Document:

ex10_1.htm

     

    Exhibit 10.1

    AMENDMENT
      NO. 2 TO CREDIT AGREEMENT, dated as of January 23, 2008 (this "Amendment
      Agreement"), among KRISPY KREME DOUGHNUT CORPORATION, a North Carolina
      corporation (the "Borrower"), KRISPY
      KREME DOUGHNUTS, INC., a North Carolina corporation (the "Parent Guarantor"),
      the SUBSIDIARY GUARANTORS (as defined in the Credit Agreement referred to below)
      signatory hereto and the LENDERS (as defined in the Credit Agreement referred
      to
      below) signatory hereto.

     

    PRELIMINARY
      STATEMENTS

     

    WHEREAS,
      the Borrower is party to a Credit Agreement, dated as of February 16, 2007
      (as
      amended by Amendment No. 1 to Credit Agreement, dated as of June 21, 2007,
      the
      "Credit
      Agreement"), among the Borrower, the Parent Guarantor, the Subsidiary
      Guarantors, the Lenders, and Credit Suisse, Cayman Islands Branch, as
      Administrative Agent, Collateral Agent, Issuing Lender, and Swingline
      Lender.

     

    WHEREAS,
      the Borrower has requested that the Required Lenders agree to amend certain
      provisions of the Credit Agreement, and the Required Lenders have agreed,
      subject to the terms and conditions hereinafter set forth to such
      amendments.

     

    Accordingly,
      in consideration of the premises and for other good and valuable consideration,
      the sufficiency and receipt of all of which are hereby acknowledged, the parties
      hereto hereby agree as follows:

     

    SECTION 1.  Defined
      Terms.  Capitalized terms used but not defined herein shall be
      used herein as defined in the Credit Agreement.

     

    SECTION 2.  Amendments.  As
      of the Amendment Effective Date:

     

    (a)           
      The definition of "Applicable Margin" in Section 1.01 of the Credit Agreement
      is
      deleted in its entirety and replaced with the following:

     

    "'Applicable
      Margin'
      means:  (a) with respect to any ABR Loan, 2.50% per annum;
      and (b) with respect to any Eurodollar Loan, 3.50% per
      annum.  The Applicable Margin for the Incremental Loans of any Series
      shall be determined at the time such Series of Loans is established pursuant
      to
      Section 2.01(c); and (a) if the Applicable Margin for Incremental Facility
      Term Loans of any Series would otherwise be more than 25 basis points higher
      than the Applicable Margin for Term Loans, then the Applicable Margin for Term
      Loans shall be automatically increased to a rate per annum equal to 25 basis
      points less than the Applicable Margin for such Series of Incremental Facility
      Term Loans from and after the earlier of the initial date of borrowing of such
      Incremental Facility Term Loans or the date that the related Incremental
      Facility Term Loan Commitments are established and (b) if the Applicable Margin
      for Incremental Revolving Credit Loans of any Series would otherwise be more
      than 25 basis points higher than the Applicable Margin for Revolving Credit
      Loans, then the Applicable Margin for Revolving Credit Loans shall be
      automatically increased to a rate per annum equal to 25 basis points less than
      the Applicable Margin for such Series of Incremental Facility Revolving Credit
      Loans from and after the date that the related Incremental Facility Revolving
      Credit Commitments are established.

     

    

     (b)           
      The second paragraph of Section 7.03 of the Credit Agreement is amended
      by

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    deleting
      "and" at the end of clause (k) thereof, replacing the period at the end of
      clause (l) thereof with "and" and adding a new clause (m) at the end thereof
      reading as follows:

     

    "(m)
      The
      property referred to as Item 124 of Schedule VIII (the property located at
      1200
      Stevens Avenue in Effingham, IL) may be disposed of (i) in accordance with
      the
      Real Property Purchase Agreement, dated December 21, 2007, between the Borrower
      and Harlan Bakeries, Inc. or (ii) in any other transaction for fair market
      value; provided
      that, notwithstanding anything to the contrary in Section 2.10(c)(iv), 100%
      of
      the Net Available Proceeds therefrom shall be applied within five Business
      Days
      after such disposition to prepay Term Loans and Incremental Facility Loans
      in
      accordance with Section 2.10(c)(vi)."

     

    SECTION 3.  Representations
      and
      Warranties.  The Borrower hereby represents and warrants to the
      undersigned Lenders that, after giving effect to the amendments herein, (a)
      the
      representations and warranties of the Borrower and the Parent Guarantor set
      forth in the Credit Agreement, and of each Obligor in each of the other Loan
      Documents to which it is a party, is true and correct in all material respects
      on and as of the date hereof (except to the extent that any such representation
      or warranty expressly relates to an earlier date), with each reference therein
      to the Credit Agreement being deemed for purposes hereof to be a reference
      to
      the Credit Agreement as modified hereby and (b) no Default has occurred and
      is
      continuing.

     

    SECTION 4.  Conditions
      to
      Effectiveness.  The amendments set forth in Section 2 hereof
      shall become effective when, and only when, and as of the date (the "Amendment Effective
      Date") on which:

     

    (a)
      the
      Administrative Agent shall have received counterparts of this Amendment
      Agreement executed by the Borrower, each of the Guarantors, and the Required
      Lenders; and

     

    (b) the
      Administrative Agent shall have received payment of fees and expenses of the
      Administrative Agent set forth in the Fee Letter, dated January 10, 2008,
      between the Administrative Agent and the Borrower (including the reasonable
      and
      accrued fees of counsel to the Administrative Agent).

     

    
      	
               

            	
              SECTION 5.  Reference
                to and
                Effect on the Financing Documents.

            

    

     

       
      (a)            On and
      after the Amendment Effective Date, each reference in the Credit Agreement
      to
      "this Agreement", "hereunder", "hereof" or words of like import referring to
      the
      Credit Agreement, and each reference in the other Loan Documents to "the Credit
      Agreement", "thereunder", "thereof", or words of like import referring to the
      Credit Agreement shall mean and be a reference to the Credit Agreement as
      modified hereby.

     

      
      (b)            The Credit
      Agreement and each of the other Loan Documents, as specifically modified by
      this
      Amendment Agreement, are and shall continue to be in full force and effect
      and
      are hereby in all respects ratified and confirmed.

     

      
      (c)            The
      execution, delivery and effectiveness of this Amendment Agreement shall not,
      except as expressly provided herein, operate as a waiver of any right, power
      or
      remedy of the Credit Agreement or the other Loan Documents, nor constitute
      a
      waiver of any provision of the Credit Agreement or the other Loan
      Documents.

     

    SECTION 6.  Affirmation
      of
      Guarantors.  Each Guarantor signatory hereto
      hereby

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    consents
      to the amendments to the Credit Agreement effected hereby, and hereby confirms
      and agrees that, notwithstanding the effectiveness of the amendments set forth
      in Section 2 hereof, the obligations of such Guarantor contained in
      Article III of the Credit Agreement or in any other Loan Documents to which
      it is a party are, and shall remain, in full force and effect and are hereby
      ratified and confirmed in all respects, except that, on and after the
      effectiveness of such amendments, each reference in Article III of the
      Credit Agreement and in each of the other Loan Documents to "the Credit
      Agreement", "thereunder", "thereof" or words of like import shall mean and
      be a
      reference to the Credit Agreement as modified by this Amendment
      Agreement.

     

    SECTION 7.  GOVERNING
      LAW.  THIS AMENDMENT AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
      WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.

     

    SECTION 8.  Execution
      in
      Counterparts.  This Amendment Agreement may be executed by one
      or more of the parties to this Amendment Agreement on any number of separate
      counterparts, and all of said counterparts taken together shall be deemed to
      constitute one and the same instrument.  Delivery of an executed
      counterpart of a signature page to this Amendment Agreement by telecopier shall
      be effective as delivery of a manually executed counterpart of this Amendment
      Agreement.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the parties hereto have caused this Amendment Agreement to
      be
      duly executed and delivered by their respective proper and duly authorized
      officers as of the day and year first above written.

     

    
      	
              KRISPY
                KREME DOUGHNUT CORPORATION

              
              

            
	
              By:
                /s/ Douglas
                R.
                Muir

            
	
                    Name:
                Douglas R. Muir

            
	
                    Title:
                Chief Financial Officer

              
              

            
	
              GUARANTORS:

              
              

            
	
              KRISPY
                KREME DOUGHNUTS, INC.

            
	 
	
              GOLDEN
                GATE DOUGHNUTS, LLC

            
	 
	
              By:  KRISPY
                KREME DOUGHNUT CORPORATION,

              as
                authorized Manager

            
	 
	
              PANHANDLE
                DOUGHNUTS, LLC

            
	 
	
              By:  KRISPY
                KREME MANAGEMENT I, LLC,

              an
                authorized Manager

            
	 
	
              By:  KRISPY
                KREME MANAGEMENT II, LLC,

              an
                authorized Manager

            
	 
	
              By:  KRISPY
                KREME DOUGHNUT CORPORATION,

            
	
              as
                authorized Member of Krispy Kreme Management I, 
LLC and Krispy Kreme
                Management II, LLC

            

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    
      	
              NORTH
                TEXAS DOUGHNUTS, L.P.

            
	 
	
              By:  KRISPY
                KREME DOUGHNUT CORPORATION,

            
	
              its
                General Partner

            
	 
	
              KK
                CANADA HOLDINGS, INC.

            
	 
	
              KRISPY
                KREME MANAGEMENT I, LLC

            
	 
	
              By:  KRISPY
                KREME DOUGHNUT CORPORATION,

            
	
              as
                authorized Member

            
	 
	
              KRISPY
                KREME MANAGEMENT II, LLC

            
	 
	
              By:  KRISPY
                KREME DOUGHNUT CORPORATION,

            
	
              as
                authorized Member

            
	 
	
              KRISPY
                KREME MANAGEMENT III, LLC

            
	 
	
              By:  KRISPY
                KREME DOUGHNUT CORPORATION,

            
	
              as
                authorized Member

            
	 
	
              SOUTHERN
                DOUGHNUTS, LLC

            
	 
	
              By:  KRISPY
                KREME MANAGEMENT I, LLC,

            
	
              as
                authorized Manager

            
	 
	
              By:  KRISPY
                KREME DOUGHNUT CORPORATION,

            
	
              as
                authorized Member

            

    

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    
      	
              SOUTHWEST
                DOUGHNUTS, LLC

            
	 
	
              By:  KRISPY
                KREME MANAGEMENT I, LLC,

              as
                authorized Manager

            
	 
	
              By:  KRISPY
                KREME DOUGHNUT CORPORATION,

            
	
              as
                authorized Member

            
	 
	
              NORTHEAST
                DOUGHNUTS, LLC

            
	 
	
              By:  KRISPY
                KREME MANAGEMENT I, LLC,

              as
                authorized Manager

            
	 
	
              By:  KRISPY
                KREME DOUGHNUT CORPORATION,

            
	
              as
                authorized Member

            
	 
	 
	
              By:  /s/
                Douglas R.
                Muir

            
	
              Name:
                Douglas R. Muir

            
	
              Title:
                Authorized Officer

            
	 
	
              KRISPY
                KREME MOBILE STORE COMPANY

              
              

            
	
              KRISPY
                KREME BRAND FUND CORPORATION

            
	 
	 
	
              By:  /s/
                Stanley L.
                Parker

            
	
              Name:
                Stanley L. Parker

            
	
              Title:
                President

            
	 
	
              KRISPY
                KREME CANADA, INC.

            
	 
	 
	
              By:  /s/
                Charles W. Bruton,
                III

            
	
              Name:
                Charles W. Bruton, III

            
	
              Title:
                President

            
	 
	 
	
              HD
                CAPITAL CORPORATION

            
	 
	
              HDN
                DEVELOPMENT CORPORATION

            
	 
	 
	
              By:  /s/
                H. Clark Beeson,
                III

            
	
              Name:
                H. Clark Beeson, III

            
	
              Title:
                President

            

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
 

    
      

      
        	
                LENDER

              
	 
	 
	
                Consent
                  of Required Lenders Receivedex48.htm

    Exhibit
      4.8

     

    SECURITIES
      PURCHASE AND SECURITY AGREEMENT

     

    SECURITIES
      PURCHASE AND SECURITY
      AGREEMENT, dated as of January 22, 2008, between MetaSwarm,
      Inc., a Florida corporation
      (the “Issuer”),
      and AIS Funding, LLC, a Delaware
      limited liability company (the “Subscriber”).

    

    Background

    

    A.           
      The Issuer has requested that the Subscriber provide loans to the Issuer in
      the
      aggregate original maximum principal amount of $1,000,000.00, which will be
      evidenced by one or more promissory notes in the aggregate amount not to exceed
      $1,000,000.

    

    B.           
      The Subscriber has agreed to provide the Loan, subject to the terms and
      conditions set forth below.

    

    Agreement

    

    The
      parties hereby agree as
      follows:

    

    
      	
              1.

            	
              DEFINITIONS
                AND ACCOUNTING
                TERMS

            

    

    

    Section
      1.01                                
As used in this Agreement,
      the
      following terms have the following meanings (terms defined in the singular
      to
      have the same meaning when used in the plural and vice
      versa):

    

     “Affiliate”shall
      mean any Person (a) which directly
      or indirectly Controls, or is Controlled by or is under common Control with
      the
      Issuer or a subsidiary, (b) which directly or indirectly beneficially holds
      or
      owns 5% or more of any class of voting stock of the Issuer or any subsidiary,
      or
      (c) 5% or more of the voting stock of which is directly or indirectly
      beneficially owned or held by the Issuer or a subsidiary.

    

    “Bankruptcy
      Code”
as used herein shall
      mean
      Title 11 of the United States Code entitled “Bankruptcy”.

    

    “Collateral”shall
      have the meaning assigned to such
      term in Section 4.

    

    “Control”
      shall mean the possession,
      directly or indirectly, of the power to direct or
      cause the direction of the management
      and policies of any Person, whether through the ownership of voting securities,
      by contract or otherwise.

    

    “Conversion
      Shares”means those Shares
      issuable upon conversion of the Note(s).

    

    “Debt”means
      , without duplication (a) indebtedness or liability
      for
      borrowed money; (b) obligations evidenced by bonds, debentures, notes, or other
      similar instruments; (c) obligations for the deferred purchase price of property
      or services (including trade obligations); (d) obligations as lessee under
      capital leases; (e) current liabilities in respect of unfunded vested benefits
      under plans covered by ERISA; (f) obligations under Letters of Credit; (g)
      obligations under acceptance facilities; (h) all guaranties, endorsements (other
      than for collection or deposit in the ordinary course of business), and other
      contingent obligations to purchase, to provide funds for payment, to supply
      funds to invest in any Person or otherwise to assure a creditor against loss;
      and (i) obligations secured by any Liens, whether or not the obligations have
      been assumed.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    “Distributions”
      shall mean all payment
      or
      distributions to Owners in cash or in property other than reasonable salaries,
      bonuses and expense reimbursements.

    

    “Environmental
      Law”means any federal,
      state, local or other governmental statute, regulation, law or ordinance dealing
      with the protection of human health and the environment.

    

    “ERISA”shall
      mean the Employee Retirement
      Income Security Act of 1974, as amended.

    

    “Event
      of
      Default”shall have the
      meaning assigned to such term in Section 13.01.

    

    “GAAP”
shall
      mean generally accepted accounting
      principles.

    

    “Hazardous
      Substances”means
      pollutants, contaminants, hazardous substances, hazardous wastes, petroleum
      and
      fractions thereof, and all other chemicals, wastes, substances and materials
      listed in, regulated by or identified in any Environmental
      Law.

    

    “Lien”means
      any mortgage, deed of trust,
      pledge, security interest, hypothecation, assignment, deposit arrangement,
      encumbrance, lien (statutory or other), or preference, priority, or other
      security agreement or preferential arrangement, charge, or encumbrance of any
      kind or nature whatsoever (including, without limitation, any conditional sale
      or other title retention agreement, any financing lease having substantially
      the
      same economic effect as any of the foregoing, and the filing of any financing
      statement under the UCC or comparable law of any jurisdiction to evidence any
      of
      the foregoing).

    

    “Loan”shall
      mean the loan described herein and
      evidenced by this Agreement, the Note(s) and the remaining Loan
      Documents.

    

    “Loan
      Amount”means an amount
      equal to $1,000,000.00 or such lesser amount equal to the sum of the original
      principal amount(s) under one or more Note(s) executed and delivered by Issuer
      to Subscriber.

    

    “Loan
      Documents”
means,
      collectively, this
      Agreement, the Note(s), the Patent
      Assignment, the Warrants, and all other documents executed in connection with
      this Agreement.

    

    “Obligations”
      shall have the meaning
      assigned to such term in Section 5.

    

    “Organizational
      Documents”means (a) with
      respect to Issuer or any other corporation, its certificate or articles of
      incorporation and by-laws; (b) with respect to a partnership, its partnership
      certificate and partnership agreement; (c) with respect to a limited liability
      company, its articles or certificate of formation and its operating or
      management agreement; and (d) with respect to a trust, the declaration of trust;
      and, with respect to any of them, any other document required to be filed with
      public authorities to evidence or establish authority to conduct
      business.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    “OTC”means
      the over-the-counter pink
      sheets.

    

    “Owner”means
      with respect to Issuer, any Person
      having legal or beneficial title to Shares or other ownership interest in Issuer
      or a right to acquire such an interest.

    

    “Permitted
      Liens”shall have the
      meaning assigned to such term in Section 12.04.

    

    “Permitted
      Protests”
means the right of the
      Issuer to protest any Lien (other than a Lien that secures the Obligations),
      tax
      (other than payroll taxes or taxes that are the subject of a federal or state
      tax lien) or rental payment, provided that (x) a reserve with respect to such
      liability is established on the books of the Issuer in an amount that is
      reasonably satisfactory to the Subscriber, (y) any such protest is instituted
      and diligently prosecuted by the Issuer in good faith, and (z) the Subscriber
      is
      satisfied that, while such protest is pending, there will be no impairment
      of
      the enforceability, validity or priority of any of the Liens of the Issuer
      in
      and to the Collateral.

    

    “Person”means
      an individual, partnership,
      corporation, limited liability company, limited liability partnership, business
      trust, joint stock company, trust, unincorporated association, joint venture,
      governmental authority, or other entity of whatever nature.

    

    “Plan”means
      any employee plan subject to Title
      IV of ERISA maintained for employees of Issuer, any subsidiary of Issuer or
      any
      other trade or business under common control with Issuer within the meaning
      of
      Section 414(c) of the Internal Revenue Code of 1986 or any regulations
      thereunder.

    

    “Registration
      Statement” means a registration
      statement filed by the Issuer with the SEC for a public offering and sale of
      securities of the Issuer on Form SB-2 or other available form for which Issuer
      is eligible (other than a registration statement on Form S-4, Form S-8, or
      successor form to either, or any reg­istration statement covering only
      securities proposed to be issued in exchange for securities or assets of another
      corporation).

    

    “SEC”
means
      the Securities and Exchange Commis­sion, or any other federal agency at the
      time administering the Securities Act.

    

    “Securities
      Act”means the Securities
      Act of 1933, as amended since, and all regulationspromulgated
      thereunder.

    

    “Securities
      Exchange
      Act”means the Securities
      Exchange Act of 1934, as amendedsince, and all regulations
      promulgated
      thereunder.

    

    “Shares”
means
      shares of common stock, no par
      value, of Issuer.

    

    “UCC”shall
      mean the Florida Uniform
      Commercial Code as in effect from time to time.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    “Warrant
      Shares”means those Shares
      issuable upon exercise of the Warrants.

    

    Section
      1.02       All accounting terms
      not specifically
      defined herein shall be construed in accordance with GAAP consistent with those
      applied in the preparation of the financial statements referred to in Section
      7.05, and all financial data submitted pursuant to this Agreement shall be
      prepared in accordance with such principles.

    

    Section
      1.03        Unless otherwise defined
      in this
      Agreement, capitalized words shall have the meanings set forth in the
      UCC.

    

    2.           
      LOAN.

    

    Section
      2.01        Subject to the terms
      and provisions of
      this Agreement, Subscriber agrees to make a loan to Issuer in the Loan Amount,
      to be secured by Issuer’s Inventory, Accounts and all other Collateral and the
      proceeds thereof (the “Loan”).

    

    Section
      2.02        The Loan shall be
      evidenced by and repayable according to this Agreement and one or more
      Convertible Promissory Note(s), the initial one being of even date, issued
      by
      Issuer to Subscriber in the form attached as Exhibit 1 (whether one or two
      are
      issued, the “Note(s)”),
      and made a part hereof.  The Note(s) shall be due and payable, if not
      paid in full earlier or converted in full earlier, one year following the
      Closing Date (the “Maturity
      Date”).  Subscriber agrees to provide Issuer with the loan
      proceeds under the Loan, in the principal amount of $1,000,000.00 upon the
      conditions under Article 3 being satisfied (the “Closing” and the date hereof,
      being the “Closing
      Date”).  Simultaneous with the
      issuance of the first Note(s) to Subscriber and payment of loan proceeds by
      Subscriber to Issuer in the original principal amount of the first Note(s),
      Issuer will also issue to Subscriber and Subsciber will purchase for an
      aggregate purchase price of $10.00, the warrants to purchase Shares in the
      form
      attached as Exhibit 2-1 (the “Warrants”,
      which term also includes the Selling
      Agent Warrants).

    

    Section
      2.03.        If any amount due pursuant
      to this
      Agreement or under the Note(s) is not paid within ten days after the date it
      is
      due and payable, without in any way affecting Subscriber’s right to declare an
      Event of Default to have occurred, Subscriber may in its sole discretion assess
      a late charge equal to five percent of such late payment against Issuer, which
      late charge shall be immediately due and payable and may be paid by treating
      the
      same as a loan made to Issuer.

    

    Section
2.04        
      It is the intention of the parties
      hereto to comply strictly with applicable usury laws, if any; accordingly,
      notwithstanding any provisions to the contrary in this Agreement or any other
      documents or instruments executed in connection herewith, in no event shall
      this
      Agreement or such documents or instruments require or permit the payment,
      taking, reserving, receiving, collecting or charging of any sums constituting
      interest under applicable laws which exceed the maximum amount permitted by
      such
      laws.  If any such excess interest is called for, contracted for,
      charged, paid, taken, reserved, collected or received in connection with the
      Obligations or in any communication by Subscriber or any other Person to the
      Issuer or any other Person, or in the event all or part of the principal of
      the
      Obligations or interest thereon shall be prepaid or accelerated, so that under
      any of such circumstances or under any other circumstance whatsoever the amount
      of interest contracted for, charged, taken, collected, reserved, or received
      on
      the amount of principal actually outstanding from time to time under this
      Agreement shall exceed the maximum amount of interest permitted by applicable
      usury laws, if any, then in any such event it is agreed as follows: (a) the
      provisions of this paragraph shall govern and control, (b) neither the Issuer
      nor any other Person now or hereafter liable for the payment of the Obligations
      shall be obligated to pay the amount of such interest to the extent such
      interest is in excess of the maximum amount of interest permitted by applicable
      usury laws, if any, (c) any such excess which is or has been received
      notwithstanding this paragraph shall be credited against the then unpaid
      principal balance hereof or, if the Obligations have been or would be paid
      in
      full by such credit, refunded to the Issuer, and (d) the provisions of this
      Agreement and the other documents or instruments executed in connection
      herewith, and any communication to the Issuer, shall immediately be deemed
      reformed and such excess interest reduced, without the necessity of executing
      any other document, to the maximum lawful rate allowed under applicable laws
      as
      now or hereafter construed by courts having jurisdiction hereof or
      thereof.  Without limiting the foregoing, all calculations of the rate
      of interest contracted for, charged, taken, collected, reserved, or received
      in
      connection herewith which are made for the purpose of determining whether such
      rate exceeds the maximum lawful rate shall be made to the extent permitted
      by
      applicable laws by amortizing, prorating, allocating and spreading during the
      period of the full term of the Obligations, including all prior and subsequent
      renewals and extensions, all interest at any time contracted for, charged,
      taken, collected, reserved or received.  The terms of this paragraph
      shall be deemed to be incorporated in every document and communication relating
      to the Obligations.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    
 

    Section
      2.05  Any
      statement rendered by Subscriber to Issuer of Issuer’s loan account with
      Subscriber hereunder shall be considered correct and to have been accepted
      by
      Issuer and shall be conclusively binding upon Issuer absent manifest
      error, in respect of all charges,
      debits and credits of whatsoever nature contained therein under or pursuant
      to
      this Agreement, and the closing balance shown therein, unless Issuer notifies
      Subscriber in writing of any discrepancy within 21 days from the mailing (or
      emailing) by Subscriber to Issuer of any such statement.

    

    3.           
      CONDITIONS TO THE SUBSCRIBER’S
      OBLIGATIONS.

    

    The
      obligation of Subscriber to
      consummate at the Closing the transactions contemplated by this Agreement,
      including delivery of the Loan proceeds to Issuer, is subject to the
      satisfaction of the following conditions:

    

    Section
      3.01                                
Representations
      and
      Warranties.   The representations and warranties of the
      Issuer in this Agreement shall be true, accurate and correct when made and
      shall
      be true, accurate and correct as of the Closing Date except that representations
      and warranties which address matters as of a specified date shall remain true,
      accurate and correct as  of such date.

    

    Section
      3.02                                
No Adverse
      Change.  There shall not have been any adverse change in the
      business, properties, condition (financial or otherwise) or operations of the
      Issuer taken as a whole as of the Closing.

    

    Section
      3.03                                
Compliance
      with
      Agreement.  The Issuer shall have performed and complied with
      all of its obligations under this Agreement which are to be performed or
      complied with by it or them on or prior to the Closing Date.

    

    Section
      3.04                                
Proceedings
      and
      Instruments Satisfactory.  All proceedings, corporate or other,
      to be taken by the Issuer in connection with the transactions contemplated
      by
      this Agreement, shall be reasonably satisfactory in all respects to the
      Subscriber and Subscriber’s Counsel.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    Section
      3.05                                
Documentation
      at
      Closing.  The Subscriber’s counsel shall have received on
      behalf of Subscriber at or prior to the Closing all of the following, each
      in
      form and substance reasonably satisfactory to the Subscriber and its counsel,
      Tarlow, Breed, Hart & Rodgers, P.C. (“Subscriber’s
      Counsel”).

    

    (a)           
      A certificate from the Secretary of the Issuer certifying (i) the duly adopted
      resolutions of the Board of Directors of the Issuer unanimously authorizing
      and
      approving the execution and delivery by the Issuer of this Agreement, the
      remaining Loan Documents and the consummation of the transactions contemplated
      hereby and thereby; (ii) as to the Issuer’s certificate of incorporation, as
      amended to date; (iii) as to the Issuer’s By-laws, as amended to date; and (iv)
      as to the incumbency of the Chief Executive Officer and President of the Issuer
      executing the Loan Documents on behalf of the Issuer.

    

    (b)           
      A certificate of the Chief Executive Officer and President of the Issuer
      certifying that (i) the representations and warranties of the Issuer set forth
      in this Agreement are true and correct on the Closing Date and (ii) all
      conditions required to be performed by the Issuer at or prior to the Closing
      have been so performed.

    

    (c)           
      Any and all consents or waivers necessary on the part of the Issuer to execute
      and deliver this Agreement, the Note, the Warrants and the remaining Loan
      Documents, and to consummate the transactions contemplated hereby and thereby,
      which consents and waivers shall be in full force and effect as of the
      Closing.

    

    (d)           
      A Certificate of the Secretary of the State of Florida as to the legal existence
      and corporate good standing of the Issuer.

    

    (e)           
      A certificate of the foreign qualification good standing of the Issuer from
      the
      Secretary of State of California; provided that Issuer shall not be deemed
      in
      violation of this clause (e) unless such certificate has not been received
      by
      Subscriber that day seven days after Subscriber disburses to Issuer any portion
      of the Loan.

    

    (f)           
      A copy of the certificate of incorporation of the Issuer, as amended to date,
      certified by the Secretary of State of Florida.

    

    (g)           
      The Note(s).

    

    (h)           
      The Warrants, duly executed by the Issuer and issued to the
      Subscriber.

    

    (i)           
      The warrants in the form of attached Exhibit 3.05(i) (the
“Selling
      Agent  Warrants”), duly executed by the Issuer and for issuance
      to First Montauk Securities Corp. (the “Selling Agent”).

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    (j)           
      The Patent Security Agreement, duly executed by the Issuer.

    

    (k)           
      A certificate of insurance on Accord Form 25 complying with the terms of Article
      11 of this Agreement.

    

    (l)           
      An escrow letter agreement in the form of attached Exhibit 3.05(l), duly
      executed by the Issuer.

    

    (m)           
      A disbursement authorization letter in the form of attached Exhibit 3.05(m), duly
      executed by the Issuer, providing in part for payment from the Loan proceeds,
      before disbursement to Issuer, of all costs and expenses reasonably incurred
      by
      Issuer in connection with the consummation of the Loan and other transactions
      contemplated by this Agreement.

    

    Section
      3.06                                
UCC-1 Financing
      Statement.  The Subscriber shall have filed with the Florida
      Secretary of State a UCC-1 Financing Statement naming Issuer as debtor and
      Subscriber as secured party thereunder.

    

    Section
      3.07                                
Filing of
      Patent
      Security Agreement.  The Subscriber shall have filed with the
      United States Patent Office, the Patent Security Agreement.

    

    4.           
      SECURITY
      INTEREST.

    

    Issuer,
      as a debtor under the UCC, for
      valuable consideration, receipt whereof is hereby acknowledged, hereby grants
      to
      Subscriber, as secured party under the UCC, a continuing security interest
      in
      and to, all
      assets of the Issuer, wherever
      located and whether now owned or hereafter acquired, including, without
      limitation, the following:

    

    (a)           
      all inventory, including all
      goods, merchandise, raw materials, goods and work in process, finished goods,
      and other tangible personal property now owned or hereafter acquired and held
      for sale or lease or furnished or to be furnished under contracts of service
      or
      used or consumed in Issuer’s business (all hereinafter called the “Inventory”);

    

    (b)           
      all Accounts, contracts, contract
      rights, notes, bills, drafts, acceptances, General Intangibles (including
      without limitation registered and unregistered trademarks, service marks and
      tradenames, together with the goodwill therein; copyrights; customer lists;
      all
      other  goodwill; computer programs; computer records; computer
      software; computer data; trade secrets; inventions; patents and patent
      applications; ledger sheets; files; records; data processing records relating
      to
      any Accounts and all tax refunds of every kind and nature to which Issuer is
      now
      or hereafter may become entitled to, no matter how arising including, without
      limitation, the intellectual property listed in the attached Schedule
      4(b)), Instruments,
      Documents, Chattel Paper (whether tangible or electronic), Deposit Accounts,
      Letter of Credit Rights (whether or not the Letter of Credit is evidenced by
      a
      writing), Securities, Security Entitlements, Security Accounts, Investment
      Property, Supporting Obligations, choses in action, Commercial Tort Claims,
      and
      all other debts, obligations and liabilities in whatever form, owing to Issuer
      from any Person, whether now existing or hereafter arising, now or hereafter
      received by or belonging or owing to Issuer, for goods sold by it or for
      services rendered by it, or however otherwise same may have been established
      or
      created, all guarantees and securities therefor, all right, title and interest
      of Issuer in the merchandise or services which gave rise thereto, including
      the
      rights of reclamation and stoppage in transit, all rights to replevy goods,
      and
      all rights of an unpaid seller of merchandise or services
      (all  hereinafter called the “Receivables”);

    

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    (c)           
      all machinery, Equipment, Fixtures
      and other Goods whether now owned or hereafter acquired by the Issuer and
      wherever located, all replacements and substitutions therefor or accessions
      thereto and all proceeds thereof (all hereinafter called the “Equipment”);
      and

    

    (d)           
      all proceeds and products of
      all
      of the foregoing in any form, including, without limitation, all proceeds of
      credit, fire or other insurance, and also including, without limitation, rents
      and profits resulting from the temporary use of any of the foregoing (which,
      with Inventory, Receivables and Equipment are all hereinafter called
“Collateral”).

    

    Issuer
      further collaterallyassigns
      to Subscriber all of the
      foregoing Collateral except for trademarks, service marks and trade
      names.

    

    This
      foregoing security interest shall
      be instantiated in the Patent Security Assignment of Schedule
      4, which may be recorded
      with any state, federal, or foreign authorities in lieu of recording this entire
      agreement, at the option of Subscriber.

    

    5.           
      OBLIGATIONS
      SECURED.

    

    The
      security interest granted hereby is
      to secure payment and performance of the Loan, debts, liabilities and
      obligations of Issuer to Subscriber hereunder, under the Note(s), and under
      the
      remaining Loan Documents, direct or indirect, absolute or contingent, primary
      or
      secondary, due or to become due, now existing or hereafter arising, under
      this Agreement, the Note(s) or the remaining Loan Documents, regardless of how they arise
      or by
      what agreement or instrument they may be evidenced or whether evidenced by
      any
      agreement or instrument, and includes obligations to perform acts and refrain
      from taking action as well as obligations to pay money including, without
      limitation, all interest, fees, charges, expenses and overdrafts, and also
      including, without limitation, all obligations and liabilities which
Lender may incur or become
      liable for, on account of, or as a result of, any of the Loan or any of
      the Loan
      Documents (all hereinafter
      called “Obligations”).

    

    
      	
              6.

            	
              ISSUER’S
                PLACES
                OF BUSINESS, INVENTORY LOCATIONS.

            

    

    

    Section
      6.01                                
Issuer warrants that
      Issuer has no
      places of business other than that shown at the end of this Agreement, and
      on
      attached Schedule
      6.01.

    

    Section
      6.02                                
Issuer’s principal executive
      office and the office where Issuer keeps its records concerning its accounts,
      contract rights and other property, is that shown at the end of this
      Agreement.  All Inventory presently owned by Issuer is stored at the
      locations set forth on Schedule
      6.01.

    

    Section
      6.03                                
Issuer will promptly
      notify
      Subscriber in writing of any change in the location of any place of business
      or
      the location of any Inventory or the establishment of any new place of business
      or location of Inventory or office where its records are kept which would be
      shown in this Agreement if it were executed after such
      change.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    7.           
      ISSUER’S ADDITIONAL REPRESENTATIONS AND WARRANTIES.

    

    Issuer
      represents and warrants
      that:

    

    Section
      7.01                                
Organization
      and Standing.  Issuer is duly organized,
      validly existing and in good standing as a corporationunder the laws of the
      State of
      Floridaand
      shallremain in good
      standing in that state, and is duly qualified and in good standing in every
      other state in which it is doing business, and shall hereafter remain duly
      qualified and in good standing in every other state in which the failure to
      qualify or become licensed could have a material adverse effect on the financial
      condition, business or operations of the Issuer.

    

    Section
      7.02                                
Issuer
      Name; Federal Identification Number.  Issuer’s exact legal name
      is as set forth in this Agreement and Issuer will not undertake or commit to
      undertake any act which will result in a change of Issuer’s legal name, without
      giving Subscriber at least 30 days’ prior written notice of the
      same.  The federal identification number of Issuer is as set forth on
Schedule
      6.01.

    

    Section
      7.03                                
Corporate
      Action.  The
      execution, delivery and performance of this Agreement, the Note(s), the
      Warrants, and any other document executed by Issuerin
      connection herewith, are within the
      Issuer’s powers, have been duly authorized, are not in contravention of law or
      the terms of the Issuer’s Organizational Documents, or of any indenture,
      agreement or undertaking to which the Issuer is a party or by which it or any
      of
      its properties may be bound.  Without limitation to the foregoing,
      Issuer has all necessary corporate power and has taken all corporate
      action required to make this Agreement, the Note(s), the Warrants, and any
      other
      agreements and instruments executed in connection herewith the valid and
      enforceable obligations of the Issuer.  Sufficient shares of
      authorized but unissued common stock of the Issuer have been reserved by
      appropriate corporate action in connection with the prospective conversion
      of
      the Note and exercise of the Warrants.  The issuance and sale of the
      Note(s) and Warrants, and the issuance of the Shares, upon the conversion of
      the
      Note(s) and exercise of the Warrants, are not subject to preemptive or other
      preferential rights, or similar statutory or contractual rights, either arising
      pursuant to any agreement or instrument to which the Issuer is a party or which
      are otherwise binding upon the Issuer.

    

    Section
      7.04                                
Governmental
      Approvals.  All authorizations, consents, approvals, licenses,
      exemptions from or filings, or registrations with any court or governmental
      department, commission, board, bureau, agency or instrumentality, domestic
      or
      foreign, necessary for, or in connection with, the offer, issuance, sale,
      execution or delivery of the Note(s) or the Warrants, or for the performance
      by
      Issuer of its obligations under this Agreement, the Note(s) or the Warrants,
      or
      the Shares issuable upon conversion of the Note(s) or exercise of the Warrants,
      shall have been made prior to, and shall be effective as of, the date
      hereof.  The Issuer is in compliance in all respects with the terms
      and provisions of its charter documents, as amended to date, by-laws, as
      amended, and with the terms and provisions of each mortgage, indenture, lease,
      contract and other instrument to which the Issuer is a party, and of all
      judgments, decrees, governmental orders, statutes, rules or regulations by
      which
      it is bound or to which its properties or assets are subject.  Neither
      the execution or delivery of this Agreement, the Note(s), the Warrants or the
      issuance of the Shares upon conversion of the Note(s) or exercise of the
      Warrants, nor the consummation of any transaction contemplated hereby, has
      constituted or resulted in or will constitute or result in a default or
      violation of any term or provision in any of the foregoing documents or
      instruments.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    Section
      7.05                                
Books
      and Records.  All
      Organizational Documents and all amendments thereto of Issuer have been duly
      filed (to the extent
      required)and are in proper
      order.  All ownership interests of Issuer outstanding was and is
      properly issued and all books and records of Issuer, including but not limited
      to its minute books, Organizational Documents and books of account, are accurate
      and up to date and will be so maintained.

    

    Section
      7.06                                
 Financial
      Statements.  The
(a) balance sheet
      of the Issuer as at June 30, 2007, and the related
      statements of income and retained earnings of the Issuer for the 6-month period
      then ended, and (b) financial statements for the year ended December 31, 2006,
      and the accompanying footnotes, together with the opinion thereon, of the
      Borrower’s independent certified public accountants (collectively, the “Financial Statements”),
      copies of which have been
      furnished to or made available to the Subscriber, are
      in all material respects complete and
      correct and fairly present the financial condition of the Issuer as at such
      dates and the results of the operations of the Issuer for the periods covered
      by
      such statements, all in accordance with GAAP consistently applied (subject
      for
      those Financial Statements for the 6-month interim period ended June 30, 2007
      to
      year-end adjustments in the case of the interim financial statements), and since June
      30, 2007, there has been no
      material adverse change in the condition (financial or otherwise), business,
      or
      operations of the Issuer.  There are no liabilities of the Issuer,
      fixed or contingent, which are material but are not reflected in the financial
      statements or in the notes thereto, other than liabilities arising in the
      ordinary course of business since June 30, 2007.  No information,
      exhibit, or report furnished by the Issuer to the Subscriber in connection
      with
      the negotiation of this Agreement or the remaining Loan Documents contained
      any
      material misstatement of fact or omitted to state a material fact or any fact
      necessary to make the statement contained therein not materially
      misleading.

    

    Section
      7.07                                
Title
      to Assets.  Issuer owns all of the
      assets reflected in the most recent of Issuer’s financial statements provided to
      Subscriber, except assets sold or otherwise disposed of in the ordinary course
      of business since the date thereof, and such assets together with any assets
      acquired since such date, including without limitation the Collateral, are
      free
      and clear of any Lien, except (a) the security interests and other encumbrances
      (if any) listed on attached Schedule
      7.07(a), (b) those leases
      set forth on attached Schedule
      7.07(b), (c) those liens
      permitted pursuant to Section 12.04 of this Agreement, (d) liens and security
      interests in favor of Subscriber, or (e) Permitted Liens.

    

    Section
      7.08                                
Taxes. Except
      as set forth on Schedule
      7.08, Issuer has made or
      filed all tax returns, reports and declarations relating to any material tax
      liability required by any jurisdiction to which it is subject (any tax liability
      which may result in a lien on any Collateral being hereby deemed material);
      has
      paid all taxes shown or determined to be due thereon except those being
      contested in good faith and which Issuer has, prior to the date of such contest,
      identified in writing to Subscriber as being contested; and has made adequate
      provision for the payment of all taxes so contested, so that no lien will
      encumber any Collateral.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    Section
      7.09                                
Compliance
      with Other Instruments; No Violations.  Issuer (a) is not subject
      to any restrictions in its Organization Documents or other legal restriction,
      or
      any judgment, award, decree, order, governmental rule or regulation or
      contractual restriction which could have a material adverse effect on its
      financial condition, business or prospects, and (b) is in compliance with its
      Organization Documents, all contractual requirements by which it or any of
      its
      properties may be bound and all applicable laws, rules and regulations
      (including without limitation those relating to environmental protection) other
      than laws, rules or regulations the validity or applicability of which it is
      contesting in good faith or provisions of any of the foregoing the failure
      to
      comply with which cannot reasonably be expected to materially adversely affect
      its financial condition, business or prospects or the value of any
      Collateral.

    

    Section
      7.10                                
Litigation. Except
      as set forth in Schedule
      7.10, there is no action,
      suit, proceeding or investigation pending or, to Issuer’s knowledge, threatened
      against or affecting it or any of its assets before or by any court or other
      governmental authority which, if determined adversely to it, would have a
      material adverse effect on its financial condition, business or prospects or
      the
      value of any Collateral.

    

     Section
      7.11                                
ERISA. Issuer
      is in compliance with ERISA; no
      Reportable Event has occurred and is continuing with respect to any Plan; and
      it
      has no unfunded vested liability under any Plan.

    

    Section
      7.12.                                
Anti-Terrorism.

    

    (a)           
      Neither Issuer nor, to the
      knowledge of Issuer, any of its Affiliates or Owners who are Issuer employees
      or
      contractors, is in violation of any laws relating to terrorism or money
      laundering (“Anti-Terrorism
      Laws”), including Executive
      Order No. 13224 on Terrorist Financing, effective September 24, 2001 (the
“Executive
      Order”), and the Uniting
      and Strengthening America by Providing Appropriate Tools Required to Intercept
      and Obstruct Terrorism Act of 2001, Public Law 107-56.

    

    (b)           
      Neither Issuer nor, to the
      knowledge of Issuer, any of its Affiliates or Owners who are Issuer employees
      or
      contractors, or other agent of Issuer acting or benefitting in any capacity
      in
      connection with the transactions contemplated hereunder, is any of the
      following: (a) a Person that is listed in the annex to, or is otherwise subject
      to the provisions of, the Executive Order; (b) a Person owned or controlled
      by,
      or acting for or on behalf of, any Person that is listed in the annex to, or
      is
      otherwise subject to the provisions of, the Executive Order; (c) a Person with
      which Subscriber is prohibited from dealing or otherwise engaging in any
      transaction by any Anti-Terrorism Law; (d) a Person that commits, threatens
      or
      conspires to commit or supports “terrorism” as defined in the Executive Order;
      or (e) a Person that is named as a “specially designated national and blocked
      person” on the most current list published by the U.S. Treasury Department
      Office of Foreign Assets Control (“OFAC”)
      at its official website or any
      replacement website or other replacement official publication of such
      list.

    

    (c)           
      Neither Issuer nor, to the
      knowledge of Issuer, any agent of any of its Affiliates or, to the extent
      employees or contractors of Issuer, Owners acting in any capacity in connection
      with the transactions contemplated hereunder (a) conducts any business or
      engages in making or receiving any contribution of funds, goods or services
      to
      or for the benefit of any Person described in Section 7.13, (b) deals in, or
      otherwise engages in any transaction relating to, any property or interest
      in
      property blocked pursuant to the Executive Order, or (c) engages in or conspires
      to engage in any transaction that evades or avoids, or has the purpose of
      evading or avoiding, or attempts to violate, any of the prohibitions set forth
      in any Anti-Terrorism Law.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    Section
      7.13.                                
Compliance
      with Laws.  Issuer has complied
      and will comply with all applicable federal or state securities laws (including
      but not limited to the Securities Act, the Securities Exchange
      Act)  in connection with the issuance and sale of the Warrants and the
      Warrant Shares.  Neither the Issuer nor anyone acting on its behalf
      has offered or will offer to sell the Shares issuable upon conversion of the
      Note(s), exercise of the Warrants, or similar securities to, or solicit offers
      with respect thereto from, or enter into any preliminary conversations or
      negotiations relating thereto with, any person or entity so as to bring the
      issuance and sale of such securities under the registration provisions of the
      Securities Act.

    

    Section
      7.14.  Capitalization.  Issuer
      has a total authorized capitalization consisting of (a) 100,000,000 shares
      of
      preferred stock, no par value, none of which are issued or outstanding, and
      (b)
      300,000,000 shares of its common stock, no par value, 102,381,508 Shares of
      which are issued and outstanding, of which the officers and directors of Issuer
      beneficially own 61,212,000 Shares as more particularly set forth in (i) the
      Form 10-SB filed by Issuer with the Securities and Exchange Commission on or
      about October 10, 2007 (“Form
      10-SB”), (ii) as supplemented by a subsequent issuance of 150,000 Shares
      to the Issuer’s Treasurer, and (iii) a subsequent issuance of 9,000,000 Shares
      upon conversion of previously outstanding 24,000 shares of the Issuer’s Series A
      Preferred Stock.  Issuer also has issued convertible securities as
      described in Item 4 of Part II of the Form 10-SB as supplemented by the
      following subsequent issuances:  (i) On October 17, 2007, the Issuer
      issued a convertible note in the principle amount of $62,500 which is
      convertible into an aggregate of 500,000 Shares and in connection with such
      offering the Issuer issued warrants to purchase an aggregate of 500,000 Shares
      at an exercise price of $0.18 per Share; (ii) On November 16, 2007, the Issuer
      issued a convertible note in the principle amount of $25,000 which is
      convertible into 250,000 Shares and in connection with such offering the Issuer
      issued warrants to purchase an aggregate of 250,000 Shares at an exercise price
      of $0.15 per Share; (iii) On December 1, 2007, the Issuer issued a convertible
      note in the principle amount of $90,000 which is convertible into an aggregate
      of 1,000,000 Shares and in connection with such offering the Issuer issued
      warrants to purchase an aggregate of 1,000,000 Shares at an exercise price
      of
      $0.15 per Share; (iv) On January 3, 2008, the Issuer issued a convertible note
      in the principle amount of $20,000 which is convertible into an aggregate of
      200,000 Shares and in connection with such offering the Issuer issued warrants
      to purchase an aggregate of 100,000 Shares; and (v) pursuant to the Investment
      Contract by and between the Issuer and Beijing InfoSure Technology Ltd., the
      Issuer is obligated to issue 200,000 Shares to the shareholders of Beijing
      InfoSure (the “Beijing InfoSure
      Shares”).  Except as set forth in this Section 7.14, there are
      no options, warrants or rights to purchase Shares  or other Issuer
      securities authorized, issued or outstanding, nor is the Issuer obligated in
      any
      other manner to issue Shares or other Issuer securities, except to Subscriber
      under the Loan Documents and to the Selling Agent in the form of the Selling
      Agent Warrant.  All of the outstanding Shares of the Issuer have been
      and will be duly authorized, validly issued, fully paid and
      nonassessable.  All Shares issuable upon exercise of outstanding
      options have been duly authorized and, when issued and paid for in accordance
      with the terms of such options or warrants, will be validly issued and fully
      paid and nonassessable.  The Shares issuable upon conversion of the
      Note and Warrants, when respectively issued, delivered and paid for in
      accordance with the terms hereof, will be duly authorized, validly issued and
      fully paid and nonassessable.  There are no restrictions imposed by
      the Issuer or any other person or entity in an agreement to which the Issuer
      is
      a party or of which the Issuer has knowledge on the transfer of Shares or other
      Issuer securities convertible into Shares other than those imposed by relevant
      state and federal securities laws.   No holder of any security of
      the Issuer is entitled to preemptive or similar statutory or contractual rights,
      either arising pursuant to any agreement or instrument to which the Issuer
      is a
      party or that are otherwise binding upon the Issuer.  The offer and
      sale of all shares of capital stock or other securities of the Issuer issued
      before the date hereof complied with or were exempt from registration or
      qualification under all federal and state securities laws.

    

    Section
      7.15.                                
Disclosure.  This
      Agreement, including the Schedules hereto, contains no untrue statement of
      a
      material fact and does not omit to state a material fact necessary in order
      to
      make the statements made, in light of the circumstances under which they were
      made, not misleading.

    

    Section
      7.16                                
Registration
      Rights.  Except as provided in Article 14 and as set forth on
Schedule
      7.16,
      no Person has the right to demand or other rights to cause the Issuer to file
      any registration statement under the Securities Act relating to any securities
      of the Issuer, presently outstanding or that may be subsequently issued, or
      any
      right to participate in any such registration statement.

    

    Section
      7.17                                
No Brokers
      or
      Finders.  No Person has or will have, as a result of the
      transactions contemplated by this Agreement based on actions taken by the Issuer
      or to the Issuer’s knowledge anyone acting on its behalf, any right, interest or
      valid claim against or upon the Subsciber or the Issuer for any commission,
      fee
      or other compensation as a finder or broker, other than fees due the Selling
      Agent by Issuer; and the Issuer agrees to indemnify and hold the Subscriber
      harmless against any such commissions, fees or other
      compensation.  The only fees due from Issuer to the Selling Agent in
      connection with the transactions described in the Loan Documents are a cash
      fee
      of $85,000 and the Selling Agent Warrant for 500,000 Shares.

    

    
      	
              8.

            	
              SALES OF INVENTORY

            

    

    

    So
      long as Issuer is not in default
      hereunder, Issuer shall have the right, in the regular course of business,
      to
      process and sell Issuer’s Inventory.  A sale in the ordinary course of
      business shall not include a transfer in total or partial satisfaction of a
      debt.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    9.           
      FINANCING
      STATEMENTS.

    

    Issuer
      hereby irrevocably authorizes
      Subscriber at any time and from time to time to file in any UCC jurisdiction
      any
      initial financing statements and amendments thereto that (a) indicate the
      Collateral (i) as all assets of Issuer or words of similar effect, regardless
      of
      whether any particular asset comprised in the Collateral falls within the scope
      of Article 9 of the UCC of such jurisdiction, or (ii) as being of an equal
      or
      lesser scope or with greater detail, and (b) contain any other information
      required by the UCC for the sufficiency or filing office acceptance of any
      financing statement or amendment, including (i) whether Issuer is an
      organization, the type of organization and any organization identification
      number issued to Issuer, and (ii) in the case of a financing statement filed
      as
      a fixture filing or indicating Collateral as as-extracted Collateral or timber
      to be cut, a sufficient description of real property to which the Collateral
      relates. Issuer  agrees to furnish any such information to Subscriber
      promptly upon request.  Issuer also ratifies its authorization for
      Subscriber to have filed in any UCC jurisdiction any like initial financing
      statements or amendments thereto if filed prior to the date
      hereof.  Issuer further hereby irrevocably authorizes Subscriber at
      any time and from time to time to file and record in the United States Patent
      and Trademark Office and an any other appropriate federal, foreign or
      international agency this Agreement, the Patent Security Agreement of
Schedule
      4, or a summary thereof,
      to
      be recorded against the Issuer’s patent applications or patents. Upon full
      repayment of Issuer’s Obligations, Subscriber shall provide to Issuer for
      recordation a release and termination of Subscriber’s assignment in security,
      re-assigning to Issuer said patents and patent applications.

    

    10.           
      ISSUER’S
      REPORTS.

    

    Section
      10.01                                
Issuer will furnish
      Subscribera copy of its
      periodic reports within five days of when filed with the SEC pursuant to Section
      13 of the Securities Exchange Act; provided that if the Issuer fails to timely
      file any such periodic reports with he SEC, then Issuer, in addition to such
      failure being an Event of Default hereunder, shall provide Subscriber with
      such
      financial statements during the continuation of such failure as Subscriber
      may
      request from time to time, such financial statements to be prepared in
      accordance with GAAP, certified by the chief financial officer of the Issuer
      (subject to year end adjustment).

    

    Section
      10.02                                   In addition to the foregoing,
      the Issuer
      promptly shall provide Subscriber with such other and additional information
      concerning the Issuer, the Collateral, the operation of the Issuer’s business,
      and the Issuer’s financial condition, including financial reports and
      statements, as Subscriber may from time to time reasonably request
      from the Issuer.  All
      financial information provided Subscriber by the Issuer shall be prepared in
      accordance with GAAP or generally accepted auditing principles (as applicable)
      applied consistently in the preparation thereof and with prior periods to fairly
      reflect the financial conditions of the Issuer at the close of, and its results
      of operations for, the periods in question.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    11.           
      GENERAL AGREEMENTS OF BORROWER.

    

    Section
      11.01                                  Issuer agrees to keep
      all the Collateral
      insured with coverage and in amounts not less than that usually carried by
      one
      engaged in a like business and in any event not less than that required by
      Subscriber with loss payable to Subscriber and Issuer, as their interests may
      appear, hereby appointing Subscriber as attorney for Issuer in obtaining,
      adjusting, settling for claims in excess of $10,000.00 following
      the occurrence and during the
      continuance uncured of an Event of Default and
      canceling such insurance and
      endorsing any draftsin
      excess of such amount following the occurrence
      and during the
      continuance uncured of an Event of Default.  As further assurance
      for
      the payment and performance of the Obligations, Issuer hereby assigns to
      Subscriber all such sums to
      which Subscriber has the foregoing rights, which
      may become payable under any
      policy of insurance on the Collateral and Issuer hereby directs each insurance
      company issuing any such policy to make payment of such sums directly to
      Subscriber.

    

    Section
      11.02                                   Subscriber or its agents
      have the right
at reasonable times after reasonable notice, to inspect the Collateral
      and all records pertaining thereto
      at intervals to be determined by Subscriber and without hindrance or
      delay.

    

    Section
      11.03                                  
Issuer will at all times
      keep
      accurate and complete records of Issuer’s Inventory, Accounts and other
      Collateral, and Subscriber, or any of its agents, shall have the right to call
      at Issuer’s place or places of business at reasonable times after
      reasonable notice at intervals to
      be determined by Subscriber, and without
      hindrance or
      delay, to inspect, audit, check, and make extracts from any copies of the books,
      records, journals, orders, receipts, correspondence which relate to Issuer’s
      Accounts, and other Collateral or other transactions, between the parties
      thereto and the general financial condition of Issuer and Subscriber may remove
      any of such records temporarily for the purpose of having copies made
      thereof.  Issuer shall pay to Subscriber all reasonable audit fees,
      plus all travel and other expenses incurred in connection with any such
      audit.

    

    Section
      11.04                                  Issuer will maintain
      a standard and
      modern system of accounting which enables Issuer to produce financial statements
      in accordance with GAAP and maintain records pertaining to the Collateral that
      contain information as from time to time may be requested by
      Subscriber.

    

    Section
      11.05                                  Issuer will maintain
      its existence in
      good standing and comply with all laws and regulations of the United States
      or
      of any state or states thereof or of any political subdivision thereof, or
      of
      any governmental authority which may be applicable to it or to its
      business , except for those the application of which to Issuer is being
      contested in good faith.

    

    Section
      11.06                                  Issuer will pay all real
      and personal
      property taxes, assessments and charges and all franchises, income,
      unemployment, old age benefits, withholding, sales and other taxes assessed
      against it, or payable by it at such times and in such manner as to prevent
      any
      penalty from accruing or any lien or charge from attaching to its
      property , except for those being contested in good faith.

    

    Section
      11.07                                  If any of Issuer’s Accounts arise out
      of
      contracts with the United States or any department, agency, or instrumentality
      thereof, Issuer will immediately notify Subscriber thereof in writing and
      execute any instruments and take any steps required by Subscriber in order
      that
      all monies due and to become due under such contracts shall be assigned to
      Subscriber and notice thereof given to the Government under the Federal
      Assignment of Claims Act.

     

    
      
        
        

      

      
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    Section
11.08                                  If
      any of Issuer’s Accounts should be
      evidenced by promissory notes, trade acceptances, or other instruments for
      the
      payment of money, Issuer will immediately deliver same to Subscriber,
      appropriately endorsed to Subscriber’s order and, regardless of the form of such
      endorsement, Issuer hereby waives presentment, demand, notice of dishonor,
      protest and notice of protest and all other notices with respect
      thereto.

    

    Section
11.09                                   If
      any goods are at any time in the
      possession of a bailee, Issuer shall promptly notify Subscriber thereof and,
      if
      requested by Subscriber, shall promptly obtain an acknowledgment from the
      bailee, in form and substance satisfactory to Subscriber, that the bailee holds
      such Collateral for the benefit of Subscriber and shall act upon the
      instructions of Subscriber, without the further consent of
      Issuer.  Subscriber agrees with Issuer that Subscriber shall not give
      any such instructions unless an Event of Default has occurred and is
      continuingor would occur
      after taking into account any action by Issuer with respect to the
      bailee.

    

    Section
11.10                                   If
      Issuer is at any time a beneficiary
      under a letter of credit now or hereafter issued in favor of Issuer, Issuer
      shall promptly notify Subscriber thereof and, at the request and option of
      Subscriber, Issuer shall, pursuant to an agreement in form and substance
      satisfactory to Subscriber, either (a) arrange for the issuer and any confirmer
      of such letter of credit to consent to an assignment to Subscriber of the
      proceeds of any drawing under the letter of credit, or (b) arrange for
      Subscriber to become the transferee beneficiary of the letter of credit, with
      Subscriber agreeing, in each case, that the proceeds of any drawing under the
      letter of credit are to be applied  in the same manner as any other
      payment on an Account.

    

    Section
11.11                                   If
      Issuer shall at any time hold or
      acquire a commercial tort claim, Issuer shall immediately notify Subscriber
      in a
      writing signed by Issuer of the brief details thereof and grant to Subscriber
      in
      such writing a security interest therein, and in the
      proceeds  thereof, all upon the terms of this Agreement, with such
      writing to be in form and substance satisfactory to
      Subscriber.

    

    Section
11.12                                   Issuer
      will promptly pay when due all
      taxes and assessments upon the Collateral or for its use or operation or upon
      this Agreement, or upon any note or notes evidencing the Obligations, and will,
      at the request of Subscriber, promptly furnish Subscriber the receipted bills
      therefor.  At its option, Subscriber may discharge taxes, Liens or
      other encumbrances at any time levied or placed on the Collateral, may pay
      for
      insurance on the Collateral and may pay for the maintenance and preservation
      of
      the Collateral.  Issuer agrees to reimburse Subscriber on demand for
      any payments made, or any expenses incurred by Subscriber pursuant to the
      foregoing authorization, and upon failure of the Issuer so to reimburse
      Subscriber, any such sums paid or advanced by Subscriber shall be deemed secured
      by the Collateral and constitute part of the Obligations.  Issuer
      shall not abandon any patent application without consent of Subscriber, in
      writing, and Issuer shall continue to prosecute its patent applications in
      good
      faith, paying all legal fees and government fees as they become
      due.

    

    Section
11.13                                  Issuer
      will immediately notify
      Subscriber upon receipt of notification of any potential or known release or
      threat of release of Hazardous Substance from any site operated by Issuer or
      of
      the incurrence of any expense or loss in connection therewith or with the
      Issuer’s obtaining knowledge of any investigation, action or the incurrence of
      any expense or loss by any governmental authority in connection with the
      assessment, containment or removal of any Hazardous Substance for which expense
      or loss the Issuer may be liable.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    Section
11.14                                  
      Except for Subscriber’s proven
      gross negligence or willful misconduct, Issuer will indemnify and save
      Subscriber harmless from all loss, costs, damage, liability or expenses
      (including, without limitation, court costs and reasonable attorneys’ fees) that
      Subscriber may sustain or incur by reason of defending or protecting this
      security interest or the priority thereof or enforcing the Obligations, or
      in
      the prosecution or defense of any action or proceeding concerning any matter
      growing out of or in connection with this Agreement and/or any other documents
      now or hereafter executed in connection with this Agreement and/or the
      Obligations and/or the Collateral.  This indemnity shall survive the
      repayment of the Obligations and the termination of Subscriber’s agreement to
      make the Loan available to Issuer and the termination of this
      Agreement.

    

    Section
11.15                                  
      At the option of Subscriber,
      Issuer will furnish to Subscriber, from time to time, within five days after
      the
      accrual in accordance with applicable law of Issuer’s obligation to make
      deposits for F.I.C.A. and withholding taxes and/or sales taxes, proof
      satisfactory to Subscriber that such deposits have been made as
      required.

    

    Section
11.16                                   Should
      Issuer fail to make any of such
      deposits or furnish such proof then Subscriber may, in its sole and absolute
      discretion, (a) make any of such deposits or any part thereof, (b) pay such
      taxes, or any part thereof, or (c) set up such reserves as Subscriber, in
      its judgment,
      shall deem necessary to
      satisfy the liability for such taxes.  Each amount so deposited or
      paid shall constitute an advance under the terms hereof, repayable on demand
      with interest, as provided herein, and secured by all Collateral and any other
      property at any time pledged by Issuer with Subscriber.  Nothing
      herein shall be deemed to obligate Subscriber to make any such deposit or
      payment or set up such reserve and the making of one or more of such deposits
      or
      payments or the setting up of such reserve shall not constitute (i) an agreement
      on Subscriber’s part to take any further or similar action, or (ii) a waiver of
      any default by Issuer under the terms hereof.

    

    Section
11.17                                   All
      advances by Subscriber to Issuer
      under this Agreement constitute one Loan, and all indebtedness of Issuer to
      Subscriber under this and under any other Loan Documentconstitute
      one general
      Obligation.  Any and all advances to Issuer hereunder or otherwise
      shall be made upon the security of all of the Collateral held and to be held
      by
      Subscriber.  It is distinctly understood and agreed that all of the
      rights of Subscriber contained in this Agreement shall likewise apply, insofar
      as applicable, to any modification of or supplement to this Agreement and to
      any
      other Loan
      Document.  Any
      default of this Agreement by Issuer shall constitute, likewise, a default by
      Issuer of each other Loan Document, and any default by
      Issuer of any
      remaining Loan Documentshall constitute a default
      of this
      Agreement.  The entire Obligation of Issuer to Subscriber shall become
      due and payable when payments become due and payable hereunder upon termination
      of this Agreement.

    

    Section
11.18                                   Issuer
      will, at its expense, upon
      request of Subscriber promptly and duly execute and deliver such documents
      and
      assurances and take such actions as may be necessary or desirable or as
      Subscriber may request in order to correct any defect, error or omission which
      may at any time be discovered or to more effectively carry out the intent and
      purpose of this Agreement and to establish, perfect and protect Subscriber’s
      security interest, rights and remedies created or intended to be created
      hereunder.  Without limiting the generality of the above, Issuer will
      join with Subscriber in executing notices appropriate under applicable Federal
      or state law in form satisfactory to Subscriber and filing the same in all
      public offices and jurisdictions wherever and whenever requested by
      Subscriber.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    Section
11.19                                   Issuer
      shall promptly notify Subscriber
      in writing of any litigation, proceeding, or counterclaim against, or of any
      investigation of, Issuer if:  (a) the outcome of such litigation,
      proceeding, counterclaim, or investigation may materially and adversely affect
      the finances or operations of Subscriber or title to, or the value of, any
      Collateral; or (b) such litigation, proceeding, counterclaim, or investigation
      questions the validity of this Agreement or any action taken, or to be taken,
      pursuant to this Agreement, Issuer shall furnish to Subscriber such information
      regarding any such litigation, proceeding, counterclaim, or investigation as
      Subscriber shall request.

    

    Section
11.20                                  In
      connection with the Subscriber’s
      exercise of the Subscriber’s rights after the occurrence ofand during the continuance
      ofan Event of Default,
      the
Subscriber may enter
      upon
      any premises or place of business which Issuer presently has or may hereafter
      have and where any Collateral may be located for the purpose of accessing such
      Collateral.  The Subscriber shall not be required to remove any of the
      Collateral from any such premises upon the Subscriber’s taking possession
      thereof, and may render any Collateral unusable to the Issuer.  In no
      event shall the Subscriber be liable to the Issuer for any rental for any
      access, use or occupancy by the Subscriber of any such premises pursuant to
      this
      Agreement.

    

    Section
11.21                                  Any
      and all instruments, documents,
      policies and certificates of insurance, securities, goods, accounts, choses
      in
      action, general intangibles, chattel papers, cash, property and the proceeds
      thereof (whether or not the same are Collateral or proceeds thereof hereunder)
      owned by Issuer or in which Issuer has an interest, which now or hereafter
      are
      at any time in possession or control of Subscriber or in transit by mail or
      carrier to or from Subscriber or in the possession of any third party acting
      in
      Subscriber’s behalf, without regard to whether Subscriber received the same in
      pledge, for safekeeping, as agent for collection or transmission or otherwise
      or
      whether Subscriber had conditionally released the same, shall constitute
      additional security for the Obligations and may be applied at any time following
      the occurrence of and
      during the continuance ofan
      Event of Default, to any Obligations.

    

    Section
11.22                                  Issuer
      shall pay to Subscriber on demand
      any and all reasonable counsel fees and other expenses incurred by Subscriber
      in
      connection with the preparation, interpretation, enforcement, administration
      or
      amendment of this Agreement, or of any documents relating thereto, and any
      and
      all expenses, all
      attorneys’ fees and expenses, and all other expenses of like or unlike nature
      which may be expended by Subscriber to obtain or enforce payment of any Account
      either as against the account debtor, Issuer, or any guarantor or surety of
      Issuer or in the prosecution or defense of any action or concerning any matter
      growing out of or connected with the subject matter of this Agreement, the
      Obligations or the Collateral or any of Subscriber’s rights or interests therein
      or thereto, including, without limiting the generality of the foregoing, any
      reasonablecounsel fees or
      expenses incurred in any bankruptcy or insolvency proceedings and all costs
      and
      expenses incurred or paid by Subscriber in connection with the administration,
      supervision, protection or realization on any security held by Subscriber for
      the debt secured hereby, whether such security was granted by Issuer or by
      any
      other Person primarily or secondarily liable (with or without recourse) with
      respect to such debt, and all reasonable costs and expenses incurred by
      Subscriber in connection with the defense, settlement or satisfaction of any
      action, claim or demand asserted against Subscriber in connection with the
      debt
      secured hereby, all of which amounts shall be considered advances to protect
      Subscriber’s security, and shall be secured hereby.  Issuer shall also
      pay Subscriber a $15,000 Loan facility fee, payable from the proceeds of the
      first Note(s).

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    Section
11.23                                  Issuer
      does hereby make, constitute and
      appoint any officer or agent of Subscriber as Issuer’s true and lawful
      attorney−in−fact, with power to endorse the name of Issuer or any of Issuer’s
      officers or agents upon any notes, checks, drafts, money orders, or other
      instruments of payment (including payments payable under any policy of insurance
      on the Collateral) or Collateral that may come into possession of Subscriber
      in
      full or part payment of any amounts owing to Subscriber; to sign and endorse
      the
      name of Issuer or any of Issuer’s officers or agents upon any invoice, freight
      or express bill, bill of lading, storage or warehouse receipts, drafts against
      debtors, assignments, verifications and notices in connection with Accounts,
      and
      any instrument or documents relating thereto or to Issuer’s rights therein; to
      give written notice to such office and officials of the United States Post
      Office to effect such change or changes of address so that all mail addressed
      to
      Issuer may be delivered directly to Subscriber; granting upon Issuer’s said
      attorney full power to do any and all things necessary to be done in and about
      the premises as fully and effectually as Issuer might or could do, and hereby
      ratifying all that said attorney shall lawfully do or cause to be done by virtue
      hereof.  Neither Subscriber nor the attorney shall be liable for any
      acts or omissions nor for any error of judgment or mistake, except for their
      gross negligence or willful misconduct.  This power of attorney shall
      be irrevocable for the term of this Agreement and all transactions hereunder
      and
      thereafter as long as Issuer may be indebted to Subscriber. Subscriber agrees not
      to exercise the
      foregoing power of attorney prior to the occurrence of an Event of Default
      which
      is continuing.

    

    Section
11.24                               
      Issuercovenants
      and agrees that during the
      term of this Agreement, neither Issuer nor any of its employees or agents or
      Affiliates shall, directly or indirectly, by operation of law or otherwise,
      knowingly cause or permit (a) any of the funds or properties of Issuer or any
      of
      its Affiliates that are used to repay the Loans to constitute property of,
      or be
      beneficially owned directly or indirectly by, any Person subject to sanctions
      or
      trade restrictions under United States law (“Embargoed
      Person”or “Embargoed
      Persons”) that is
      identified  on (i) the “List of Specially Designated Nationals and
      Blocked Persons” (the “SDN
      List”) maintained by OFAC
      and/or on any other similar list (“Other
      List”) maintained by OFAC
      pursuant to any authorizing statutes including, but not limited to, the
      International Emergency Economic Powers Act, 50 U.S.C. §§ 1701 et seq., The
      Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Order
      or
      regulation promulgated thereunder, with the result that the investment of such
      funds in Issuer (whether directly or indirectly) is prohibited by law, or the
      Loan made by Subscriber would be in violation of law, or (ii) the Executive
      Order, any related enabling legislation or any other similar Executive Orders,
      or (b) any Embargoed Person to have any direct or indirect interest, or any
      nature whatsoever in Issuer or any of its Owners or Affiliates, with the result
      that the investment in Issuer (whether directly or indirectly) is prohibited
      by
      law or any of the transactions contemplated hereunder is in violation of
      law.

    

    Section
11.25                                  Issuer
      covenants and agrees during the
      term of this Agreement, to comply with all applicable laws, rules,
      regulations and orders of any governmental authority (including but not limited
      to compliance with the Securities Act and the Securities Exchange Act)
      noncompliance with which could materially adversely affect its business or
      condition, financial or otherwise, except non-compliance being contested in
      good
      faith through appropriate proceedings so long as the Issuer shall have set
      up
      and funded sufficient reserves, if any, required under generally accepted
      accounting principles with respect to such items.  Issuer further
      covenants and agrees that during the term of this Agreement, Issuer shall comply
      in all respects with all Securities and Exchange Commission requirements
      currently applicable to Issuer and other OTC reporting and other requirements
      currently applicable to Issuer and/or its Shares.

    

    12.           
      ISSUER’S
      NEGATIVE COVENANTS.  Issuer will not at any
      time:

    

    Section
      12.01                                
Issue evidence of Debt
      or suffer
      to exist Debt in addition to the Obligations, except (a) Debt or liabilities
      of
      Issuer other than for money borrowed, incurred or arising in the ordinary course
      of business, or (b) Debt related to Permitted Liens;

    

    Section
      12.02                                  After there has occurred
      an Event of
      Default which has not been cured, Issuer shall not make any distributions or
      dividends to its Owners whatsoever at any time after there has occurred an
      Event
      of Default which has not been cured;

    

    Section
      12.03                                  Sell, assign, exchange,
      license or
      otherwise dispose of or encumber any of the Collateral, other than Collateralconsisting
      ofscrap, waste, defective
      goods and the
      like; obsolete goods;
finished
      goods sold in the
      ordinary course of business or any interest therein to any Person;
      andEquipment which is no
      longer required or deemed necessary for the conduct of Issuer’s business, so
      long as Issuer receives therefor a sum substantially equal to such Equipment’s
      fair value;

    

    Section
      12.04                                  Create, permit to be
      created or suffer
      to exist any Lien upon any of the Collateral or any other property of Issuer,
      now owned or hereafter acquired, except: (a) landlords’, carriers’,
      warehousemen’s, mechanics’ and other similar liens arising by operation of law
      in the ordinary course of Issuer’s business; (b) arising out of pledge or
      deposits under worker’s compensation, unemployment insurance, old age pension,
      social security, retirement benefits or other similar legislation; (c) purchase
      money Liens arising in the ordinary course of business (so long as the Debt
      secured thereby does not exceed the lesser of the cost or fair market value
      of
      the property subject thereto, and such Lien extends to no other property);
      (d)
      Liens for unpaid taxes that are either (i) not yet due and payable, or (ii)
      the
      subject of Permitted Protests; (e) Liens which are the subject of Permitted
      Protests; (f) those Liens and encumbrances set forth on attached Schedule
      12.04; (g) in favor of
      Subscriber; and (h) other Liens and encumbrances approved by Subscriber in
      writing and subject to subordination and intercreditor agreements as approved
      by
      Subscriber (collectively, “Permitted
      Liens”);

    

    Section
      12.05                                  Pay or make any distribution
      on account
      of (except as permitted under Section 12.02) any class of Issuer’s ownership
      interest in cash or in property (other than additional ownership interest),
      or
      redeem, purchase or otherwise acquire, directly or indirectly, any of the
      ownership interests;

    

    Section
      12.06                                  Make any loans or advances
      to any
      Person, including without limitation Issuer’s directors, officers and employees,
      except advances to officers or employees with respect to expenses incurred
      by
      them in the ordinary course of their duties which are properly reimbursable
      by
      Issuer and are consistent with past practice;

    

    Section
      12.07                                  Assume, guaranty, endorse
      or otherwise
      become directly or contingently liable in respect of (including without
      limitation by way of agreement, contingent or otherwise, to purchase, provide
      funds to or otherwise invest in a debtor or otherwise to assure a creditor
      against loss), any Debt (except guarantees by endorsement of instruments for
      deposit or collection in the ordinary course of business and guarantees in
      favor
      of Subscriber) of any other Person.

     

    
      
        
        

      

      
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    Section
      12.08                                  (a) Use any Loan proceeds
      to purchase or
      carry any “margin stock” (as defined in Regulation U of the Board of Governors
      of the Federal Reserve System) or (b) invest in or purchase any stock or
      securities of any Person except readily marketable direct obligations of, or
      obligations guaranteed by, the United States of America or any agency
      thereof;

    

    Section
      12.09                                  Enter into any lease
      or other
      transaction with any Owner, officer of  Issuer or Affiliate on terms
      any less favorable than those which might be obtained at the time from Persons
      who are not such an Owner, officer of Issuer or Affiliate;

    

    Section
      12.10                                  
Sell, transfer or otherwise
      dispose of any stock or other ownership interest of any subsidiary of Issuer;
      or

    

    Section
      12.11                                  (a) Except as set forth
      on Schedule
      12.11, merge or consolidate
      with or into any Person, (b) acquire all or substantially all of the assets
      of
      any Person, (c) enter into any joint venture or partnership with any Person;
      (d)
      convey, lease or sell all or any material portion of its property or assets
      or
      business to any other Person, except for the sale of Inventory in the ordinary
      course of its business; or (e) convey, lease or sell any of its assets to any
      Person for less than the fair market value thereof.

    

    Section
      12.12                                 
Authorize or issue,
      or
      obligate itself to issue, any shares of capital stock or any equity security
      or
      preferred stock that is senior to, or pari passu with, the rights of the Note
      holder in and to the Collateral upon a liquidation or dissolution of the Issuer,
      including any other security convertible into or exercisable for any such
      security of the Issuer.

    

    13.           
      RIGHT TO PARTICIPATE IN
      SUBSEQUENT FINANCINGS.

    

    (a)           
      The Issuer covenants and agrees that it shall not until the later of (I) the
      first anniversary following the Closing Date, and (II) the date that the Note
      is
      either paid in full or converted into Shares, issue or sell any (A) shares
      of
      capital stock of the Issuer (including but not limited to Shares), (B)
      securities convertible into or carrying any rights to purchase capital stock
      of
      the Issuer (including but not limited to Shares), or (C) options, warrants
      or
      other rights to subscribe for, purchase or otherwise acquire any capital stock
      of the Issuer (including but not limited to Shares), or (D) debt financing,
      unless the Issuer first submits a written offer to the Subscriber to permit
      it
      to purchase its “Proportionate Share” of such securities (as defined below) on
      terms and conditions, including price, not less favorable to the Subscriber
      than
      those offered to such other prospective purchaser (the “Buyer”).  Such
      notice shall be delivered to the address of Subscriber as set forth on the
      Issuer’s securities record book and shall identify the Buyer (to the extent
      known), describe the securities proposed to be issued by the Issuer, specify
      price and payment terms and any other material terms related thereto and shall
      include any offer letter, term sheet and related correspondence between the
      Issuer or its representatives and the Buyer.  Subscriber shall have
      the right to elect to purchase a number of such securities (or participate
      in
      such debt financing), as the case may be, based on the ratio which the Shares
      owned by the Subscriber or obtainable by the Subscriber upon conversion of
      any
      rights to acquire Shares and exercise of Warrants bears to all the issued and
      outstanding Shares owned by all stockholders or obtainable by all holders of
      Issuer securities (including the Subscriber) upon conversion of any rights
      to
      acquire Shares (the “Proportionate
      Share”).  The Issuer’s offer to the Subscriber shall remain
      open for a period of fourteen days following receipt of the written notice
      to
      the Subscriber.  In the event Subscriber elects to acquire its
      Proportionate Share of the securities offered by the Issuer pursuant to this
      Section 13, the closing of such purchase shall take place no later than the
      thirtieth day from the date of the Subscriber’s acceptance notice, unless
      otherwise any agreed to in writing by the Subscriber and the
      Issuer.  Notwithstanding the foregoing, the Issuer or the Subscriber
      electing to acquire its Proportionate Share may abandon such sale or purchase
      without liability in the event the pending sale described in the notice from
      the
      Issuer referred to above is abandoned for any reason.

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    (b)           
      Any securities offered to the Subscriber pursuant to this section which
      Subscriber has not elected to purchase within the time fixed herein may, within
      ninety days after the date for making such election, be sold by the Issuer
      at
      not less than the same price and upon terms not materially less favorable to
      the
      Issuer than were offered to the Subscriber provided, however,
      that if such third party sale or sales are not consummated within such 90-day
      period, the Issuer shall not sell such securities as shall not have been so
      purchased without again complying with the provisions of this Section
      13.  Notwithstanding the above, the Issuer may from the date hereof,
      without offering or having offered such securities to the Subscriber, issue
      or
      grant (i) stock options to employees or contractors approved by Issuer’s Board
      of Directors; (ii) any Shares or securities convertible into Shares issued
      for
      or in connection with any joint venture, strategic partnering, merger, or stock
      or asset acquisition approved by Issuer’s Board of Directors; (iii) any Shares
      issuable upon conversion of the Notes or upon exercise of the Warrants; and
      (iv)
      any Shares issuable upon conversion of the securities identified in the Form
      10-SB; (v) any exercise of rights which when issued, were the subject of an
      offering with respect to which the Issuer complied with the requirements of
      this
      Section 13, or such requirements were waived by the Subscriber in accordance
      with Section 13(d).

    

    (c)           
      Issuer shall not issue any securities without the consent of a majority of
      its
      Board of Directors or approval of a higher percentage of its Board of Directors
      if required by the terms of its certificate of incorporation or any other
      agreement to which it is a party or by which it is bound.

    

    (d)           
      Notwithstanding the foregoing, the Subscriber may in writing waive the
      provisions of Section 13(a) and (b), provided however, that such waiver shall
      not be permitted with respect to any offering of securities in which more than
      50% of the securities are sold to the Subscriber or its Affiliates.

    

    14.           
      COVENANTS RELATING TO REGISTRATION OF SHARES.

    

    
      	
               

            	
              Section
                14.1  Registration
                Obligation. 

            

    

    

    
      	
              (a)

            	
              The
                Issuer represents and warrants that it will file a Registration Statement
                promptly following the clearing of all comments on the Issuer’s Form 10-SB
                filed with the SEC on October 4, 2007, and that it will use its best
                efforts to have such Registration Statement become effective promptly
                after the date of filing, and in any event to become effective not
                later
                than 150 days following the Closing Date.  Such Registration
                Statement will include to register under the Securities Act all Conversion
                Shares and all Warrant Shares provided that the amount of Conversion
                Shares and Warrant Shares shall be limited to not less than 100%
                of the
                maximum amount of common stock which may be included in a single
                registration statement without exceeding registration limitations
                imposed
                by the SEC pursuant to Rule 415 of the Securities Act.  In the
                event that less than all of the initial registrable securities are
                included in the Registration Statement as a result of the limitation
                described in Section 14.1(a), then the Issuer will file within fourteen
                days of such limits being triggered, an additional registration statement
                each registering the amount permitted under Rule 415 until all of
                the
                Conversion Shares and Warrant Shares have been registered, such
                registration statements to be effective within forty-five days of
                the
                filing thereof. 

            

    

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    
      	
              (b)

            	
              The
                Issuer’s obligation to register all Conversion Shares and all Warrant
                Shares shall, notwithstanding any other provision of this Agreement,
                be
                deemed satisfied  when, and only when, (i) a Registration
                Statement or Registration Statements covering all Conversion Shares
                and
                all Warrant Shares shall have become effective, or (ii) such time
                as all
                of the Conversion Shares and Warrant Shares are no longer, by reason
                of
                Rule 144(k) under the Securities Act, required to be registered for
                the
                sale thereof by such holders (provided that if clause (ii) applies,
                Issuer
                shall provide Subscriber with an opinion letter as to same in form
                and
                from counsel each satisfactory to Subscriber and Issuer’s transfer agent
                and Issuer’s obligation to so register such Conversion Shares and Warrant
                Shares shall not be deemed satisfied until such satisfactory opinion
                is
                provided); except as expressly provided in this Section
                14(b).  In the event that a Registration Statement or
                Registration Statements to register all the Conversion Shares and
                all
                Warrant Shares has (or have) not become effective within 150 days
                following the Closing Date (for whatever reason), it will be deemed
                an
                Event of Default under this Agreement, and Subscriber will be entitled
                to,
                without limitation, the benefit of the provisions of Section 14(c),
                in
                addition to any other remedies as provided in this Agreement, any
                of the
                remaining Loan Documents, or otherwise by law.

            

    

     

    
      	
              (c)

            	
              In
                the event that a Registration Statement or Registration Statements
                to
                register all Conversion Shares and all Warrant Shares has not become
                effective by that date 150 days following the Closing Date unless
                clause
                (ii) of Section 14.1(b) applies including satisfaction of the opinion
                letter condition described therein, then whether or not Issuer used
                its
                best efforts to meet such deadline, the Subscriber shall be entitled
                to
                liquidated damages on demand, payable in cash by wire transfer according
                to wiring instructions given by Subscriber to Issuer, in the amount
                equal
                to 1% of the Loan Amount, for each thirty days, pro rated daily,
                that such
                Registration Statement(s) are not effective by such 150-day deadline
                or
                until clause (ii) of Section 14.1(b) applies including satisfaction
                of the
                opinion letter condition described therein. Notwithstanding the remaining
                provisions of this Section 14.1(c), liquidated damages under the
                provisions of this paragraph shall not be imposed for a period beyond
                a
                maximum of six 30-day periods. 

            

    

    

    
      	
              Section
                14.2

            	
              Registration
                Procedures.  If and whenever the Issuer is required by
                the provisions of Section 14.1 to effect the registration of Conversion
                Shares and/or Warrant Shares under the Securities Act, the Issuer
                will, at
                its expense, as expeditiously as possible:

            

    

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    
      	
              (a)

            	
              In
                accordance with the Securities Act and the rules and regulations
                of the
                SEC, prepare and file with the SEC a Registration Statement with
                respect
                to the Conversion Shares and Warrant Shares and use its best efforts
                to
                cause such Reg­istration Statement to become and remain effective
                until the Conversion Shares and Warrant Shares covered by such
                Registration Statement have been sold, but for no longer than twelve
                months subsequent to the effective date of such registration, and
                prepare
                and file with the SEC such amend­ments to such Registration Statement
                and supplements to the prospectus contained therein as may be necessary
                to
                keep such Registration Statement effective and such Registration
                Statement
                and prospectus accurate and complete until the Conversion Shares
                and
                Warrant Shares covered by such Registration Statement has been sold,
                but
                for no longer than twelve months subsequent to the effective date
                of such
                registration; 

            

    

    

    
      	
              (b)

            	
              If
                the offering is to be underwritten in whole or in part, enter into
                a
                written underwriting agreement in form and substance reasonably
                satisfactory to the managing under­writer, if any, of the public
                offering and the Subscriber; 

            

    

    

    
      	
              (c)

            	
              Furnish
                to the Subscriber and to the underwriters such reasonable number
                of copies
                of the Registration Statement, preliminary prospectus, final prospectus
                and such other documents as such underwriters and the Subscriber
                may
                reasonably request in order to facilitate the public offering of
                such
                securities; 

            

    

    

    
      	
              (d)

            	
              Use
                its best efforts to register or qualify the Conversion Shares and
                the
                Warrant Shares covered by such Registration Statement under such
                state
                securities or blue sky laws of such jurisdictions (i) as shall be
                reasonably appropriate for the distribution of the Conversion Shares
                and
                Warrant Shares covered by such Registration Statement or (ii) as
                the
                Subscriber and underwriters may rea­sonably request within
                ten  days following the origi­nal fil­ing of such
                Registration Statement, except that the Issuer shall not for any
                purpose
                be required to execute a general consent to service of process, to
                subject
                itself to taxation, or to qualify to do business as a foreign corporation
                in any jurisdiction where it is not so qualified;
                

            

    

    

    
      	
              (e)

            	
              Notify
                the Subscriber promptly after it shall receive notice thereof, of
                the date
                and time when such Registration Statement and each post-effective
                amendment thereto has become effective or a supplement to any prospectus
                forming a part of such Registration Statement has been filed;
                

            

    

    

    
      	
              (f)

            	
              Notify
                the Subscriber promptly of any request by the SEC or any state securities
                commission or agency for the amending or supple­menting of such
                Registration Statement or prospectus or for additional information;
                

            

    

    

    
      	
              (g)

            	
              Prepare
                and file with the SEC, promptly upon the request of the Subscriber
                or any
                other participating holder of Shares for which registration is sought
                by
                such Registration Statements, any amendments or supplements to such
                Registration Statement or prospectus which, in the opinion of counsel
                representing the Issuer in such Registration, is required under the
                Securities Act or the rules and regulations thereunder in connection
                with
                the dis­tribution of the Shares being registered thereby, by such
                participating holders of Shares, including the Subscriber, but for
                no
                longer than twelve months subsequent to the effective date of such
                registration; 

            

    

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    
      	
              (h)

            	
              Prepare
                and promptly file with the SEC, and promptly notify such participating
                holders of Shares for which registration is sought by such Registration
                Statements, including the Subscriber, of the filing of, such amendments
                or
                supplements to such Registration State­ment or prospectus as may be
                necessary to correct any state­ments or omissions if, at the time when
                a prospectus relat­ing to such Shares is required to be delivered
                under the Securities Act, any event has occurred as the result of
                which
                any such prospectus or any other prospectus as then in effect would
                include an untrue statement of a material fact or omit to state any
                material fact required to be stated therein or necessary to make
                the
                statements therein not mis­leading;

            

    

    

    
      	
              (i)

            	
              In
                case any of such participating holders of Shares, including the
                Subscriber, or any underwriter for any such holders of Shares is
                required
                to deliver a prospectus at a time when the prospectus then in circulation
                is not in compliance with the Securities Act or the rules and regulations
                of the SEC, prepare promptly upon request such amendments or supplements
                to such Registration Statement and such prospectus as may be necessary
                in
                order for such prospectus to comply with the requirements of the
                Securities Act and such rules and regulations;

            

    

    

    
      	
              (j)

            	
              Advise
                such participating holders of Shares, including the Subscriber, promptly
                after it shall receive notice or obtain knowledge of the issuance
                of any
                stop order by the SEC or any state securities commission or agency
                suspending the effectiveness of such Registration Statement or the
                initia­tion or threatening of any proceeding for that purpose and
                promptly use its best efforts to prevent the issuance of any stop
                order or
                to obtain its withdrawal if such stop order should be issued;
                

            

    

    

    
      	
              (k)

            	
              At
                the request of the Subscriber (i) furnish to the indemnitors, if
                such
                registration includes an underwritten public offering, at the closing
                provided for in the underwriting agreement, copies of any opinion,
                dated
                such date, of the counsel representing the Issuer for the purposes
                of such
                registration, (which opinion need only be addressed to the underwriters),
                if any, covering such matters with respect to the registration statement,
                the prospectus and each amendment or supplement thereto, proceedings
                under
                state and Federal securities laws, other mat­ters relating to the
                Issuer, the securities being registered and the offer and sale of
                such
                securities as are cus­tomarily the subject of opinions of issuer’s
                counsel provid­ed to underwriters in underwritten public offerings and
                (ii) use its best efforts to furnish to the Subscriber a letter dated
                each
                such effective date and such closing date, from the independent certified
                public accountants of the Issuer, addressed to the underwriters,
                if any,
                and to the Subscriber, stating that they are indepen­dent certified
                public accountants within the meaning of the Securities Act and dealing
                with such matters as the underwriters may request, or, if the offering
                is
                not underwrit­ten, that in the opinion of such accountants the
                financial statements and other financial data of the Issuer included
                in
                the Registration Statement or the prospectus or any amendment or
                supplement thereto comply in all material respects with the applicable
                accounting requirements of the Securities Act, and additionally covering
                such other finan­cial matters, including information as to the period
                ending not more than five business days prior to the date of such
                letter
                with respect to the Registration Statement and prospectus, as the
                Subscriber may reasonably request; 

            

    

    

    (l)           
      Maintain its OTC listing for the Shares and continue to maintain the
      qualification of the Shares being registered on the OTC system.

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

    Section
      14.3                                
Expenses.

    

    
      	
              (a)

            	
              With
                respect to each registration effected pursu­ant to Section 14.1, all
                fees, costs and expenses of and incidental to such registration and
                the
                public offer­ing in connection therewith shall be borne by the Issuer,
                as set forth in paragraph 14.3(b); provided,
                however, (i) that holders of Shares being registered thereby, including
                the Subscriber, and other holders of the Shares participating in
                any such
                registration shall bear their pro rata share of the underwriting
                discounts
                and selling commissions, and (ii) any such fee, cost or expense which
                does
                not constitute a fee, cost or expense customary in such a
                registra­tion and which is attribut­able solely to one holder of
                such Shares or other holder of Shares participating in any such
                registration shall be borne by that holder.

            

    

    

    
      	
              (b)

            	
              The
                fees, costs and expenses of registration to be borne as provided
                in
                paragraph 14.3(a) above, shall include, without limitation, all
                registration, filing and OTC fees, fees of any other governmental
                authority, printing expenses, fees and disbursements of counsel and
                accountants for the Issuer, fees and disbursements of counsel for
                the
                underwriter or underwriters of such securities (if the Issuer and/or
                selling security holders are otherwise required to bear such fees
                and
                disbursements), all legal fees and disbursements and other expenses
                of
                complying with state securities or blue sky laws of any jurisdictions
                in
                which the securities to be offered are to be registered or qualified,
                reasonable fees and disbursements of counsel for the Subscriber and
                the
                premiums and other costs of policies of insurance insuring the Issuer
                against liability arising out of such public offering.
                

            

    

    

    Section
      14.4                                
Indemnification
      and
      Contribution.

    

    
      	
              (a)

            	
              The
                Issuer will indemnify and hold harmless the Subscriber if any Conversion
                Shares or Warrant Shares are included in a Registration Statement
                pursuant
                to the provisions of this Agreement, and any underwriter (as defined
                in
                the Securities Act) for the Subscriber, and any Person who controls
                the
                Subscriber or such underwriter within the meaning of the Securities
                Act,
                and each of their successors, from and against, and will reimburse
                the
                Subscriber and each such underwriter and controlling Person with
                respect
                to, any and all claims, actions, demands, losses, damages, liabilities,
                costs and expenses to which the Subscriber or any such underwriter
                or
                controlling Person may become subject under the Securities Act or
                otherwise, insofar as such claims, actions, demands, losses, damages,
                liabilities, costs or expenses arise out of or are based upon any
                untrue
                statement or allegedly untrue statement of any material fact contained
                in
                such Registration Statement, any prospectus contained therein or
                any
                amendment or supplement thereto, or arise out of or are based upon
                the
                omission or alleged omission to state therein a material fact required
                to
                be stated therein or necessary to make the statements therein not
                misleading or arise out of any violation by the Issuer of any rule
                or
                regulation under the Securities Act applicable to the Issuer and
                relating
                to action or inaction required of the Issuer in connection with such
                registration; provided,
                however, that the Issuer will not be liable in any such case to the
                extent
                that any such claim, action, demand, loss, damage, liability, cost
                or
                expense arises out of or is based upon an untrue statement or alleged
                untrue statement or omission or alleged omission so made in reliance
                upon
                and in conformity with information furnished by the Subscriber, such
                underwriter or controlling Person in writing specifically for use
                in the
                preparation thereof; and provided,
further,
                that
                this indemnity shall not be deemed to relieve any underwriter of
                any of
                its due diligence obligations; and provided further, that if any
                claim,
                action, demand, loss, damage, liability, cost or expense arises out
                of or
                is based upon an untrue statement or alleged untrue statement or
                omission
                or alleged omission contained in any preliminary prospectus which
                did not
                appear in the final prospectus and if the Subscriber delivered a
                copy of
                the preliminary prospectus to the person alleging damage and failed
                to
                deliver a copy of the final prospectus to such persons, the Issuer
                shall
                not be liable with respect to the claims of such person.
                

            

    

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    
      	
              (b)

            	
              Promptly
                after receipt by the Subscriber of actual knowledge or notice of
                the
                commencement of any action involving the subject matter of the indemnity
                provisions under Section 14.4(a), the Subscriber will, if a claim
                thereof
                is to be made against the Issuer pursuant to the provisions of paragraph
                14.4(a), notify the Issuer of the commencement thereof; but the omission
                so to notify the Issuer will not relieve it from any liability which
                it
                may have to the Subscriber otherwise than under this Section 14.4
                and
                shall not relieve the Issuer from liability under this Section 14.4
                unless
                the Issuer is prejudiced by such omission. In case such action is
                brought
                against the Subscriber and the Subscriber notifies the Issuer of
                the
                commencement thereof, the Issuer shall have the right to participate
                in,
                and, to the extent that it may wish, to assume the defense there­of,
                with counsel reasonably satisfactory to the Subscriber, and after
                notice
                from the Issuer to the Subscriber of its election so to assume the
                defense
                thereof, the Issuer will not be liable to the Subscriber pursuant
                to the
                provisions of such para­graph 14.4(a) for any legal or other expense
                subsequent­ly incurred by the Subscriber in connection with the
                defense thereof other than reasonable costs of
                investiga­tion.  Notwithstanding the foregoing, the
                Subscriber shall have the right to retain its or her own counsel,
                with the
                fees and expenses to be paid by the Issuer, if representation of
                the
                Subscriber by the counsel retained by the Issuer would be inappropriate
                due to actual or potential differing interests, as reasonably determined
                by either party, between the Subscriber and any other party represented
                by
                such counsel in such proceeding.  The Issuer shall not be liable
                to the Subscriber for any settlement of any action or claim without
                the
                consent of the Issuer, provided that the Issuer may not unreasonably
                withhold its consent to any such settle­ment.  The Issuer
                will not consent to entry of any judgment or enter into any settlement
                which does not include as an unconditional term thereof the giving
                by the
                claimant or plaintiff to the Subscriber of a release from all liability
                in
                respect to such claim or litigation.

            

    

     

    
       

      
        	
                (c)      

              	In order to provide for just and equitable contribution
                to joint liability under the Securities Act in any case in which
                either
                (i) any holder of Shares exercising rights under this Agreement,
                or any
                controlling Person of any such holder of Shares, makes a claim for
                indemnification pursuant to this Section 14.4 but it is judicially
                determined (by the entry of a final judgment or decree by a court
                of
                competent jurisdiction and the expiration of time to appeal or the
                denial
                of the last right of appeal) that such indemnification may not be
                enforced
                in such case notwithstanding the fact that this Section 14.4 provides
                for
                the indemnification in such case, or (ii) contribution under the
                Securities Act may be required on the part of any such selling holder
                of
                Shares or any such controlling Person in circumstances for which
                indemnification was provided under this Section 14.4; then, and in
                each
                case, the Issuer and each such holder of Shares will contribute to
                the
                aggregate losses, claims, damages or liabilities to which they may
                be
                subject (after contribution from others) in such proportion so that
                such
                holder of Shares is responsible for the portion represented by the
                percentage that the public offering price of its Shares offered by
                the
                Registration Statement bears to the public price of all securities
                offered
                by such Registration Statement, and the Issuer is responsible for
                the
                remaining portion; provided, however, that, in any such case, (A)
                no
                Person or entity guilty of fraudulent misrepresentation (within the
                meaning of Section 12(f) of the Securities Act) will be entitled
                to
                contribution from any Person or entity was not guilty of such fraudulent
                misrepresentation and (B) no holder of Shares will be required to
                contribute any amount in excess of the proceeds of such holder of
                Shares
                offered by it pursuant to such Registration
                Statement.

      

       

      
        
          
          

        

        
          25

          
            

          

        

        
          
          

        

      

       

    

    
      	
              (d)

            	
              In
                the event of any conflict between the provision of this Section 14.4
                and
                the provisions of any indemnity agreement entered into by any holder
                of
                Shares in conjunction with any such Registration Statement, the provisions
                of such indemnity agreement shall govern and control.
                

            

    

    

    Section
      14.5                                
Reporting
      Requirements
      Under Securities Exchange Act of 1934.  The Issuer shall
      maintain the registration of its Shares under Section 12 of the Securities
      Exchange Act and shall keep effective such registration and shall timely file
      such information, documents and reports as the SEC may require or prescribe
      under Section 13 of the Securities Exchange Act.  The
      Issuer  shall use its best efforts to (whether or not it shall then be
      required to do so) timely file such information, documents and reports as the
      SEC may require or prescribe under Section 13 or 15(d) (whichever is applicable)
      of the Securities Ex­change Act. Immediately upon becoming subject to the
      reporting requirements of either Section 13 or 15(d) of the Securities Exchange
      Act, the Issuer shall forthwith upon request furnish the Subscriber or any
      other
      holder of Shares being so registered (i) a written statement by the Issuer
      that
      it has complied with such reporting requirements, (ii) a copy of the most recent
      annual or quarterly report of the Issuer, and (iii) such other reports and
      documents filed by the Issuer with the SEC as the Subscriber or such holder
      of
      Shares may reasonably request in availing it­self of an exemption for the
      sale of Shares, Conversion Shares or Warrant Shares without registration under
      the Securities Act.  The Issuer acknowledges and agrees that the
      purposes of the requirements contained in this Section 14.5 are (a) to enable
      any of Subscriber or such other holder of such Shares to comply with the current
      public information requirement contained in Paragraph (c) of Rule 144 under
      the
      Securities Act should the Subscriber or such other holder of Shares ever wish
      to
      dispose of any of the securities of the Issuer acquired by it without
      registration under the Securities Act in reliance upon Rule 144 (or any other
      similar or successor exemptive provi­sion), and (b) to qualify the Issuer
      for the use of Registration Statements on Form S-3.  In addition, the
      Issuer shall take such other measures and file such other information, documents
      and reports, as shall hereafter be required by the SEC as a condition to the
      availability of Rule 144 under the Securities Act (or any similar or successor
      exemptive provision hereafter in effect) and the use of Form S-3.  The
      Issuer also covenants to use its best efforts, to the extent that it is
      reasonably within its power to do so, to qualify for the use of Form SB-2 or
      Form S-3.  From and after the effective date of the first Registration
      Statement filed by the Issuer which is first effective after the date hereof,
      the Issuer agrees to use its best efforts to facilitate and expedite transfers
      of Shares pursu­ant to Rule 144 under the Securities Act (or any similar or
      suc­cessor exemptive provision hereafter in effect), which efforts shall
      include timely notice to its transfer agent to expedite such transfers of
      Shares.

    

    Section
      14.6                                
Stockholder
      Information.  The Issuer may require Subscriber and each other
      holder of Shares as to which any registration is to be effected pursuant to
      this
      Agreement to furnish the Issuer in a timely manner such information with respect
      to Subscriber or such other holder of such Shares and the distribution of such
      Shares as the Issuer may from time to time rea­sonably request in writing
      and as shall be required by law or by the SEC in connection
      therewith.

     

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

     

    Section
      14.7                                
Lock-Up
      Agreements.

    

    
      	
              (a)

            	
              Restrictions
                on Public
                Sale by the Company.  The Issuer agrees not to effect any
                public sale or other distribution of its equity securities, or any
                securities convertible into or exchangeable or exercisable for such
                equity
                securities, during the period (not to exceed ninety days) as requested
                by
                the managing underwriter, following the effective date of any underwritten
                public offering of Conversion Shares or Warrant Shares, except in
                connection with any such underwritten offering of any remaining portion
                of
                Conversion Shares or Warrant Shares not covered by the prior offering
                and
                except for equity securities issued pursuant to employee stock option
                or
                employee stock purchase plans or in conjunction with any merger or
                consolidation with, or acquisition of the stock or assets of, any
                other
                entity. 

            

    

    

    
      	
              (b)

            	
              Restrictions
                on Public
                Sale by Subsequent Holders.  Except in the public
                offering registered under the Securities Act, the Issuer shall not
                issue
                or sell any equity security unless each recipient thereof agrees
                in
                writing with the Issuer not to offer to sell or sell such equity
                security
                during a period specified by the Issuer and the underwriter thereof
                (not
                to exceed ninety days), except in conjunction with such underwritten
                offering. 

            

    

    

    Section
      14.8                                
Other Registration
      Rights.  The Issuer shall not grant to any third party any
      registration rights which would interfere with or delay the exercise by the
      Subscriber of its registrations rights hereunder, so long as any of the
      registration rights under this Agreement remains in effect, unless such rights
      are (i) subordinate to the rights of the Subscriber or (ii) approved in writing
      by the Subscriber in its sole discretion, which approval may require that such
      rights be granted only pursuant to an amendment or restatement of this
      Agreement.

    

    15.           
      SUBSCRIBER’S REPRESENTATIONS AND WARRANTIES.

    

    The
      Subscriber represents and warrants to the Issuer that:

    

    (a)           
      The Subscriber has full legal capacity, power and authority to execute and
      deliver this Agreement and to perform its obligations hereunder. This Agreement
      has been duly executed and delivered by the Subscriber and is the legal, valid
      and binding obligation of the Subscriber enforceable against it in accordance
      with the terms hereof, subject to applicable bankruptcy, insolvency,
      reorganization, moratorium, arrangement, fraudulent transfer or other similar
      law affecting creditors’ rights generally, and subject to principles of equity,
      including without limitation, concepts of materiality, reasonableness, good
      faith and fair dealing, election of remedies, estoppel and other similar
      doctrines affecting the enforceability of agreements generally, regardless
      of
      whether considered in a proceeding in equity or at law.

    

    (b)           
      The Subscriber has been advised that the Note and Warrants have not been
      registered under the Securities Act or any state securities laws and, therefore,
      cannot be resold unless they are registered under the Securities Act and
      applicable state securities laws or unless an exemption from such registration
      requirements is available.

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

     

    (c)           
      The Subscriber is purchasing the Note and Warrants to be acquired by
      theSubscriber hereunder for its own account and not with a view to, or for
      resale inconnection with, the distribution thereof in violation of the
      Securities Act.

    

    (d)           
      The Subscriber has such knowledge and experience in financial and business
      matters that the Subscriber is capable of evaluating the merits and risks of
      the
      investment in the Note and Warrants, is able to incur a complete loss of such
      investment and is able to bear the economic risk of such investment for an
      indefinite period of time.

    

    (e)           
      The Subscriber is an accredited investor as that term is defined inRegulation
      D
      under the Securities Act.

    

    (f)           
      The Subscriber had and continues to have an opportunity (i) to question,
      and to receive information from the Issuer concerning the Issuer and the
      Subscriber’s purchase of the Note and Warrants each from the Issuer, and
      (ii) to obtain any and all additional information necessary to verify the
      accuracy of any information which the Subscriber deems relevant to make an
      informed investment decision as to the purchase of the Note and Warrants,
      provided in both cases that the Issuer possesses such information or can acquire
      it without unreasonable effort or expense.

    

    16.           
      DEFAULT.

    

    Section
      16.01                                                                
Nothing contained in
      this section,
      or elsewhere in this Agreement, shall affect the demand nature of such of the
      Obligations as are by their terms, demand obligations, including, without
      limitation, the Loan under this Agreement.  The occurrence of an Event
      of Default shall not be a prerequisite for the Subscriber’s requiring payment of
      such Obligations upon the Maturity Date.

    

    Upon
      the occurrence of any one or more
      of the following events (“Events of Default”),
      any and all Obligations of Issuer to
      Subscriber shall become immediately due and payable, at the option of Lender
      and
      without notice or demand.  The occurrence of any such Event of Default
      shall also constitute, without notice or demand, a default under all other
      Loan Documents,
      whether such agreements now exist or
      hereafter arise, namely:

    

    (a)           
      The failure by Issuer to pay
      within five days of when due any amount due under this
      Agreement.

    
 

    (b)           
      The failure by Issuer to pay
      within five days of when due any amount due under the Note.

    

    (c)           
      The failure of Issuer to pay
      within five days of when due any other Obligations.

    

    (c)           
      The failure by Issuer to promptly,
      punctually and faithfully perform, or observe any term, covenant or agreement
      on
      its part to be performed or observed pursuant to any of the provisions of this
      Agreementwhich failure
      continues for 14 days after written notice by Subscriber to Issuer(except for failure to
      perform or
      observe any of the provisions of Section 13 or Section 14.1, for which there
      shall be a default for failure to perform with no grace
      period).

     

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

     

    (d)           
      Any representation
      or warranty heretofore,
      now or hereafter made by Issuer to Subscriber, in any documents,
      instrument, agreement, or paper was not true or accurate in any material respect
      when given.

    

    (e)           
      The occurrence of any event
      such
      that any Debt exceeding
      $50,000of Issuer from any
      lender other than Subscriber could be accelerated, notwithstanding that such
      acceleration has not taken place.

    

    (f)           
      The occurrence of any event
      which
      would cause a lien creditor, as that term is defined in Section 9−102 of the
      UCC, to take priority over advances made by Subscriber, which event is not
      satisfied within fifteen days.

    

    (g)           
      A filing against or relating
      to
      Issuer of (i) a federal tax lien in favor of the United States of America or
      any
      political subdivision of the United States of America, or (ii) a state tax
      lien
      in favor of any state of the United States of America or any political
      subdivision of any such state.

    

    (h)           
      The occurrence of any event
      of
      default under any of the remaining Loan Documents, whether such agreement
      now exists or
      hereafter arises (notwithstanding that Subscriber may not have
      exercised its
      rights upon default under any such other agreement).

    

    (i)           
      Any act by, against, or relating
      to Issuer, or its property or assets, which act constitutes the application
      for,
      consent to, or sufferance of the appointment of a receiver, trustee or other
      Person, pursuant to court action or otherwise, over all, or any part of Issuer’s
      property.

    

    (j)           
      The granting of any trust mortgage
      or execution of an assignment for the benefit of the creditors of Issuer, or
      the
      occurrence of any other voluntary or involuntary liquidation or extension of
      debt agreement for Issuer, the failure by Issuer to generally pay the debts
      of
      Issuer as they mature; adjudication of bankruptcy or insolvency relative to
      Issuer; the entry of an order for relief or similar order with respect to Issuer
      in any proceeding pursuant to the Bankruptcy Code or any other federal
      bankruptcy law; the filing of any complaint, application, or petition by
      or, if not dismissed within
      thirty days, against Issuer
      initiating any matter in which Issuer is or may be granted any relief from
      the
      debts of Issuer pursuant to the Bankruptcy Code or any other insolvency statute
      or procedure; the calling or sufferance of a meeting of creditors of Issuer;
      the
      meeting by Issuer of a formal or informal creditor’s committee; the offering by
      or entering into by Issuer of any composition, extension or any other
      arrangement seeking relief or extension for the debts of Issuer, or the
      initiation of any other judicial or non−judicial proceeding or agreement by,
      against or including Issuer which seeks or intends to accomplish a
      reorganization or arrangement with creditors.

    

    (k)           
      The entry of any judgment against
      Issuer, which judgment is not satisfied or appealed from (with execution or
      similar process stayed) within 20 days of its entry.

    

    (l)           
      The occurrence of any event
      or
      circumstance with respect to Issuer such that Subscriber shall believe in good
      faith that the prospect of payment of all or any part of the Obligations or
      the
      performance by Issuer under this Agreement is impaired or there
      shall occur any
      material adverse change in the business or financial condition of
      Issuer.

     

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

     

    (m)           
      The entry of any court order
      which
      enjoins, restrains or in any way prevents Issuer from conducting all or any
      substantialpart
      of its business affairs in the
      ordinary course of business.

    

    (n)           
      The service of any process upon
      Subscriber seeking to attach by trustee process any assets of Issuer in the
      Subscriber’s possession.

    

    (o)           
      The occurrence of any uninsured
      loss, theft, damage or destruction to any material asset(s) of
      Issuer.

    

    (p)           
      Any act by or against, or relating
      to Issuer or its assets pursuant to which any creditor of Issuer seeks to
      reclaim or repossess or reclaims or repossesses all or a material  portion
      of Issuer’s
      assets.

    

    (q)           
      The termination of existence,
      dissolution, or liquidation of Issuer or the ceasing to carry on actively any
      substantial part of Issuer’s current business.

    

    (r)           
      This Agreement shall, at any
      time
      after its execution and delivery and for any reason, cease (i) to create a
      valid
      and perfected first priority security interest in and to the property purported
      to be subject to this Agreement; or (ii) to be in full force and effect or
      shall
      be declared null and void, or the validity or enforceability hereof shall be
      contested by Issuer or any guarantor of Issuer denies it has any further
      liability or obligation hereunder.

    

    (s)           
      Any of the following events
      occur
      or exist with respect to Issuer or any ERISA affiliate: (i) any “prohibited
      transaction” (as defined in Section 406 of ERISA or Section 4975 of the Internal
      Revenue Code) involving any Plan; (ii) any “reportable event” (as defined in
      Section 4043 of ERISA and the regulations issued under such Section) shall
      occur
      with respect to any Plan; (iii) the filing under Section 4041 of ERISA of a
      notice of intent to terminate any Plan or the termination of any Plan; (iv)
      any
      event or circumstance exists which might constitute grounds entitling the
      Pension Benefit Guaranty Corporation (PBGC) to institute proceedings under
      Section 4042 of ERISA for the termination of, or for the appointment of a
      trustee to administer, any Plan, or the institution by the PBGC of any such
      proceedings; or (v) partial withdrawal under Section 4201 or 4204 of ERISA
      from
      a Multiemployer Plan or the reorganization, insolvency, or termination of any
      Multiemployer Plan; and in each case above, such event or condition, together
      with all other events or conditions, if any, could in the opinion of Subscriber
      subject Issuer to any tax, penalty, or other liability to a Plan, a
      Multiemployer Plan, the PBGC, or otherwise.

    

    (t)           
      The occurrence of any of the
      foregoing Events of Default with respect to any guarantor, endorser, or surety
      to Subscriber of the Obligations, as if such guarantor, endorser or surety,
      were
      the “Issuer” described therein.

    

    (u)           
      Any guarantor or Person signing
      a
      guaranty or support agreement in favor of Subscriber shall repudiate, purport
      to
      revoke or fail to perform his obligations under such guaranty or support
      agreement in favor of Subscriber.

     

    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    

     

    (v)           
      Issuer will take or participate
      in
      any action which would be prohibited under the provisions of any subordination
      agreement or make any payment with respect to indebtedness that has been
      subordinated pursuant to any subordination agreement.

    

    
      	
              17.

            	
              RIGHTS
                AND
                REMEDIES UPON DEFAULT; EXPENSES; POWER OF ATTORNEY.

            

    

    

    Upon
      the occurrence and
      continuanceof an Event of
      Default or, if the Note is not then paid in full or converted in full, on the
      Maturity Date, the Subscriber shall have the following rights and
      remedies.

    

    Section
      17.01                              
Subscriber may declare
      any
      obligation Subscriber may have hereunder to be cancelled, declare all
      Obligations of Issuer to be due and payable and proceed to enforce payment
      of
      the Obligations and to exercise any and all of the rights and remedies afforded
      to Subscriber by the UCC or under the terms of this Agreement or
      otherwise.  Upon the occurrence of, and during the continuance of, an
      Event of Default, the Issuer, as additional compensation to the Subscriber
      for
      its increased credit risk, promises to pay interest on all Obligations
      (including, without limitation, principal, whether or not past due, past due
      interest and any other amounts past due under this Agreement) at a per annum
      rate of 3 1⁄2% greater than the Interest Rate, as defined in the
      Note.

    

    Section
      17.02                              
Upon the filing of any
      complaint,
      application, or petition by or against the Issuer initiating any matter in
      which
      the Issuer is or may be granted any relief from the debts of the Issuer pursuant
      to the Bankruptcy Code, Subscriber’s obligation hereunder shall be canceled
      immediately, automatically, and without notice, and all Obligations of the
      Issuer then outstanding shall become immediately due and payable without
      presentation, demand, or notice of any kind to the Issuer.

    

    Section
      17.03                              
Any sale or other disposition
      of
      the Collateral may be at public or private sale upon such terms and in such
      manner as the Subscriber deems advisable, having due regard to compliance with
      any statute or regulation which might affect, limit or apply to the Subscriber’s
      disposition of the Collateral.  The Subscriber may conduct any such
      sale or other disposition of the Collateral upon the Issuer’s
      premises.  Unless the Collateral is perishable or threatens to decline
      speedily in value, or is of a type customarily sold on a recognized market
      (in
      which event the Subscriber shall provide the Issuer with such notice as may
      be
      practicable under the circumstances), the Subscriber shall give the Issuer
      at
      least the greater of the minimum notice required by law or seven days prior
      written notice of the date, time and place of any proposed public sale, and
      of
      the date after which any private sale or other disposition of the Collateral
      may
      be made.  The Subscriber may purchase the Collateral, or any portion
      of it at any such sale.

    

    If
      the Subscriber sells any of the
      Collateral on credit, the Issuer will be credited only with payments actually
      made by the purchaser of such Collateral and received by the
      Subscriber.   If the purchaser fails to pay for the Collateral,
      the Subscriber may re-sell the Collateral and the Issuer shall be credited
      with
      the proceeds of the sale.

    

    Section
      17.04                              
The Subscriber may require
      the
      Issuer to assemble the Collateral and make it available to the Subscriber at
      the
      Issuer’s sole risk and expense at a place or places which are reasonably
      convenient to both the Subscriber and the Issuer.

     

    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    

     

    Section
      17.05                              
In connection with Subscriber’s
      exercise of Subscriber’s rights under this Agreement, Subscriber may enter upon,
      occupy and use any premises owned or occupied by Issuer, and may exclude Issuer
      from such premises or portion thereof as may have been so entered upon,
      occupied, or used by Subscriber.  Subscriber shall not be required to
      remove any of the Collateral from any such premises upon Subscriber’s taking
      possession thereof, and may render any Collateral unusable to
      Issuer.  In no event shall Subscriber be liable to Issuer for use or
      occupancy by Subscriber of any premises pursuant to this
      Agreement.

    

    Section
      17.06                              
Issuer shall, following
      the
      occurrence of an Event of Default which is continuing, deliver to Subscriber,
      daily, a schedule in form and content satisfactory to Subscriber describing
      the
      invoices issued by Issuer since the last schedule submitted to
      Subscriber.  The schedules to be provided under this subsection are
      solely for the convenience of Subscriber in administering this Agreement and
      maintaining records of the Collateral.  Issuer’s failure to provide
      Subscriber with any such schedule shall not affect the security interest of
      Subscriber in such Accounts.

    

    Section
      17.07                              
From and after the occurrence
      of
      an Event of Default which is continuing, Issuer will immediately, upon receipt
      of all checks, drafts, cash and other remittances in payment of any Inventory
      sold or in payment or on account of Issuer’s accounts, contracts, contract
      rights, notes, bills, drafts, acceptances, general intangibles, choses in action
      and all other forms of obligations, deliver the same to Subscriber accompanied
      by a remittance report in form specified by Subscriber.  Said proceeds
      shall be delivered to Subscriber in the same form received except for the
      endorsement of Issuer where necessary to permit collection of items, which
      endorsement Issuer agrees to make.  Subscriber will credit
      (conditional upon final collection) all such payments against the principal
      or
      interest of the Loan secured hereby; provided, however, for the purpose of
      computing interest, any items requiring clearance or payment shall not be
      considered to have been credited against the Loan secured hereby until
threebusiness
      days after receipt by
Subscriber of any such
      items.  The order and method of such application shall be in the sole
      discretion of Subscriber and any portion of such funds which Subscriber elects
      not to so apply shall be paid over from time to time by Subscriber to
      Issuer.   Subscriber will at all times have the right to require
      Issuer to enter into a lockbox arrangement with Subscriber for the collection
      of
      such remittances and payments.

    

    Section
      17.08                              
Subscriber may at any
      time, after
      the occurrence of an Event of Default which is continuing,
      notify account debtors that Collateral
      has been assigned to Subscriber and that payments
      shall be
      made directly to or as directed by Subscriber.  Upon request of
      Subscriber at any timeafter
      an Event of Default which is continuing, Issuer will so notify
      such account
      debtors and will indicate on all billings to such account debtors that their
      Accounts must be paid directly to or as directed by Subscriber. After an
      Event of Default which is continuing, Subscriber shall have full power to
      collect, compromise, endorse, sell or otherwise deal with the Collateral or proceeds thereof
      in its own
      name or in the name of Issuer.

    

    Section
      17.09                              
Borrower hereby appoints
      Lender as
      its attorney-in-fact, with full authority in the place and stead of Borrower
      and
      in the name of Borrower, Lender, or otherwise, from time to time in Lender’s
      discretion, to take any actions and to execute any instruments which Lender
      may
      deem necessary or desirable to obtain, adjust, make claims under, and otherwise
      deal with insurance required pursuant hereto and to receive, endorse, and
      collect any drafts or other instruments delivered in connection
      therewith.  This power of attorney shall be irrevocable for the term
      of this Agreement and all transactions hereunder and thereafter as long as
      Borrower may be indebted to Lender.  Lender agrees not to exercise the
      foregoing power of attorney until the occurrence of an Event of Default which
      is
      continuing.

     

    
      
        
        

      

      
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    18.             
      STANDARDS FOR EXERCISING
      REMEDIES.

    

    To
      the extent that applicable law
      imposes duties on Subscriber to exercise remedies in a commercially reasonable
      manner, Issuer acknowledges and agrees that it is not commercially unreasonable
      for Subscriber (a) to fail to incur expenses reasonably deemed significant
      by
      Subscriber to prepare Collateral for disposition or otherwise to complete raw
      material or work in process into finished goods or other finished products
      for
      disposition, (b) to fail to obtain third party consents for access to Collateral
      to be disposed of, or to obtain or, if not required by other law, to fail to
      obtain governmental or third party consents for the collection or disposition
      of
      Collateral to be collected or disposed of, (c) to fail to exercise collection
      remedies against account debtors or other Persons obligated on Collateral or
      to
      remove liens or encumbrances on or any adverse claims against Collateral, (d)
      to
      exercise collection remedies against account debtors and other Persons obligated
      on Collateral directly or through the use of collection agencies and other
      collection specialists, (e) to advertise dispositions of Collateral through
      publications or media of general circulation, whether or not the Collateral
      is
      of a specialized nature, (f) to contact other Persons, whether or not in the
      same business as Issuer, for expressions of interest in acquiring  all
      or any portion of the Collateral, (g) to hire one or more professional
      auctioneers to assist in the disposition of Collateral, whether or not the
      Collateral is of a specialized nature, (h) to dispose of the Collateral by
      utilizing Internet sites that provide for the auction of assets of the types
      included in the Collateral or that have the reasonable capability of doing
      so,
      or that match buyers and sellers of assets, (i) to dispose of assets in
      wholesale rather than retail markets, (j) to disclaim disposition warranties
      specifically to disclaim any warranties of title or the like, (k) to purchase
      insurance or credit enhancements to insure Subscriber against risks of loss,
      collection or disposition of Collateral or to provide to Subscriber a guaranteed
      return from the collection or disposition of Collateral, or (l) to the extent
      deemed appropriate by Subscriber, to obtain the services of other brokers,
      investment bankers, consultants and other professionals to assist Subscriber
      in
      the collection or disposition of any of the Collateral. Issuer acknowledges
      that
      the purpose of this section is to provide non-exhaustive indications of what
      actions or omissions by Subscriber would not be commercially unreasonable in
      Subscriber’s exercise of remedies against the Collateral and that other actions
      or omissions by Subscriber shall not be deemed commercially unreasonable solely
      on account of not being indicated in this section.  Without limitation
      upon the foregoing, nothing contained in this section shall be construed to
      grant any rights to Issuer or to impose any duties on Subscriber that would
      not
      have been granted or imposed by this Agreement or by applicable law in the
      absence of this section.

     

    
      
        
        

      

      
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    19.             
      WAIVER OF JURY
      TRIAL.

    

    ISSUER
      AND SUBSCRIBER EACH HEREBY
      KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE OR
      HEREAFTER HAVE TO A TRIAL BY JURY IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING
      ARISING OUT OF OR RELATING TO THIS AGREEMENT.  Issuer hereby certifies
      that neither Subscriber nor any of its representatives, agents or counsel has
      represented, expressly or otherwise, that Subscriber would not, in the event
      of
      any such suit, action or proceeding, seek to enforce this waiver of right to
      trial by jury.  Issuer acknowledges that it has read the provisions of
      this Agreement and in particular, this section; has consulted legal counsel;
      understands the right it is granting in this Agreement and is waiving in this
      section in particular; and makes the above waiver knowingly, voluntarily and
      intentionally.

    

    20.             
      CONSENT TO
      JURISDICTION.

    

    Issuer
      and Subscriber agree that any
      action or proceeding to enforce or arising out of this Agreement may be
      commenced in any court of the Commonwealth of Massachusetts sitting in the
      County of Middlesex, the County of Suffolk or in the District Court of the
      United States for the District of Massachusetts, and Issuer waives personal
      service of process and agrees that a summons and complaint commencing an action
      or proceeding in any such court shall be properly served and confer personal
      jurisdiction if served by registered or certified mail to Issuer, or as
      otherwise provided by the laws of the Commonwealth of Massachusetts or the
      United States of America.

    

    21.             
      TERMINATION

    

    This
      Agreement may be terminated at any
      time by either party giving written notice of termination to the other party;
      provided, however, that unless and until any Loan made by the Subscriber to
      the
      Issuer hereunder and all other Obligations or commitments of the Subscriber
      under which an Obligation could arise, outstanding as of the time of giving
      or
      receipt as the case may be, of such notice by the Subscriber have been paid
      in
      full, such termination shall in no way affect the security interest or other
      rights and powers herein granted to the Subscriber, and until such payment
      in
      full the security interest of the Subscriber in all Inventory, Accounts and
      other Collateral of the Issuer, whether existing as of the time of such
      termination or thereafter arising, and all rights and powers herein granted
      to
      the Subscriber in respect thereof shall remain in full force and
      effect.  Until all of the Obligations of Issuer to Subscriber have
      been fully paid and satisfied and all commitments of the Subscriber under which
      an Obligation could arise have expired, Issuer shall fully comply with the
      terms
      and conditions of this Agreement as herein provided.  Prior to such
      payment in full of all of the Obligations of Issuer to Subscriber, this
      Agreement shall be a continuing agreement in every respect.

    

    22.             
      MISCELLANEOUS.

    

    Section
      22.01                              
No delay or omission
      on the part
      of Subscriber in exercising any rights shall operate as a waiver of such right
      or any other right. Waiver on any one occasion shall not be construed as a
      bar
      to or waiver of any right or remedy on any future occasion.  All
      Subscriber’s rights and remedies, whether evidenced hereby or by any other
      agreement, instrument or paper, shall be cumulative and may be exercised
      singularly or concurrently.

     

    
      
        
        

      

      
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    Section
      22.02                              
This Agreement shall
      bind and
      inure to the benefit of the respective successors and assigns of each of the
      parties hereto; provided,
however,
      that Issuer may not assign this
      Agreement or any rights or duties hereunder without Subscriber’s prior written
      consent and any prohibited assignment shall be absolutely void.  No
      consent to an assignment by Subscriber shall release Issuer from its
      Obligations.  Subscriber may assign this Agreement and its rights and
      duties hereunder and no consent or approval by Issuer is required in connection
      with any such assignment.  Subscriber reserves the right to sell,
      assign, transfer or negotiate in all or any part of, or any interest in
      Subscriber’s rights and benefits hereunder.  In connection with any
      assignment, Subscriber may disclose all documents and information which
      Subscriber now or hereafter may have relating to Issuer or Issuer’s
      business.  To the extent that Subscriber assigns its rights and
      obligations hereunder to another party, Subscriber thereafter shall be released
      from such assigned obligations to Issuer and such assignment shall effect a
      novation between Issuer and such other party.

    

    Section
      22.03                              
Issuer agrees that any
      and all
      Loans made by Subscriber to Issuer or for its account under this Agreement
      shall
      be conclusively deemed to have been authorized by Issuer and to have been made
      pursuant to duly authorized requests therefor on its behalf.

    

    Section
      22.04                              
Paragraph and section
      headings
      used in this Agreement are for convenience only, and shall not effect the
      construction of this Agreement.  If one or more provisions of this
      Agreement (or the application thereof) shall be invalid, illegal or
      unenforceable in any respect in any jurisdiction, the same shall not, invalidate
      or render illegal or unenforceable such provision (or its application) in any
      other jurisdiction or any other provision of this Agreement (or its
      application).  This Agreement is the entire agreement of the parties
      with respect to the subject matter hereof and supersedes any prior written
      or
      verbal communications or instruments relating thereto.

    

    Section
      22.05                              
Unless otherwise provided
      in this
      Agreement, all notices or demands by any party relating to this Agreement or
      any
      other loan document shall be in writing and (except for financial statements
      and
      other informational documents which may be sent by first-class mail, postage
      prepaid) shall be personally delivered or sent by registered or certified
      mail

    (postage
      prepaid, return receipt
      requested ), overnight courier, or facsimile to Issuer or to Subscriber, as the case
      may be, at its
      address set forth below:

     

     

    
    

    
      	If
              to Subscriber:
              	AIS
              Funding, LLC
              
	 	4
              Robert Bonazzoli
              Avenue 
	 	Hudson,
              MA  01749 
	 	Attn:Arthur
              Maxwell,
              Manager
	 	Telephone:
 
              (978)
              562-7500
	 	Facsimile:
 
              (978)
              562-0811
	 	 
	If
              to
              Issuer:  	MetaSwarm,
              Inc.
              
	 	301
              N. Lake Avenue, Suite
              810
	 	Pasadena,
              CA
              91101
	 	Attn:Marvin
              Shannon,
              President
	 	Telephone:  (626)
              792-0153
	 	Facsimile:
              (626)
              792-3258 

    

     

    The
      parties hereto may change the
      address at which they are to receive notices hereunder, by notice in writing
      in
      the foregoing manner given to the other.  All notices or demand sent
      in accordance with this section shall be deemed received on the earlier of
      the
      date of actual receipt or three days after the deposit thereof in the
      mail.

     

    
      
        
        

      

      
        35

        
          

        

      

      
        
        

      

    

     

    Section
      22.06  Neither
      this Agreement nor any uncertainty or ambiguity herein shall be construed or
      resolved against Subscriber or Issuer, whether under any rule of construction
      or
      otherwise.  On the contrary, this Agreement has been reviewed by all
      parties and shall be construed and interpreted according to the ordinary meaning
      of the words used so as to fairly accomplish the purposes and intentions of
      all
      parties hereto.

    

    Section
      22.07Each provision of this
      Agreement shall be severable from every other provision of this Agreement for
      the purpose of determining the legal enforceability of any specific
      provision.

    

    Section
      22.08  This
      Agreement, together with the remaining Loan Documents and other documents and
      instruments executed concurrently herewith, represent the entire and final
      understanding of the parties with respect to the transactions contemplated
      hereby and shall not be contradicted or qualified by evidence of any prior,
      contemporaneous or subsequent other agreement, oral or written, before the
      date
      hereof.

    

    Section
      22.09  This
      Agreement can only be amended by a writing signed by both Subscriber and
      Issuer.

    

    Section
      22.10  The laws
      of Massachusetts shall govern the construction of this Agreement and the rights
      and duties of the parties hereto, but without reference to choice of law
      principles.  This Agreement shall take effect as a sealed
      instrument.

     

    
      
        
        

      

      
        36

        
          

        

      

      
        
        

      

    

    

    Section
      22.11     Subscriber and Issuer agree
      to
      issue a joint press release in form mutually satisfactory.  In
      addition, Issuer agrees that Subscriber is entitled, at Subscriber’s election,
      to an acknowledgement line designating that Issuer is an “AIS Funding,
      LLC-funded company” but in such precise form as selected by Subscriber but
      subject to Issuer approval, in all Issuer press releases during any time period
      that the Note remains outstanding.

     

    
      
        	 	METASWARM,
                INC. 	 
	 	 	 	 
	
                Witnessed
                  by:       

              	
                By:
                  

              	/s/ Marvin
                Shannon	 
	 /s/
Celia
                Rivera   	 	Marvin
                Shannon 	 
	 	 	Chairman
                and Chief Executive Officer 	 
	 	 	Address: 301
                N. Lake Avenue, Suite
                810	 
	 	 	Pasadena,
                CA
                91101	 

      

       

    

    
      
        	 	AIS
                FUNDING, LLC 	 
	 	 	 	 
	
                 

              	
                By:
                  

              	/s/
                Arthur Maxwell	 
	 	 	Arthur
                Maxwell	 
	 	 	Manager
                	 
	 	 	Address:4
                Robert Bonazzoli
                AvenueHudson,
                Massachusetts  01749	 

      

    

     

     

    37

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