy
      of the Purchasers’ Representations and Warranties.
      The
      representations and warranties of each Purchaser shall be true and correct
      in
      all material respects as of the date when made and as of each Closing Date
      as
      though made at that time, except for representations and warranties that are
      expressly made as of a particular date, which shall be true and correct in
      all
      material respects as of such date.

     

    (b)  Performance
      by the Purchasers.
      Each
      Purchaser shall have performed, satisfied and complied in all material respects
      with all covenants, agreements and conditions required by this Agreement to
      be
      performed, satisfied or complied with by the Purchasers at or prior to each
      Closing Date.

     

    (c)  No
      Injunction.
      No
      statute, rule, regulation, executive order, decree, ruling or injunction shall
      have been enacted, entered, promulgated or endorsed by any court or governmental
      authority of competent jurisdiction which prohibits the consummation of any
      of
      the transactions contemplated by this Agreement.

     

    (d)  Delivery
      of Purchase Price.
      The
      Purchase Price for the Securities shall have been delivered to the Company
      on
      each Closing Date.

     

    (e)  Delivery
      of Transaction Documents.
      The
      Transaction Documents shall have been duly executed and delivered by the
      Purchasers to the Company.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    Section
      4.2  Conditions
      Precedent to the Obligation of the Purchasers to Close and to Purchase the
      Securities.
      The
      obligation hereunder of the Purchasers to purchase the Securities and consummate
      the transactions contemplated by this Agreement is subject to the satisfaction
      or waiver, at or before each Closing, of each of the conditions set forth below.
      These conditions are for the Purchasers’ sole benefit and may be waived by the
      Purchasers at any time in their sole discretion.

     

    (a)  Accuracy
      of the Company's Representations and Warranties.
      Each of
      the representations and warranties of the Company in this Agreement and the
      other Transaction Documents shall be true and correct in all material respects
      as of each Closing Date, except for representations and warranties that speak
      as
      of a particular date, which shall be true and correct in all material respects
      as of such date.

     

    (b)  Performance
      by the Company.
      The
      Company shall have performed, satisfied and complied in all material respects
      with all covenants, agreements and conditions required by this Agreement to
      be
      performed, satisfied or complied with by the Company at or prior to each Closing
      Date.

     

    (c)  No
      Suspension, Etc.
      Trading
      in the Common Stock shall not have been suspended by the Commission or the
      OTC
      Bulletin Board (except for any suspension of trading of limited duration agreed
      to by the Company, which suspension shall be terminated prior to the Initial
      Closing), and, at any time prior to each Closing Date, trading in securities
      generally as reported by Bloomberg Financial Markets ("Bloomberg")
      shall
      not have been suspended or limited, or minimum prices shall not have been
      established on securities whose trades are reported by Bloomberg, or on the
      New
      York Stock Exchange, nor shall a banking moratorium have been declared either
      by
      the United States or New York State authorities,
      nor
      shall there have occurred any material outbreak or escalation of hostilities
      or
      other national or international calamity or crisis of such magnitude in its
      effect on, or any material adverse change in any financial market which, in
      each
      case, in the judgment of such Purchaser, makes it impracticable or inadvisable
      to purchase the Securities.

     

    (d)  No
      Injunction.
      No
      statute, rule, regulation, executive order, decree, ruling or injunction shall
      have been enacted, entered, promulgated or endorsed by any court or governmental
      authority of competent jurisdiction which prohibits the consummation of any
      of
      the transactions contemplated by this Agreement.

     

    (e)  No
      Proceedings or Litigation.
      No
      action, suit or proceeding before any arbitrator or any governmental authority
      shall have been commenced, and no investigation by any governmental authority
      shall have been threatened, against the Company or any Subsidiary, or any of
      the
      officers, directors or affiliates of the Company or any Subsidiary seeking
      to
      restrain, prevent or change the transactions contemplated by this Agreement,
      or
      seeking damages in connection with such transactions.

     

    (f)  Opinion
      of Counsel.
      The
      Purchasers shall have received an opinion of counsel to the Company, dated
      the
      date of each Closing, substantially in the form of Exhibit
      O
      hereto,
      with such exceptions and limitations as shall be reasonably acceptable to
      counsel to the Purchasers. The Purchasers shall also have received an opinion
      of
      Texas counsel to the Company relating to the Collateral (as defined in the
      Security Agreement) located in the State of Texas, dated the Initial Closing
      Date, substantially in the form of Exhibit
      P
      hereto,
      with such exceptions and limitations as shall be reasonably acceptable to
      counsel to the Purchasers.

     

    (g)  Notes
      and Warrants.
      At or
      prior to each Closing, the Company shall have delivered to the Purchasers the
      Notes (in such denominations as each Purchaser may request) and the Warrants
      (in
      such denominations as each Purchaser may request). 

     

    (h)  Secretary's
      Certificate.
      The
      Company shall have delivered to the Purchasers a secretary's certificate, dated
      as of the Initial Closing Date, as to (i) the resolutions adopted by the Board
      of Directors approving the transactions contemplated hereby, (ii) the Articles,
      (iii) the Bylaws, each as in effect at the Closing, and (iv) the authority
      and
      incumbency of the officers of the Company executing the Transaction Documents
      and any other documents required to be executed or delivered in connection
      therewith.

     

    (i)  Officer's
      Certificate.
      On each
      Closing Date, the Company shall have delivered to the Purchasers a certificate
      signed by an executive officer on behalf of the Company, dated as of each
      Closing Date, confirming the accuracy of the Company's representations,
      warranties and covenants as of such Closing Date and confirming the compliance
      by the Company with the conditions precedent set forth in paragraphs (b)-(e)
      and
      (l) of this Section 4.2 as of each Closing Date (provided that, with respect
      to
      the matters in paragraphs (d) and (e) of this Section 4.2, such confirmation
      shall be based on the knowledge of the executive officer after due
      inquiry).

     

    (j)  Registration
      Rights Agreement.
      As of
      the Initial Closing Date, the Company shall have executed and delivered the
      Registration Rights Agreement to each Purchaser.

     

    (k)  Material
      Adverse Effect.
      No
      Material Adverse Effect shall have occurred.

     

    (l)  Transfer
      Agent Instructions.
      The
      Irrevocable Transfer Agent Instructions, in the form of Exhibit
      N
      attached
      hereto, shall have been delivered to the Company’s transfer agent. 

     

    (m)  Security
      Agreement.
      At the
      Initial Closing, the Company shall have executed and delivered the Security
      Agreement to each Purchaser.

     

    (n)  UCC
      Financing Statements.
      The
      Company shall have filed all UCC financing statements in form and substance
      satisfactory to the Purchasers at the appropriate offices to create a valid
      and
      perfected security interest in the Collateral (as defined in the Security
      Agreement).

     

    Section
      4.3  Conditions
      Precedent to the Obligation of the Purchasers to Purchase the Option
      Notes.
      The
      obligation hereunder of each Purchaser to acquire and pay for the Option Notes
      is subject to the satisfaction or waiver, at or before the closing and sale
      of
      such Option Notes (the “Subsequent
      Closing Date”),
      of
      each of the conditions set forth below. These conditions are for each
      Purchaser’s sole benefit and may be waived by such Purchaser at any time in its
      sole discretion.

     

    (a)  Accuracy
      of the Company’s Representations and Warranties.
      Each of
      the representations and warranties of the Company in this Agreement and the
      other Transaction Documents shall be true and correct in all material respects
      as of the Subsequent Closing Date, except for representations and warranties
      that speak as of a particular date, which shall be true and correct in all
      material respects as of such date.

     

    (b)  Performance
      by the Company.
      The
      Company shall have performed, satisfied and complied in all material respects
      with all covenants, agreements and conditions required by this Agreement to
      be
      performed, satisfied or complied with by the Company at or prior to the
      Subsequent Closing Date.

     

    (c)  No
      Suspension, Etc.
      Trading
      in the Common Stock shall not have been suspended by the Commission or the
      OTC
      Bulletin Board (except for any suspension of trading of limited duration agreed
      to by the Company, which suspension shall be terminated prior to the Closing),
      and, at any time prior to the Subsequent
      Closing
      Date, trading in securities generally as reported by Bloomberg Financial Markets
      ("Bloomberg")
      shall
      not have been suspended or limited, or minimum prices shall not have been
      established on securities whose trades are reported by Bloomberg, or on the
      New
      York Stock Exchange, nor shall a banking moratorium have been declared either
      by
      the United States or New York State authorities,
      nor
      shall a banking moratorium have been declared either by the United States or
      New
      York State authorities, nor shall there have occurred any material outbreak
      or
      escalation of hostilities or other national or international calamity or crisis
      of such magnitude in its effect on, or any material adverse change in any
      financial market which, in each case, in the judgment of such Purchaser, makes
      it impracticable or inadvisable to purchase the Option Notes.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    (d)  No
      Injunction.
      No
      statute, rule, regulation, executive order, decree, ruling or injunction shall
      have been enacted, entered, promulgated or endorsed by any court or governmental
      authority of competent jurisdiction which prohibits the consummation of any
      of
      the transactions contemplated by this Agreement.

     

    (e)  No
      Proceedings or Litigation.
      No
      action, suit or proceeding before any arbitrator or any governmental authority
      shall have been commenced, and no investigation by any governmental authority
      shall have been threatened, against the Company or any Subsidiary, or any of
      the
      officers, directors or affiliates of the Company or any Subsidiary seeking
      to
      restrain, prevent or change the transactions contemplated by this Agreement,
      or
      seeking damages in connection with such transactions.

     

    (f)  Opinion
      of Counsel, Etc.
      At the
      Subsequent Closing Date, the Purchasers shall have received an opinion of
      counsel to the Company, dated the date of the Subsequent Closing Date, in the
      form of Exhibit
      O
      hereto,
      and such other certificates and documents as the Purchasers or its counsel
      shall
      reasonably require incident to the Subsequent Closing.

     

    (g)  Option
      Notes and Warrants.
      At or
      prior to the Subsequent Closing Date, the Company shall have delivered to the
      Purchasers the Option Notes (in such denominations as each Purchaser may
      request) and the Warrants, in each case, being acquired by the Purchasers at
      the
      Subsequent Closing Date. 

     

    (h)  Officer’s
      Certificate.
      The
      Company shall have delivered to the Purchasers a certificate of an executive
      officer of the Company, dated as of the Subsequent Closing Date, confirming
      the
      accuracy of the Company’s representations, warranties and covenants as of such
      Closing Date and confirming the compliance by the Company with the conditions
      precedent set forth in this Section 4.3 as of the Subsequent Closing
      Date.

     

    (i)  Material
      Adverse Effect.
      No
      Material Adverse Effect shall have occurred at or before the Subsequent Closing
      Date. 

     

    (j)  Effective
      Registration Statement.
      The
      Registration Statement shall have been declared effective by the
      Commission.

     

     

    ARTICLE
      V

     

    CERTIFICATE
      LEGEND 

     

    Section
      5.1  Legend.
      Each
      certificate representing the Securities shall be stamped or otherwise imprinted
      with a legend substantially in the following form (in addition to any legend
      required by applicable state securities or "blue sky" laws):

     

    THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE NOT BEEN
      REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
      OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
      DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
      STATE SECURITIES LAWS OR QUEST OIL CORPORATION SHALL HAVE RECEIVED AN OPINION
      OF
      COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER
      THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

     

    The
      Company agrees to issue or reissue certificates representing any of the
      Conversion Shares and the Warrant Shares, without the legend set forth above
      if
      at such time, prior to making any transfer of any such Conversion Shares or
      Warrant Shares, such holder thereof shall give written notice to the Company
      describing the manner and terms of such transfer and removal as the Company
      may
      reasonably request. Such proposed transfer and removal will not be effected
      until: (a) either (i) the Company has received an opinion of counsel reasonably
      satisfactory to the Company, to the effect that the registration of the
      Conversion Shares or Warrant Shares under the Securities Act is not required
      in
      connection with such proposed transfer, (ii) a registration statement under
      the
      Securities Act covering such proposed disposition has been filed by the Company
      with the Commission and has become effective under the Securities Act, (iii)
      the
      Company has received other evidence reasonably satisfactory to the Company
      that
      such registration and qualification under the Securities Act and state
      securities laws are not required, or (iv) the holder provides the Company with
      reasonable assurances that such security can be sold pursuant to Rule 144 under
      the Securities Act; and (b) either (i) the Company has received an opinion
      of
      counsel reasonably satisfactory to the Company, to the effect that registration
      or qualification under the securities or "blue sky" laws of any state is not
      required in connection with such proposed disposition, (ii) compliance with
      applicable state securities or "blue sky" laws has been effected, or (iii)
      the
      holder provides the Company with reasonable assurances that a valid exemption
      exists with respect thereto. The Company will respond to any such notice from
      a
      holder within three (3) business days. In the case of any proposed transfer
      under this Section 5.1, the Company will use reasonable efforts to comply with
      any such applicable state securities or "blue sky" laws, but shall in no event
      be required, (x) to qualify to do business in any state where it is not then
      qualified, (y) to take any action that would subject it to tax or to the general
      service of process in any state where it is not then subject, or (z) to comply
      with state securities or “blue sky” laws of any state for which registration by
      coordination is unavailable to the Company. The restrictions on transfer
      contained in this Section 5.1 shall be in addition to, and not by way of
      limitation of, any other restrictions on transfer contained in any other section
      of this Agreement. Whenever
      a
      certificate representing the Conversion Shares or Warrant Shares is required
      to
      be issued to a Purchaser without a legend, in lieu of delivering physical
      certificates representing the Conversion Shares or Warrant Shares, provided
      the
      Company's transfer agent is participating in the Depository Trust Company
      ("DTC")
      Fast
      Automated Securities Transfer program, the Company shall use its reasonable
      best
      efforts to cause its transfer agent to electronically transmit the Conversion
      Shares or Warrant Shares to a Purchaser by crediting the account of such
      Purchaser's Prime Broker with DTC through its Deposit Withdrawal Agent
      Commission ("DWAC")
      system
      (to the extent not inconsistent with any provisions of this
      Agreement).

     

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    ARTICLE
      VI

     

    INDEMNIFICATION

     

    Section
      6.1  General
      Indemnity.
      The
      Company agrees to indemnify and hold harmless the Purchasers (and their
      respective directors, officers, affiliates, agents, successors and assigns)
      from
      and against any and all losses, liabilities, deficiencies, costs, damages and
      expenses (including, without limitation, reasonable attorneys’ fees, charges and
      disbursements) incurred by the Purchasers as a result of any inaccuracy in
      or
      breach of the representations, warranties or covenants made by the Company
      herein. Each Purchaser severally but not jointly agrees to indemnify and hold
      harmless the Company and its directors, officers, affiliates, agents, successors
      and assigns from and against any and all losses, liabilities, deficiencies,
      costs, damages and expenses (including, without limitation, reasonable
      attorneys’ fees, charges and disbursements) incurred by the Company as result of
      any inaccuracy in or breach of the representations, warranties or covenants
      made
      by such Purchaser herein. The maximum aggregate liability of each Purchaser
      pursuant to its indemnification obligations under this Article VI shall not
      exceed the portion of the Purchase Price paid by such Purchaser hereunder.
      

     

    Section
      6.2  Indemnification
      Procedure.
      Any
      party entitled to indemnification under this Article VI (an "indemnified party")
      will give written notice to the indemnifying party of any matter giving rise
      to
      a claim for indemnification; provided, that the failure of any party entitled
      to
      indemnification hereunder to give notice as provided herein shall not relieve
      the indemnifying party of its obligations under this Article VI except to the
      extent that the indemnifying party is actually prejudiced by such failure to
      give notice. In case any such action, proceeding or claim is brought against
      an
      indemnified party in respect of which indemnification is sought hereunder,
      the
      indemnifying party shall be entitled to participate in and, unless in the
      reasonable judgment of the indemnifying party a conflict of interest between
      it
      and the indemnified party exists with respect to such action, proceeding or
      claim (in which case the indemnifying party shall be responsible for the
      reasonable fees and expenses of one separate counsel for the indemnified
      parties), to assume the defense thereof with counsel reasonably satisfactory
      to
      the indemnified party. In the event that the indemnifying party advises an
      indemnified party that it will contest such a claim for indemnification
      hereunder, or fails, within thirty (30) days of receipt of any indemnification
      notice to notify, in writing, such person of its election to defend, settle
      or
      compromise, at its sole cost and expense, any action, proceeding or claim (or
      discontinues its defense at any time after it commences such defense), then
      the
      indemnified party may, at its option, defend, settle or otherwise compromise
      or
      pay such action or claim. In any event, unless and until the indemnifying party
      elects in writing to assume and does so assume the defense of any such claim,
      proceeding or action, the indemnified party's costs and expenses arising out
      of
      the defense, settlement or compromise of any such action, claim or proceeding
      shall be losses subject to indemnification hereunder. The indemnified party
      shall cooperate fully with the indemnifying party in connection with any
      negotiation or defense of any such action or claim by the indemnifying party
      and
      shall furnish to the indemnifying party all information reasonably available
      to
      the indemnified party which relates to such action or claim. The indemnifying
      party shall keep the indemnified party fully apprised at all times as to the
      status of the defense or any settlement negotiations with respect thereto.
      If
      the indemnifying party elects to defend any such action or claim, then the
      indemnified party shall be entitled to participate in such defense with counsel
      of its choice at its sole cost and expense. The indemnifying party shall not
      be
      liable for any settlement of any action, claim or proceeding effected without
      its prior written consent. Notwithstanding anything in this Article VI to the
      contrary, the indemnifying party shall not, without the indemnified party's
      prior written consent, settle or compromise any claim or consent to entry of
      any
      judgment in respect thereof which imposes any future obligation on the
      indemnified party or which does not include, as an unconditional term thereof,
      the giving by the claimant or the plaintiff to the indemnified party of a
      release from all liability in respect of such claim. The indemnification
      obligations to defend the indemnified party required by this Article VI shall
      be
      made by periodic payments of the amount thereof during the course of
      investigation or defense, as and when bills are received or expense, loss,
      damage or liability is incurred, so long as the indemnified party shall refund
      such moneys if it is ultimately determined by a court of competent jurisdiction
      that such party was not entitled to indemnification. The
      indemnity agreements contained herein shall be in addition to (a) any cause
      of
      action or similar rights of the indemnified party against the indemnifying
      party
      or others, and (b) any liabilities the indemnifying party may be subject to
      pursuant to the law.
      No
      indemnifying party will be liable to the indemnified party under this Agreement
      to the extent, but only to the extent that a loss, claim, damage or liability
      is
      attributable to the indemnified party’s breach of any of the representations,
      warranties or covenants made by such party in this Agreement or in the other
      Transaction Documents.

     

     

    ARTICLE
      VII

     

    MISCELLANEOUS

     

    Section
      7.1  Fees
      and Expenses.
      Each
      party shall pay the fees and expenses of its advisors, counsel, accountants
      and
      other experts, if any, and all other expenses, incurred by such party incident
      to the negotiation, preparation, execution, delivery and performance of this
      Agreement; provided,
      however,
      that
      the Company shall pay all actual attorneys' fees and expenses (including
      disbursements and out-of-pocket expenses) incurred by the Purchasers in
      connection with (i) the preparation, negotiation, execution and delivery of
      the
      Transaction Documents and the transactions contemplated thereunder, which
      payment shall be made at Closing and shall not exceed $45,000, including
      attorneys’ fees for local Canadian counsel (plus disbursements and out-of-pocket
      expenses), and (ii) any amendments, modifications or waivers of this Agreement
      or any of the other Transaction Documents. In addition, the Company shall pay
      all reasonable fees and expenses incurred by the Purchasers in connection with
      the enforcement of this Agreement or any of the other Transaction Documents,
      including, without limitation, all reasonable attorneys' fees and expenses.
       

     

    Section
      7.2  Specific
      Performance; Consent to Jurisdiction; Venue. 

     

    (a)  The
      Company and the Purchasers acknowledge and agree that irreparable damage would
      occur in the event that any of the provisions of this Agreement or the other
      Transaction Documents were not performed in accordance with their specific
      terms
      or were otherwise breached. It is accordingly agreed that the parties shall
      be
      entitled to an injunction or injunctions to prevent or cure breaches of the
      provisions of this Agreement or the other Transaction Documents and to enforce
      specifically the terms and provisions hereof or thereof, this being in addition
      to any other remedy to which any of them may be entitled by law or
      equity.

     

    (b)  The
      parties agree that venue for any dispute arising under this Agreement will
      lie
      exclusively in the state or federal courts located in New York County, New
      York,
      and the parties irrevocably waive any right to raise forum
      non conveniens
      or any
      other argument that New York is not the proper venue. The parties irrevocably
      consent to personal jurisdiction in the state and federal courts of the state
      of
      New York. The Company and each Purchaser consent to process being served in
      any
      such suit, action or proceeding by mailing a copy thereof to such party at
      the
      address in effect for notices to it under this Agreement and agrees that such
      service shall constitute good and sufficient service of process and notice
      thereof. Nothing in this Section 7.2 shall affect or limit any right to serve
      process in any other manner permitted by law. The Company and the Purchasers
      hereby agree that the prevailing party in any suit, action or proceeding arising
      out of or relating to the Securities, this Agreement or the other Transaction
      Documents, shall be entitled to reimbursement for reasonable legal fees from
      the
      non-prevailing party. The parties hereby waive all rights to a trial by jury.
      

     

    Section
      7.3  Entire
      Agreement; Amendment.
      This
      Agreement and the Transaction Documents contain the entire understanding and
      agreement of the parties with respect to the matters covered hereby and, except
      as specifically set forth herein or in the other Transaction Documents, neither
      the Company nor any Purchaser make any representation, warranty, covenant or
      undertaking with respect to such matters, and they supersede all prior
      understandings and agreements with respect to said subject matter, all of which
      are merged herein. No provision of this Agreement may be waived or amended
      other
      than by a written instrument signed by the Company and the Purchasers holding
      at
      least a majority of the principal amount of the Notes then held by the
      Purchasers. Any amendment or waiver effected in accordance with this Section
      7.3
      shall be binding upon each Purchaser (and their permitted assigns) and the
      Company. 

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    Section
      7.4  Notices.
      Any
      notice, demand, request, waiver or other communication required or permitted
      to
      be given hereunder shall be in writing and shall be effective (a) upon hand
      delivery by telecopy or facsimile 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:

     

    If
      to the
      Company:          Quest
      Oil
      Corporation 

    1188
      West
      Georgia Street, Suite 1650

    Vancouver,
      BC, Canada V6E 4A2

    Attention:
      Chief Executive Officer

    Tel.
      No.:
      (604) 629-2461

    Fax
      No.:
      (800) 608-3562

    

    with
      copies (which copies 

    shall
      not
      constitute notice 

    to
      the
      Company) to:      The
      Baum
      Law Firm

    580 Second
      Street, Suite 102

    Encinitas,
      California 92024

    Attention:
      Mark L. Baum

    Tel.
      No.: (760) 230-2300, ext. 205

    Fax
      No.: (760) 230-2305

    

    If
      to any
      Purchaser: At
      the
      address of such Purchaser set forth on Exhibit
      A
      to this
      Agreement, with copies to Purchaser’s counsel as set forth on Exhibit
      A
      or as
      specified in writing by such Purchaser with copies to:

    

    Kramer
      Levin Naftalis & Frankel LLP

    1177
      Avenue of the Americas

    New
      York,
      New York 10036

    Attention:
      Christopher S. Auguste

    Tel.
      No.:
      (212) 715-9100

    Fax
      No.:
      (212) 715-8000

    

    Any
      party
      hereto may from time to time change its address for notices by giving written
      notice of such changed address to the other party hereto.

     

    Section
      7.5  Waivers.
      No
      waiver by either party of any default with respect to any provision, condition
      or requirement of this Agreement shall be deemed to be a continuing waiver
      in
      the future or a waiver of any other provision, condition or requirement hereof,
      nor shall any delay or omission of any party to exercise any right hereunder
      in
      any manner impair the exercise of any such right accruing to it thereafter.
      No
      consideration shall be offered or paid to any Purchaser to amend or consent
      to a
      waiver or modification of any provision of any of the Transaction Documents
      unless the same consideration is also offered to all of the parties to the
      Transaction Documents. This provision constitutes a separate right granted
      to
      each Purchaser by the Company and shall not in any way be construed as the
      Purchasers acting in concert or as a group with respect to the purchase,
      disposition or voting of Securities or otherwise.

     

    Section
      7.6  Headings.
      The
      article, section and subsection headings in this Agreement are for convenience
      only and shall not constitute a part of this Agreement for any other purpose
      and
      shall not be deemed to limit or affect any of the provisions
      hereof.

     

    Section
      7.7  Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their successors and assigns. After the Initial Closing, the assignment by
      a
      party to this Agreement of any rights hereunder shall not affect the obligations
      of such party under this Agreement. Subject to Section 5.1 hereof, the
      Purchasers may assign the Securities and its rights under this Agreement and
      the
      other Transaction Documents and any other rights hereto and thereto without
      the
      consent of the Company.

     

    Section
      7.8  No
      Third Party Beneficiaries.
      This
      Agreement is intended for the benefit of the parties hereto and their respective
      permitted successors and assigns and is not for the benefit of, nor may any
      provision hereof be enforced by, any other person.

     

    Section
      7.9  Governing
      Law.
      This
      Agreement shall be governed by and construed in accordance with the internal
      laws of the State of New York, without giving effect to any of the conflicts
      of
      law principles which would result in the application of the substantive law
      of
      another jurisdiction. This
      Agreement shall not be interpreted or construed with any presumption against
      the
      party causing this Agreement to be drafted.

     

    Section
      7.10  Survival.
      The
      representations and warranties of the Company and the Purchasers shall survive
      the execution and delivery hereof and the Initial Closing until the second
      anniversary of the Closing Date, except the agreements and covenants set forth
      in Articles I, III, V, VI and VII of this Agreement shall survive the execution
      and delivery hereof and such Closing hereunder.

     

    Section
      7.11  Counterparts.
      This
      Agreement may be executed in any number of counterparts, all of which taken
      together shall constitute one and the same instrument and shall become effective
      when counterparts have been signed by each party and delivered to the other
      parties hereto, it being understood that all parties need not sign the same
      counterpart. 

     

    Section
      7.12  Publicity.
      The
      Company agrees that it will not disclose, and will not include in any public
      announcement, the names of the Purchasers without the consent of the Purchasers,
      which consent shall not be unreasonably withheld or delayed, or unless and
      until
      such disclosure is required by law, rule or applicable regulation, including
      without limitation any disclosure pursuant to the Registration Statement, and
      then only to the extent of such requirement. 

     

    Section
      7.13  Severability.
      The
      provisions of this Agreement are severable and, in the event that any court
      of
      competent jurisdiction shall determine that any one or more of the provisions
      or
      part of the provisions contained in this Agreement shall, for any reason, be
      held to be invalid, illegal or unenforceable in any respect, such invalidity,
      illegality or unenforceability shall not affect any other provision or part
      of a
      provision of this Agreement and this Agreement shall be reformed and construed
      as if such invalid or illegal or unenforceable provision, or part of such
      provision, had never been contained herein, so that such provisions would be
      valid, legal and enforceable to the maximum extent possible.

     

    Section
      7.14  Further
      Assurances.
      From
      and after the date of this Agreement, upon the request of the Purchasers or
      the
      Company, the Company and each Purchaser shall execute and deliver such
      instruments, documents and other writings as may be reasonably necessary or
      desirable to confirm and carry out and to effectuate fully the intent and
      purposes of this Agreement and the other Transaction Documents.

     

    

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          KL2:2407594.9

          

        

        
        

      

      
        13

        
          

        

      

      
        
        

        
        

      

    

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

     

    

    QUEST
      OIL CORPORATION

    

    

    By:_____________________________________       

    Name:
      

    Title:
      

    

     

    PURCHASER:

    

    

    By:_____________________________________    

    Name:
      

    Title:
      

    

    
      
        
        

      

      
        14Exhibit 10.4 (Senior Secured Convertible Promissory Note)

       

    Exhibit
      10.4

     

     

    THIS
      NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT
      BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
      APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE
      DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF
      AN
      OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY
      TO
      THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
      HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
      FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES
      LAWS.

    

    

    QUEST
      OIL CORPORATION

    

    Senior
      Secured Convertible Promissory Note

    due
      October __, 2007

    

    No.
      CN-05-__                                                                                                                      $___________

    Dated:
      October __, 2005

    

    

    For
      value
      received, QUEST
      OIL
      CORPORATION,
      a
      Nevada corporation (the "Maker"),
      hereby promises to pay to the order of _______________________ (together with
      its successors, representatives, and permitted assigns, the "Holder"),
      in
      accordance with the terms hereinafter provided, the principal amount of
      ________________________ ($______________), together with interest thereon.
      Concurrently with the issuance of this Note, the Maker is issuing separate
      senior secured convertible promissory notes (the “Other
      Notes”)
      to
      separate purchasers (the “Other
      Holders”)
      pursuant to the Purchase Agreement (as defined in Section 1.1 hereof).

     

    All
      payments under or pursuant to this Note shall be made in United States Dollars
      in immediately available funds to the Holder at
      the
      address of the Holder first set forth above or at such other place as the Holder
      may designate from time to time in writing to the Maker or by wire transfer
      of
      funds to the Holder's account, instructions for which are attached hereto as
      Exhibit
      A. The
      outstanding principal balance of this Note shall be due and payable on October
      __, 2007 (the "Maturity
      Date")
      or at
      such earlier time as provided herein. 

     

    ARTICLE
      I

     

    Section
      1.1  Purchase
      Agreement.
      This
      Note has been executed and delivered pursuant to the Note and Warrant Purchase
      Agreement dated as of September 30, 2005 (the "Purchase Agreement”) by and among
      the Maker
      and the
      purchasers listed therein. Capitalized terms used and not otherwise defined
      herein shall have the meanings set forth for such terms in the Purchase
      Agreement. 

     

    Section
      1.2  -Interest.
      Beginning on the issuance date of this Note (the “Issuance Date”), the
      outstanding principal balance of this Note shall bear interest, in arrears,
      at a
      rate per annum equal to ten percent (10%), payable annually on October 1 of
      each
      year commencing October 1, 2006 at the option of the Maker in (A) cash, (B)
      additional senior secured convertible promissory notes in a form substantially
      identical to this Note, or (C) in registered shares of the Maker’s common stock,
      par value $0.001 per share (the “Common Stock”), in accordance with terms of
      Section 1.3 below. Interest shall be computed on the basis of a 360-day year
      of
      twelve (12) 30-day months and shall accrue commencing on the Issuance Date.
      Furthermore,
      upon the occurrence of an Event of Default (as defined in Section 2.1 hereof),
      then to the extent permitted by law, the Maker will pay interest to the Holder,
      payable on demand, on the outstanding principal balance of the Note from the
      date of the Event of Default until such Event of Default is cured at the rate
      of
      the lesser of fifteen percent (15%) and the maximum applicable legal rate per
      annum. 

     

    Section
      1.3  Payment
      of Principal and Interest. 

     

    (a)  Commencing
      on the fifth (5th)
      month
      following the Issuance Date and continuing thereafter on the first
      (1st)
      business day of each month (a “Principal Payment Date”), the Maker shall pay an
      amount to the Holder equal to 1/20th
      of the
      original principal amount of this Note plus any accrued but unpaid interest
      (the
“Principal
      Installment Amount”);
      provided,
      however,
      if on
      any Principal Payment Date, the outstanding principal amount of this Note plus
      any accrued but unpaid interest is less than the Principal Installment Amount,
      then the Maker shall pay to the Holder such lesser amount. The Maker may pay
      such Principal Installment Amount in cash or registered shares of Common Stock.
      If the Maker elects to pay the Principal Installment Amount in cash such amount
      shall be wired in immediately available funds on the Principal Payment Date;
      provided,
      however,
      that if
      the Holder has delivered a Conversion Notice to the Maker or delivers a
      Conversion Notice prior to the Principal Payment Date, the Holder shall indicate
      in such Conversion Notice whether the principal amount of this Note to be so
      converted shall be applied against the final Principal Installment Amount or
      some other Principal Installment Amount.
      The
      Maker shall provide irrevocable written notice to the Holder of the form of
      payment of the Principal Installment Amount on the tenth (10th)
      business day prior to the first day of each month for which a Principal
      Installment Amount is required to be made by the Maker.

     

    (b)  If
      the
      Maker elects to pay the Principal Installment Amount in registered shares of
      Common Stock, the number of registered shares of Common Stock to be issued
      to
      the Holder shall be an amount equal to the Principal Installment Amount divided
      by eighty-seven and one-half percent (87.5%) of the average of the Closing
      Bid
      Price (as defined in Section 1.3(c) hereof) for the ten (10) Trading Days
      immediately preceding the Principal Payment Date; provided,
      however,
      that if
      the Holder has delivered a Conversion Notice to the Maker or delivers a
      Conversion Notice prior to the Principal Payment Date, the Holder shall indicate
      in such Conversion Notice whether the principal amount of this Note to be so
      converted shall be applied against the final Principal Installment Amount or
      some other Principal Installment Amount. Notwithstanding the foregoing to the
      contrary, the Maker may elect to pay the Principal Installment Amount in
      registered shares of Common Stock on any Principal Payment Date only if (A)
      the
      registration statement providing for the resale of the shares of Common Stock
      issuable upon conversion of this Note (the “Registration
      Statement”)
      is
      effective and has been effective, without lapse or suspension of any kind,
      for a
      period of twenty (20) consecutive calendar days, (B) trading
      in the Common Stock shall not have been suspended by the Securities and Exchange
      Commission or the OTC Bulletin Board (or other exchange or market on which
      the
      Common Stock is trading), (C) the Maker is in material compliance with the
      terms
      and conditions of this Note and the other Transaction Documents, and (D) the
      issuance of shares of Common Stock on the Principal Payment Date does not
      violate the provisions of Section 3.4 hereof.
      

     

    (c)  The
      term
      "Closing
      Bid Price"
      shall
      mean, on any particular date (i) the last trading price per share of the Common
      Stock on such date on the OTC
      Bulletin Board or
      another registered national stock exchange on which the Common Stock is then
      listed, or if there is no such price on such date, then the last trading price
      on such exchange or quotation system on the date nearest preceding such date,
      or
      (ii) if the Common Stock is not listed then on the OTC Bulletin Board or any
      registered national stock exchange, the last trading price for a share of Common
      Stock in the over-the-counter market, as reported by the OTC Bulletin Board
      or
      in the National Quotation Bureau Incorporated or similar organization or agency
      succeeding to its functions of reporting prices) at the close of business on
      such date, or (iii) if the Common Stock is not then reported by the OTC Bulletin
      Board or the National Quotation Bureau Incorporated (or similar organization
      or
      agency succeeding to its functions of reporting prices), then the average of
      the
      "Pink Sheet" quotes for the relevant conversion period, as determined in good
      faith by the Holder, or (iv) if the Common Stock is not then publicly traded
      the
      fair market value of a share of Common Stock as determined by the Holder and
      reasonably acceptable to the Maker.

     

    Section
      1.4  Security
      Agreement.
      The
      obligations of the Maker hereunder are secured by a continuing security interest
      in certain assets of the Maker pursuant to the terms of a security agreement
      dated as of September 30, 2005 by and among the Maker and the Maker’s wholly
      owned subsidiaries, on the one hand, and the Holder and the Other Holders,
      on
      the other hand. 

     

    Section
      1.5  Payment
      on Non-Business Days. Whenever any payment to be made shall be due on a
      Saturday, Sunday or a public holiday under the laws of the State of New York,
      such payment may be due on the next succeeding business day and such next
      succeeding day shall be included in the calculation of the amount of accrued
      interest payable on such date.

     

    Section
      1.6  -Transfer.
      This Note may be transferred or sold, subject to the provisions of Section
      4.8
      of this Note, or pledged, hypothecated or otherwise granted as security by
      the
      Holder.

     

    Section
      1.7  -Replacement.
      Upon receipt of a duly executed, notarized and unsecured written statement
      from
      the Holder with respect to the loss, theft or destruction of this Note (or
      any
      replacement hereof) and a standard indemnity, or, in the case of a mutilation
      of
      this Note, upon surrender and cancellation of such Note, the Maker shall issue
      a
      new Note, of like tenor and amount, in lieu of such lost, stolen, destroyed
      or
      mutilated Note.

     

     

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

    ARTICLE
      II

     

    EVENTS
      OF
      DEFAULT; REMEDIES

     

    Section
      2.1  Events
      of Default.
      The
      occurrence of any of the following events shall be an "Event of Default" under
      this Note:

     

    (a)  the
      Maker
      shall fail to make the Principal Installment Amount on a Principal Payment
      Date
      and such default is not fully cured within one (1) business day after the
      occurrence thereof; or

     

    (b)  the
      failure of the Registration Statement to be declared effective by the Securities
      and Exchange Commission on or prior to the date which is one hundred eighty
      (180) days after the Issuance Date; or

     

    (c)  the
      suspension from listing, without subsequent listing on any one of, or the
      failure of the Common Stock to be listed on at least one of the OTC Bulletin
      Board, the American Stock Exchange, the Nasdaq National Market, the Nasdaq
      SmallCap Market or The New York Stock Exchange, Inc. for a period of five (5)
      consecutive Trading Days; or

     

    (d)  the
      Maker's notice to the Holder, including by way of public announcement, at any
      time, of its inability to comply (including for any of the reasons described
      in
      Section 3.8(a) hereof) or its intention not to comply with proper requests
      for
      conversion of this Note into shares of Common Stock; or

     

    (e)  the
      Maker
      shall fail to (i) timely deliver the shares of Common Stock upon conversion
      of
      the Note or any interest accrued and unpaid, (ii) file the Registration
      Statement in accordance with the terms of the Registration Rights Agreement
      or
      (iii) make the payment of any fees and/or liquidated damages under this Note,
      the Purchase Agreement or the Registration Rights Agreement, which failure
      in
      the case of items (i) and (iii) of this Section 2.1(e) is not remedied within
      three (3) business days after the incurrence thereof; or

     

    (f)  while
      the
      Registration Statement is required to be maintained effective pursuant to the
      terms of the Registration Rights Agreement, the effectiveness of the
      Registration Statement lapses for any reason (including, without limitation,
      the
      issuance of a stop order) or is unavailable to the Holder for sale of the
      Registrable Securities (as defined in the Registration Rights Agreement) in
      accordance with the terms of the Registration Rights Agreement, and such lapse
      or unavailability continues for a period of ten (10) consecutive Trading Days,
      provided
      that the
      Maker has not exercised its rights pursuant to Section 3(n) of the Registration
      Rights Agreement; or

     

    (g)  default
      shall be made in the performance or observance of (i) any material covenant,
      condition or agreement contained in this Note (other than as set forth in clause
      (f) of this Section 2.1) and such default is not fully cured within three (3)
      business days after the Maker receives notice from the Holder of the occurrence
      thereof or (ii) any material covenant, condition or agreement contained in
      the
      Purchase Agreement, the Other Notes, the Registration Rights Agreement or any
      other Transaction Document which is not covered by any other provisions of
      this
      Section 2.1 and such default is not fully cured within three (3) business days
      after the Maker receives notice from the Holder of the occurrence thereof;
      or

     

    (h)  any
      material representation or warranty made by the Maker herein or in the Purchase
      Agreement, the Registration Rights Agreement, the Other Notes or any other
      Transaction Document shall prove to have been false or incorrect or breached
      in
      a material respect on the date as of which made; or

     

    (i)  the
      Maker
      shall (A) default in any payment of any amount or amounts of principal of or
      interest on any Indebtedness (other than the Indebtedness hereunder) the
      aggregate principal amount of which Indebtedness is in excess of
      $100,000 or
      (B)
      default in the observance or performance of any other agreement or condition
      relating to any Indebtedness or contained in any instrument or agreement
      evidencing, securing or relating thereto, or any other event shall occur or
      condition exist, the effect of which default or other event or condition is
      to
      cause, or to permit the holder or holders or beneficiary or beneficiaries of
      such Indebtedness to cause with the giving of notice if required, such
      Indebtedness to become due prior to its stated maturity; or 

     

    (j)  the
      Maker
      shall (i) apply for or consent to the appointment of, or the taking of
      possession by, a receiver, custodian, trustee or liquidator of itself or of
      all
      or a substantial part of its property or assets, (ii) make a general assignment
      for the benefit of its creditors, (iii) commence a voluntary case under the
      United States Bankruptcy Code (as now or hereafter in effect) or under the
      comparable laws of any jurisdiction (foreign or domestic), (iv) file a petition
      seeking to take advantage of any bankruptcy, insolvency, moratorium,
      reorganization or other similar law affecting the enforcement of creditors'
      rights generally, (v) acquiesce in writing to any petition filed against it
      in
      an involuntary case under United States Bankruptcy Code (as now or hereafter
      in
      effect) or under the comparable laws of any jurisdiction (foreign or domestic),
      (vi) issue a notice of bankruptcy or winding down of its operations or issue
      a
      press release regarding same, or (vii) take any action under the laws of any
      jurisdiction (foreign or domestic) analogous to any of the foregoing; or

     

    (k)  a
      proceeding or case shall be commenced in respect of the Maker, without its
      application or consent, in any court of competent jurisdiction, seeking (i)
      the
      liquidation, reorganization, moratorium, dissolution, winding up, or composition
      or readjustment of its debts, (ii) the appointment of a trustee, receiver,
      custodian, liquidator or the like of it or of all or any substantial part of
      its
      assets in connection with the liquidation or dissolution of the Maker or (iii)
      similar relief in respect of it under any law providing for the relief of
      debtors, and such proceeding or case described in clause (i), (ii) or (iii)
      shall continue undismissed, or unstayed and in effect, for a period of thirty
      (30) days or any order for relief shall be entered in an involuntary case under
      United States Bankruptcy Code (as now or hereafter in effect) or under the
      comparable laws of any jurisdiction (foreign or domestic) against the Maker
      or
      action under the laws of any jurisdiction (foreign or domestic) analogous to
      any
      of the foregoing shall be taken with respect to the Maker and shall continue
      undismissed, or unstayed and in effect for a period of thirty (30) days;
      or

     

    (l)  the
      failure of the Maker to instruct its transfer agent to remove any legends from
      shares of Common Stock eligible to be sold under Rule 144 of the Securities
      Act
      and issue such unlegended certificates to the Holder within three (3) business
      days of the Holder’s request so long as the Holder has provided reasonable
      assurances to the Maker that such shares of Common Stock can be sold pursuant
      to
      Rule 144; or

     

    (m)  the
      failure of the Maker to pay any amounts due to the Holder herein or in the
      Purchase Agreement or the Registration Rights Agreement within three (3)
      business days of the date such payments are due; or

     

    (n)  the
      occurrence of an Event of Default under the Other Notes or the Zero Coupon
      Notes.

     

    Section
      2.2  Remedies
      Upon An Event of Default.
      If an
      Event of Default shall have occurred and shall be continuing, the Holder of
      this
      Note may at any time at its option, (a) declare the entire unpaid principal
      balance of this Note, together with all interest accrued hereon, due and
      payable, and thereupon, the same shall be accelerated and so due and payable,
      without presentment, demand, protest, or notice, all of which are hereby
      expressly unconditionally and irrevocably waived by the Maker; provided,
      however, that upon the occurrence of an Event of Default described in (i)
      Sections 2.1 (j) or (k), the outstanding principal balance and accrued interest
      hereunder shall be automatically due and payable and (ii) Sections 2.1 (b)-(i),
      demand the prepayment of this Note pursuant to Section 3.7 hereof, (b) demand
      that the principal amount of this Note then outstanding and all accrued and
      unpaid interest thereon shall be converted into shares of Common Stock at a
      Conversion Price per share calculated pursuant to Section 3.1 hereof assuming
      that the date that the Event of Default occurs is the Conversion Date (as
      defined in Section 3.1 hereof), or (c) exercise or otherwise enforce any one
      or
      more of the Holder's rights, powers, privileges, remedies and interests under
      this Note, the Purchase Agreement, the Registration Rights Agreement or
      applicable law. No course of delay on the part of the Holder shall operate
      as a
      waiver thereof or otherwise prejudice the right of the Holder. No remedy
      conferred hereby shall be exclusive of any other remedy referred to herein
      or
      now or hereafter available at law, in equity, by statute or
      otherwise.

     

     

    
      
        2

      

      
         

        
          

        

      

      
         

      

    

    ARTICLE
      III

     

    CONVERSION;
      ANTIDILUTION; PREPAYMENT

     

              Section
      3.1  Conversion
      Option.
      

     

    (a)  At
      any
      time on or after the Issuance Date, this Note shall be convertible (in whole
      or
      in part), at the option of the Holder (the "Conversion Option"), into such
      number of fully paid and non-assessable shares of Common Stock (the "Conversion
      Rate") as is determined by dividing (x) that portion of the outstanding
      principal balance plus any accrued but unpaid interest under this Note as of
      such date that the Holder elects to convert by (y) the Conversion Price (as
      defined in Section 3.2(a) hereof) then in effect on the date on which the Holder
      faxes a notice of conversion (the "Conversion Notice"), duly executed, to the
      Maker (facsimile number (800) 608-3562, Attn.: Chief Executive Officer) (the
      “Voluntary Conversion Date”), provided, however, that the Conversion Price shall
      be subject to adjustment as described in Section 3.6 below. The Holder shall
      deliver this Note to the Maker at the address designated in the Purchase
      Agreement at such time that this Note is fully converted. With respect to
      partial conversions of this Note, the Maker shall keep written records of the
      amount of this Note converted as of each Conversion Date. 

     

    (b)  On
      the
      Mandatory Conversion Date (as defined below), the Maker may cause the principal
      amount of this Note plus all accrued and unpaid interest to convert into a
      number of fully paid and nonassessable shares of Common Stock equal to the
      quotient of (i) the principal amount of this Note plus all accrued and unpaid
      interest outstanding on the Mandatory Conversion Date divided by (ii) the
      Conversion Price in effect on the Mandatory Conversion Date by providing five
      business (5) days prior written notice of such Mandatory Conversion Date;
provided,
      that,
      the Maker shall not convert, during any fifteen day period, this Note into
      such
      number of registered shares of Common Stock in excess of an amount equal to
      the
      greater of (1) twenty-five percent (25%) of the aggregate trading volume for
      the
      prior fifteen (15) days or (2) twenty percent (20%) of the original principal
      amount of this Note. As used herein, a "Mandatory
      Conversion Date"
      shall
      be a date following the effective date of the Registration Statement in which
      the Closing Bid Price exceeds $0.80 for a period of ten (10) consecutive Trading
      Days and the average daily trading volume for such ten (10) consecutive Trading
      Day period exceeds 250,000 shares of Common Stock; provided,
      that
      (A) the
      Registration Statement is effective and has been effective, without lapse or
      suspension of any kind, for a period of twenty (20) consecutive calendar days
      immediately preceding the Mandatory Conversion Date, (B) trading
      in the Common Stock shall not have been suspended by the Securities and Exchange
      Commission or the OTC Bulletin Board (or other exchange or market on which
      the
      Common Stock is trading), (C) the Maker is in material compliance with the
      terms
      and conditions of this Note and the other Transaction Documents, (D) the
      issuance of shares of Common Stock on the Mandatory Conversion Date pursuant
      to
      such mandatory conversion does not violate the provisions of Section 3.4 hereof,
      and (E) the Maker is not in possession of any material non-public
      information.
      Notwithstanding the foregoing to the contrary, the Mandatory Conversion Date
      shall be extended for as long as a Triggering Event (as defined in Section
      3.7(f) hereof) shall have occurred and be continuing. The Mandatory Conversion
      Date and the Voluntary Conversion Date collectively are referred to in this
      Note
      as the "Conversion
      Date."

     

    (c)  So
      long
      as the Registration Statement is effective, in the event that the Closing Bid
      Price of the Common Stock is greater than $0.40 and less than $1.25, the maximum
      number of shares of Common Stock that may be issued upon conversion of this
      Note
      shall not exceed the greater of (1) twenty-five percent (25%) of the aggregate
      trading volume for the prior fifteen (15) days or (2) twenty percent (20%)
      of
      the original principal amount of this Note.

     

                    
      Section 3.2  Conversion
      Price.

     

    (a)  The
      term
      "Conversion
      Price"
      shall
      mean $0.40, subject to adjustment under Section 3.6 hereof. 

     

    (b)  Notwithstanding
      any of the foregoing to the contrary, if during any period (a "Black-out
      Period"),
      a
      Holder is unable to trade any Common Stock issued or issuable upon conversion
      of
      this Note immediately due to the postponement of filing or delay or suspension
      of effectiveness of the Registration Statement or because the Maker has
      otherwise informed such Holder that an existing prospectus cannot be used at
      that time in the sale or transfer of such Common Stock (provided that such
      postponement, delay, suspension or fact that the prospectus cannot be used
      is
      not due to factors solely within the control of the Holder of this Note or
      due
      to the Maker exercising its rights under Section 3(n) of the Registration Rights
      Agreement), such Holder shall have the option but not the obligation on any
      Conversion Date within ten (10) Trading Days following the expiration of the
      Black-out Period of using the Conversion Price applicable on such Conversion
      Date or any Conversion Price selected by such Holder that would have been
      applicable had such Conversion Date been at any earlier time during the
      Black-out Period or within the ten (10) Trading Days thereafter. In no event
      shall the Black-out Period have any effect on the Maturity Date of this Note.
      

     

                          
      Section 3.3  Mechanics
      of Conversion. 

     

    (a)  Not
      later
      than three (3) Trading Days after any Conversion Date, the Maker or its
      designated transfer agent, as applicable, shall issue and deliver to the
      Depository Trust Company (“DTC”)
      account on the Holder’s behalf via the Deposit Withdrawal Agent Commission
      System (“DWAC”)
      as
      specified in the Conversion Notice, registered in the name of the Holder or
      its
      designee, for the number of shares of Common Stock to which the Holder shall
      be
      entitled. In the alternative, not later than three (3) Trading Days after any
      Conversion Date, the Maker shall deliver to the applicable Holder by express
      courier a certificate or certificates which shall be free of restrictive legends
      and trading restrictions (other than those required by Section 5.1 of the
      Purchase Agreement) representing the number of shares of Common Stock being
      acquired upon the conversion of this Note (the “Delivery
      Date”).
      Notwithstanding the foregoing to the contrary, the Maker 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 such
      conversion is in connection with a sale and the Holder has complied with the
      applicable prospectus delivery requirements (as evidenced by documentation
      furnished to and reasonably satisfactory to the Maker). If in the case of any
      Conversion Notice such certificate or certificates are not delivered to or
      as
      directed by the applicable Holder by the Delivery Date, the Holder shall be
      entitled by written notice to the Maker at any time on or before its receipt
      of
      such certificate or certificates thereafter, to rescind such conversion, in
      which event the Maker shall immediately return this Note tendered for
      conversion, whereupon the Maker and the Holder shall each be restored to their
      respective positions immediately prior to the delivery of such notice of
      revocation, except that any amounts described in Sections 3.3(b) and (c) shall
      be payable through the date notice of rescission is given to the Maker.

     

    (b)  The
      Maker
      understands that a delay in the delivery of the shares of Common Stock upon
      conversion of this Note beyond the Delivery Date could result in economic loss
      to the Holder. If the Maker fails to deliver to the Holder such shares via
      DWAC
      or a certificate or certificates pursuant to this Section hereunder by the
      Delivery Date, the Maker shall pay to such Holder, in cash, an amount per
      Trading Day for each Trading Day until such shares are delivered via DWAC or
      certificates are delivered, together with interest on such amount at a rate
      of
      10% per annum, accruing until such amount and any accrued interest thereon
      is
      paid in full, equal to the greater of (A) (i) 1% of the aggregate principal
      amount of the Notes requested to be converted for the first five (5) Trading
      Days after the Delivery Date and (ii) 2% of the aggregate principal amount
      of
      the Notes requested to be converted for each Trading Day thereafter and (B)
      $2,000 per day (which amount shall be paid as liquidated damages and not as
      a
      penalty). Nothing herein shall limit a Holder's right to pursue actual damages
      for the Maker's failure to deliver certificates representing shares of Common
      Stock upon conversion within the period specified herein and such Holder shall
      have the right to pursue all remedies available to it at law or in equity
      (including, without limitation, a decree of specific performance and/or
      injunctive relief). Notwithstanding anything to the contrary contained herein,
      the Holder shall be entitled to withdraw a Conversion Notice, and upon such
      withdrawal the Maker shall only be obligated to pay the liquidated damages
      accrued in accordance with this Section 3.3(b) through the date the Conversion
      Notice is withdrawn.

     

    (c)  In
      addition to any other rights available to the Holder, if the Maker fails to
      cause its transfer agent to transmit to the Holder a certificate or certificates
      representing the shares of Common Stock issuable upon conversion of this Note
      on
      or before the Delivery Date, and if after such date the Holder is required
      by
      its broker to purchase (in an open market transaction or otherwise) shares
      of
      Common Stock to deliver in satisfaction of a sale by the Holder of the shares
      of
      Common Stock issuable upon conversion of this Note which the Holder anticipated
      receiving upon such exercise (a “Buy-In”),
      then
      the Maker shall (1) pay in cash to the Holder the amount by which (x) the
      Holder’s total purchase price (including brokerage commissions, if any) for the
      shares of Common Stock so purchased exceeds (y) the amount obtained by
      multiplying (A) the number of shares of Common Stock issuable upon conversion
      of
      this Note that the Maker was required to deliver to the Holder in connection
      with the conversion at issue times (B) the price at which the sell order giving
      rise to such purchase obligation was executed, and (2) at the option of the
      Holder, either reinstate the portion of the Note and equivalent number of shares
      of Common Stock for which such conversion was not honored or deliver to the
      Holder the number of shares of Common Stock that would have been issued had
      the
      Maker timely complied with its conversion and delivery obligations hereunder.
      For example, if the Holder purchases Common Stock having a total purchase price
      of $11,000 to cover a Buy-In with respect to an attempted conversion of shares
      of Common Stock with an aggregate sale price giving rise to such purchase
      obligation of $10,000, under clause (1) of the immediately preceding sentence
      the Maker shall be required to pay the Holder $1,000. The Holder shall provide
      the Maker written notice indicating the amounts payable to the Holder in respect
      of the Buy-In, together with applicable confirmations and other evidence
      reasonably requested by the Maker. Nothing herein shall limit a Holder’s right
      to pursue any other remedies available to it hereunder, at law or in equity
      including, without limitation, a decree of specific performance and/or
      injunctive relief with respect to the Maker’s failure to timely deliver
      certificates representing shares of Common Stock upon conversion of this Note
      as
      required pursuant to the terms hereof.

     

    
      
        3

      

      
         

        
          

        

      

      
         

      

    

    Section
      3.4  Ownership
      Cap and Certain Conversion Restrictions.
      

     

    (a)  Notwithstanding
      anything to the contrary set forth in Section 3 of this Note, at no time may
      the
      Holder convert all or a portion of this Note if the number of shares of Common
      Stock to be issued pursuant to such conversion would exceed, when aggregated
      with all other shares of Common Stock owned by the Holder at such time, the
      number of shares of Common Stock which would result in the Holder beneficially
      owning (as determined in accordance with Section 13(d) of the Exchange Act
      and
      the rules thereunder) more than 4.9% of all of the Common Stock outstanding
      at
      such time; provided,
      however,
      that
      upon the Holder providing the Maker with sixty-one (61) days notice (pursuant
      to
      Section 4.1 hereof) (the "Waiver
      Notice")
      that
      the Holder would like to waive this Section 3.4(a) with regard to any or all
      shares of Common Stock issuable upon conversion of this Note, this Section
      3.4(a) will be of no force or effect with regard to all or a portion of the
      Note
      referenced in the Waiver Notice. 

     

    (b)  Notwithstanding
      anything to the contrary set forth in Section 3 of this Note, at no time may
      the
      Holder convert all or a portion of this Note if the number of shares of Common
      Stock to be issued pursuant to such conversion, when aggregated with all other
      shares of Common Stock owned by the Holder at such time, would result in the
      Holder beneficially owning (as determined in accordance with Section 13(d)
      of
      the Exchange Act and the rules thereunder) in excess of 9.9% of the then issued
      and outstanding shares of Common Stock outstanding at such time; provided,
      however,
      that
      upon the Holder providing the Maker with a Waiver Notice that the Holder would
      like to waive Section 3.4(b) of this Note with regard to any or all shares
      of
      Common Stock issuable upon conversion of this Note, this Section 3.4(b) shall
      be
      of no force or effect with regard to all or a portion of the Note referenced
      in
      the Waiver Notice.

     

              Section
      3.5  Intentionally
      Omitted.

     

              Section
      3.6  Adjustment
      of Conversion Price.

     

    (a)  The
      Conversion Price shall be subject to adjustment from time to time as
      follows:

     

    (i)  Adjustments
      for Stock Splits and Combinations.
      If the
      Maker shall at any time or from time to time after the Issuance Date, effect
      a
      stock split of the outstanding Common Stock, the applicable Conversion Price
      in
      effect immediately prior to the stock split shall be proportionately decreased.
      If the Maker shall at any time or from time to time after the Issuance Date,
      combine the outstanding shares of Common Stock, the applicable Conversion Price
      in effect immediately prior to the combination shall be proportionately
      increased. Any adjustments under this Section 3.6(a)(i) shall be effective
      at
      the close of business on the date the stock split or combination
      occurs.

     

    (ii)  Adjustments
      for Certain Dividends and Distributions.
      If the
      Maker shall at any time or from time to time after the Issuance Date, make
      or
      issue or set a record date for the determination of holders of Common Stock
      entitled to receive a dividend or other distribution payable in shares of Common
      Stock, then, and in each event, the applicable Conversion Price in effect
      immediately prior to such event shall be decreased as of the time of such
      issuance or, in the event such record date shall have been fixed, as of the
      close of business on such record date, by multiplying, the applicable Conversion
      Price then in effect by a fraction:

     

    (1)  the
      numerator of which shall be the total number of shares of Common Stock issued
      and outstanding immediately prior to the time of such issuance or the close
      of
      business on such record date; and

     

    (2)  the
      denominator of which shall be the total number of shares of Common Stock issued
      and outstanding immediately prior to the time of such issuance or the close
      of
      business on such record date plus the number of shares of Common Stock issuable
      in payment of such dividend or distribution.

     

    (iii)  Adjustment
      for Other Dividends and Distributions.
      If the
      Maker shall at any time or from time to time after the Issuance Date, make
      or
      issue or set a record date for the determination of holders of Common Stock
      entitled to receive a dividend or other distribution payable in other than
      shares of Common Stock, then, and in each event, an appropriate revision to
      the
      applicable Conversion Price shall be made and provision shall be made (by
      adjustments of the Conversion Price or otherwise) so that the holders of this
      Note shall receive upon conversions thereof, in addition to the number of shares
      of Common Stock receivable thereon, the number of securities of the Maker which
      they would have received had this Note been converted into Common Stock on
      the
      date of such event and had thereafter, during the period from the date of such
      event to and including the Conversion Date, retained such securities (together
      with any distributions payable thereon during such period), giving application
      to all adjustments called for during such period under this Section 3.6(a)(iii)
      with respect to the rights of the holders of this Note and the Other Notes;
      provided,
      however,
      that if
      such record date shall have been fixed and such dividend is not fully paid
      or if
      such distribution is not fully made on the date fixed therefor, the Conversion
      Price shall be adjusted pursuant to this paragraph as of the time of actual
      payment of such dividends or distributions.

     

    (iv)  Adjustments
      for Reclassification, Exchange or Substitution.
      If the
      Common Stock issuable upon conversion of this Note at any time or from time
      to
      time after the Issuance Date shall be changed to the same or different number
      of
      shares of any class or classes of stock, whether by reclassification, exchange,
      substitution or otherwise (other than by way of a stock split or combination
      of
      shares or stock dividends provided for in Sections 3.6(a)(i), (ii) and (iii),
      or
      a reorganization, merger, consolidation, or sale of assets provided for in
      Section 3.6(a)(v)), then, and in each event, an appropriate revision to the
      Conversion Price shall be made and provisions shall be made (by adjustments
      of
      the Conversion Price or otherwise) so that the Holder shall have the right
      thereafter to convert this Note into the kind and amount of shares of stock
      and
      other securities receivable upon reclassification, exchange, substitution or
      other change, by holders of the number of shares of Common Stock into which
      such
      Note might have been converted immediately prior to such reclassification,
      exchange, substitution or other change, all subject to further adjustment as
      provided herein.

     

    (v)  Adjustments
      for Reorganization, Merger, Consolidation or Sales of Assets.
      If at
      any time or from time to time after the Issuance Date there shall be a capital
      reorganization of the Maker (other than by way of a stock split or combination
      of shares or stock dividends or distributions provided for in Section 3.6(a)(i),
      (ii) and (iii), or a reclassification, exchange or substitution of shares
      provided for in Section 3.6(a)(iv)), or a merger or consolidation of the Maker
      with or into another corporation where the holders of outstanding voting
      securities prior to such merger or consolidation do not own over fifty percent
      (50%) of the outstanding voting securities of the merged or consolidated entity,
      immediately after such merger or consolidation, or the sale of all or
      substantially all of the Maker's properties or assets to any other person (an
      "Organic
      Change"),
      then
      as a part of such Organic Change, (A) if the surviving entity in any such
      Organic Change is a public company that is
      registered pursuant to the Securities Exchange Act of 1934, as amended, and
      its
      common stock is listed or quoted on a national exchange or the OTC Bulletin
      Board, an
      appropriate revision to the Conversion Price shall be made and provision shall
      be made (by adjustments of the Conversion Price or otherwise) so that the Holder
      shall have the right thereafter to convert such Note into the kind and amount
      of
      shares of stock and other securities or property of the Maker or any successor
      corporation resulting from Organic Change, and (B) if the surviving entity
      in
      any such Organic Change is not a public company that is
      registered pursuant to the Securities Exchange Act of 1934, as amended, or
      its
      common stock is not listed or quoted on a national exchange or the OTC Bulletin
      Board,
      the
      Holder shall have the right to demand prepayment pursuant to Section 3.7(b)
      hereof. In any such case, appropriate adjustment shall be made in the
      application of the provisions of this Section 3.6(a)(v) with respect to the
      rights of the Holder after the Organic Change to the end that the provisions
      of
      this Section 3.6(a)(v) (including any adjustment in the applicable Conversion
      Price then in effect and the number of shares of stock or other securities
      deliverable upon conversion of this Note and the Other Notes) shall be applied
      after that event in as nearly an equivalent manner as may be
      practicable.

     

    (vi)  Adjustments
      for Issuance of Additional Shares of Common Stock.
      In the
      event the Maker, shall, at any time, from time to time, issue or sell any
      additional shares of common stock (otherwise than as provided in the foregoing
      subsections (i) through (v) of this Section 3.6(a) or pursuant to Common Stock
      Equivalents (hereafter defined) granted or issued prior to the Issuance Date)
      (“Additional
      Shares of Common Stock”),
      at a
      price per share less than the Conversion Price then in effect or without
      consideration, then the Conversion Price upon each such issuance shall be
      reduced to a price equal to the consideration per share paid for such Additional
      Shares of Common Stock.

     

    (vii)  Issuance
      of Common Stock Equivalents.
      The
      provisions of this Section 3.6(a)(vii) shall apply if (a) the Maker, at any
      time
      after the Issuance Date, shall issue any securities convertible into or
      exchangeable for, directly or indirectly, Common Stock ("Convertible
      Securities"),
      other
      than the Notes, or (b) any rights or warrants or options to purchase any such
      Common Stock or Convertible Securities (collectively, the "Common
      Stock Equivalents")
      shall
      be issued or sold. If the price per share for which Additional Shares of Common
      Stock may be issuable pursuant to any such Common Stock Equivalent shall be
      less
      than the applicable Conversion Price then in effect, or if, after any such
      issuance of Common Stock Equivalents, the price per share for which Additional
      Shares of Common Stock may be issuable thereafter is amended or adjusted, and
      such price as so amended shall be less than the applicable Conversion Price
      in
      effect at the time of such amendment or adjustment, then the applicable
      Conversion Price upon each such issuance or amendment shall be adjusted as
      provided in the first sentence of subsection (vi) of this Section 3.6(a). No
      adjustment shall be made to the Conversion Price upon the issuance of Common
      Stock pursuant to the exercise, conversion or exchange of any Convertible
      Security or Common Stock Equivalent where an adjustment to the Conversion Price
      was made as a result of the issuance or purchase of any Convertible Security
      or
      Common Stock Equivalent.

     

    (viii)  Consideration
      for Stock.
      In case
      any shares of Common Stock or any Common Stock Equivalents shall be issued
      or
      sold:

     

    (1)  in
      connection with any merger or consolidation in which the Maker is the surviving
      corporation (other than any consolidation or merger in which the previously
      outstanding shares of Common Stock of the Maker shall be changed to or exchanged
      for the stock or other securities of another corporation), the amount of
      consideration therefor shall be, deemed to be the fair value, as determined
      reasonably and in good faith by the Board of Directors of the Maker, of such
      portion of the assets and business of the nonsurviving corporation as such
      Board
      may determine to be attributable to such shares of Common Stock, Convertible
      Securities, rights or warrants or options, as the case may be; or

     

    (2)  in
      the
      event of any consolidation or merger of the Maker in which the Maker is not
      the
      surviving corporation or in which the previously outstanding shares of Common
      Stock of the Maker shall be changed into or exchanged for the stock or other
      securities of another corporation, or in the event of any sale of all or
      substantially all of the assets of the Maker for stock or other securities
      of
      any corporation, the Maker shall be deemed to have issued a number of shares
      of
      its Common Stock for stock or securities or other property of the other
      corporation computed on the basis of the actual exchange ratio on which the
      transaction was predicated, and for a consideration equal to the fair market
      value on the date of such transaction of all such stock or securities or other
      property of the other corporation. If any such calculation results in adjustment
      of the applicable Conversion Price, or the number of shares of Common Stock
      issuable upon conversion of the Notes, the determination of the applicable
      Conversion Price or the number of shares of Common Stock issuable upon
      conversion of the Notes immediately prior to such merger, consolidation or
      sale,
      shall be made after giving effect to such adjustment of the number of shares
      of
      Common Stock issuable upon conversion of the Notes. In the event Common Stock
      is
      issued with other shares or securities or other assets of the Maker for
      consideration which covers both, the consideration computed as provided in
      this
      Section 3.6(viii) shall be allocated among such securities and assets as
      determined in good faith by the Board of Directors of the Maker.

     

    (b)  Record
      Date.
      In case
      the Maker shall take record of the holders of its Common Stock for the purpose
      of entitling them to subscribe for or purchase Common Stock or Convertible
      Securities, then the date of the issue or sale of the shares of Common Stock
      shall be deemed to be such record date.

     

    (c)  Certain
      Issues Excepted.
      Anything herein to the contrary notwithstanding, the Maker shall not be required
      to make any adjustment to the Conversion Price in connection with (i) securities
      issued (other than for cash) in connection with a merger, acquisition, or
      consolidation, (ii) securities issued pursuant to a bona fide firm underwritten
      public offering of the Maker’s securities, (iii) securities issued pursuant to
      the conversion or exercise of convertible or excercisable securities issued
      or
      outstanding on or prior to the date hereof or issued pursuant to the Purchase
      Agreement, (iv) the shares of Common Stock issuable upon the exercise of
      Warrants, (v) securities issued in connection with strategic license agreements
      or other partnering arrangements so long as such issuances are not for the
      purpose of raising capital, (vi) Common Stock issued or options to purchase
      Common Stock granted or issued pursuant to the Maker’s employee stock purchase
      plans as they now exist and stock incentive plans as they now exist or as may
      be
      amended so long as the aggregate number of shares of Common Stock issued
      pursuant to such stock incentive plans does not exceed 8,000,000, (vii) any
      warrants issued to the placement agent and its designees for the transactions
      contemplated by the Purchase Agreement, and (viii) the payment of any principal
      and accrued interest in shares of Common Stock pursuant to this Note or the
      Other Notes.

    

    (d)  No
      Impairment.
      The
Maker
      shall
      not, by amendment of its Articles of Incorporation or through any
      reorganization, transfer of assets, consolidation, merger, dissolution, issue
      or
      sale of securities or any other voluntary action, avoid or seek to avoid the
      observance or performance of any of the terms to be observed or performed
      hereunder by the Maker,
      but
      will at all times in good faith, assist in the carrying out of all the
      provisions of this Section 3.6 and in the taking of all such action as may
      be
      necessary or appropriate in order to protect the Conversion Rights of the Holder
      against impairment. In the event a Holder shall elect to convert any Notes
      as
      provided herein, the Maker cannot refuse conversion based on any claim that
      such
      Holder or any one associated or affiliated with such Holder has been engaged
      in
      any violation of law, violation of an agreement to which such Holder is a party
      or for any reason whatsoever, unless, an injunction from a court, or notice,
      restraining and or adjoining conversion of all or of said Notes shall have
      issued and the Maker posts a surety bond for the benefit of such Holder in
      an
      amount equal to one hundred thirty percent (130%) of the amount of the Notes
      the
      Holder has elected to convert, 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 Holder (as liquidated damages) in the event it obtains
      judgment.

    

    
      
        4

      

      
         

        
          

        

      

      
         

      

    

    (e)  Certificates
      as to Adjustments.
      Upon
      occurrence of each adjustment or readjustment of the Conversion Price or number
      of shares of Common Stock issuable upon conversion of this Note pursuant to
      this
      Section 3.6, the Maker
      at its
      expense shall promptly compute such adjustment or readjustment in accordance
      with the terms hereof and furnish to the Holder a certificate setting forth
      such
      adjustment and readjustment, showing in detail the facts upon which such
      adjustment or readjustment is based. The Maker
      shall,
      upon written request of the Holder, at any time, furnish or cause to be
      furnished to the Holder a like certificate setting forth such adjustments and
      readjustments, the applicable Conversion Price in effect at the time, and the
      number of shares of Common Stock and the amount, if any, of other securities
      or
      property which at the time would be received upon the conversion of this Note.
      Notwithstanding the foregoing, the Maker shall not be obligated to deliver
      a
      certificate unless such certificate would reflect an increase or decrease of
      at
      least one percent (1%) of such adjusted amount.

     

    (f)  Issue
      Taxes.
      The
      Maker shall pay any and all issue and other taxes, excluding federal, state
      or
      local income taxes, that may be payable in respect of any issue or delivery
      of
      shares of Common Stock on conversion of this Note pursuant thereto; provided,
      however,
      that
      the Maker shall not be obligated to pay any transfer taxes resulting from any
      transfer requested by the Holder in connection with any such
      conversion.

     

    (g)  Fractional
      Shares.
      No
      fractional shares of Common Stock shall be issued upon conversion of this Note.
      In lieu of any fractional shares to which the Holder would otherwise be
      entitled, the Maker shall pay cash equal to the product of such fraction
      multiplied by the average of the Closing Bid Prices of the Common Stock for
      the
      five (5) consecutive Trading Days immediately preceding the Conversion Date.
      

     

    (h)  Reservation
      of Common Stock.
      The
      Maker shall at all times when this Note shall be outstanding, reserve and keep
      available out of its authorized but unissued Common Stock, such number of shares
      of Common Stock as shall from time to time be sufficient to effect the
      conversion of this Note and all interest accrued thereon; provided
      that the
      number of shares of Common Stock so reserved shall at no time be less than
      one
      hundred twenty percent (120%) of the number of shares of Common Stock for which
      this Note and all interest accrued thereon are at any time convertible. The
      Maker shall, from time to time in accordance with the Nevada Revised Business
      Corporation Act, increase the authorized number of shares of Common Stock if
      at
      any time the unissued number of authorized shares shall not be sufficient to
      satisfy the Maker’s obligations under this Section 3.6(h).

     

    (i)  Regulatory
      Compliance.
      If any
      shares of Common Stock to be reserved for the purpose of conversion of this
      Note
      or any interest accrued thereon require registration or listing with or approval
      of any governmental authority, stock exchange or other regulatory body under
      any
      federal or state law or regulation or otherwise before such shares may be
      validly issued or delivered upon conversion, the Maker shall, at its sole cost
      and expense, in good faith and as expeditiously as possible, endeavor to secure
      such registration, listing or approval, as the case may be.

    Section
      3.7 Prepayment.

     

    (a)  Prepayment
      Upon an Event of Default.
      Notwithstanding anything to the contrary contained herein, upon the occurrence
      of an Event of Default described in Sections 2.1(b)-(k) hereof, the Holder
      shall
      have the right, at such Holder's option, to require the Maker to prepay in
      cash
      all or a portion of this Note at a price equal to one hundred ten percent (110%)
      of the aggregate principal amount of this Note plus all accrued and unpaid
      interest applicable at the time of such request. Nothing in this Section 3.7(a)
      shall limit the Holder's rights under Section 2.2 hereof.

     

    (b)  Prepayment
      Option Upon Major Transaction. In addition to all other rights of the Holder
      contained herein, simultaneous with the occurrence of a Major Transaction (as
      defined below), the Holder shall have the right, at the Holder's option, to
      require the Maker to prepay all or a portion of the Holder's Notes at a price
      equal to one hundred percent (100%) of the aggregate principal amount of this
      Note plus all accrued and unpaid interest (the "Major Transaction Prepayment
      Price"); provided that the Maker shall have the sole option to make payment
      of
      the Major Transaction Prepayment Price in cash or shares of Common Stock. If
      the
      Maker elects to make payment of the Major Transaction Prepayment Price in shares
      of Common Stock, the price per share shall be based upon the Conversion Price
      then in effect on the day preceding the date of delivery of the Notice of
      Prepayment at Option of Holder Upon Major Transaction (as hereafter defined)
      and
      the Holder shall have demand registration rights with respect to such
      shares.

     

    (c)  Prepayment
      Option Upon Triggering Event.
      In
      addition to all other rights of the Holder contained herein, after a Triggering
      Event (as defined below), the Holder shall have the right, at the Holder's
      option, to require the Maker to prepay all or a portion of this Note in cash
      at
      a price equal to the sum of (i) the greater of (A) one hundred twenty percent
      (120%) of the aggregate principal amount of this Note plus all accrued and
      unpaid interest and (B) in the event at such time the Holder is unable to obtain
      the benefit of its conversion rights through the conversion of this Note and
      resale of the shares of Common Stock issuable upon conversion hereof in
      accordance with the terms of this Note and the other Transaction Documents,
      the
      aggregate principal amount of this Note plus all accrued but unpaid interest
      hereon, divided by the Conversion Price on (x) the date the Prepayment Price
      (as
      defined below) is demanded or otherwise due or (y) the date the Prepayment
      Price
      is paid in full, whichever is less, multiplied by the VWAP (as defined below)
      on
      (x) the date the Prepayment Price is demanded or otherwise due, and (y) the
      date
      the Prepayment Price is paid in full, whichever is greater, and (ii) all other
      amounts, costs, expenses and liquidated damages due in respect of this Note
      and
      the other Transaction Documents (the "Triggering
      Event Prepayment Price,"
      and,
      collectively with the Major Transaction Prepayment Price, the "Prepayment
      Price").
      For
      purposes hereof, “VWAP”
      means,
      for any date, (i) the daily volume weighted average price of the Common Stock
      for such date on the OTC Bulletin Board as reported by Bloomberg Financial
      L.P.
      (based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time);
      (ii) if the Common Stock is not then listed or quoted on the OTC Bulletin
      Board and if prices for the Common Stock are then reported in the “Pink Sheets”
      published by the Pink Sheets, LLC (or a similar organization or agency
      succeeding to its functions of reporting prices), the most recent bid price
      per
      share of the Common Stock so reported; or (iii) in all other cases,
      the
      fair market value of a share of Common Stock as determined by an independent
      appraiser selected in good faith by the Holder and reasonably acceptable to
      the
      Maker.

     

    (d)  Intentionally
      Omitted.

     

    (e)  "Major
      Transaction." A "Major Transaction" shall be deemed to have occurred at such
      time as any of the following events:

     

    (i)  the
      consolidation, merger or other business combination of the Maker with or into
      another Person (as defined in Section 4.13 hereof) (other than (A) pursuant
      to a
      migratory merger effected solely for the purpose of changing the jurisdiction
      of
      incorporation of the Maker or (B) a consolidation, merger or other business
      combination in which holders of the Maker's voting power immediately prior
      to
      the transaction continue after the transaction to hold, directly or indirectly,
      the voting power of the surviving entity or entities necessary to elect a
      majority of the members of the board of directors (or their equivalent if other
      than a corporation) of such entity or entities).

     

    (ii)  the
      sale
      or transfer of more than fifty percent (50%) of the Maker’s assets (based on the
      fair market value as determined in good faith by the Maker’s Board of Directors)
      other than inventory in the ordinary course of business in one or a related
      series of transactions; or

     

    (iii)  closing
      of a purchase, tender or exchange offer made to the holders of more than fifty
      percent (50%) of the outstanding shares of Common Stock in which more than
      fifty
      percent (50%) of the outstanding shares of Common Stock were tendered and
      accepted.

     

    (f)  "Triggering
      Event." A "Triggering Event" shall be deemed to have occurred at such time
      as
      any of the following events:

     

    (i)  so
      long
      as any Notes are outstanding, the effectiveness of the Registration Statement,
      after it becomes effective, (i) lapses for any reason (including, without
      limitation, the issuance of a stop order) or (ii) is unavailable to the Holder
      for sale of the shares of Common Stock, and such lapse or unavailability
      continues for a period of twenty (20) consecutive Trading Days, and the shares
      of Common Stock into which the Holder's Notes can be converted cannot be sold
      in
      the public securities market pursuant to Rule 144(k), provided that the cause
      of
      such lapse or unavailability is not due to factors primarily within the control
      of the Holder of the Notes; and provided further that a Triggering Event shall
      not have occurred if and to the extent the Maker exercised its rights set forth
      in Section 3(n) of the Registration Rights Agreement; 

     

    (ii)  the
      suspension from listing, without subsequent listing on any one of, or the
      failure of the Common Stock to be listed on at least one of the OTC Bulletin
      Board, the American Stock Exchange, the Nasdaq National Market, the Nasdaq
      SmallCap Market or The New York Stock Exchange, Inc., for a period of five
      (5)
      consecutive Trading Days;

     

    (iii)  the
      Maker's notice to any holder of the Notes, including by way of public
      announcement, at any time, of its inability to comply (including for any of
      the
      reasons described in Section 3.8) or its intention not to comply with proper
      requests for conversion of any Notes into shares of Common Stock;
      or

     

    (iv)  the
      Maker's failure to comply with a Conversion Notice tendered in accordance with
      the provisions of this Note within ten (10) business days after the receipt
      by
      the Maker of the Conversion Notice; or

     

    (v)  the
      Maker
      deregisters its shares of Common Stock and as a result such shares of Common
      Stock are no longer publicly traded; or

     

    (vi)  the
      Maker
      consummates a “going private” transaction and as a result the Common Stock is no
      longer registered under Sections 12(b) or 12(g) of the Exchange
      Act.

     

    (g)  Intentionally
      Omitted.

    

    (h)  Mechanics
      of Prepayment at Option of Holder Upon Major Transaction. No sooner than fifteen
      (15) days nor later than ten (10) days prior to the consummation of a Major
      Transaction, but not prior to the public announcement of such Major Transaction,
      the Maker shall deliver written notice thereof via facsimile and overnight
      courier ("Notice of Major Transaction") to the Holder of this Note. At any
      time
      after receipt of a Notice of Major Transaction (or, in the event a Notice of
      Major Transaction is not delivered at least ten (10) days prior to a Major
      Transaction, at any time within ten (10) days prior to a Major Transaction),
      any
      holder of the Notes then outstanding may require the Maker to prepay, effective
      immediately prior to the consummation of such Major Transaction, all of the
      holder's Notes then outstanding by delivering written notice thereof via
      facsimile and overnight courier ("Notice of Prepayment at Option of Holder
      Upon
      Major Transaction") to the Maker, which Notice of Prepayment at Option of Holder
      Upon Major Transaction shall indicate (i) the principal amount of the Notes
      that
      such holder is electing to have prepaid and (ii) the applicable Major
      Transaction Prepayment Price, as calculated pursuant to Section 3.7(b)
      above.

     

    (i)  Mechanics
      of Prepayment at Option of Holder Upon Triggering Event. Within one (1) business
      day after the occurrence of a Triggering Event, the Maker shall deliver written
      notice thereof via facsimile and overnight courier ("Notice of Triggering
      Event") to each holder of the Notes. At any time after the earlier of a holder's
      receipt of a Notice of Triggering Event and such holder becoming aware of a
      Triggering Event, any holder of this Note and the Other Notes then outstanding
      may require the Maker to prepay all of the Notes on a pro rata basis by
      delivering written notice thereof via facsimile and overnight courier ("Notice
      of Prepayment at Option of Holder Upon Triggering Event") to the Maker, which
      Notice of Prepayment at Option of Holder Upon Triggering Event shall indicate
      (i) the amount of the Note that such holder is electing to have prepaid and
      (ii)
      the applicable Triggering Event Prepayment Price, as calculated pursuant to
      Section 3.7(c) above. A holder shall only be permitted to require the Maker
      to
      prepay the Note pursuant to Section 3.7 hereof for the greater of a period
      of
      ten (10) days after receipt by such holder of a Notice of Triggering Event
      or
      for so long as such Triggering Event is continuing.

     

    
      
        5

      

      
         

        
          

        

      

      
         

      

    

    (j)  Payment
      of Prepayment Price.
      Upon
      the Maker's receipt of a Notice(s) of Prepayment at Option of Holder Upon
      Triggering Event or a Notice(s) of Prepayment at Option of Holder Upon Major
      Transaction from any holder of the Notes, the Maker shall immediately notify
      each holder of the Notes by facsimile of the Maker's receipt of such Notice(s)
      of Prepayment at Option of Holder Upon Triggering Event or Notice(s) of
      Prepayment at Option of Holder Upon Major Transaction and each holder which
      has
      sent such a notice shall promptly submit to the Maker such holder's certificates
      representing the Notes which such holder has elected to have prepaid. The Maker
      shall deliver the applicable Triggering Event Prepayment Price, in the case
      of a
      prepayment pursuant to Section 3.7(i), to such holder within five (5) business
      days after the Maker's receipt of a Notice of Prepayment at Option of Holder
      Upon Triggering Event and, in the case of a prepayment pursuant to Section
      3.7(h), the Maker shall deliver the applicable Major Transaction Prepayment
      Price immediately prior to the consummation of the Major Transaction; provided
      that a holder's original Note shall have been so delivered to the Maker;
      provided further that if the Maker is unable to prepay all of the Notes to
      be
      prepaid, the Maker shall prepay an amount from each holder of the Notes being
      prepaid equal to such holder's pro-rata amount (based on the number of Notes
      held by such holder relative to the number of Notes outstanding) of all Notes
      being prepaid. If the Maker shall fail to prepay all of the Notes submitted
      for
      prepayment (other than pursuant to a dispute as to the arithmetic calculation
      of
      the Prepayment Price), in addition to any remedy such holder of the Notes may
      have under this Note and the Purchase Agreement, the applicable Prepayment
      Price
      payable in respect of such Notes not prepaid shall bear interest at the rate
      of
      two percent (2%) per month (prorated for partial months) until paid in full.
      Until the Maker pays such unpaid applicable Prepayment Price in full to a holder
      of the Notes submitted for prepayment, such holder shall have the option (the
      "Void Optional Prepayment Option") to, in lieu of prepayment, require the Maker
      to promptly return to such holder(s) all of the Notes that were submitted for
      prepayment by such holder(s) under this Section 3.7 and for which the applicable
      Prepayment Price has not been paid, by sending written notice thereof to the
      Maker via facsimile (the "Void Optional Prepayment Notice"). Upon the Maker's
      receipt of such Void Optional Prepayment Notice(s) and prior to payment of
      the
      full applicable Prepayment Price to such holder, (i) the Notice(s) of Prepayment
      at Option of Holder Upon Triggering Event or the Notice(s) of Prepayment at
      Option of Holder Upon Major Transaction, as the case may be, shall be null
      and
      void with respect to those Notes submitted for prepayment and for which the
      applicable Prepayment Price has not been paid, (ii) the Maker shall immediately
      return any Notes submitted to the Maker by each holder for prepayment under
      this
      Section 3.7(j) and for which the applicable Prepayment Price has not been paid
      and (iii) the Conversion Price of such returned Notes shall be adjusted to
      the
      lesser of (A) the Conversion Price as in effect on the date on which the Void
      Optional Prepayment Notice(s) is delivered to the Maker and (B) the lowest
      Closing Bid Price during the period beginning on the date on which the Notice(s)
      of Prepayment of Option of Holder Upon Major Transaction or the Notice(s) of
      Prepayment at Option of Holder Upon Triggering Event, as the case may be, is
      delivered to the Maker and ending on the date on which the Void Optional
      Prepayment Notice(s) is delivered to the Maker; provided that no adjustment
      shall be made if such adjustment would result in an increase of the Conversion
      Price then in effect. A holder's delivery of a Void Optional Prepayment Notice
      and exercise of its rights following such notice shall not effect the Maker's
      obligations to make any payments which have accrued prior to the date of such
      notice. Payments provided for in this Section 3.7 shall have priority to
      payments to other stockholders in connection with a Major Transaction.

     

    (k)  Maker
      Prepayment Option.
      So long
      as less than ten percent (10%) of the original principal amount of this Note
      is
      outstanding, the Maker may prepay in cash all or any portion of the outstanding
      principal amount of this Note together with all accrued and unpaid interest
      thereon upon thirty (30) days prior written notice to the Holder (the
      "Maker's
      Prepayment Notice")
      at a
      price equal to one hundred twenty-five percent (125%)
      of the
      aggregate principal amount of this Note plus any accrued but unpaid
      interest
      (the
      "Maker's
      Prepayment Price");
      provided,
      however,
      that if
      a holder has delivered a Conversion Notice to the Maker or delivers a Conversion
      Notice within such thirty (30) day period following delivery of the Maker’s
      Prepayment Notice, the principal amount of the Notes plus any accrued but unpaid
      interest designated to be converted may not be prepaid by the Maker and shall
      be
      converted in accordance with Section 3.3 hereof; provided further
      that if
      during the period between delivery of the Maker's Prepayment Notice and the
      Maker's Prepayment Date (as defined below), a holder shall become entitled
      to
      deliver a Notice of Prepayment at Option of Holder Upon Major Transaction or
      Notice of Prepayment at Option of Holder upon Triggering Event, then the such
      rights of the holders shall take precedence over the previously delivered Maker
      Prepayment Notice. The Maker's Prepayment Notice shall state the date of
      prepayment which date shall be the thirty-first (31st)
      day
      after the Maker has delivered the Maker's Prepayment Notice (the "Maker's
      Prepayment Date"),
      the
      Maker’s Prepayment Price and the principal amount of Notes plus any accrued but
      unpaid interest to be prepaid by the Maker. The Maker shall deliver the Maker's
      Prepayment Price on the Maker’s Prepayment Date, provided,
      that if
      the holder(s) delivers a Conversion Notice before the Maker's Prepayment Date,
      then the portion of the Maker's Prepayment Price which would be paid to prepay
      the Notes covered by such Conversion Notice shall be returned to the Maker
      upon
      delivery of the Common Stock issuable in connection with such Conversion Notice
      to the holder(s). On the Maker's Prepayment Date, the Maker shall pay the
      Maker's Prepayment Price, subject to any adjustment pursuant to the immediately
      preceding sentence, to the holder(s) on a pro rata basis. If the Maker fails
      to
      pay the Maker's Prepayment Price by the thirty-first (31st)
      day
      after the Maker has delivered the Maker's Prepayment Notice, the prepayment
      will
      be declared null and void and the Maker shall lose its right to serve a Maker
      's
      Prepayment Notice pursuant to this Section 3.7(k) in the future. Notwithstanding
      the foregoing to the contrary, the Maker may effect a prepayment pursuant to
      this Section 3.7(k) only if (A) the Registration Statement is effective and
      has
      been effective, without lapse or suspension of any kind, for a period sixty
      (60)
      consecutive calendar days immediately preceding the Maker’s Prepayment Notice
      through the Maker’s Prepayment Date, (B) trading
      in the Common Stock shall not have been suspended by the Securities and Exchange
      Commission or the OTC Bulletin Board (or other exchange or market on which
      the
      Common Stock is trading), (C) the Maker is in material compliance with the
      terms
      and conditions of this Note and the other Transaction Documents, and (D) the
      Maker is not in possession of any material non-public information.

     

    Section
      3.8  Inability
      to Fully Convert.

     

    (a) Holder's
      Option if Maker Cannot Fully Convert.
      If,
      upon the Maker's receipt of a Conversion Notice, the Maker cannot issue shares
      of Common Stock registered for resale under the Registration Statement for
      any
      reason, including, without limitation, because the Maker (w) does not have
      a
      sufficient number of shares of Common Stock authorized and available, (x) is
      otherwise prohibited by applicable law or by the rules or regulations of any
      stock exchange, interdealer quotation system or other self-regulatory
      organization with jurisdiction over the Maker or any of its securities from
      issuing all of the Common Stock which is to be issued to the Holder pursuant
      to
      a Conversion Notice or (y) fails to have a sufficient number of shares of Common
      Stock registered for resale under the Registration Statement, then the Maker
      shall issue as many shares of Common Stock as it is able to issue in accordance
      with the Holder's Conversion Notice and, with respect to the unconverted portion
      of this Note, the Holder, solely at Holder's option, can elect to:

     

    (i)  require
      the Maker to prepay that portion of this Note for which the Maker is unable
      to
      issue Common Stock in accordance with the Holder's Conversion Notice (the
      "Mandatory
      Prepayment")
      at a
      price per share equal to the Triggering Event Prepayment Price as of such
      Conversion Date (the "Mandatory
      Prepayment Price");

     

    (ii)  if
      the
      Maker's inability to fully convert is pursuant to Section 3.8(a)(x) above,
      require the Maker to issue restricted shares of Common Stock in accordance
      with
      such holder's Conversion Notice;

     

    (iii)  void
      its
      Conversion Notice and retain or have returned, as the case may be, this Note
      that was to be converted pursuant to the Conversion Notice (provided that the
      Holder's voiding its Conversion Notice shall not effect the Maker's obligations
      to make any payments which have accrued prior to the date of such
      notice);

     

    (iv)  exercise
      its Buy-In rights pursuant to and in accordance with the terms and provisions
      of
      Section 3.3(c) of this Note.

     

    In
      the
      event a Holder shall elect to convert any portion of its Notes as provided
      herein, the Maker cannot refuse conversion based on any claim that such Holder
      or any one associated or affiliated with such Holder has been engaged in any
      violation of law, violation of an agreement to which such Holder is a party
      or
      for any reason whatsoever, unless, an injunction from a court, on notice,
      restraining and or adjoining conversion of all or of said Notes shall have
      been
      issued and the Maker posts a surety bond for the benefit of such Holder in
      an
      amount equal to 130% of the principal amount of the Notes the Holder has elected
      to convert, 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 Holder in the event it obtains judgment. 

    

    (b)  Mechanics
      of Fulfilling Holder's Election.
      The
      Maker shall immediately send via facsimile to the Holder, upon receipt of a
      facsimile copy of a Conversion Notice from the Holder which cannot be fully
      satisfied as described in Section 3.8(a) above, a notice of the Maker's
      inability to fully satisfy the Conversion Notice (the "Inability
      to Fully Convert Notice").
      Such
      Inability to Fully Convert Notice shall indicate (i) the reason why the Maker
      is
      unable to fully satisfy such holder's Conversion Notice, (ii) the amount of
      this
      Note which cannot be converted and (iii) the applicable Mandatory Prepayment
      Price. The Holder shall notify the Maker of its election pursuant to Section
      3.8(a) above by delivering written notice via facsimile to the Maker
      ("Notice
      in Response to Inability to Convert").

     

    (c)  Payment
      of Prepayment Price.
      If the
      Holder shall elect to have its Notes prepaid pursuant to Section 3.8(a)(i)
      above, the Maker shall pay the Mandatory Prepayment Price to the Holder within
      thirty (30) days of the Maker's receipt of the Holder's Notice in Response
      to
      Inability to Convert, provided
      that
      prior to the Maker's receipt of the Holder's Notice in Response to Inability
      to
      Convert the Maker has not delivered a notice to the Holder stating, to the
      satisfaction of the Holder, that the event or condition resulting in the
      Mandatory Prepayment has been cured and all Conversion Shares issuable to the
      Holder can and will be delivered to the Holder in accordance with the terms
      of
      this Note. If the Maker shall fail to pay the applicable Mandatory Prepayment
      Price to the Holder on the date that is one (1) business day following the
      Maker's receipt of the Holder's Notice in Response to Inability to Convert
      (other than pursuant to a dispute as to the determination of the arithmetic
      calculation of the Prepayment Price), in addition to any remedy the Holder
      may
      have under this Note and the Purchase Agreement, such unpaid amount shall bear
      interest at the rate of two percent (2%) per month (prorated for partial months)
      until paid in full. Until the full Mandatory Prepayment Price is paid in full
      to
      the Holder, the Holder may (i) void the Mandatory Prepayment with respect to
      that portion of the Note for which the full Mandatory Prepayment Price has
      not
      been paid, (ii) receive back such Note, and (iii) require that the Conversion
      Price of such returned Note be adjusted to the lesser of (A) the Conversion
      Price as in effect on the date on which the Holder voided the Mandatory
      Prepayment and (B) the lowest Closing Bid Price during the period beginning
      on
      the Conversion Date and ending on the date the Holder voided the Mandatory
      Prepayment. 

     

    (d)  Pro-rata
      Conversion and Prepayment.
      In the
      event the Maker receives a Conversion Notice from more than one holder of the
      Notes on the same day and the Maker can convert and prepay some, but not all,
      of
      the Notes pursuant to this Section 3.8, the Maker shall convert and prepay
      from
      each holder of the Notes electing to have its Notes converted and prepaid at
      such time an amount equal to such holder's pro-rata amount (based on the
      principal amount of the Notes held by such holder relative to the principal
      amount of the Notes outstanding) of all the Notes being converted and prepaid
      at
      such time.

     

    Section
      3.9  No
      Rights as Shareholder.  Nothing contained in this Note shall be
      construed as conferring upon the Holder, prior to the conversion of this Note,
      the right to vote or to receive dividends or to consent or to receive notice
      as
      a shareholder in respect of any meeting of shareholders for the election of
      directors of the Maker or of any other matter, or any other rights as a
      shareholder of the Maker.

     

     

    
      
        6

      

      
         

        
          

        

      

      
         

      

    

    ARTICLE
      IV

     

    MISCELLANEOUS

     

    Section
      4.1  Notices. 
      Any notice, demand, request, waiver or other communication required or permitted
      to be given hereunder shall be in writing and shall be effective (a) upon hand
      delivery, telecopy or facsimile at the address or number designated in the
      Purchase Agreement (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 Maker will give written notice to the Holder at least ten (10) days prior
      to
      the date on which the Maker takes a record (x) with respect to any dividend
      or
      distribution upon the Common Stock, (y) with respect to any pro rata
      subscription offer to holders of Common Stock or (z) for determining rights
      to
      vote with respect to any Organic Change, dissolution, liquidation or winding-up
      and in no event shall such notice be provided to such holder prior to such
      information being made known to the public. The Maker will also give written
      notice to the Holder at least ten (10) days prior to the date on which any
      Organic Change, dissolution, liquidation or winding-up will take place and
      in no
      event shall such notice be provided to the Holder prior to such information
      being made known to the public. The Maker shall promptly notify the Holder
      of
      this Note of any notices sent or received, or any actions taken with respect
      to
      the Other Notes.

     

    Section
      4.2  Governing
      Law. This Note shall be governed by and construed in accordance with the
      internal laws of the State of New York, without giving effect to any of the
      conflicts of law principles which would result in the application of the
      substantive law of another jurisdiction. This Note shall not be interpreted
      or
      construed with any presumption against the party causing this Note to be
      drafted.

     

    Section
      4.3  Headings.
      Article and section headings in this Note are included herein for purposes
      of
      convenience of reference only and shall not constitute a part of this Note
      for
      any other purpose.

     

    Section
      4.4  Remedies,
      Characterizations, Other Obligations, Breaches and Injunctive Relief. The
      remedies provided in this Note shall be cumulative and in addition to all other
      remedies available under this Note, at law or in equity (including, without
      limitation, a decree of specific performance and/or other injunctive relief),
      no
      remedy contained herein shall be deemed a waiver of compliance with the
      provisions giving rise to such remedy and nothing herein shall limit a holder's
      right to pursue actual damages for any failure by the Maker to comply with
      the
      terms of this Note. Amounts set forth or provided for herein with respect to
      payments, conversion and the like (and the computation thereof) shall be the
      amounts to be received by the holder thereof and shall not, except as expressly
      provided herein, be subject to any other obligation of the Maker (or the
      performance thereof). The Maker acknowledges that a breach by it of its
      obligations hereunder will cause irreparable and material harm to the Holder
      and
      that the remedy at law for any such breach may be inadequate. Therefore the
      Maker agrees that, in the event of any such breach or threatened breach, the
      Holder shall be entitled, in addition to all other available rights and
      remedies, at law or in equity, to seek and obtain such equitable relief,
      including but not limited to an injunction restraining any such breach or
      threatened breach, without the necessity of showing economic loss and without
      any bond or other security being required. 

     

    Section
      4.5  Enforcement
      Expenses. The Maker agrees to pay all costs and expenses of enforcement of
      this Note, including, without limitation, reasonable attorneys' fees and
      expenses.

     

    Section
      4.6  Binding
      Effect. The obligations of the Maker and the Holder set forth herein shall
      be binding upon the successors and assigns of each such party, whether or not
      such successors or assigns are permitted by the terms hereof.

     

    Section
      4.7  Amendments.
      This Note may not be modified or amended in any manner except in writing
      executed by the Maker and the Holder.

     

    Section
      4.8  Compliance
      with Securities Laws. The Holder of this Note acknowledges that this Note is
      being acquired solely for the Holder's own account and not as a nominee for
      any
      other party, and for investment, and that the Holder shall not offer, sell
      or
      otherwise dispose of this Note. This Note and any Note issued in substitution
      or
      replacement therefor shall be stamped or imprinted with a legend in
      substantially the following form:

     

    "THIS
      NOTE
      AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN
      REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
      APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE
      ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL
      IN
      THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS
      NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE MAY
      BE
      SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
      FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS."

    

    Section
      4.9  Consent
      to Jurisdiction.
      Each of
      the Maker and the Holder (i) hereby irrevocably submits to the exclusive
      jurisdiction of the United States District Court sitting in the Southern
      District of New York and the courts of the State of New York located in New
      York
      county for the purposes of any suit, action or proceeding arising out of or
      relating to this Note and (ii) 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 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. Each of the Maker and the Holder consents to process being served
      in
      any such suit, action or proceeding by mailing a copy thereof to such party
      at
      the address in effect for notices to it under the Purchase Agreement and agrees
      that such service shall constitute good and sufficient service of process and
      notice thereof. Nothing in this Section 4.9 shall affect or limit any right
      to
      serve process in any other manner permitted by law. Each of the Maker and the
      Holder hereby agree that the prevailing party in any suit, action or proceeding
      arising out of or relating to this Note shall be entitled to reimbursement
      for
      reasonable legal fees from the non-prevailing party. 

     

    Section
      4.10  Parties
      in Interest. This Note shall be binding upon, inure to the benefit of and be
      enforceable by the Maker, the Holder and their respective successors and
      permitted assigns.

     

    Section
      4.11  Failure
      or Indulgence Not Waiver. No failure or delay on the part of the Holder in
      the exercise of any power, right or privilege hereunder shall operate as a
      waiver thereof, nor shall any single or partial exercise of any such power,
      right or privilege preclude other or further exercise thereof or of any other
      right, power or privilege.

     

    Section
      4.12  Maker
      Waivers. Except as otherwise specifically provided herein, the Maker and all
      others that may become liable for all or any part of the obligations evidenced
      by this Note, hereby waive presentment, demand, notice of nonpayment, protest
      and all other demands' and notices in connection with the delivery, acceptance,
      performance and enforcement of this Note, and do hereby consent to any number
      of
      renewals of extensions of the time or payment hereof and agree that any such
      renewals or extensions may be made without notice to any such persons and
      without affecting their liability herein and do further consent to the release
      of any person liable hereon, all without affecting the liability of the other
      persons, firms or Maker liable for the payment of this Note, AND DO HEREBY
      WAIVE
      TRIAL BY JURY.

     

    (a)  No
      delay
      or omission on the part of the Holder in exercising its rights under this Note,
      or course of conduct relating hereto, shall operate as a waiver of such rights
      or any other right of the Holder, nor shall any waiver by the Holder of any
      such
      right or rights on any one occasion be deemed a waiver of the same right or
      rights on any future occasion.

     

    (b)  THE
      MAKER
      ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL
      TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS
      RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE
      HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.

     

    Section
      4.13  Definitions.
      For the
      purposes hereof, the following terms shall have the following
      meanings:

    

    "Person"
      means
      an individual or a corporation, partnership, trust, incorporated or
      unincorporated association, joint venture, limited liability company, joint
      stock company, government (or an agency or political subdivision thereof) or
      other entity of any kind.

     

    “Trading
      Day”
      means
      (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or
      (b)
      if the Common Stock is not traded on the OTC Bulletin Board, a day on which
      the
      Common Stock is quoted in the over-the-counter market as reported by the
      National Quotation Bureau Incorporated (or any similar organization or agency
      succeeding its functions of reporting prices); provided,
      however,
      that in
      the event that the Common Stock is not listed or quoted as set forth in (a)
      or
      (b) hereof, then Trading Day shall mean any day except Saturday, Sunday and
      any
      day which shall be a legal holiday or a day on which banking institutions in
      the
      State of New York are authorized or required by law or other government action
      to close.

    

    

    
      
        7

      

      
         

        
          

        

      

      
         

      

    

    QUEST
      OIL CORPORATION

    

    

    By:
      ______________________________

    Name:

    Title:
      

    

    
      
        8

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