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Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (this "AGREEMENT," "PURCHASE AGREEMENT," or "SECURITIES PURCHASE AGREEMENT"), dated as of September ___, 2007, by and among UNIVERSAL ENERGY CORP., a Delaware corporation, ("COMPANY"), and each buyer listed on the Schedule of Buyers attached hereto (each, including its successors and assigns, a "BUYER" and collectively the "BUYERS").

WHEREAS: 

 A.       The Company and the Buyers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 under Regulation D ("Regulation D") as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933 ACT" or the "Securities Act");

         B.       Buyers desire to purchase and the Company desires to issue and sell in a private offering, upon the terms and conditions set forth in this Agreement, (i) senior secured convertible debentures (the "Debentures") of the Company and (ii) Warrants (as defined in Section 1(b)(iv) in the form described in this Agreement, to purchase shares of common stock, par value $.0001 per share, of the Company ("Common Stock").  The minimum aggregate Subscription Amount of this offering of the Debentures to all of the Buyers shall be Three Million Dollars (U.S. $3,000,000)(the "Minimum Amount") and the maximum aggregate Subscription Amount of this offering of the Debentures all of the Buyers shall be Five Million U.S. Dollars (U.S. $5,000,000)(the "Maximum Amount")(collectively, the "Offering"); 

 

C.      The terms of the Debentures, including the terms on which the Debentures may be converted into Common Stock, are set forth in Debenture, in the form attached hereto as Exhibit A;

  

 D.    Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement, in the form attached hereto as Exhibit B (the "Registration Rights Agreement"), pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws. 

E.    The Debentures will rank senior to all outstanding and future indebtedness of the Company, guaranteed by each of the Company's subsidiaries pursuant to the subsidiary guarantee attached hereto as Exhibit C-1 (the "Subsidiary Guarantee"), and secured by a first priority, perfected security interest in certain of the assets of the Company and the stock and certain of the assets of each of the Company's subsidiaries, as evidenced by the pledge agreement attached hereto as Exhibit C-2  (the "Pledge Agreement") and the security agreement attached hereto as Exhibit C-3 (the "Security Agreement").

         NOW THEREFORE, the Company and each Buyer, severally and not jointly, hereby agree as follows:

     1.       PURCHASE AND SALE OF DEBENTURES AND WARRANTS.

(a)  Certain Definitions.  This Securities Purchase Agreement, the Debenture, the Registration Rights Agreement, the Security Documents, the Warrants, and any other agreements delivered together with this Agreement or in connection herewith shall be referred to herein as the "Transaction Documents."  The Company and the each Buyer (severally and not jointly) mutually agree to the terms of each of the Transaction Documents.  For purposes hereof:

"1934 Act" shall mean the Securities Exchange Act of 1934.

"Approved Stock Plan" means any employee benefit plan which has been duly adopted by a majority of members of the Board of Directors of the Company or a majority of the members of a committee of directors established for such purpose, pursuant to which the Company's securities may be issued to any employee, consultant, officer or director for services provided to the Company.

"Closing Legal Opinion" shall have the meaning set forth in Section 1(b)(v)(C) below.

 "Common Stock Equivalents" means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire, directly or indirectly, at any time Common Stock, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

"Conversion Shares" shall have the meaning set forth in Section 2(a) below.

"Convertible Securities" shall have the meaning ascribed to it in the Debenture.

"Designated Insiders" shall have the meaning set forth in Section 4(r) below.

"Effective Date" shall mean the date that the initial Registration Statement required to be filed pursuant to the Registration Rights Agreement is declared effective by the SEC.

"Eligible Market" means the over the counter Bulletin Board ("OTC-BB"), the New York Stock Exchange, Inc., the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the American Stock Exchange.

"Exempt Issuance" means the issuance of (a) any Common Stock issued or issuable in connection with any Approved Stock Plan of the outstanding Common Stock, in the aggregate (provided that no such options shall be issued to consultants or advisors unless such options are not registered, either at the time of issuance or at any time thereafter, and are subject to volume limitations under Rule 144, (b) securities upon the exercise, exchange of, conversion or redemption of, or payment of interest or liquidated or similar damages on, any Securities issued hereunder, (c) other securities exercisable, exchangeable for, convertible into, or redeemable for shares of Common Stock issued and outstanding on the date of this Agreement, provided that such securities have not been amended since the date of this Agreement to directly or indirectly effectively increase the number of such securities or to decrease the exercise, exchange or conversion price of such securities (and including any issuances of securities pursuant to the anti-dilution provisions of any such securities), and (d) any Common Stock issued or issuable in connection with any acquisition by the Company, whether through an acquisition of stock or a merger of any business, assets or technologies the primary purpose of which is not to raise equity capital.  Notwithstanding anything to the contrary herein, no issuance of Variable Equity Securities shall be an Exempt Issuance.

"Indebtedness" shall have the meaning set forth in Section 3(mm) below.

"Initial Warrant Exercise Price" shall have the meaning set forth in Section 1(b)(iv) below.

"Intellectual Property" shall have the meaning set forth in Section 3(j) below.

"Intellectual Property Rights" shall have the meaning set forth in Section 3(j) below.

"Key Person Life Insurance Policy" shall have the meaning set forth in Section 3(u) below.

"Legend Removal Date" shall have the meaning set forth in Section 6(a).

"Lien" shall have the meaning set forth in Section 5 below.

"Limited Standstill Agreements" shall have the meaning set forth in Section 4(r) below.

"Market Price," for any security as of any date, shall have the meaning ascribed to it in the applicable security.

"Material Adverse Effect" shall have the meaning set forth in Section 3(a) below.

"Officer's Certificate" shall have the meaning set forth in Section 8(c) below.

"Ongoing Share Reservation Requirement" shall have the meaning set forth in Section 4(h)(i) below.

"Options" shall have the meaning ascribed to it in the Debenture.

"Patents" shall have the meaning set forth in Section 3(j) below.

"Payment Shares" shall mean (i) Default Shares (as defined in the Debenture), (ii) Interest Payment Shares and Monthly Redemption Shares (as each is defined in the Debenture) and (iii) shares issuable upon conversion of Required Cash Payments (as each is defined in the Debenture) into Common Stock of the Company.  The Payment Shares shall be treated as Common Stock issuable upon conversion of the Debentures for all purposes hereof and thereof and shall be subject to all of the limitations and afforded all of the rights of the other shares of Common Stock issuable hereunder or thereunder, including without limitation, the right to be included in the Registration Statement (as defined in the Registration Rights Agreement) filed pursuant to the Registration Rights Agreement.  

"Permitted Liens" shall mean: (i) Liens on equipment purchased in the ordinary course of business, (ii) Liens subordinate to those created by this Agreement as long as the lienholder enters into a subordination agreement acceptable to the Buyers in their reasonable discretion, (iii) landlords', carriers', warehousemen's, mechanics' and other similar Liens arising by operation of law in the ordinary course of the Company's business; provided, however, that all such Liens shall be discharged or bonded off within sixty (60) days from the filing thereof; (iv) Liens arising out of pledge or deposits under worker's compensation, unemployment insurance, old age pension, social security, retirement benefits or other similar legislation; (v) Liens for taxes (excluding any Lien imposed pursuant to any provision of ERISA) not yet due or which are being contested in good faith by appropriate proceedings and the Company maintains appropriate reserves in respect thereto provided that in Buyer's judgment such Lien does not adversely affect Buyer's rights or the priority of Buyer's Lien in the Collateral; and (vi) easements, rights of way, restrictions and other similar charges or Liens relating to real property and not interfering in a material way with the ordinary conduct of the Company's business.

"Person" shall mean an individual, a limited liability company, a partnership, a joint venture, an exempted company, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

 "Principal Market" shall have the meaning set forth in Section 4(j) below.

"Purchase Price" shall have the meaning set forth in Section 1(b)(ii) below.

"Registration Rights Agreement" shall have the meaning set forth in Recital "D" above.

"Required Holders" shall have the meaning ascribed to it in the Debenture.

"Security Agreement" shall have the meaning ascribed to it in Recital "E" above. 

"SEC Documents" shall have the meaning set forth in Section 3(g) below.

"Securities" shall have the meaning set forth in Section 2(a) below.

"Security Documents" shall mean the Security Agreement and any other documents and filing required thereunder in order to grant the Buyers a first priority security interest in the assets of the Company and the Subsidiaries as provided in the Security Agreement, including but not limited to all UCC-1 filing receipts and documentation evidencing filing of liens with the United States Patent and Trademark Office.  

"Subscription Amount" shall have the meaning set forth in Section 10 below.

"Subsidiaries" shall have the meaning set forth in Section 3(a) below.

"Trading Market" means the Eligible Market on which the Common Stock is listed or quoted for trading on the date in question.

"Underlying Shares" means the shares of Common Stock issued and issuable upon conversion or redemption of the Debentures or as Payment Shares, issued and issuable upon exercise of the Warrants and issued and issuable in lieu of the cash payment of interest on the Debentures in accordance with their terms.

"Variable Equity Securities" shall have the meaning set forth in Section 4(e) below.

"VWAP" means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time); (b) if the Common Stock is not then listed or quoted for trading on a Trading Market and if prices for the Common Stock are then reported in the "Pink Sheets" published by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (c) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Buyers of a majority in interest of the Securities then outstanding and reasonably acceptable to the Company.

"Warrants" shall mean the "A Warrants," the "B Warrants" and the "C Warrants", each as defined in Section 1(b) below.

"Warrant Amount" shall mean the "A Warrant Amount," the "B Warrant Amount" and the "C Warrant Amount", each as defined in Section 1(b) below.

"Warrant Shares" shall have the meaning set forth in Section 2(a) below.

 

(b) Closing of Purchase of Debentures and Warrants.   Subject to the satisfaction or waiver of the terms and conditions of this Agreement, on the Closing Date (as defined below), the Company shall issue and sell to each Buyer and each Buyer, severally and not jointly, agrees to purchase from the Company the Debenture in a principal amount equal to the Subscription Amount (as defined in Section 10) and an accompanying number of Warrants (as described below) to purchase a number of shares equal to the Warrant Amount (as defined below).  

(i) Form of Debenture.  The Debenture shall be in the form annexed hereto as Exhibit A.

 (ii) Form Of Payment.  The aggregate purchase price for the Debenture  and the Warrants to be purchased by each Buyer at the Closing (the "Purchase Price") shall be the amount set forth opposite such Buyer's name in column (5) of the Schedule of Buyers annexed hereto.  Each Buyer shall pay $0.80 for each $1.00 of principal amount of Debentures and related Warrants to be purchased by such Buyer at the Closing, representing a twenty percent (20%) original issue discount (the "Original Issue Discount").  On or before the Closing Date (as defined below), (i) each Buyer shall pay the Purchase Price for the Debentures and the Warrants to be issued and sold to it at the Closing (as defined below) by wire transfer of immediately available funds to the Company, in accordance with the Company's written wiring instructions, against delivery of duly a executed Debenture having an aggregate initial principal amount (the "Original Principal Amount") equal to the Purchase Price and the number of Warrants equal to the Warrant Amount, and (ii) the Company shall deliver such Debentures and Warrants duly executed on behalf of the Company, to such Buyer, against delivery of such Purchase Price.  

 (iii) Closing Date.  Subject to the satisfaction or waiver of the terms and conditions of this Agreement, the "Closing" with respect to a Buyer shall occur when subscriber funds representing the aggregate Original Principal Amount of the Debenture being purchased by such Buyer are transmitted by wire transfer of immediately available funds by each Buyer to the Company, assuming that the Transaction Documents are signed by both parties prior to or within three (3) business days following such transmission.  The date of the Closing shall be referred to herein as the "Closing Date."  Unless otherwise mutually agreed by the parties, the last Closing hereunder shall occur not later than September 11, 2007. The Closing contemplated by this Agreement shall occur on the applicable Closing Date at the offices of the Company, or at such other location as may be agreed to by the parties.  

(iv) Warrants.  Each Buyer's Debenture shall be accompanied by a number of warrants (the "A Warrants") to purchase a number of shares of Common Stock equal to 100% of the Original Principal Amount of the Debentures being purchased by such Buyer, divided by the Initial Conversion Price (as defined in the Debenture) (the "A Warrant Amount").  The A Warrants shall be in the form of the Warrant annexed hereto as Exhibit E-1, except that the "Initial Exercise Price," as defined therein, shall equal $0.88 (the "Initial A Warrant Exercise Price"), subject to adjustment therein.  The A Warrants shall contain Exercise Price adjustment provisions that are consistent with the adjustment provisions afforded to the Conversion Price of the Debenture in the Debenture and shall have a five (5) year term.  

Each Debenture shall also be accompanied by a number of warrants (the "B Warrants") to purchase a number of shares of Common Stock equal to 100% of the Original Principal Amount of the Debentures being purchased by such Buyer, divided by the Initial Conversion Price (as defined in the Debenture) (the "B Warrant Amount").  The B Warrants shall be in the form of the Warrant annexed hereto as Exhibit E-2, except that the "Initial Exercise Price," as defined therein, shall equal $0.80 (the "Initial B Warrant Exercise Price"), subject to adjustment therein.  The B Warrants shall contain Exercise Price adjustment provisions that are consistent with the adjustment provisions afforded to the Conversion Price of the Debenture in the Debenture and shall have a term which extends through the date that if one (1) year after the Effective Date.  The B Warrant shall afford the Holder the right to purchase a number of "C Warrants" equal to the B Warrant Amount (the "C Warrant Amount"), and shall be redeemable by the Company at any time after issuance at a price determined by the Black-Scholes model (as further described in the B Warrants).  The "C Warrants" shall be in the form attached hereto as Exhibit E-3, except that the "Initial Exercise Price" as defined therein shall equal $0.88 (the "Initial C Warrant Exercise Price").

 (v) Closing Deliveries.  On the Closing Date, the Company will deliver or cause to be delivered to each Buyer (the "Company Documents"): 

(A) the items required to be delivered to Buyer pursuant to   Section 8, duly executed by the Company where so required,

 (B) omitted,

(C) a legal opinion of the Company's counsel, dated as of the Closing Date, in form, scope and substance reasonably satisfactory to the Buyer and in substantially the same form as Exhibit F attached hereto in relation to the Company, the applicable Debenture, the applicable Warrant and the Transaction Documents ("Closing Legal Opinion"), 

(D) a duly executed Debenture with a principal amount equal to such Buyer's  Subscription Amount, divided by 0.8 to account for the Original Issue Discount, registered in the name of such Buyer,

(E) a duly executed Warrant registered in the name of such Buyer to purchase up to a number of shares of Common Stock equal to the Warrant Amount (as defined in Section 1(b)(iv)) with an exercise price equal to the Initial Warrant Exercise Price (as defined in Section 1(b)(iv)) subject to adjustment therein,

(F) Limited Standstill Agreements, duly executed by each of the Designated Insiders (as defined in Section 4(m));

(G) The Company shall have delivered to such Buyer a true copy of certificate evidencing the formation and good standing of the Company and each of its Subsidiaries in such entity's jurisdiction of formation issued by the Secretary of State (or comparable office) of such jurisdiction, as of a date within 10 days of the Closing Date.

(H) The Company shall have delivered to such Buyer a true copy of certificate evidencing the Company's qualification as a foreign corporation and good standing issued by the Secretary of State (or comparable office) of each jurisdiction in which the Company conducts business, as of a date within five (5) days of the Closing Date.

(I) The Company shall have delivered to such Buyer a certified copy of the Certificate of Incorporation as certified by the Secretary of the State of Delaware as of a date that is five (5) days prior to the Closing Date.

On the Closing Date, each Buyer shall deliver or cause to be delivered to the Company the following (the "Buyer Documents"):

(A) this Securities Purchase Agreement and the Registration Rights Agreement duly executed by such Buyer,

(B) such Buyer's Subscription Amount by wire transfer to the account as specified in writing by the Company (subject to offsets for any expenses to which such Buyer is entitled).

 

         2.       BUYER'S REPRESENTATIONS AND WARRANTIES. Each Buyer represents and warrants to the Company solely as to such Buyer that:

                  (a)   Investment Purpose. As of the date hereof, the Buyer is purchasing the Debenture and the shares of Common Stock issuable upon conversion of the Debenture or otherwise pursuant to the Debenture and the other Transaction Documents (including, without limitation, the Payment Shares) (such shares of Common Stock being collectively referred to herein as the "Conversion Shares") and the Warrants and the shares of Common Stock issuable upon exercise thereof (the "Warrant Shares" and, collectively with the Debenture, Warrants and Conversion Shares, the "Securities") for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the 1933 Act; PROVIDED, HOWEVER, that by making the representations herein, the Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act and applicable state securities laws.  

(b)     Accredited Investor Status. The Buyer is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D (an "Accredited Investor").  

(c)     Reliance On Exemptions. The Buyer understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities.

                  (d)     Information. The Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Buyer or its advisors. The Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigation conducted by Buyer or any of its advisors or representatives shall modify, amend or affect Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. The Buyer understands that its investment in the Securities involves a significant degree of risk.

                  (e)      Transfer Or Re-Sale. The Buyer understands that (i) except as provided in the Registration Rights Agreement, the sale or re-sale of the Securities has not been and is not being registered under the 1933 Act or any applicable state securities laws, and the Securities may not be transferred or resold unless (a) the Securities are sold pursuant to an effective registration statement under the 1933 Act, (b) the Buyer shall have delivered to the Company an opinion of counsel (which opinion shall be in form, substance and scope reasonably satisfactory to counsel to the Company) to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, (c) the Securities are sold or transferred to an "affiliate" (as defined in Rule 144 promulgated under the 1933 Act (or a successor rule) ("Rule 144") of the Buyer who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(e) and who is an Accredited Investor, or (d) the Securities are sold pursuant to Rule 144 or Rule 144(k); and (ii) any sale of such Securities made in reliance on Rule 144 or Rule 144(k) may be made only in accordance with the terms of said Rule. Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a bona fide margin account or other lending arrangement.

                  (f)     Organization; Authorization; Enforcement. Buyer is a duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized.  Buyer has all requisite power and authority to enter into and perform this Agreement and the other Transaction Documents to which Buyer is a signatory and to consummate the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof.  The execution and delivery of this Agreement and the other Transaction Documents to which Buyer is a signatory have been duly and validly authorized and no further consent or authorization of Buyer, its manager or members is required. This Agreement has been duly executed and delivered on behalf of the Buyer, and this Agreement constitutes, and upon execution and delivery by the Buyer of the other Transaction Documents to which Buyer is a signatory, such agreements will constitute, legal, valid and binding agreements of the Buyer enforceable in accordance with their terms except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

(g)        Residency. The Buyer's residency is as indicated on its signature page hereto. 

                  (h)     Knowledge And Experience.  Buyer has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment in the Securities.

(i)     Short Sales Prior To The Date Hereof.   Buyer and its Affiliates have not from the time that such Buyer first received a term sheet (written or oral) from the Company or any other person setting forth the material terms of the transactions contemplated hereunder until the date hereof entered into or effected, or attempted to induce any third party to enter into or effect, any short sales of the Common Stock, or any hedging transaction which establishes a net short position with respect to the Common Stock.  

 (j)    Independent Investment Decision.  Such Buyer has independently evaluated the merits of its decision to purchase the Securities pursuant to the Transaction Documents, and such Buyer confirms that it has not relied on the advice of any other Buyer's business and/or legal counsel in making such decision.  

         3.       REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Buyer that, except as set forth on the Company's disclosure schedules referred to herein and attached hereto or any update thereto prior to the Closing Date (so long as such schedules do not contain any material adverse change)(collectively, the "Disclosure Schedules"). If an exception is adequately disclosed in any one section of the Disclosure Schedule it shall be deemed disclosed for purposes of each other applicable section of the Disclosure Schedule.

                  (a)      Organization And Qualification. The Company and each of its Subsidiaries (as defined below), if any, is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. Schedule 3(a) sets forth a list of all of the Subsidiaries of the Company and the jurisdiction in which each is incorporated. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect on (i) the Securities, (ii) the business, operations, assets, financial condition or prospects of the Company and its Subsidiaries, if any, taken as a whole, (iii) on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith or (iv) the authority or the ability of the Company to perform its obligations under this Agreement, the Registration Rights Agreement, the Debenture or the Warrants. "Subsidiaries" means any corporation or other organization, whether incorporated or unincorporated, in which the Company owns, directly or indirectly, any equity or other ownership interest.

                  (b)      Authorization; Enforcement. (i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, the Security Documents, the Registration Rights Agreement, the Debenture and the Warrants and to consummate the transactions contemplated hereby and thereby and to issue the Securities, in accordance with the terms hereof and thereof, (ii) except as otherwise set forth in Schedule 3(b), the execution and delivery of this Agreement, the Security Documents, the Registration Rights Agreement, the Debenture and the Warrants by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation, the issuance of the Debenture and the Warrants and the issuance and reservation for issuance of the Conversion Shares issuable upon conversion of or otherwise pursuant to the Debenture and the Warrant Shares issuable upon exercise of or otherwise pursuant to the Warrants) have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its stockholders is required, (iii) this Agreement has been duly executed and delivered by the Company, and (iv) this Agreement constitutes, and upon execution and delivery by the Company of the Security Documents, the Registration Rights Agreement, the Debenture and the Warrants, each of such agreements and instruments will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law. 

                  (c)      Capitalization.  As of the date hereof, the authorized capital stock of the Company is as set forth on Schedule 3(c-1).  The authorized capital stock of the Company consists of 250,000,000 shares of Common Stock, par value $0.0001 per share, of which approximately 29,588,119 shares are outstanding as of the date hereof.   There are no outstanding securities which are convertible into shares of Common Stock, whether such conversion is currently exercisable or exercisable only upon some future date or the occurrence of some event in the future, except as disclosed on Schedule (c-1).  If any such securities are listed on the Schedule (c-1), the number or amount of each such outstanding convertible security and the conversion terms are set forth in said Schedule (c-1).  All of such outstanding shares of capital stock set forth in Schedule 3(c-1) are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable.

No shares of capital stock of the Company are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company. Except as disclosed in Schedule 3(c-2), as of the effective date of this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries, (ii) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of its or their securities under the 1933 Act (except the Registration Rights Agreement) and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Debenture, the Warrants, the Conversion Shares, the Payment Shares, or the Warrant Shares. The Company has furnished to each Buyer true and correct copies of the Company's Articles of Incorporation as in effect on the date hereof ("Articles Of Incorporation"), the Company's By-laws, as in effect on the date hereof (the "By-Laws"), and the terms of all securities convertible into or exercisable for Common Stock of the Company and the material rights of the holders thereof in respect thereto. In the event that the date of execution of this Agreement is not the Closing Date, the Company shall provide each Buyer with a written update of this representation signed by the Company's President and Chief Executive or Chief Financial Officer on behalf of the Company as of the Closing Date ("Closing Bring-Down Certificate").  No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Securities.  There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company's capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company's stockholders.

                  (d)      Issuance of Shares. Upon issuance upon conversion of the Debenture and upon exercise of the Warrants in accordance with their respective terms, and receipt of the exercise price therefor, the Conversion Shares and Warrant Shares, along with any Payment Shares or any other shares issued pursuant to the terms of the Transaction Documents, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances and shall not be subject to preemptive rights or other similar rights of stockholders of the Company and will not impose personal liability upon the holder thereof. 

                  (e)      Acknowledgment Of Dilution. The Company understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares upon conversion of or otherwise pursuant to the Debentures or upon issuance of the Warrant Shares upon exercise of or otherwise pursuant to the Warrants. The Company's directors and executive officers have studied and fully understand the nature of the Securities being sold hereunder. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of or otherwise pursuant to the Debentures, to issue Warrant Shares upon exercise of or otherwise pursuant to the Warrants in accordance with this Agreement, and to otherwise issue Payment Shares or other shares of Common Stock to the Buyer is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company. Taking the foregoing into account, the Company's Board of Directors has determined, in its good faith business judgment, that the issuance of the Securities hereunder and under the Debentures and the Warrants and the consummation of the transactions contemplated hereby and thereby are in the best interest of the Company and its stockholders.

                  (f)      No Conflicts. Except as otherwise set forth in Schedule 3(f), the execution, delivery and performance of each of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance of the Conversion Shares and Warrant Shares) will not (i) conflict with or result in a violation of any provision of the Certificate of Incorporation or By-laws, (ii) trigger any resets of conversion or exercise prices in other outstanding convertible securities, warrants or options of the Company, (iii) trigger the issuance of securities by the Company to any third party, (iv) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (v) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except, in the case of clauses (i), (iv) and (v) above, for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation of its Certificate of Incorporation, By-laws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and no event has occurred which with notice or lapse of time or both could put the Company or any of its Subsidiaries in default) under, and neither the Company nor any of its Subsidiaries has taken any action or failed to take any action that would give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for possible defaults as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its Subsidiaries, if any, are not being conducted, and shall not be conducted so long as a Buyer owns any of the Securities, in violation of any law, ordinance or regulation of any governmental entity the violation of which would have a Material Adverse Effect. Except as disclosed in Schedule 3(f) or as specifically contemplated by this Agreement or as required under the 1933 Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency, regulatory agency, self regulatory organization or stock market or any third party in order for it to execute, deliver or perform any of its obligations under this Agreement, the Registration Rights Agreement, the Debentures or the Warrants in accordance with the terms hereof or thereof or to issue and sell the Debentures and Warrants in accordance with the terms hereof and to issue the Conversion Shares upon conversion of or otherwise pursuant to the Debentures and the Warrant Shares upon exercise of or otherwise pursuant to the Warrants. Except as disclosed in Schedule 3(f), all consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is not in violation of the listing or trading requirements of the Principal Market (as defined herein) and does not reasonably anticipate that the Common Stock will cease to be listed or traded on the Principal Market in the foreseeable future. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.

                  (g)      SEC Documents; Financial Statements.  Since at least the beginning of the most recent fiscal quarter that began more than two (2) years prior to the Closing Date, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act  (all of the foregoing filed prior to the date hereof and since at least the beginning of the most recent fiscal quarter that began more than two (2) years prior to the Closing Date, and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits to such documents) incorporated by reference therein, being hereinafter referred to herein as the "SEC Documents"). For purposes of this Agreement, "Timely Filed" shall mean that the applicable document was filed (i) by its original due date under the 1934 Act, or, if a request for an extension was timely filed, (ii) by such extended due date.  True and complete copies of the SEC Documents are available on the SEC's internet website (www.sec.gov), except for such exhibits and incorporated documents. Upon the request of a Buyer, the Company will promptly provide copies of the SEC Documents to such Buyer.  As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the statements made in any such SEC Documents is, or has been, required to be amended or updated under applicable law (except for such statements as have been amended or updated in subsequent filings prior to the date hereof). As of their respective dates, the financial statements of the Company (and the Buyers thereto) included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the financial statements of the Company included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to the date of the Company's most recent 10-QSB or 10-KSB and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such financial statements, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company. 

 

(h)      Absence Of Certain Changes. Except for losses incurred in the ordinary course of business that have been publicly disclosed at least five (5) days prior to the date hereof or as set forth on Schedule 3(h) hereof, since the date of the Company's most recent 10-Q or 10-K, there has been no material adverse change and no material adverse development in the assets, liabilities, business, properties, operations, financial condition, results of operations or prospects of the Company or any of its Subsidiaries. For purposes of this Section 3(h), the terms "Material Adverse Change" and "Material Adverse Development" shall exclude continuing losses that are consistent with the Company's historical losses.  Except as disclosed in Schedule 3(h), since the date of the Company's most recent audited financial statements contained in a Form 10-K, neither the Company nor any of its Subsidiaries has

 (i) declared or paid any dividends on its Common Stock;

(ii) sold any assets, individually or in the aggregate, in excess of $100,000 outside of the ordinary course of business; 

(iii) except as set forth in Schedule 3(h), had capital expenditures, individually or in the aggregate, in excess of $100,000;

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

(v) borrowed any amount or incurred or become subject to any liabilities (absolute or contingent) except current liabilities incurred in the ordinary course of business which are comparable in nature and amount to the current liabilities incurred in the ordinary course of business during the comparable portion of its prior fiscal year, as adjusted to reflect the current nature and volume of the Company's or such subsidiary's business;

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

(vii) declared or made any payment or distribution of cash or other property to stockholders with respect to its stock, or purchased or redeemed, or made any agreements so to purchase or redeem, any shares of its capital stock;

(viii) sold, assigned or transferred any other tangible assets, or canceled any debts or claims, except in the ordinary course of business;

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

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

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

(xii) made capital expenditures or commitments therefor that aggregate in excess of $50,000;

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

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

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

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

(xvii) effected any two or more events of the foregoing kind which in the aggregate would be material to the Company or its subsidiaries; or

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

Except as set forth in Schedule 3(h), neither the Company nor any of its Subsidiaries has taken any steps to seek protection pursuant to any bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor to do so. The Company and its Subsidiaries, individually and on a consolidated basis, are not as of the date hereof, and after giving effect to the transactions contemplated hereby to occur at the Closing, will not be Insolvent (as defined below). For purposes of this Section 3(h), "Insolvent" means, without giving effect to this transactions contemplated hereby, (i) the present fair saleable value of the Company's assets is less than the amount required to pay the Company's total Indebtedness, (ii) the Company is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, (iii) the Company intends to incur or believes that it will incur debts that would be beyond its ability to pay as such debts mature or (iv) the Company has unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted.

                  (i)    Absence Of Litigation.  Except as disclosed in Schedule 3(i-1), to the knowledge of the Company or any of its subsidiaries, there is no action, suit, claim, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries, or their officers or directors in their capacity as such. Schedule 3(i-2) contains a complete list and summary description of any known pending or threatened proceeding against or affecting the Company or any of its Subsidiaries, without regard to whether it, if adversely decided, would have a Material Adverse Effect. The Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing.

(j)    Patents, Copyrights, Etc.  All of the Company's material patents, patent applications, Patents (as defined below), patent rights, inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service names, trade names and copyrights ("Intellectual Property") are set forth in Schedule 3(j-1) hereof.  The Company and its Subsidiaries own or possess adequate rights or licenses to use all of the Intellectual property and the rights to receive proceeds from patent licensing agreements, patent infringement litigation or other litigation related to such intellectual property (collectively, the "Intellectual Property Rights"). Any Liens, encumbrances or licenses that have been granted against the Intellectual Property are listed in Schedule 3(j-2).  Except as set forth in Schedule 3(J-2), none of the Company's Intellectual Property Rights have expired or terminated, or are expected to expire or terminate, within three years from the date of this Agreement.  Except as otherwise set forth on Schedule 3(j-2), the Company owns all right and title to the Intellectual Property free and clear of any Liens or encumbrances and has not granted any licenses or rights to use any of the Patents to any third party. The Company and each of its Subsidiaries owns or possesses the requisite licenses or rights to use all Intellectual Property necessary to enable it to conduct its business as now operated, including but not limited to the intellectual property set forth in Schedule 3(j-1) hereof (and, except as otherwise set forth in Schedule 3(j-2) hereof, to the best of the Company's knowledge, as presently contemplated to be operated in the future), except for such licenses or rights the failure of which to own or possess would not, individually or in the aggregate, have a Material Adverse Effect; there is no claim or action by any person pertaining to, or proceeding pending, or to the Company's knowledge threatened, which challenges the right of the Company or of a Subsidiary with respect to any Intellectual Property necessary to enable it to conduct its business as now operated (and, except as otherwise set forth in Schedule 3(j-2) hereof, to the best of the Company's knowledge, as presently contemplated to be operated in the future), except for actions or claims which, if adversely decided, would not have a Material Adverse Effect; to the best of the Company's knowledge, the Company's or its Subsidiaries' current and intended products, services and processes do not infringe on any Intellectual Property Rights or other rights held by any person, and the Company is unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and each of its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of their Intellectual Property.   

For purposes hereof, "Patents" means all domestic and foreign letters patent, design patents, utility patents, industrial designs, inventions, trade secrets, ideas, concepts, methods, techniques, processes, proprietary information, technology, know-how, formulae, rights of publicity and other general intangibles of like nature, now existing or hereafter acquired (including, without limitation, all domestic and foreign letters patent, design patents, utility patents, industrial designs, inventions, trade secrets, ideas, concepts, methods, techniques, processes, proprietary information, technology, know-how and formulae described in Schedule 3(j-1) hereof), all applications, registrations and recordings thereof (including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office, or in any similar office or agency of the United States or any other country or any political subdivision thereof), and all reissues, divisions, continuations, continuations in part and extensions or renewals thereof, in each case owned by the Company or an of its Subsidiaries. The Company does not own or have any rights in and to any Patents.

                  (k)     No Materially Adverse Contracts, Etc. Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is reasonably likely in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement, or has knowledge of a breach of any contract or agreement to which the Company or any of its Subsidiaries is a party, either of which in the judgment of the Company's officers has or is reasonably likely to have a Material Adverse Effect.

                  (l)     Tax Status. Except as set forth on Schedule 3(l), the Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, state or local tax. Except as set forth on Schedule 3(l), none of the Company's tax returns is presently being audited by any taxing authority.

(m)      Transactions With And Obligations To Affiliates.    Other than the grant of stock options disclosed on Schedule 3(m), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than customary employment contracts for ordinary course services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.  Schedule 3(m) sets forth any loans, payables, payments, transactions, debt or equity securities, or similar agreements or obligations between the Company and any officers, directors, management or affiliates of the Company.

                       (n)   Acknowledgment Regarding Buyer's Purchase Of Securities. The Company acknowledges and agrees that each Buyer is acting solely in the capacity of arm's length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that each Buyer is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and that any statement made by each Buyer or any of its respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Buyer's purchase of the Securities and has not been relied upon by the Company, its officers or directors in any way. The Company further represents to each Buyer that the Company's decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives.

                  (o)      No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would require registration under the 1933 Act of the issuance of the Securities to any Buyer. The issuance of the Securities to each Buyer will not be integrated with any other issuance of the Company's securities (past, current or future) for purposes of any stockholder approval provisions applicable to the Company or its securities.

                  (p)    No Brokers.  The identity of any brokers or placement agents (each, a "Placement Agent") that are receiving compensation in respect to this Offering, along with the amount of cash, warrants or other consideration that compose any compensation to each such broker or placement agent, are disclosed in Schedule 3(p) hereto.  Other than as set forth on Schedule 3(p), the Company has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments relating to this Agreement or the transactions contemplated hereby.  The Company shall indemnify and hold harmless each of Buyer, its employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees.

(q)      Conduct of Business; Regulatory Permits; Compliance. The Company and each of its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "Company Permits"), except where the failure to so possess any such Company Permits would not have a Material Adverse Effect, and there is no action pending or, to the knowledge of the Company, threatened regarding suspension or cancellation of any of the Company Permits. Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of, any of the Company Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is in violation of any term of or in default under its respective Certificates or Articles of Incorporation or its Bylaws or their organizational charter or bylaws, respectively. Since the beginning of the most recent fiscal quarter that began more than two (2) years prior to the Closing Date, neither the Company nor any of its Subsidiaries has received any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material Adverse Effect.    Neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. To the best of the Company's knowledge, neither the Company nor any of its Subsidiaries is in violation of any judgment, decree or order or any statute, ordinance, rule or regulation applicable to the Company or its Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct its business in violation of any of the foregoing, except for possible violations which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.  Without limiting the generality of the foregoing, the Company is not in violation of any of the rules, regulations or requirements of the Principal Market and has no knowledge of any facts or circumstances that would reasonably lead to delisting or suspension of the Common Stock by its Principal Market in the foreseeable future.  Since at least September 2, 2004, (i) the Common Stock has been designated for quotation on the Principal Market, (ii) trading in the Common Stock has not been suspended by the SEC or the Principal Market and (iii) the Company has received no communication, written or oral, from the SEC or the Principal Market regarding the suspension or delisting of the Common Stock from the Principal Market. 

                   (r)    Title To Property. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all Liens, encumbrances and defects except such as are described in Schedule 3(r) or such as would not have a Material Adverse Effect. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as would not have a Material Adverse Effect.                

                  (s)      Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary has, in the course of his actions for, or on behalf of, the Company, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

                  (t)     Solvency. The Company (both before and after giving effect to the transactions contemplated by this Agreement) is solvent (i.e., its assets have a fair market value in excess of the amount required to pay its probable liabilities on its existing debts as they become absolute and matured) and currently the Company has no information that would lead it to reasonably conclude that the Company would not have the ability to, nor does it intend to take any action that would impair its ability to, pay its debts from time to time incurred in connection therewith as such debts mature. Except as disclosed in Schedule 3(t), the Company did not receive a qualified opinion from its auditors with respect to its most recent fiscal year end and does not anticipate or know of any basis upon which its auditors might issue a qualified opinion in respect of its current fiscal year.

                  (u)     No Investment Company. The Company is not, and upon the issuance and sale of the Securities as contemplated by this Agreement will not be, an "investment company" required to be registered under the Investment Company Act of 1940 (an "Investment Company"). The Company is not controlled by an Investment Company.

                 

                  (v) No Undisclosed Liabilities. The Company has no liabilities or obligations which are material, individually or in the aggregate, other than those incurred in the ordinary course of the Company's businesses which have been disclosed in the Company's public filings and which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect other than as set forth in Schedule 3(v).

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

(x)     Company Acknowledgment.  The Company hereby acknowledges that each Buyer may elect to hold its Debenture and the Warrants for various periods of time, as permitted by the terms of the Transaction Documents and the Company further acknowledges that Buyer has made no representations or warranties, either written or oral, as to how long the Securities will be held by such Buyer or regarding Buyer's trading history or investment strategies.

(y)      Disclosure. The Company confirms that neither it nor any other Person acting on its behalf has provided any of the Buyers or their agents or counsel with any information that constitutes material, nonpublic information concerning the Company or its Subsidiaries other than the existence of the transactions contemplated by this Agreement or the other Transaction Documents. The Company understands and confirms that each of the Buyers will rely on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Buyers regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each press release issued by the Company or any of its Subsidiaries during the twelve (12) months preceding the date of this Agreement did not at the time of release contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.

(z)      Absence Of Certain Company Control Person Actions Or Events.  To the Company's knowledge, during the past five (5) years:

(i) No petition under the federal bankruptcy laws or any state insolvency law was filed by or against, and no receiver, fiscal agent or similar officer was appointed by a court for the business or property of such Company Control Person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

(ii) No Company Control Person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

(iii) No Company Control Person has been the subject of any order, judgment or decree, that was not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

(A) acting, as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, any other Person regulated by the Commodity Futures Trading Commission ("CFTC") or engaging in or continuing any conduct or practice in connection with such activity;

(B) engaging in any type of business practice; or

(C) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;

(iv) No Company Control Person has been the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such Company Control Person to engage in any activity described in paragraph (3) of this item, or to be associated with Persons engaged in any such activity; or

(v) No Company Control Person was found by a court of competent jurisdiction in a civil action or by the CFTC or SEC to have violated any federal or state securities law, and the judgment in such civil action or finding by the CFTC or SEC has not been subsequently reversed, suspended, or vacated.

For purposes hereof, "Company Control Person" means each director, executive officer, promoter, and such other Persons as may be deemed in control of the Company pursuant to Rule 405 under the 1933 Act or Section 20 of the 1934 Act.

                    (aa)          DTC Status. The Company's transfer agent is a participant in and the Common Stock is eligible for transfer pursuant to the Depository Trust Company Automated Securities Transfer Program. The name, address, telephone number, fax number, contact person and email address of the Company transfer agent is set forth on Schedule 3(aa) hereto.

(bb)Sarbanes-Oxley; Internal Accounting Controls.  The Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date.

(cc)Seniority.  Except as set forth on Schedule 3(cc), as of the Closing Date, no indebtedness or other equity of the Company is senior to or pari passu with the Debentures in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise.

(dd)Registration Rights.   Except as set forth on Schedule 3(dd) hereto, other than each of the Buyers, no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company.

(ee) Off Balance Sheet Arrangements.  There is no transaction, arrangement, or other relationship between the Company and an unconsolidated or other off balance sheet entity that is required to be disclosed by the Company in its 1934 Act filings and is not so disclosed or that otherwise would be reasonably likely to have a Material Adverse Effect.

(ff)Indebtedness And Other Contracts.  Except as disclosed in Schedule 3(ff), neither the Company nor any of its Subsidiaries (i) has any outstanding indebtedness (as defined below), (ii) is a party to any contract, agreement or instrument, the violation of which, or default under which, by the other party(ies) to such contract, agreement or instrument would result in a Material Adverse Effect, (iii) is in violation of any term of or in default under any contract, agreement or instrument relating to any indebtedness, or (iv) is a party to any contract, agreement or instrument relating to any Indebtedness, the performance of which, in the judgment of the Company's officers, has or is expected to have a Material Adverse Effect. Schedule 3(ff) provides a detailed description of the material terms of any such outstanding Indebtedness.  

 

(gg)Conduct Of Business.  Neither the Company nor its Subsidiaries is in violation of any term of or in default under its Certificate of Incorporation, Bylaws or their organizational charter or bylaws, respectively. Except as disclosed in Schedule 3(gg), neither the Company nor any of its Subsidiaries is in violation of any judgment, decree or order or any statute, ordinance, rule or regulation applicable to the Company or its Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct its business in violation of any of the foregoing, except for possible violations which would not, individually or in the aggregate, have a Material Adverse Effect.  Without limiting the generality of the foregoing, the Company is not in violation of any of the rules, regulations or requirements of the Principal Market other than violations which could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect and has no knowledge of any facts or circumstances which would reasonably lead to delisting or suspension of the Common Stock by the Principal Market in the foreseeable future.  Except as disclosed on Schedule 3(gg) since September 2, 2004, (i) the Common Stock has been designated for quotation on the Principal Market, (ii) trading in the Common Stock has not been suspended by the SEC or the Principal Market and (iii) the Company has received no communication, written or oral, from the SEC or the Principal Market regarding the suspension or delisting of the Common Stock from the Principal Market, and the Company has not received any letters of inquiry from the SEC Division of Enforcement or state securities regulators in the past 24 months related to any potential or alleged violation of state or federal securities laws.  The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate regulatory authorities necessary to conduct their respective businesses, except where the failure to possess such certificates, authorizations or permits would not have, individually or in the aggregate, a Material Adverse Effect, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.

(hh)   No Undisclosed Events, Liabilities, Developments Or Circumstances.  Except as disclosed in the Disclosure Schedules, no event, liability, development or circumstance has occurred or exists, or is contemplated to occur with respect to the Company, its Subsidiaries or their respective business, properties, prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement on Form SB-2 or any other appropriate form filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced.

 (ii)    Obligations To Issue Additional Securities.   Schedule 3(ii) lists all outstanding debt or equity securities, warrants or options, or Common Stock Equivalents, and all contractual agreements of the Company, in each case, that contain any provisions ("Triggering Provisions") that could require the adjustment to conversion or exercise prices of existing securities, or the issuance of additional securities triggered as a result of the issuance of securities by the Company or by the passage of time on or after the date of this Securities Purchase Agreement.

(jj)Regulation M Compliance.  The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the securities of the Company or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company, other than, in the case of clauses (ii) and (iii), compensation paid to the Company's placement agent in connection with the placement of the Securities.

   4.  COVENANTS.  Unless otherwise specified below, with respect to the covenants in Sections 4 and 5 applicable to the Company: the Company's obligations to follow such covenants shall continue until such time as less than 20% of the principal amount of Debenture issued in the Offering remain outstanding; and, any or all of such covenants may be waived by the written consent of the Required Holders (as defined in the Debenture).  

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

                  (b)     Reporting Status. The Company's Common Stock is registered under Section 12(b) or  12(g) of the 1934 Act. So long as any Buyer beneficially owns any of the Securities, the Company shall timely file all reports required to be filed with the SEC pursuant to the 1934 Act ("1934 Act Filings"), and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. 

(c)    Use Of Proceeds. The Company shall segregate at least $250,000 of the Offering proceeds into a separate designated bank account to be used only as payment to third-party entities acceptable to the Required Holders, for carrying out investor relations services ("IR Purposes").  The Company shall use at least $150,000 of the proceeds of the Offering for IR Purposes during each the first 12 months after the Closing Date.  The Company shall use the remainder of the proceeds from the sale of the Debentures and the Warrants in the manner set forth in Schedule 4(c) attached hereto and made a part hereof and, except as otherwise expressly specified in Schedule 4(c), the Company shall not use any of such proceeds (i) to repay any of its corporate debt or other Indebtedness, (ii) to redeem any Common Stock or Common Stock Equivalents, (iii) to settle any outstanding litigation, or (iv) to repay any debt or obligation to any officer, director or manager of the Company, including but not limited to the Company's president, chief executive officer, chief financial officer and chief operations officer, and any of their affiliates or family members (collectively, "Insiders"). 

       

               (d)       Securities Issuance Restrictions; Capital Raising Limitations; Right Of Participation.

  

(i) Lock-Up of Issuance of Securities.  Except for Exempt Issuances, the transactions or other issuances of securities by the Company to the Buyers as contemplated by the Transaction Documents, during the period from the date hereof until the date that is 90 days following the Effective Date (the "Limitation Period"), neither the Company nor any Subsidiary shall issue shares of Common Stock or Common Stock Equivalents (the "Equity Issuance Lock-Up"), provided, however, the 90 day period set forth in this Section 4(d)(i) shall be extended for the number of Trading Days during such period in which (i) trading in the Common Stock is suspended by any Trading Market, or (ii) following the Effective Date, the Registration Statement is not effective or the prospectus included in the Registration Statement may not be used by the Buyers for the resale of the Underlying Shares..  The Equity Issuance Lock-Up shall not apply in respect of an Exempt Issuance.

(ii)Capital Raising Limitations.  During the period that any Debentures remain outstanding, notwithstanding whether or not an issuance of securities is an Exempt Issuance, the Company shall not issue or sell, or agree to issue or sell Variable Equity Securities (as defined below)(the "Variable Equity Securities Lock-Up"), without obtaining the prior written approval of each of the Buyers, with the exception of any such agreements or transactions that (x) exist as of the date hereof and (y) are not amended or modified after the date hereof.  For purposes hereof, the following shall be collectively referred to herein as, the "Variable Equity Securities": (A) any debt or equity securities which are convertible into, exercisable or exchangeable for, or carry the right to receive additional shares of Common Stock either (1) at any conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for Common Stock at any time after the initial issuance of such debt or equity security, or (2) with a fixed conversion, exercise or exchange price that is subject to being reset at some future date at any time after the initial issuance of such debt or equity security due to a change in the market price of the Company's Common Stock since date of initial issuance, or (B) any amortizing convertible security which amortizes prior to its maturity date, where the Company is required to or has the option to (or the investor in such transaction has the option to require the Company to) make such amortization payments in shares of Common Stock (whether or not such payments in stock are subject to certain equity conditions), or (C) any transaction involving a written agreement between the Company and an investor or underwriter whereby the Company has the right to "put" its securities to the investor or underwriter over an agreed period of time and at an agreed price or price formula (each, an "Equity Line" transaction).   For purposes of the above, the "Market Price" at time of closing shall mean the Market Price, as defined in the Debentures.

It is expressly agreed and understood that the Variable Equity Securities Lock-Up shall apply in respect of an Exempt Issuance and that no issuance of Variable Equity Securities shall be an Exempt Issuance.  

(iii)      Omitted.

(iv)      Buyer's Right of Participation in Future Financings. 

(A) From the date hereof and during the period that any portion of the Debenture is outstanding, upon any financing by the Company or any of its subsidiaries (each, a "Subsequent Financing") of Common Stock or Common Stock Equivalents (as defined in Section 1(a)), excluding any securities issued pursuant to the Offering described in this Agreement, each Buyer shall have the right to participate (the "Buyer's Right Of Participation") in up to the Buyer's Participation Maximum (as defined below) of the Subsequent Financing, provided that any securities issued to the Buyer hereunder, and any securities issuable pursuant to the conversion or exercise of such securities, shall be subject to the Beneficial Ownership Limitation. 

(B) At least ten (10) days prior to the closing of the Subsequent Financing, the Company shall deliver to each Buyer a written notice of its intention to effect a Subsequent Financing (an "Advance Notice Of Financing"), which Advance Notice of Financing shall ask such Buyer if it wants to review the details of such financing (such additional notice, a "Subsequent Financing Notice").  Upon the request of a Buyer, and only upon a request by such Buyer, for a Subsequent Financing Notice, the Company shall promptly, but no later than one (1) Trading Day after such request, deliver a Subsequent Financing Notice to such Buyer.  The Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder, the Person with whom such Subsequent Financing is proposed to be effected, and attached to which shall be a term sheet or similar document relating thereto and complete, definitive legal documentation ("Legal Documents") for the transaction.    

(C) Any Buyer desiring to participate in such Subsequent Financing must provide written notice ("Participation Notice") to the Company by not later than 5:30 p.m. (New York City time) on the tenth (10th) Trading Day after such Buyer has received the Advance Notice of Financing that the Buyer is willing to participate in the Subsequent Financing, the amount of the Buyer's participation, and that the Buyer has such funds ready, willing, and available for investment on the terms set forth in the Subsequent Financing Notice.  If the Company receives no notice from a Buyer as of such tenth (10th) Trading Day, such Buyer shall be deemed to have notified the Company that it does not elect to participate.  Buyer shall not be obligated to participate in a Subsequent Offering after delivering a Participation Notice to the Company until after the Buyer has reviewed and agreed to the final Legal Documents for such offering.

(D) If by 5:30 p.m. (New York City time) on the tenth (10th) Trading Day after all of the requesting Buyers have received the Advance Notice of Financing, notifications by the Buyers of their willingness to participate in the Subsequent Financing (or to cause their designees to participate) is, in the aggregate, less than the total amount of the Subsequent Financing, then the Company may effect the remaining portion of such Subsequent Financing on the terms and to the Persons set forth in the Subsequent Financing Notice.  

(E) If by 5:30 p.m. (New York City time) on the tenth (10th) Trading Day after all of the Buyers have received the Advance Notice of Financing, the Company receives responses to a Subsequent Financing Notice from Buyers seeking to purchase more than the aggregate amount of the Subsequent Financing, each such Buyer shall have the right to purchase up to (the "Buyer's Participation Maximum") (a) their Pro Rata Portion (as defined below) of the Subsequent Financing, plus (b) a pro rata amount (based upon the relative amount of the participating Buyers' respective Pro Rata Portions) of the aggregate of the unused Pro Rata Portions of the other Buyers.   For purposes hereof, "Pro Rata Portion" shall mean the ratio of (x) the aggregate Purchase Price of Securities purchased on the Closing Date by a Buyer participating under this Section 4(e)(iv) and (y) the sum of the aggregate Purchase Price of Securities purchased on the Closing Date by all Buyers participating under this Section 4(d)(iv).

(F)  For purposes of clarity, in the event that there is any amount of a Subsequent Financing that is not requested to be purchased by a Buyer, then any other Buyer shall have the right to purchase such remaining amount of the Subsequent Financing.

(G) The Company must provide the Buyers with a second Subsequent Financing Notice, and the Buyers will again have the right of participation set forth above in this Section 4(d)(iv), if the Subsequent Financing subject to the initial Subsequent Financing Notice is not consummated for any reason on the terms set forth in such Subsequent Financing Notice within thirty (30) Trading Days after the date of the initial Subsequent Financing Notice.

(H)  The Company and the Buyers agree that if any Buyer elects to participate in the Subsequent Financing, (x) neither the agreement regarding the Subsequent Placement (the "Subsequent Placement Agreement") with respect to such Subsequent Financing nor any other transaction documents related thereto (collectively, the "Subsequent Placement Documents") shall include any term or provisions whereby any Buyer shall be required to agree to any restrictions in trading as to any securities of the Company owned by such Buyer prior to such Subsequent Placement, and (y) the Buyers shall be entitled to the same registration rights provided to other investors in the Subsequent Placement.

(v)Most Favored Nation (MFN) Securities Exchange Provision.  From the date hereof until the date when such Buyer holds less than 20% in principal amount of Debentures originally purchased by such Buyer hereunder, if the Company effects a Subsequent Financing, each Buyer may elect, in its sole discretion, to exchange (an "MFN Exchange") all or some of the Debentures then held by such Buyer for any securities or units issued in a Subsequent Financing on a $1.00 for $1.00 basis based on the outstanding principal amount of such Debentures, along with any accrued but unpaid interest, liquidated damages and other amounts owing thereon, and the effective price at which such securities were sold in such Subsequent Financing; PROVIDED, HOWEVER, that this Section 4(d)(v) shall not apply with respect to (a) an Exempt Issuance or (b) a firm commitment underwritten public offering of Common Stock with a reputable national underwriter. The Company shall provide each Buyer with notice of any such Subsequent Financing in the manner set forth in Section 4(d)(iv).  Following such an exchange, the Holder shall retain all of its unconverted Warrants and shall receive any warrants, options or other ancillary securities that normally accompany the securities being purchased and sold in the Subsequent Financing.  

(vi)      Injunctive Relief.   The remedies provided in this Agreement shall be cumulative and in addition to all other remedies available under this Agreement and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder's right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Agreement or any of the Transaction Documents.  The Company acknowledges that a breach by it of its obligations under this Agreement or the other Transaction Documents, including but not limited to a breach of its obligations under this subsection 4(d) or its obligations under Section 4(t) hereof, will cause irreparable harm to Buyer, by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Agreement or the other Transaction Documents, including but not limited to a breach of its obligations under this subsection 4(d) or a breach of its obligations under subsection 4(t) hereof, will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement or the other Transaction Documents, that Buyer shall be entitled, in addition to all other available remedies in law or in equity, to an injunction or injunctions to prevent or cure any breaches of the provisions of this Agreement or the other Transaction Documents, including but not limited to a breach of its obligations under this subsection 4(d) or of subsection 4(m) hereof, and to enforce specifically the terms and provisions of this Agreement and the other Transaction Documents, including but not limited to its obligations under this subsection 4(d) or of subsection 4(m) hereof, without the necessity of showing economic loss and without any bond or other security being required.  Specifically, the Buyer shall be entitled to injunctive relief to cause the court to rescind any financing or financings or other transactions between the Company and a third party that are in violation of subsection 4(d) or subsection 4(t).

(vii)    Stockholder Approval.  If at any time the number of shares of Common Stock authorized and reserved for issuance is below 100% of the number of Conversion Shares issued and issuable upon conversion of or otherwise pursuant to the Debentures (based on the Conversion Price (as defined in the Debentures) in effect from time to time) and Warrant Shares issued or issuable upon exercise of or otherwise pursuant to the Warrants (based on the Exercise Price of the Warrants in effect from time to time), together with the Payment Shares and any other shares of Common Stock issued or issuable pursuant to the terms of the Transaction Documents, the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including, without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company's obligations under this Section 4(h), in the case of an insufficient number of authorized shares, and using its best efforts to obtain stockholder approval of an increase in such authorized number of shares.

(e)      Certain Trading Activities.  For so long as such Buyer owns any Debentures, such Buyer shall not maintain a Net Short Position.  For purposes hereof, a "Net Short Position" by a person means a position whereby such person has executed one or more sales of Common Stock that is marked as a short sale and that is executed at a time when such Buyer has no equivalent offsetting long position in the Common Stock or contract for the foregoing.  For purposes of determining whether a Buyer has an equivalent offsetting long position in the Common Stock, all Common Stock (i) that is owned by such Buyer, (ii) that may be issued as Interest Shares pursuant to the terms of the Debentures to the Buyer, (iii) that would be issuable upon conversion or exercise in full of all Securities then held by such Buyer (assuming that such Securities were then fully convertible or exercisable, notwithstanding any provisions to the contrary, and giving effect to any conversion or exercise price adjustments that would take effect given only the passage of time), or (iv) that would otherwise be issuable to the Buyer as Payment Shares, shall be deemed to be held long by such Buyer.  Without limiting the foregoing, the Buyers may engage in hedging activities at various times during the period following the Initial Effective Date.   

                  (f)      Listing. The Company shall use its best efforts to promptly secure the listing of the Conversion Shares and Warrant Shares upon each national securities exchange or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and, so long as any Buyer owns any of the Securities, shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Conversion Shares from time to time issuable upon conversion of or otherwise pursuant to the Debentures and all Warrant Shares from time to time issuable upon exercise of or otherwise pursuant to the Warrants. The Company will use its best efforts to obtain and, so long as any Buyer owns any of the Securities, maintain the listing and trading of its Common Stock on an Eligible Market (whichever Eligible Market is at the time the principal trading exchange or market for the Common Stock is referred to herein as the "Principal Market"), and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers, or any successor entity ("NASD") and such exchanges, as applicable. The Company shall promptly provide to Buyer copies of any notices it receives from the Principal Market and any other exchanges or quotation systems on which the Common Stock is then listed regarding the continued eligibility of the Common Stock for listing on such exchanges and quotation systems.

                  (g)       Corporate Existence. So long as a Buyer beneficially owns any portion of the Debentures or Warrants, the Company shall maintain its corporate existence in good standing and remain a "Reporting Issuer" (defined as a Company which files periodic reports under the 1934 Act).

                  (h)       No Integration. The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities to the Buyers in a manner that would require the registration under the Securities Act of the sale of the Securities to the Buyers or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.

 (i)      Limitation On Sale Or Disposition Of Intellectual Property.   So long as any portion of the Debentures remain outstanding, so long as the Company shall have any obligation under the Debentures or so long as any of the Warrants remain outstanding, the Corporation shall not sell, convey, dispose of, spin off or assign any or all of its Intellectual Property (including but not limited to the Intellectual Property set forth in Schedules 3(j)(1) and (2) hereof), or any of the Intellectual Property Rights, in each case without Buyer's written consent, provided that the Company may, without the Buyer's written consent, enter into one or more licensing agreements with respect to its Intellectual Property so long as such licensing agreements exceed $5 million per calendar year and so long as such agreements are not with any affiliate (as such term is defined in Rule 501(b) of Regulation D) of the Company or with any relative of, or entity controlled by, or any entity 10% or more of which is owned by, any officer, director, employee or former employee of the Company, provided, further, that the Company shall not be subject to the restrictions of this Section 4(i) if the cash consideration received by the Company in exchange for such Intellectual Property Rights exceeds $50 million.  

(j)      Limitation On Rate Of Issuance Of Shares.     The parties agree that, if by virtue of this AGREEMENT, or by virtue of any other agreement between the parties, Holder becomes entitled to receive from the Company a number of shares of Common Stock of the Company (collectively, "Issuable Securities"), such that the sum of (1) the number of shares of Common Stock of the Company beneficially owned by HOLDER and any applicable affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Debenture, the unexercised Warrants or the unexercised or unconverted portion of any other security of HOLDER subject to a limitation on conversion or exercise analogous to the limitations contained herein)(collectively, the "Beneficially Owned Shares") and (2) the number Issuable Securities described above, with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock (the "Beneficial Ownership Limitation"), then the Company shall immediately deliver to Holder the number of shares of Common Stock of the Company, that can be issued without exceeding the Beneficial Ownership Limitation, and the Company shall not issue shares of Common Stock to the Buyer in excess of the Beneficial Ownership Limitation.

For purposes of the proviso to the immediately preceding sentence, (i) beneficial ownership shall be determined by the Holder in accordance with Section 13(d) of the 1934 Act and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso to the immediately preceding sentence, and PROVIDED THAT the Beneficial Ownership Limitation shall be conclusively satisfied if the applicable notice from Holder includes a signed representation by the Holder that the issuance of the shares in such notice will not violate the Beneficial Ownership Limitation, and the Company shall not be entitled to require additional documentation of such satisfaction. 

The parties agree that, in the event that the Company receives any tender offer or any offer to enter into a merger with another entity whereby the Company shall not be the surviving entity (an "Offer"), or in the event the Company is issuing Default Shares (as defined in the Debenture) to the Buyer, then "4.99%" shall be automatically revised immediately after such offer to read "9.99%" each place it occurs in the first two paragraphs of this Section 4(j) above.  Notwithstanding the above, Holder shall retain the option to either exercise or not exercise its option(s) to acquire Common Stock pursuant to the terms hereof after an Offer.  In addition, the Beneficial Ownership Limitation provisions of this Section 4(j) may be waived by such Holder, at the election of such Holder, upon not less than 61 days' prior notice to the Company, to change the Beneficial Ownership Limitation to any other percentage not less than 4.99% and not in excess of 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of the Debenture held by the Holder or upon exercise of a Warrant held by the Holder, as applicable, and the provisions of this Section 4(j) shall continue to apply.  The limitations on conversion set forth in this subsection are referred to as the "Beneficial Ownership Limitation."  Upon such a change by a Holder of the Beneficial Ownership Limitation from such 4.99% Beneficial Ownership Limitation to such 9.99% limitation, the Beneficial Ownership Limitation may not be further waived by such Holder.  

The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 4(j) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.

           Maximum Exercise of Rights. In the event the Buyer notifies the Company that the exercise of the rights described herein or in the Warrants, or the issuance of Payment Shares or other shares of Common Stock issuable to the Holder under the terms of the Transaction Documents (collectively, "Issuable Shares") would result in the issuance of an amount of Common Stock of the Company that would exceed the maximum amount that may be issued to a Buyer calculated in the manner described in this Section 4(j) of this Agreement, then the issuance of such additional shares of Common Stock of the Company to such Buyer will be deferred in whole or in part until such time as such Buyer is able to beneficially own such Common Stock without exceeding the maximum amount set forth calculated in the manner described in herein. The determination of when such Common Stock may be issued shall be made by each Buyer as to only such Buyer. 

(k)       Equal Treatment Of Buyers.  The terms of Securities issued to Buyers per the terms of this Agreement and the Transaction Documents shall be identical in all material respects.  In addition, neither the Company nor any of its affiliates shall, directly or indirectly, pay or cause to be paid any consideration (immediate or contingent), whether by way of interest, fee, payment for the redemption, conversion of the Debentures or exercise of the Warrants, or otherwise, to any Buyer or holder of Securities, for or as an inducement to, or in connection with the solicitation of, any consent, waiver or amendment. of any terms or provisions of the Transaction Documents, unless such consideration is required to be paid to all Buyers or holders of Securities bound by such consent, waiver or amendment.  The Company shall not, directly or indirectly, redeem any Securities unless such offer of redemption is made pro rata to all Buyers or holders of Securities, as the case may be, on identical terms.  For clarification purposes, this provision constitutes a separate right granted by the Company to each Buyer of Securities and negotiated separately by each Buyer, is intended for the Company to treat the Buyers as a class, and shall not in any way be construed as the Buyers acting in concert or as a group with respect to the purchase, disposition or voting of Securities or otherwise.

(l)     Legal And Due Diligence Fees.  The Company shall pay to BridgePointe Master Fund Ltd. (the "Lead Investor") a non-accountable cash fee of $20,000 at closing as reimbursement for legal services rendered by its attorneys in connection with this Agreement and the purchase and sale of the Debentures and Warrants and as reimbursement for due diligence expenses.  The Lead Investor may withhold such amount out of the Purchase Price for its Debenture.

(m)      Limited Standstill. The Company will deliver to the Buyers on or before the Closing Date and enforce the provisions of irrevocable standstill agreements ("Limited Standstill Agreements") in the form annexed hereto as Exhibit G with the Insiders and other shareholders that are identified on Schedule 4(m) hereto (collectively, the "Designated Insiders").  

(n)       Non-Public Information.  The Company covenants and agrees that from and after the date hereof, neither it nor any other Person acting on its behalf will provide any Buyer or its agents or counsel with any information that constitutes material non-public information, unless prior thereto such Buyer shall have executed a written agreement regarding the confidentiality and use of such information.  The Company understands and confirms that each Buyer shall be relying on the foregoing representations in effecting transactions in securities of the Company.  In the event of a breach of the foregoing covenant by the Company, or any of its Subsidiaries, or any of its or their respective officers, directors, employees and agents, in addition to any other remedy provided herein or in the Transaction Documents, the Company shall publicly disclose any material, non-public information in a Form 8-K within five (5) Business Days of the date that it discloses such information to the Buyer.  In the event that the Company discloses any material, non-public information to the Buyer and fails to publicly file a Form 8-K in accordance with the above, a Buyer shall have the right to make a public disclosure, in the form of a press release, public advertisement or otherwise, of such material, nonpublic information without the prior approval by the Company, its Subsidiaries, or any of its or their respective officers, directors, employees or agents.  No Buyer shall have any liability to the Company, its Subsidiaries, or any of its or their respective officers, directors, employees, stockholders or agents, for any such disclosure.  The Company understands and confirms that each Buyer shall be relying on the foregoing representations in effecting transactions in securities of the Company.

(o)       Omitted.  

(p)    Transactions With Affiliates.  So long as any Debenture or Warrant is outstanding, the Company shall not, and shall cause each of its Subsidiaries not to, enter into, amend, modify or supplement, or permit any Subsidiary to enter into, amend, modify or supplement any agreement, transaction, commitment, or arrangement with any of its or any Subsidiary's officers, directors, employees, persons who were officers or directors at any time during the previous two (2) years, stockholders who beneficially own five percent (5%) or more of the Common Stock, or Affiliates (as defined below) of any thereof, or with any individual related by blood, marriage, or adoption to any such individual or with any entity in which any such entity or individual owns a five percent (5%) or more beneficial interest (each a "Related Party"), except for customary employment arrangements and benefit programs on reasonable terms.  "Affiliate" for purposes hereof means, with respect to any person or entity, another person or entity that, directly or indirectly, (i) has a ten percent (10%) or more equity interest in that person or entity, (ii) has ten percent (10%) or more common ownership with that person or entity, (iii) controls that person or entity, or (iv) shares common control with that person or entity.  "Control" or "Controls" for purposes hereof means that a person or entity has the power, direct or indirect, to conduct or govern the policies of another person or entity.

(q)    Pledge Of Securities.  The Company acknowledges and agrees that the Securities may be pledged by an Investor (as defined in the Registration Rights Agreement) in connection with a bona fide margin agreement or other loan or financing arrangement that is secured by the Securities.  The pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and no Investor effecting a pledge of Securities shall be required to provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Document, including, without limitation, Section 2(e) hereof; provided that an Investor and its pledgee shall be required to comply with the provisions of Section 2(e) hereof in order to effect a sale, transfer or assignment of Securities to such pledgee.  The Company hereby agrees to execute and deliver such documentation as a pledgee of the Securities may reasonably request in connection with a pledge of the Securities to such pledgee by an Investor.

(r)    Additional Registration Statements.  Except for the filing of a registration statement on Form S-8 for Approved Stock Plans (as defined in the Debentures), until such time that all of the Conversion Shares and Warrant Shares can be sold under a registration statement declared effective by the SEC, the Company will not file a registration statement under the 1933 Act relating to securities that are not the Securities without the prior written consent of the Buyers.  

(s)     Omitted.

(t)     Appointment Of Directors Upon Continuing Default.   If any Event of Default (as defined in the Debentures) remains uncured for an aggregate of thirty (30) days or more, the Buyers, at their option, may recommend one nominee for the Company's Board of Directors (such nomination based upon a majority vote of the Buyers, where each Buyer receives a number of votes in proportion to the then outstanding principal amount of its Debenture), if any Event of Default remains uncured for an aggregate of sixty (60) days or more, the Buyers, at their option, may recommend a second nominee for the Company's Board of Directors (using the above described nomination procedure), and if any Event of Default remains uncured for an aggregate of ninety (90) days or more, the Buyers, at their option, may (on one or more occasions thereafter anytime that the nominees of the Required Holders constitute less than a majority of the Company's directors until cured) recommend an additional number of nominees to the Company's Board of Directors (using the above described nomination procedure), such that the Buyers' nominees shall constitute a majority of the Company's Board of Directors (each such nominee referred to singularly as a "Buyers Nominee" and collectively as the "Buyers' Nominees").   The Company agrees that its Board of Directors, or the Nominating Committee of the Board, as applicable, shall appoint as members of the Company's Board of Directors the number of Buyers' Nominee's required pursuant to the immediately preceding sentence.  After such appointment, the Company and its Board of Directors shall use their best efforts to obtain shareholder ratification of the appointment of the Buyers' Nominees at the next shareholder meeting.

5.     SECURITY; SENIOR DEBT.  The Debentures are secured by the Security Agreement of the same date. Except as otherwise set forth on Schedule 5 annexed hereto, the Company hereby represents that the Holder has a senior lien on the Collateral (as defined in the Security Agreement), and agrees not to grant any liens on the Collateral (except for Permitted Liens).  From the Original Issue Date (as defined in the Debentures) of the Debentures through the date that all of the Debentures have been paid in full or converted in full, will not issue nor permit any Subsidiary to issue any securities or incur any indebtedness that is senior to or pari passu with the Debentures and, before entering into any future debt with a third party or permitting any Subsidiary to enter into any future debt with a third party (unless the issuance of such debt is otherwise prohibited under the terms of the Transaction Documents), the Company shall first obtain a subordination agreement, satisfactory to Buyer, from the proposed debt holder.  The Company agrees to take all necessary actions to assist the Holder in perfecting the Holder's lien on each piece of Collateral within fifteen (15) days of the date hereof, including but not limiting to signing and delivering the appropriate forms.  

The Company hereby represents that, except as otherwise set forth on Schedule 5 annexed hereto, there are no liens or encumbrances on the Intellectual Property (as defined in Section 3(j)) or the Collateral.  The Company agrees that from the Original Issue Date of the Debentures through the date that all of the Debentures have been paid in full or converted in full (the "Covered Period"), the Company shall not enter into, create, incur, assume or suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance (collectively, "Liens") upon or in the Intellectual Property or the Collateral owned by the Company or any of its Subsidiaries and shall not assign or transfer any interest in the Patents owned by the Company or any of its Subsidiaries.  In the event that the Company attempts to place any Lien or Liens on the Intellectual Property or the Collateral or attempts to assign or transfer any interest in the Intellectual Property or the Collateral during the Covered Period, the Buyer shall have the right to apply for an injunction in any state or federal courts sitting in the City of New York, borough of Manhattan to prevent such Lien or transfer. Before entering into any future debt with a third party, the Company shall first obtain a subordination agreement, satisfactory to Buyer, from the proposed debt holder.  

6.      LEGENDS. 

(a)  The Conversion Shares and the Warrant Shares, together with any other shares of Common Stock that are issued or issuable pursuant to the Transaction Documents shall be referred to herein as the "Issued Common Shares."  Certificates evidencing the Issued Common Shares shall not contain any legend restricting the transfer thereof (including the legend set forth in Section 2(e) of the Debentures): (i) while a registration statement (including the Registration Statement) covering the resale of such security is effective under the Securities Act, or (ii) following any sale of such Issued Common Shares pursuant to Rule 144, or (iii) if such Issued Common Shares are eligible for sale under Rule 144(k), or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission)(collectively, the "Unrestricted Conditions"). The Company shall cause its counsel to issue a legal opinion to the Company's transfer agent promptly after the Effective Date if required by the Company's transfer agent to effect the issuance of Issued Common Shares without a restrictive legend or removal of the legend hereunder. If the Unrestricted Conditions are met at the time of issuance of Issued Common Shares, then such Issued Common Shares shall be issued free of all legends.  The Company agrees that following the Effective Date or at such time as the Unrestricted Conditions are met or such legend is otherwise no longer required under this Section 6(a), it will, no later than three (3) Trading Days following the delivery by a Buyer to the Company or the Company's transfer agent of a certificate representing Issued Common Shares, as applicable, issued with a restrictive legend (such third Trading Day, the "Legend Removal Date"), deliver or cause to be delivered to such Buyer a certificate representing such shares that is free from all restrictive and other legends.  

 (b) Each Buyer, severally and not jointly with the other Buyers, agrees that the removal of the restrictive legend from certificates representing Securities as set forth in this Section 6 is predicated upon the Company's reliance that each Buyer will sell any Securities pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom, and that if Securities are sold pursuant to a Registration Statement, they will be sold in compliance with the plan of distribution set forth therein.  

         7.      CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the Company hereunder to issue and sell the Debentures and Warrants to a Buyer at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions thereto, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion:

                  (a)    The Buyer shall have executed each of the Transaction Documents which requires Buyer's signature, and delivered the same to the Company.

                  (b)     The Buyer shall have delivered the applicable Purchase Price in accordance with Section 1(b) above.

                  (c)      The representations and warranties of the Buyer shall be true and correct in all material respects as of the date when made and as of the applicable Closing Date as though made at that time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date), and the Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Buyer at or prior to the Closing Date.

                  (d)   No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.

         8.      CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE. The obligation of each Buyer hereunder to purchase the Debenture and Warrants at each Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for such Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion:

                  (a)   The Company shall have executed this Agreement, the Security Documents and the Registration Rights Agreement, and delivered the same to the Buyer.

                  (b)   The Company shall have delivered to such Buyer the duly executed Debenture  and Warrants in accordance with Section 1 above.

                  (c)   The representations and warranties of the Company contained in this Agreement, as modified by the Exhibits and Schedules hereto, shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at such time (except for representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. The Buyer shall have received a certificate or certificates (the "Officer's Certificate"), executed by the President and Chief Executive Officer of the Company, dated as of the applicable Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, but not limited to certificates with respect to the Company's Certificate of Incorporation, By-laws and Board of Directors' resolutions relating to the transactions contemplated hereby.

                  (d)  No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.

                  (e)   Trading in the Common Stock on the Principal Market shall not have been suspended by the SEC or the Nasdaq and, within two (2) business days of the Closing, the Company will make application to the Principal Market, if legally required by Nasdaq, to have the Conversion Shares and the Warrant Shares authorized for quotation.

                  (f)    The Buyer shall have received a Closing Legal Opinion as further described in Section 1(b)(v)(C) hereof.

                  (g)  The Buyer shall have received a Closing Certificate described in Section 1(b)(v)(B) above, dated as of the Closing Date.

(h)     The Company shall have delivered to the Buyer executed Accountant and Lawyer Letters, as described in Section 3(w) hereof.

(i)     In accordance with the terms of the Security Documents, the Company shall have delivered to the Buyer (i) the Security Agreement, and (ii) appropriate financing statements on Form UCC-1 to be duly filed in such office or offices as may be necessary or, in the opinion of the Buyer, desirable to perfect the security interests purported to be created by each Security Document.

(j)     Within six (6) Business Days prior to the Closing, the Company shall have delivered or caused to be delivered to each Buyer (A) certified copies of UCC search results, listing all effective financing statements which name as debtor the Company or any of its Subsidiaries filed in the prior five (5) years to perfect an interest in any assets thereof, together with copies of such financing statements, none of which, except as otherwise agreed in writing by the Buyers, shall cover any of the Collateral (as defined in the Security Documents) and the results of searches for any tax lien and judgment lien filed against such Person or its property, which results, except as otherwise agreed to in writing by the Buyers shall not show any such Liens (as defined in the Security Documents); and (B) a perfection certificate, duly completed and executed by the Company and each of its Subsidiaries, in form and substance satisfactory to the Buyers.

                  (k)   The Company shall have received funds from Buyers representing their respective Purchase Prices in an amount exceeding the Minimum Amount, in the aggregate and not exceeding the Maximum Amount, in the aggregate.

(l)    No Material Adverse Changes have occurred since the date that the Buyer executed this Agreement.

     

    9.      GOVERNING LAW; MISCELLANEOUS.

(a)   Governing Law.  All questions concerning the construction, validity, enforcement and interpretation of this Agreement and the other Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof.  Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York.  Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding.  If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys' fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.  THE PARTIES HEREBY WAIVE ALL RIGHTS TO, AND AGREES NOT TO REQUEST, A TRIAL BY JURY FOR ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR BY ANY OF THE TRANSACTION DOCUMENTS.  

                  (b)    Counterparts; Signatures By Facsimile. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

                  (c)     Headings. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.

                  (d)  Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction.

                  (e)   Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and supersede all previous communication, representation, or Agreements whether oral or written, between the parties with respect to the matters covered herein. Except as specifically set forth herein or therein, neither the Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters.  The Agreement may not be orally modified. Only a modification in writing, signed authorized representatives of both parties will be enforceable.  The parties waive the right to rely on any oral representations made by the other party, whether in the past or in the future, regarding the subject matter of the Agreement, the instruments referenced herein or any other dealings between the parties related to investments or potential investments into the Company or any securities transactions or potential securities transactions with the Company.

(f)      Independent Nature Of Buyers' Obligations And Rights.  The obligations of each Buyer under any Transaction Document are several and not joint with the obligations of any other Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any other Buyer under any Transaction Document.  Nothing contained herein or in any Transaction Document, and no action taken by any Buyer pursuant thereto, shall be deemed to constitute the Buyers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Buyers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents.  Each Buyer shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Buyer to be joined as an additional party in any proceeding for such purpose.  Each Buyer has been represented by its own separate legal counsel in its review and negotiation of the Transaction Documents.  

                  (g)     Notices. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be:

         If to the Company, to:

Attn:  Dyron M. Watford, CFO

Universal Energy Corp.

30 Skyline Drive

Lake Mary, FL 32746

Office:  800-975-2076

Local:   407-771-0312

Cell:  407-694-3714

Fax:  800-805-4561

         With copy to:

Joseph Sierchio, Esq.

Sierchio Greco & Greco, LLP

110 East 59th Street, 29th Floor

New York, New York 10022

Tel. (212) 246-3030

Fax (212) 486-0208

         If to a Buyer: To the address set forth immediately below such

         Buyer's name on the signature pages hereto.

Each party shall provide notice to the other party of any change in address.

                  (h)    Successors And Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Neither the Company nor any Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding the foregoing, subject to Section 2(f), Buyer may assign its rights hereunder to any person that purchases Securities in a private transaction from a Buyer or to any of its "Affiliates," as that term is defined under the 1934 Act, without the consent of the Company.

                  (i)    Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

                  (j)    Survival. The representations and warranties of the parties hereto contained in this Agreement shall survive the closing hereunder for the maximum period permitted by applicable law notwithstanding any due diligence investigation conducted by or on behalf of the Buyer. 

                  (k)  Indemnification.  The Company (the "Indemnifying Party") agrees to indemnify and hold harmless the Buyer and all its officers, directors, employees, agents, members and managers (the "Indemnified Party") for loss or damage arising as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants set forth in Sections 3 and 4 hereof or any of its covenants and obligations under this Agreement or the Registration Rights Agreement, including advancement of expenses as they are incurred with respect to claims by third parties.

Promptly after receipt of notice of the commencement of any action against an Indemnified Party, such Indemnified Party shall notify the Indemnifying Party in writing of the commencement thereof and the basis hereunder upon which a claim for indemnification is asserted, but the failure to do so shall not relieve the Indemnifying Party of its obligations hereunder except to the extent the Indemnifying Party is materially prejudiced by such failure. In the event of the commencement of any such action, the Indemnifying Party shall be entitled to participate therein and to assume the defense thereof with counsel satisfactory to the Indemnified Party, and, after notice from the Indemnifying Party to the Indemnified Party of its election so to assume the defense thereof, the Indemnifying Party shall not be liable to the Indemnified Party hereunder for any legal expenses (including attorneys' fees) subsequently incurred by such Indemnified Party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, PROVIDED, HOWEVER, that, if the defendants in any such action include both the Indemnified Party and the Indemnifying Party and the Indemnified Party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the Indemnifying Party or if the interests of the Indemnified Party reasonably may be deemed to conflict with the interests of the Indemnifying Party, the Indemnified Party shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Indemnifying Party as incurred. 

As to cases in which the Indemnifying Party has assumed and is providing the defense for the Indemnified Party, the control of such defense shall be vested in the Indemnifying Party; provided that the consent of the Indemnified Party shall be required prior to any settlement of such case or action, which consent shall not be unreasonably withheld. As to any action, the party which is controlling such action shall provide to the other party reasonable information (including reasonable advance notice of all proceedings and depositions in respect thereto) regarding the conduct of the action and the right to attend all proceedings and depositions in respect thereto through its agents and attorneys, and the right to discuss the action with counsel for the party controlling such action. 

                  (l)   Publicity. The Company and the Buyer shall have the right to review a reasonable period of time before issuance of any press releases, filings with the SEC, NASD or any stock exchange or interdealer quotation system, or any other public statements with respect to the transactions contemplated hereby; PROVIDED, HOWEVER, that the Company shall be entitled, without the prior approval of the Buyer, to make any press release or public filings with respect to such transactions as is required by applicable law and regulations (although the Buyer shall be consulted by the Company in connection with any such press release prior to its release and shall be provided with a copy thereof and be given an opportunity to comment thereon). The Company agrees that it will not disclose, and will not include in any public announcement, the name of the Buyers without the consent of the Buyers unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement.

                  (m)     Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

                  (n)     No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

                  (p)    Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to Buyer, by vitiating the intent and purpose of the transactions contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement, that Buyer shall be entitled, in addition to all other available remedies in law or in equity, to an injunction or injunctions to prevent or cure any breaches of the provisions of this Agreement and to enforce specifically the terms and provisions of this Agreement, without the necessity of showing economic loss and without any bond or other security being required.

10.    NUMBER OF SHARES AND PURCHASE PRICE.   Buyer subscribes for a Debenture in the Original Principal Amount equal to the Original Principal Amount set forth on the Schedule of Buyers against payment by wire transfer in the amount of the Purchase Price (taking into account the Original Issue Discount)(the "Subscription Amount") set forth opposite such Buyer's name on the Schedule of Buyers (less any offset of expenses as permitted hereunder.

The undersigned acknowledges that this Agreement and the subscription represented hereby shall not be effective unless accepted by the Company as indicated below.

 

IN WITNESS WHEREOF, the undersigned Buyer does represent and certify under penalty of perjury that the foregoing statements are true and correct and that Buyer by the following signature(s) executed this Agreement.

Dated this _____ day of _____________, 2007.

 

 

 

_____________________________________________________________________
                      Your Signature  PRINT EXACT NAME IN WHICH YOU WANT 

THE SECURITIES TO BE REGISTERED

Buyer's Subscription Amout: $__________________.

Buyer's Entity Type and Residency: ______________________.    

____________________________________DELIVERY INSTRUCTIONS:

Name: Please PrintPlease type or print address where your security is to be delivered 

____________________________________ATTN.:___________________________________________

Title/Representative Capacity (if applicable)

______________________________________________________________________________________

Name of Company You Represent (if applicable)Street Address

______________________________________________________________________________________

Place of Execution of this AgreementCity, State or Province, Country, Offshore Postal Code

__________________________________________________

Phone Number (For Federal Express) and Fax Number (re: Notice)

 

 

 

THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF 

$ _________________ ("SUBSCRIPTION AMOUNT") ON THE _____ DAY OF SEPTEMBER, 2007.

UNIVERSAL ENERGY CORP.

 
By:________________________________

Print Name:______________________________

Title:_______________________________

SCHEDULE OF BUYERS

 

	
(1)
	
 
	
(2)
	
 
	
(3)
	
 
	
(4)
	
 
	
(5)
	
 
	
(6)

	
Buyer
	
 
	
Address and

Facsimile Number
	
 
	
Aggregate

Principal of Debenture*
	
 
	
Aggregate

Number of

Warrant

Shares
	
 
	
Purchase

Price
	
 
	
Legal Representative's

Address and

Facsimile Number

	
 
	
 
	
 
	
 
	
 
	
 
	
 
	
 
	
 
	
 
	
 

	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	
Total:
	 	 	 	
$_________
	 	
________
	 	
$_______
	 	 

* = After accounting for a 20% Original Issue Discount.THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN

EXHIBIT 10.2

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN

REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE"ACT") OR APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO COUNSEL TO THE BORROWER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.

 

Original Issue Date: September ____, 2007

Initial Conversion Price (subject to adjustment herein): $0.80

SENIOR SECURED CONVERTIBLE DEBENTURE 

DUE AUGUST 31, 2009

FOR VALUE RECEIVED, UNIVERSAL ENERGY CORP., a Delaware corporation (hereinafter called the "Borrower" or "Company"), hereby promises to pay to the order of ________________., a ___________________ Company or its registered assigns (the "Holder") the sum of ________ Million U.S. Dollars (U.S. $__________), on August 31, 2009 (the "Maturity Date"), or such earlier date as this Debenture is required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture in accordance with the provisions hereof.  This Convertible Debenture (including all Convertible Debentures issued in exchange, transfer or replacement hereof, this "Debenture") is one of an issue of Convertible Debentures issued pursuant to the Securities Purchase Agreement (as defined in Section 1 below) on the Closing Date (collectively, the "Debentures" and such other Convertible Debentures, the "Other Debentures").   

Except as otherwise expressly provided herein, this Debenture may not be prepaid by the Borrower. All payments due hereunder (to the extent not converted into Common Stock, par value $0.0001 per share, of the Borrower (the "Common Stock") in accordance with the terms hereof) shall be made in lawful money of the United States of America provided that, to the extent that any accrued Interest has not been paid when due, at the option of the Holder, in whole or in part, such accrued and unpaid Interest may, upon written notice to the Borrower, be added to the principal amount of this Debenture, in which event Interest shall accrue thereon in accordance with the terms of this Debenture and such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Debenture.  All payments shall be made at the address of the Holder as set forth in the Securities Purchase Agreement (as defined in Section 1 below) or at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Debenture.  Whenever any amount expressed to be due by the terms of this Debenture is due on any day which is not a Business Day (as defined below), the same shall instead be due on the next succeeding day which is a Business Day.    

 This Debenture is subject to the following additional provisions:

Section 1.Certain Definitions.  Capitalized terms used and not otherwise defined herein that are defined in that certain Securities Purchase Agreement, of date even herewith, pursuant to which the Debenture was originally issued (the "Securities Purchase Agreement" or the "Purchase Agreement"), shall have the meanings given such terms in the Securities Purchase Agreement.  For the purposes hereof, the following terms shall have the following meanings:

"1933 Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated hereunder.

"1934 Act" means the Securities Exchange Act of 1934, as amended.

"Bankruptcy Event" means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof; (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement; (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment; (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.

"Business Day" shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the City of New York, New York are authorized or required by law or executive order to remain closed. 

"Buyer(s)" shall have the meaning ascribed to it in the Securities Purchase Agreement.

"Closing Date" means the Trading Day when (i) all of the Holder's Transaction Documents have been executed and delivered by the applicable parties thereto, (ii) all conditions precedent to (a) each Holder's obligations to pay the Subscription Amount and (b) the Company's obligations to deliver the Securities have been satisfied or waived, and (iii) Holder shall have delivered the purchase price for the Debenture to the Company in accordance with the Securities Purchase Agreement.

"Closing Bid Price," as of any date, means the last bid price of the Common Stock on the Principal Market as reported by Bloomberg or, if the principal market is not the principal trading market for such security, the last bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, Inc., or if no last bid price of such security is available on the Principal Market for such security or in any of the foregoing manners, the average of the bid prices of any market makers for such security that are listed in the "pink sheets" by the National Quotation Bureau, Inc.  If the Closing Bid Price cannot be calculated for such security on such date in the manner provided above, the Closing Bid Price shall be the fair market value as mutually determined by the Company and the Holder.

"Closing Price," as of any date, means the last sale price of the Common Stock on the Principal Market as reported by Bloomberg or, if the principal market is not the principal trading market for such security, the last sale price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, Inc., or if no last sale price of such security is available on the Principal Market for such security or in any of the foregoing manners, the average of the bid prices of any market makers for such security that are listed in the "pink sheets" by the National Quotation Bureau, Inc.  If the Closing Price cannot be calculated for such security on such date in the manner provided above, the Closing Price shall be the fair market value as mutually determined by the Company and the Holder.

"Commission" means the Securities and Exchange Commission.

"Common Stock Equivalents" shall have the meaning ascribed to it in the Securities Purchase Agreement.

"Conversion Amount" shall have the meaning set forth in Section 3(a)(iv) below.

"Convertible Securities" means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.

"Debentures" shall be deemed to refer to this Debenture, as originally executed, or if later amended or supplemented, then as so amended or supplemented, all other convertible debentures issued pursuant to the Securities Purchase Agreement and all convertible debentures issued in replacement hereof or thereof or otherwise with respect hereto or thereto.  

"Default Conversion Sum" shall have the meaning set forth in Section 11(a) below.

"Effective Date" shall mean the date that the initial Registration Statement that the Company is required to file pursuant to the Registration Rights Agreement has been declared effective by the Securities and Exchange Commission.

"Eligible Market" shall have the meaning ascribed to it in the Securities Purchase Agreement by and between the Company and the Holder.

"Equity Payment Conditions" shall mean, during each Trading Day of the period in question, (i) the Company shall have duly honored all Conversions scheduled to occur or occurring by virtue of one or more Notices of Conversion, if any, (ii) all Required Cash Payments (as defined in Section 10(a) below) shall have been paid; (iii) no (A) Events of Default or (B) event that with the passage of time or giving of notice would constitute an Event of Default, have occurred that have not been cured, (iv) there is an effective Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all of the Conversion Shares, Warrant Shares and other shares issued or issuable pursuant to the Transaction Documents (and the Company believes, in good faith, that such effectiveness will continue uninterrupted for the foreseeable future or such shares may be resold, without restriction, pursuant to Rule 144(k)), (v) the Common Stock is trading on an Eligible Market and all of the shares issuable pursuant to the Transaction Documents are listed for trading on an Eligible Market (and the Company believes, in good faith, that trading of the Common Stock on a Principal  Market will continue uninterrupted for the foreseeable future), (vi) such issuance would be permitted in full without violating Section 3(a)(ii) hereof or the rules or regulations of the Eligible Market on which such shares are listed or quoted, (vii) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of all of the shares issuable pursuant to the Transaction Documents, (viii) the Company shall not have been a party to a Major Transaction and there shall not have occurred the public announcement of a pending, proposed or intended Major Transaction which has not been abandoned, terminated or consummated, (ix) all of the shares issued or issuable pursuant to the transaction proposed would not violate the Beneficial Ownership Limitation, and (x) the average daily trading dollar volume of the Common Stock for each three consecutive Trading Day throughout such period exceeds $100,000.

"Filing Deadline" shall have the meaning ascribed to it in the Registration Rights Agreement.

"Holders" shall mean the Holder, and the holders of Other Debentures issued pursuant to the Securities Purchase Agreement.

"Indebtedness" shall have the meaning ascribed to it in the Securities Purchase Agreement. 

"Indebtedness Lock-Up Exceptions" means (a) Indebtedness evidenced by the Debentures or issuances to the Holders as contemplated by the Transaction Documents; (b) the Indebtedness existing on the Original Issue Date as set forth on Schedule 3.1(mm) attached to the Securities Purchase Agreement, provided that the principal amount thereof is not increased or the terms thereof are not otherwise amended or modified after the Closing Date; and (c) Indebtedness to trade creditors incurred in the ordinary course of business.  For purposes of clarification, it is expressly agreed and understood that the classification of Indebtedness as an "Indebtedness Lock-Up Exception" does not cause such Indebtedness to be exempted from the Subsequent Issuance Adjustments (as defined in Section 6(a) below and as defined in the Warrants), the prohibition against the issuance of Variable Equity Securities (as defined in Section 4(e)(ii) of the Securities Purchase Agreement), the Buyer's Rights of Participation (as defined in Section 4(e)(iii) of the Securities Purchase Agreement) or from any other provisions of the Transaction Documents, except that the Indebtedness Lock-Up Exceptions do constitute an exception to the Indebtedness Negative Covenant specified in Section 9(d) hereof.

"Interest" shall heave the meaning set forth in Section 2 below.

"Interest Share Conversion Price" shall mean 80% of the average of the three (3) lowest Closing Bid Prices of the Common Stock over the twenty (20) Trading Day period ending on the Trading Day immediately preceding the applicable Interest Payment Date.

"Issuable Shares" shall heave the meaning set forth in Section 3(a)(iii) below.

"Market Price," as of any date, means the Volume Weighted Average Price (as defined herein) of the Common Stock during the five (5) consecutive Trading Day period immediately preceding the date in question.

 "Mandatory Redemption Premium" shall mean 125%.  

"Maximum Monthly Share Amount" means 20% of the aggregate dollar trading volume (as reported on Bloomberg) of the Common Stock on the Principal Market over the twenty (20) consecutive Trading Day period immediately prior to the applicable Interest Payment Date or Monthly Redemption Date, as applicable.

"Ongoing Share Reservation Requirement" shall have the meaning ascribed to it in the Securities Purchase Agreement.

"Options" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

"Original Issue Date" shall mean the date of the first issuance of any Debenture regardless of the number of transfers of any particular Debenture.

"Parent Entity" of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common stock or equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.

"Permitted Liens" shall have the meaning ascribed to it in the Securities Purchase Agreement.

"Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity and a government or any department or agency thereof.

"Principal Market" shall have the meaning ascribed to it in the Securities Purchase Agreement by and between the Company and the Holder.

"Redemption" shall mean any redemption of the Debenture hereunder, including but not limited to a Redemption Upon Major Transaction, a Mandatory Redemption, and an Automatic Redemption.

"Redemption Amount" shall mean any amount that is payable to the Holder pursuant to a Redemption.

"Redemption Date" shall mean the date of any Redemption of the Debenture hereunder.

"Registration Rights Agreement" shall have the meaning ascribed to it in the Securities Purchase Agreement.

"Registration Statement(s)" shall have the meaning ascribed to it in the Registration Rights Agreement.

"Required Cash Payment" shall have the meaning set forth in Section 10(a) below.

"Required Holders" shall mean Holders holding at least two-thirds (2/3) of the then outstanding principal amount of Debentures.

"Shares" shall mean the shares of Common Stock issuable upon Conversion of the Debentures. 

"Subscription Amount" shall mean, as to each Buyer, the amount to be paid for the Debenture purchased pursuant to the Securities Purchase Agreement as specified in Section 10 of the Securities Purchase Agreement, in United States Dollars and in immediately available funds.

"Subsidiaries" shall have the meaning ascribed to it in the Securities Purchase Agreement.

"Trading Day" shall mean any day on which the Common Sock is traded for any period on the PRINCIPAL MARKET, or on the principal securities exchange or other securities market on which the Common Stock is then being traded.  

"Transaction Documents" shall have the meaning ascribed to it in the Securities Purchase Agreement.

"Variable Equity Securities" shall have the meaning ascribed to it in the Securities Purchase Agreement.

The "Volume Weighted Average Price" or "VWAP" for any security as of any date means the volume weighted average sale price on the Principal Market, as reported by, or as calculated based upon data reported by, Bloomberg Financial Markets or an equivalent, reliable reporting service mutually acceptable to and hereafter designated by holders of a majority in interest of the Debentures and the Company ("BLOOMBERG") or, if no volume weighted average sale price is reported for such security, then the last closing trade price of such security as reported by Bloomberg, or, if no last closing trade price is reported for such security by Bloomberg, the average of the closing trade prices of any market makers for such security that are listed in the "pink sheets" by the National Quotation Bureau, Inc.  If the Volume Weighted Average Price is to be determined over a period of more than one Trading Day, then "Volume Weighted Average Price" for the period shall mean the volume weighted average of the daily Volume Weighted Average Prices, determined as set forth above, for each Business Day during the period.  If the volume weighted average price cannot be calculated for such security on such date in the manner provided above, the volume weighted average price shall be the fair market value as mutually determined by the Company and the holders of a majority in interest of the Debentures being converted for which the calculation of the volume weighted average price is required in order to determine the Conversion Price of such Debentures. 

"Warrant" shall have the meaning ascribed to it in the Securities Purchase Agreement.

"Warrant Shares" shall have the meaning ascribed to it in the Warrant.

Section 2.Interest.  The Company shall pay interest ("Interest") to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture at the rate of eight percent (8%) per annum (the "Interest Rate") from the Original Issue Date (as defined herein) until the same becomes due and payable, whether at maturity or upon acceleration or otherwise.  Interest shall commence accruing on the Original Issue Date, shall be computed on the basis of a 365-day year and the actual number of days elapsed and shall be payable monthly (as further described below), in cash or, to the extent not yet paid, at maturity or upon acceleration in accordance with the terms hereof.  Payments of Interest shall be due and payable monthly, in arrears, on the first Business Day of each month after the Original Issue Date, (in each case, if not a Business Day, then on the next Business Day) occurring after the Original Issue Date, (ii) on each Conversion Date (as defined in Section 3(d))(as to that principal amount then being converted), (iii) on each Redemption Date, and (iv) on the Maturity Date (as defined above) (each such date, an "Interest Payment Date"). Upon five (5) Trading Days advance written notice to the Holder, provided that the Equity Payment Conditions (as defined in Section 1 above) have been met on each of the twenty (20) Trading Days immediately preceding the date of payment of Interest Payment Shares (as defined below) and provided that Interest is paid timely, the Company may pay the Interest payable on this Debenture with registered, free-trading shares of Common Stock (as defined below)("Interest Payment Shares") with an attributed value per share equal to the Interest Share Conversion Price as determined on the Interest Payment Date that such Interest is due to be paid hereunder (the "Interest Conversion Price"), or, if such shares are paid late, as calculated on the date that such Interest Payment Shares are delivered to the Holder, whichever is less.  Notwithstanding the above, the Company may not issue a number of shares of Common Stock in excess of the Maximum Monthly Interest Share Amount toward the payment of Interest and Monthly Redemptions (as defined in Section 7(b), as to all outstanding Debentures, in the aggregate, during any rolling twenty (20) Trading Day period (the "Share Payment Restriction").

Notwithstanding anything herein to the contrary herein, the Company shall not be entitled to pay Interest in shares of Common Stock or pay any portion of a Monthly Redemption in Common Stock if, and to the extent that, in the sole determination of the Holder, the issuance of such shares of Common Stock would cause the Beneficial Ownership Limitation of Section 3(a)(ii) to be exceeded.  In the event the Company provides notice of its intention to pay interest in shares of Common Stock and because of the Beneficial Ownership Limitation it is unable to issue such shares of Common Stock to the Holder, the Holder, upon the Company's written request, must promptly provide documentation to the Company demonstrating that the Beneficial Ownership Limitation would be exceeded by payment of Interest in shares of Common Stock.  

 

Section 3.Conversion.  

(a)    Conversion Right.

(i)    Conversion Timing and Amount.  Subject to the limitations on Conversion contained herein, the record Holder of this Debenture shall have the right (a "Conversion Right") from time to time, and at any time on or after the Original Issue Date hereof to convert any of all of the Debentures (plus any accrued and unpaid Interest, and other Required Cash Payments) into fully paid and non-assessable shares of Common Stock, or any shares of capital stock or other securities of the Company into which such Common Stock shall hereafter be changed or reclassified, at the Conversion Price (as defined in Section 3(b) below, subject to adjustment as provided herein) determined as provided herein (a "Conversion").   The Conversion Rights set forth in this Section 3 shall remain in full force and effect immediately from the Original Issue Date until the Debenture is paid in full regardless of the occurrence of an Event of Default.

(ii)    Limitation On Conversion.  Notwithstanding the above, in no event shall the Holder be entitled to convert any portion of this Debenture in excess of that portion of this Debenture upon Conversion of which (nor shall the Company be permitted to pay Interest in shares of Common Stock to the extent that) the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and any applicable affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Debenture, the unexercised Warrants or the unexercised or unconverted portion of any other security of the Company subject to a limitation on Conversion or exercise analogous to the limitations contained herein)(the "Beneficially Owned Shares") and (2) the number of shares of Common Stock issuable upon the Conversion of the portion of the Debenture with respect to which the determination of this proviso is being made or upon the payment of Interest in shares of Common Stock with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% (the "Maximum Percentage") of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Debenture held by the Holder  (the "Beneficial Ownership Limitation").  For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined by the Holder in accordance with Section 13(d) of the Exchange Act and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such proviso in the immediately preceding sentence, and PROVIDED THAT the Beneficial Ownership Limitation shall be conclusively satisfied if the applicable Notice of Conversion includes a signed representation by the Holder, if requested by the Company, that the issuance of the shares in such Notice of Conversion will not violate the Beneficial Ownership Limitation, and the Company shall not be entitled to require additional documentation of such satisfaction.   

The parties agree that, in the event that the Company receives any tender offer or any offer to enter into a merger with another entity whereby the Company shall not be the surviving entity (an "Offer"), in the event of a Forced Conversion by the Company in accordance with Section 3(i) hereof, or in the event that Default Shares are being issued to the Holder pursuant to Section 11 hereof, then the Maximum Percentage shall be automatically increased immediately after such Offer to read "9.99%" each place that "4.99%" occurs in the first paragraph of this Section 3(a)(ii) above.  Notwithstanding the above, Holder shall retain the option to either exercise or not exercise its option(s) to acquire Common Stock pursuant to the terms hereof after an Offer.  The Beneficial Ownership Limitation provisions of this Section 3(a)(ii) may be waived by such Holder, at the election of such Holder, upon not less than 61 days' prior notice to the Company, to change the Maximum Percentage to any other percentage not less than 4.99% and not in excess of 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of this Debenture held by the Holder and the provisions of this Section 3(a)(ii) shall continue to apply.  Any such increase or decrease to the Maximum Amount will apply only to the Holder and not to any other holder of Debentures.  Upon such a change by a Holder of the Beneficial Ownership Limitation from such 4.99% limitation to such 9.99% limitation, the Beneficial Ownership Limitation may not be further waived by such Holder, provided that, if an Event of Default occurs, thereafter the Beneficial Ownership Limitation provisions of this Section 3(a)(ii) may be waived by such Holder, at the election of such Holder, upon not less than 61 days' prior notice to the Company, to change the Maximum Percentage to any other percentage not less than 4.99% (and not limited to 9.99%) of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of this Debenture held by the Holder and the provisions of this Section 3(a)(ii) shall continue to apply.  The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 3(ii) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. 

(iii)    Maximum Exercise of Rights. In the event the Holder notifies the Company that the exercise of the rights described in this Section 3 or the issuance of Interim Conversion Shares (as defined in Section 3(e)(iii) hereof), Payment Shares (as defined in the Securities Purchase Agreement) or other shares of Common Stock issuable to the Holder under the terms of the Transaction Documents (collectively, "Issuable Shares") would result in the issuance of an amount of Common Stock that would exceed the maximum amount that may be issued to a Holder calculated in the manner described in Section 3(a)(ii) of this Agreement, then the issuance of such additional shares of Common Stock to such Holder will be deferred in whole or in part until such time as such Holder is able to beneficially own such Common Stock without exceeding the maximum amount calculated in the manner described in Section 3(a)(ii) of this Agreement. The determination of when such Common Stock may be issued without violating the Beneficial Ownership Limitations shall be made by each Holder as to only such Holder.

(iv)    Calculation of Conversion Amount.  The number of shares of Common Stock to be issued upon each Conversion of this Debenture shall be determined by dividing the Conversion Amount (as defined herein) by the applicable Conversion Price.  The term "Conversion Amount" means, with respect to any Conversion of the Debenture, the sum of (1) the principal amount of the Debenture to be converted in such Conversion, PLUS (2) all accrued and unpaid Interest thereon for the period beginning on the Original Issue Date and ending on the Conversion Date (as defined in Section 3(d) hereof), PLUS (3) at the Holder's option, any other Required Cash Payment owed to the Holder. 

(b)    Conversion Price. The "Conversion Price" shall initially equal $0.80 (the "Initial Conversion Price")(subject to resets and adjustments pursuant to the terms of this Debenture and subject to equitable adjustments for stock splits, stock dividends or rights offerings by the Company relating to the Company's securities or the securities of any Subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events). 

 

(c)    Reservation of Shares. 

(i)  Increase and Maintenance of Authorized and Reserved Amount.  The Company represents that the aggregate number of its authorized shares of Common Stock is at least 250,000,000 shares and covenants that it will initially reserve (the "Initial Share Reservation") from its authorized and unissued Common Stock a number of shares of Common Stock equal to at least 150% of the initial principal amount of this Debenture, divided by the Conversion Price in effect on the Original Issue Date of this Debenture, free from preemptive rights, to provide for the issuance of Common Stock upon the Conversion of this Debenture. Company further covenants that, beginning on the Original Issue Date hereof, and continuing until all of the Debentures have been converted, redeemed or otherwise satisfied in accordance with their terms, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares (the "Required Debenture Reserve Amount"), free from preemptive rights, equal to 150% of the number of shares as shall from time to time be necessary to provide for the issuance of Common Stock upon the full Conversion of all of the Debentures (without regard to any limitations on conversions). The Company represents that upon issuance, such Shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Company shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which the Debenture shall be convertible at the then applicable Conversion Price, or if the Conversion Price shall be adjusted, the Company shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for Conversion of the outstanding portion of this Debenture.  

 (ii) Insufficient Authorized Shares.  If at any time while any of the Notes remain outstanding the Company does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Debentures and exercise of the Warrants at least a number of shares of Common Stock equal to the Required Reserve Amount (an "Authorized Share Failure"), then the Company shall immediately take all action necessary to increase the Company's authorized shares of Common Stock to an amount sufficient to allow the Company to reserve the Required Reserve Amount for the Notes and Warrants then outstanding.  Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than sixty (60) days after the occurrence of such Authorized Share Failure, the Company shall hold a meeting of its stockholders for the approval of an increase in the number of authorized shares of Common Stock.  In connection with such meeting, the Company shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders' approval of such increase in authorized shares of Common Stock and to cause its board of directors to recommend to the stockholders that they approve such proposal.

The Company shall use its best efforts to authorize and reserve a sufficient number of shares of Common Stock as soon as practicable following the earlier of (i) such time that the Holder notifies the Company or that the Company otherwise becomes aware that there are or likely will be insufficient authorized, reserved and unissued shares to allow full Conversion of the outstanding amount of the Debenture and full exercise of the outstanding amount of Holder's Warrants, based upon the Holder's Reserved Share Allocation (as defined below) (as defined below).  The Company shall send notice to the Holder of the authorization of additional shares of Common Stock, the Authorization Date. 

(iii)  Allocations of Reserve Amount.  The initial number of shares of Common Stock authorized and reserved for conversions of the Debentures and exercise of the Warrants and each increase in the number of shares so reserved (collectively, the "Actual Reserved Amount") shall be allocated pro rata among the holders (the "Reserved Share Allocation") of the Debentures  based on the aggregate number of Shares into which all of the Holder's outstanding Debenture would be convertible and into which all of Holder's outstanding Warrants would be exercisable at the time of the increase (collectively, the "Fully Diluted Holdings").  In the event a holder shall sell or otherwise transfer such Holder's Debenture, each transferee shall immediately be allocated a pro rata portion of such transferor's Reserved Share Allocation.  Any portion of the Reserved Share Allocation which remains allocated to any Person or entity which does not hold any Debenture shall be allocated to the remaining holders of Debentures, pro rata based on the Holder's Fully Diluted Holdings at the time of such allocation.  

(d)    Method of Conversion.

(i)  Mechanics of Conversion.  Subject to Section 3(a) and the other provisions of this Debenture, this Debenture may be converted into Common Stock by the Holder in whole or in part at any time and from time to time after the Original Issue Date, by (A) submitting to the Company a duly executed notice of Conversion in the form attached hereto as Exhibit A ("Notice of Conversion") by facsimile dispatched prior to Midnight, New York City time (the "Conversion Notice Deadline") on the date specified therein as the Conversion Date (as defined herein) (or by other means resulting in written notice to the Company on the date specified therein as the Conversion Date) to the office of the Company; which notice shall specify the principal amount of this Debenture to be converted (plus the dollar amount of any accrued but unpaid Interest and other Required Cash Payments that the Holder elects to convert into Common Stock), the applicable Conversion Price, and the number of shares of Common Stock issuable upon such Conversion; and (B) subject to Section 3(d)(vii), surrendering the Debenture at the principal office of the Company.

(ii)  Conversion Date.  The "Conversion Date" shall be the date specified in the Notice of Conversion, provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in, or reasonably expected to result in, written notice) to the Company or its transfer agent ("Transfer Agent") before Midnight, New York City time, on the date so specified, otherwise the Conversion Date shall be the date that the Notice of Conversion (or a facsimile thereof) is first received by the Company or its Transfer Agent.  The Person or Persons entitled to receive the shares of Common Stock issuable upon Conversion shall be treated for all purposes as the record holder or holders of such securities as of the Conversion Date.

(iii)  Delivery of Common Stock Upon Conversion.  Upon submission of a Notice of Conversion, the Company shall, by no later than the third (3rd) Business Day after the Conversion Date (the "Conversion Shares Delivery Deadline"), issue and deliver (or cause its Transfer Agent so to issue and deliver) in accordance with the terms hereof and the Securities Purchase Agreement to or upon the order of the Holder that number of shares of Common Stock ("Conversion Shares") for the principal amount of this Debenture (plus the dollar amount of any accrued but unpaid Interest and other Required Cash Payments that the Holder elects to convert into Common Stock) converted as shall be determined in accordance herewith.  Upon the Conversion of this Debenture, the Company shall, at its own cost and expense, take all necessary action, including obtaining and delivering an opinion of counsel to assure that the Company's Transfer Agent shall issue stock certificates in the name of Holder (or its nominee) or such other Persons as designated by Holder and in such denominations to be specified at Conversion representing the number of shares of Common Stock issuable upon such Conversion. The Company warrants that no instructions other than these instructions have been or will be given to the Transfer Agent of the Common Stock and that the Shares will be free-trading, and freely transferable, and will not contain a legend restricting the resale or transferability of the Shares provided the Shares are being sold pursuant to an effective registration statement covering the Shares or are otherwise exempt from registration.

(iv)  Delivery Failure; Revocation of Conversion.  In addition to any other remedies which may be available to the Holder, in the event that the Company fails for any reason to effect delivery of the Conversion Shares by the Conversion Shares Delivery Deadline, or fails to effect delivery of Default Shares by the Default Share Delivery Deadline (as defined in Section 11 hereof) (each, a "Delivery Failure"), the Holder, at its option, will be entitled to revoke all or part of the relevant Notice of Conversion (a "Conversion Revocation") or rescind all or part of a Default Conversion Notice (as defined in Section 11) (a "Default Conversion Revocation") or rescind all or part of a Major Transaction Conversion Notice (as defined in Section 4) (a "Major Transaction Conversion Revocation") or rescind all or part of the notice of Redemption, including but not limited to a notice of Mandatory Redemption (a "Redemption Revocation"), as applicable, by delivery of a notice to such effect to the Company whereupon the Holder shall regain the rights of a Holder of this Debenture with respect to such unconverted portions of this Debenture and the Company and the Holder shall each be restored to their respective positions immediately prior to the delivery of such notice. 

(v)  Obligation of Company to Deliver Common Stock.  Upon receipt by the Company of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such Conversion, and, except as otherwise provided in this Debenture, unless the Company defaults on its obligations hereunder, all rights with respect to the portion of this Debenture being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such Conversion.  The provisions of this subsection are subject to the provisions of Section 3(d)(iv) hereof. 

(vi)  Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion, or Upon Submission for Legend Removal. In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates (without legends, if the Unrestricted Conditions have been met) by the Conversion Shares Deliver Deadline pursuant to Section 3(d)(iii), or if at any time the Holder submits shares of Common Stock for legend removal when the Unrestricted Conditions have been met, and the Company fails to deliver or cause to be delivered to such Holder a certificate representing such shares that is free from all restrictive and other legends by the applicable Legend Removal Date, and if after such Conversion Shares Deliver Deadline or Legend Removal Date, as applicable, the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder's brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion relating to such Conversion Shares Deliver Deadline or Legend Removal Date, as applicable (each, a "Buy-In"), then the Company shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount by which (x) the Holder's total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, if applicable, either reinstate (or if necessary, reissue) the portion of the Debenture for which such conversion was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements under Section 3(d)(iii).  For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of the Debenture with respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000.  The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss.  Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing shares of Common Stock upon conversion of the Debenture as required pursuant to the terms hereof.

(vii)  Surrender of Debenture Upon Conversion; Book-Entry.  Notwithstanding anything to the contrary set forth herein, upon Conversion of this Debenture in accordance with the terms hereof, the Holder shall not be required to physically surrender the Debenture to the Company unless all of this Debenture is converted, in which case such Holder shall deliver the Debenture being converted to the Company promptly following the Conversion Date at issue.  The Holder and the Company shall maintain records showing the amount of this Debenture that is so converted and the dates of such Conversions or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Debenture upon each such Conversion.  In the event of any dispute or discrepancy, such records of the Company shall be controlling and determinative in the absence of manifest error.   

(viii)  No Fractional Shares.  If any Conversion of this Debenture would result in a fractional share of Common Stock or the right to acquire a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon Conversion of this Debenture shall be the next higher number of shares.

(ix)  Lost or Stolen Debentures.  Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of a Debenture, and (in the case of loss, theft or destruction) of indemnity reasonably satisfactory to the Company, and upon surrender and cancellation of the Debenture, if mutilated, the Company shall execute and deliver a new Debenture of like tenor and date.

(e)  Legends.  

(i)  Restrictive Legends.  The Holder understands that the Debentures and, until such time as Conversion Shares and any other Issued Common Shares (as defined in the Securities Purchase Agreement) have been registered under the 1933 Act as contemplated by the Registration Rights Agreement or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Conversion Shares and any other Issued Common Shares may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such Securities):

         "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO COUNSEL TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT."

(ii)    Removal of Legends.  The Company will issue and deliver the Conversion Shares without restrictive legends (including the legend set forth above in this Section 3(e)), and will remove any restrictive legends on any Conversion Shares that contain restrictive legends (including the legend set forth above in this Section 3(e)), in each case when and as required under Section 6(a) of the Securities Purchase Agreement.  The Holder agrees to sell all Securities, including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus delivery requirements, if any.  

(f)    DTC Delivery.  In lieu of delivering physical certificates representing the unlegended shares of Common Stock (the "Unlegended Shares"), provided the Holder's Transfer Agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the Holder, so long as the certificates therefor are not required to bear a legend and the Holder is not obligated to return such certificate for the placement of a legend thereon, the Company shall cause its Transfer Agent to electronically transmit the Unlegended Shares to the Holder by crediting the account of the Holder's prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system.  The time periods for delivery and penalties described herein shall likewise apply to the electronic transmittals described herein.   

(g)    Status as Shareholder.  Upon submission of a Notice of Conversion by a Holder, (i) the portion of the Debenture covered thereby (other than the portion , if any, pursuant to the Conversion of which shares cannot be issued because their issuance would exceed such Holder's allocated portion of the Required Reserve Amount) shall be deemed converted into shares of Common Stock and (ii) the Holder's rights as a Holder of such converted portion of this Debenture shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any other remedies provided herein or in the Transaction Documents or otherwise available at law or in equity to such Holder because of a failure by the Company to comply with the terms of this Debenture, including but not limited to the remedies provided in Section 3(d)(iv), Section 14 and Section 11 hereof.  Notwithstanding the foregoing, if a Holder initiates a Conversion Revocation, a Default Conversion Revocation or a Redemption Revocation pursuant to Section 3(d)(iv) hereof, the Holder shall regain the rights of a Holder of this Debenture with respect to such unconverted portion of this Debenture as specified in Section 3(d)(iv) and the Company shall, as soon as practicable, return such unconverted portion of this Debenture to the Holder or, if the Debenture has not been surrendered, adjust its records to reflect that such portion of the Debenture has not been converted.  In all cases, the Holder shall retain all of its rights and remedies (including, without limitation, the right to receive the Default Amount pursuant to Section 11 to the extent required thereby) for the Company's failure to convert this Debenture.

(h)  Pro Rata Conversion.  In the event that the Company receives a Conversion Notice from more than one holder of Debentures for the same Conversion Date and the Company can convert some, but not all, of such portions of the Debentures submitted for conversion, the Company shall convert from each holder of Debentures electing to have Debentures converted on such date a pro rata amount of such holder's portion of its Debentures submitted for conversion based on the principal amount of Debentures submitted for conversion on such date by such holder relative to the aggregate principal amount of all Debentures submitted for conversion on such date.  

(i)   Forced Conversion.  Anytime after the Effective Date, if for each of any twenty (20) consecutive Trading Days (i) the Equity Payment Conditions have all been met for each such Trading, and (ii) the Market Price of the Common Stock for each such Trading Day exceeds 300% of the Initial Conversion Price for this Debenture, then the Company may provide to the Holders a twenty (20) Trading Day advance notice (an "Advance Forced Conversion Notice") to all Holders notifying the Holders that the Company has elected to force each Holder to convert all or a specified portion of the Debenture held by such Holders on the date that is twenty (20) Trading Days after the date of such advance notice (the "Target Forced Conversion Date").  If the Equity Payment Conditions are met during each Trading Day of the twenty (20) consecutive Trading Day period immediately preceding the Target Forced Conversion Date (the "Forced Conversion Threshold Period") and the Closing Price for the Common Stock exceeds 300% of the Initial Conversion Price for this Debenture during each day of the Forced Conversion Threshold Period, then the Debenture shall be deemed automatically converted as of the Target Forced Conversion Date to the extent set forth in the Advance Forced Conversion Notice (a "Forced Conversion").  The Company shall, within three (3) Business Days after the Target Forced Conversion Date (the "Delivery Period"), issue and deliver (or cause its Transfer Agent so to issue and deliver) in accordance with the terms hereof and the Securities Purchase Agreement to or upon the order of the Holder that number of shares of Common Stock ("Conversion Shares") for the principal amount of this Debenture for which Conversion was forced (plus the dollar amount of any accrued but unpaid Interest) as shall be determined in accordance herewith.  In the event of a Forced Conversion, the Holder shall promptly deliver the Debenture for which Conversion was forced to the Company, if and to the extent required under Section 3(d)(vii) hereof.   

Notwithstanding the above, if any one or more of the Equity Payment Conditions are not met, or if the Closing Price for the Common Stock does not exceed 300% of the Initial Conversion Price, on any Trading Day during the Forced Conversion Threshold Period, then the Company shall not be entitled to force Conversion of the portion of the Debenture described in the Advance Forced Conversion Notice.  Any Advance Forced Conversion Notices shall be applied ratably to all of the Holders in proportion to each Holder's initial purchases of Debentures pursuant to the Securities Purchase Agreement, provided that any voluntary Conversions by a Holder during the Forced Conversion Threshold Period shall be applied against such Holder's pro-rata allocation thereby decreasing the aggregate amount forcibly converted hereunder.  

Notwithstanding anything herein to the contrary herein, an Advance Forced Conversion Notice shall be void and of no effect to the extent that, in the sole determination of the Holder, the forced Conversion would cause the Beneficial Ownership Limitation to be exceeded.  In the event the Company issues an Advance Forced Conversion Notice and because of the Beneficial Ownership Limitation it is unable to force the Holders to convert all of the Debenture, as to any portion of the Debenture outstanding, (i) the Holder, upon the Company's written request, must promptly provide documentation to the Company demonstrating that the Beneficial Ownership Limitation would be exceeded by such forced conversion and (ii) the Company shall not have the right to issue another Forced Conversion Notice for at least 30 days and at such time all conditions hereunder must again be met, including the pricing condition and the Equity Payment Conditions.  

Section 4.   Rights Upon Major Transaction or Change of Entity Transaction. 

(a) Definitions. For purposes hereof, 

"Change of Entity Transaction" means (i) a consolidation, merger, exchange of shares, recapitalization, reorganization, business combination or other similar event,  (A) following which the holders of Common Stock immediately preceding such consolidation, merger, combination or event either (1) no longer hold a majority of the shares of Common Stock of the Company or (2) no longer have the ability to elect the board of directors of the Company or (B) as a result of which shares of Common Stock shall be changed into (or the shares of Common Stock become entitled to receive) the same or a different number of shares of the same or another class or classes of stock or securities of the Company or another entity.

"Sufficient Trading Characteristics" shall mean that the average daily dollar trading volume of the common stock of such entity on its primary exchange or market is equal to or in excess of $100,000 for the 90th through the 31st day prior to the public announcement of such transaction.

"Permissible Change of Entity Transaction" shall mean a Change of Entity Transaction where the Successor Entity (as defined below) (A) is a publicly traded Company whose common stock is quoted on or listed for trading on an Eligible Market, (B) has Sufficient Trading Characteristics (as defined below) and (C) meets the Assumption Requirements (as required in Section 4(b) below), or any other Change of Entity Transaction with respect to which the Holder provides the Company with a Major Transaction Approval Notice (as defined in subsection (d) immediately below).

"Impermissible Change of Entity Transaction" shall mean a Change of Entity Transaction which does not qualify as a Permissible Change of Entity Transaction.

"Major Transaction" means 

(i)an Impermissible Change of Entity Transaction; and

(ii)the sale or transfer of more than 40%, in the aggregate, of the properties or assets of the Company to another Person or Persons in any rolling 12 month period (an "Asset Sale");  and

(iii)a purchase, tender or exchange offer made to and accepted by the holders of more than the 50% of the outstanding shares of Common Stock.

(b)    Assumption Upon Permissible Change of Entity Transaction.  The Company shall not, so long as any of the Debentures remain outstanding, enter into or be party to a Change of Entity Transaction unless any Person purchasing the Company's assets or Common Stock, or any successor entity resulting from such Change of Entity Transaction (in each case, a "Successor Entity"), assumes (an "Assumption") in writing all of the obligations of the Company under the Debenture and the other Transaction Documents in accordance with the provisions of this Section 4(b) pursuant to written agreements in form and substance satisfactory to the Required Holders and approved by the Required Holders prior to such Change of Entity Transaction, including agreements to deliver to each holder of Debentures in exchange for such Debentures a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Debenture, including, without limitation, having a principal amount and interest rate equal to the principal amount and Interest rate of the Debentures held by such holder, having similar conversion rights as the Debentures (including but not limited to a similar Conversion Price and similar Conversion Price adjustment provisions) and having similar priority to the Debentures, and satisfactory to the Required Holders.  Upon the occurrence of any Change of Entity Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Change of Entity Transaction, the provisions of the Debenture referring to the "Company" shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under the Debenture with the same effect as if such Successor Entity had been named as the Company herein.  Upon consummation of a Change of Entity Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be issued upon conversion or redemption of the Debentures at any time after the consummation of the Change of Entity Transaction, in lieu of the shares of Common Stock (or other securities, cash, assets or other property) issuable upon the conversion of the Debentures prior to such Change of Entity Transaction, such shares of publicly traded common stock (or their equivalent) of the Successor Entity, as adjusted in accordance with the provisions of the Debenture.  The provisions of this Section shall apply similarly and equally to successive Change of Entity Transactions and shall be applied without regard to any limitations on the conversion of the Debenture.  The requirements of this Section 4(b) are referred to herein as the "Assumption Requirements."

(c)Notice of Transaction.  At least thirty (30) days prior to the consummation of a Major Transaction or Change of Entity Transaction, but not prior to the public announcement of such transaction, the Company shall deliver written notice thereof via facsimile and overnight courier to the Holder (a " Transaction Notice"), which notice shall specify the nature and terms of the proposed transaction (including notice of whether or not such transaction constitutes a Major Transaction) and nature of the Successor Entity (if any).   

(d)   Redemption Right Upon Major Transaction.  If the Company proposes to enter into a Major Transaction, then, unless otherwise notified by the Holder in writing (a "Major Transaction Approval Notice") prior to the consummation of such Major Transaction, the Company shall redeem (a "Redemption Upon Major Transaction") all or any portion of its Debentures by delivering written notice thereof ("Major Transaction Redemption Notice") to the Company, which Major Transaction Redemption Notice shall indicate the aggregate principal amount of Debentures (the "Redemption Principal Amount") that the Holder is electing to be redeemed.  The Debentures subject to redemption pursuant to this Section 4(d) shall be redeemed by the Company in cash at a price (the "Major Transaction Redemption Price") equal to the greater of:

(i) the product of (A) the sum of the Redemption Principal Amount being redeemed and any accrued and unpaid Interest with respect to such Redemption Principal Amount, and any other Required Cash Payments (such amounts in addition to the Redemption Principal Amount are referred to herein as the "Supplementary Amounts"), and (B) the quotient determined by dividing (x) the greater of (I) the Market Price of the Common Stock immediately following the public announcement of such proposed Major Transaction and (II) the Market Price on the date that the Major Transaction Redemption Price is paid to the Holder, by (y) the Conversion Price, 

and 

(ii) the sum of (A) the Redemption Principal Amount being redeemed, plus (B) the Supplementary Amounts. 

(e)  Escrow; Payment of Major Transaction Redemption Price.  Following the receipt of a Major Transaction Redemption Notice from the Holder, the Company shall not effect a Major Transaction unless it shall first place, or shall cause the Successor Entity to place, into an escrow account with an independent escrow agent, at least three (3) Business Days prior to the closing the Major Transaction (the "Major Transaction Escrow Deadline"), an amount equal to the Major Transaction Redemption Price.  Concurrently upon closing of any Major Transaction, the Company shall pay or shall instruct the escrow agent to pay the Major Transaction Redemption Price to the Holder, which payment shall constitute a Redemption Upon Major Transaction of the Debenture.  

 

(f)    Injunction.  Following the receipt of a Major Transaction Redemption Notice from the Holder, in the event that the Company attempts to consummate a Major Transaction without placing the Major Transaction Redemption Price in escrow in accordance with subsection (e) above or without payment of the Major Transaction Redemption Price to the Holder upon consummation of such Major Transaction, the Buyer shall have the right to apply for an injunction in any state or federal courts sitting in the City of New York, borough of Manhattan to prevent the closing of such Major Transaction until the Major Transaction Redemption Price is paid to the Holder, in full.

(g)   Mechanics of Redemptions Upon Major Transactions.  Redemptions required by this Section 4 shall be made in accordance with the provisions of Section 12 and shall have priority to payments to shareholders in connection with a Major Transaction.  To the extent redemptions required by this Section 4(g) are deemed or determined by a court of competent jurisdiction to be prepayments of the Debenture by the Company, such redemptions shall be deemed to be voluntary prepayments.  Notwithstanding anything to the contrary in this Section 4, until the Major Transaction Redemption Price (together with any Supplementary Amounts thereon) is paid in full, the Redemption Principal Amount submitted for redemption under this Section and the Supplementary Amounts may be converted (a "Major Transaction Conversion"), in whole or in part, by the Holder into shares of Common Stock upon written notice ("Major Transaction Conversion Notice") to the Company (or the Successor Entity, if applicable), or in the event the Conversion Date is after the consummation of a Change of Entity Transaction (as defined above), into shares of publicly traded common stock (or their equivalent) of the Successor Entity pursuant to Section 4(b).  Unless otherwise indicated by the Holder in the applicable Notice of Conversion, any principal amount of this Debenture converted during the period from the date of the Major Transaction Redemption Notice until the date the Major Transaction Redemption Price is paid in full shall be considered to be a conversion (instead of a Redemption) of a portion of the Debenture that would have been subject to such Redemption, and any amounts of this Debenture converted from time to time during such period shall converted in full into Common Stock at the Conversion Price then in effect, and the dollar amount so converted into Common Stock shall be deducted from the Redemption Principal Amount (as defined above) and any Supplementary Amounts that are subject to such redemption.  The parties hereto agree that in the event of the Company's redemption of any portion of the Debenture under Section 4(d), the Holder's damages would be uncertain and difficult to estimate because of the parties' inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder.  

 

Section 5.  Effect of Certain Events.   

(a)  Participation. The Holder, as the holder of the Debenture, shall be entitled to receive such dividends paid and distributions made to the holders of Common Stock to the same extent as if the Holder had completely converted the Debenture into Common Stock (without regard to any limitations on Conversion herein or elsewhere and without regard to whether or not a sufficient number of shares are authorized and reserved to effect any such exercise and issuance) and had held such shares of Common Stock on the record date for such dividends and distributions. Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of Common Stock.  

(b)  Voting Rights.  The Holder shall obtain common shareholder voting rights with respect to the number of shares of Common Stock held by the Holder plus the number of shares of Common Stock issuable pursuant to Conversions of the Debenture at any given time (subject to the Beneficial Ownership Limitations).

(c)  Rights Upon Issuance of Purchase Rights.   If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase shares, warrants, securities or other property pro rata to the record holders of any class of Common Shares (the "Purchase Rights"), then the Holders will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of Common Shares acquirable upon complete Conversion of the Debenture (without taking into account any limitations or restrictions on the convertibility of the Debenture) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Shares are to be determined for the grant, issue or sale of such Purchase Rights.

Section 6.  Certain Adjustments.  The Conversion Price shall be subject to adjustment from time to time as provided in this Section. 

(a) Adjustments to Conversion Price Due to Subsequent Equity Sales.  If, at any time while this Debenture is outstanding, the Company or any Subsidiary, as applicable, sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents (including Common Stock or Common Stock Equivalents issued in consideration for settlement or retirement of existing debt) entitling any Person to acquire shares of Common Stock at an effective price per share that is lower than the then Conversion Price (such lower price, the "Base Conversion Price" and such issuances, collectively, a "Dilutive Issuance") (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments (including but not limited to Common Stock Equivalents that are entitled to price adjustments analogous to these Subsequent Issuance Adjustments or price adjustments for failure to achieve certain milestones or results), reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), regardless of whether or not any such issuance or repricing of securities is conditioned upon circumstances or events that may occur in the future, then the Conversion Price shall be reduced (but not increased) to equal the lesser of (i) the Base Conversion Price, or (ii) the Conversion Price in effect immediately prior to such Dilutive Issuance.  Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued.  Notwithstanding the foregoing, no adjustment will be made under this Section 6(a) in respect of an Exempt Issuance.  If the Company issues or sells, or agrees to issue or sell, Variable Equity Securities, despite the prohibition set forth in the Securities Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion price at which such securities may be converted or exercised. The adjustments required by this Section 6(a) are referred to in the singular, a "Subsequent Issuance Adjustment," and collectively, the "Subsequent Issuance Adjustments").  No adjustment shall be made hereunder if such adjustment would result in an increase of the Conversion Price then in effect.  

 (b)   Subsequent Rights Offerings.  If the Company, at any time prior to the date that all of the Debentures have been converted, redeemed or otherwise satisfied in accordance with their terms, shall issue rights, options or warrants to all holders of Common Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common Stock at a price per share (the "Base Rights Offering Price") that is lower than the Conversion Price then in effect, then the Conversion Price shall be reduced (but not increased) to the Base Rights Offering Price.  Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants.  No adjustment shall be made hereunder if such adjustment would result in an increase of the Conversion Price then in effect.

(c)   Milestone Adjustments.  If the Company shall have failed (each a "Milestone Failure") to meet or exceed any of the milestone events ("Milestone Events") that are set forth on Schedule 6(c) annexed hereto for  the six (6) month period ("Milestone Period") ending March 31, 2008 (the "Milestone Date"), as reported in the Company's Form 10-QSB (or Form 10-KSB, if applicable) for such fiscal quarter, then the Conversion Price shall be reduced (but not increased) (each, a "Milestone Adjustment") to equal the lesser of (a) the Conversion Price then in effect, (b) the Market Price as determined on the applicable Milestone Date, or (c) the Market Price as determined on the date (each, a "Milestone Adjustment Date") that is five (5) Trading Days after the date that Company files its next Form 10-QSB (or Form 10-KSB, if applicable) with the Commission following the end of the applicable Milestone Period (the "Milestone Adjustment Price").

Each such adjustment shall be effective as of the first day following each Milestone Date (by way of example, if the Milestone Goals are not met for the Milestone Period ending March 31, 2008, the reduction is effective immediately on April 1, 2008).  As to any Conversions by the Holder that occurred following the end of a Milestone Period but prior to the date the Company's periodic report was filed ("Interim Period"), the Company shall retroactively send the Holder additional Conversion Shares ("Interim Conversion Shares") within 3 Trading Days of the date of the applicable filing if an adjustment is required hereunder (provided that to the extent any such shares would cause the Beneficial Ownership Limitation to be exceeded, such excess shares shall not be issued and delivered until such time as such shares may be so issued without exceeding the Beneficial Ownership Limitation).  The number of additional Conversion Shares issued shall be equal to the number of Conversion Shares receivable from such Conversions based on the adjusted Conversion Price less any Conversion Shares previously received on account of such Conversions.  Any subsequent restatements of the Company's financials shall require similar retroactive issuances if the aforementioned events are subsequently deemed to have occurred.  The Company shall provide written notice to the Holder no later than 1 Business Day following the Company's filing of the applicable periodic report with the Commission, indicating therein the new Conversion Price and the revenue for the applicable quarter.  In the event that there is an adjustment to the Conversion Price pursuant to any other provision under this Debenture during the Interim Period, the Conversion Price shall be the lower of (i) the Conversion Price as adjusted pursuant to the other provisions of this Debenture and (ii) the new Conversion Price as determined hereunder.  Notwithstanding anything herein to the contrary, (i) the provision shall only have the effect of reducing the Conversion Price and (ii) each adjustment shall be permanent notwithstanding future Revenue or the achievement of any other milestones and cumulative with any other adjustments hereunder.  

(d)Adjustments to Conversion Price During Major Announcements.  Notwithstanding anything contained in this Debenture to the contrary, in the event the Company makes any public announcement (the date of such announcement is hereinafter referred to as the "Announcement Date") anytime during the period beginning five (5) Business Days before any Milestone Adjustment Date and ending five (5) Business Days after such Milestone Adjustment Date (the "Protected Period"), then the "Milestone Adjustment Price" for such Milestone Adjustment shall equal the lesser of (X) the Milestone Adjustment Price as determined pursuant to Section 6(c) above, (Y) the Market Price as determined on the Trading Day immediately preceding the Announcement Date and (Z) the Market Price as determined on the date that is ten (10) Trading Days after the Announcement Date.  
 

(e)  Pro Rata Distributions. If the Company, at any time prior to the date that all of the Debentures have been converted, redeemed or otherwise satisfied in accordance with their terms, distributes to all holders of Common Stock (and not to the Holders) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security (other than the Common Stock, which shall be subject to Section 6(b)), then in each such case the Conversion Price shall be adjusted by multiplying such Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to 1 outstanding share of the Common Stock as determined by the Board of Directors of the Company in good faith.  In either case the adjustments shall be described in a statement delivered to the Holder describing the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to 1 share of Common Stock.  Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

(f)  Subdivision or Combination of Common Stock.  If the Company at any time subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a greater number of shares, then, after the date of record for effecting such subdivision, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced.  If the Company at any time combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a smaller number of shares, then, after the date of record for effecting such combination, the Conversion Price in effect immediately prior to such combination will be proportionately increased.

(g)  Notice of Dilutive Issuances and Adjustments.  The Company shall notify the Holder in writing, no later than one (1) Business Day following any Dilutive Issuance, indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price, exercise price and other pricing terms (such notice, the "Dilutive Issuance Notice").  The Company shall notify the Holder in writing, no later than one (1) Business Day following any Milestone Adjustment Date, indicating therein the applicable Milestone Adjustment Price (such notice, a "Milestone Adjustment Notice").  For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice or a Milestone Adjustment Notice, pursuant to this Section 6(g), upon the occurrence of any Dilutive Issuance or Milestone Adjustment, the Holder is entitled to receive a number of Conversion Shares based upon the Conversion Price (as adjusted) on or after the date of such Dilutive Issuance or Milestone Adjustment, as applicable, regardless of whether the Holder accurately refers to the Conversion Price (as adjusted) in the Notice of Conversion.   Whenever the Conversion Price is adjusted pursuant to this Section 6 or otherwise, the Company shall promptly mail to the Holder a notice (a "Conversion Price Adjustment Notice") setting forth the Conversion Price after such adjustment and setting forth a statement of the facts requiring such adjustment.  For purposes of clarification, whether or not the Company provides a Conversion Price Adjustment Notice pursuant to this Section 6(g), upon the occurrence of any event that leads to an adjustment of the Conversion Price, the Holders are entitled to receive a number of Conversion Shares based upon the new Conversion Price, as adjusted, for Conversions occurring on or after the date of such adjustment, regardless of whether a Holder accurately refers to the adjusted Conversion Price in the Notice of Conversion.  

(h) Notice to Allow Conversion by Holder.  If (i) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (iii) the Company shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (v) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Debenture, and shall cause to be delivered to the Holder at its last address as it shall appear upon the Debenture Register, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice.  The Holder is entitled to convert this Debenture during the 20-day period commencing on the date of such notice through the effective date of the event triggering such notice.

Section 7.Automatic Redemption at End of Term; Monthly Redemption.  

(a)   Automatic Redemption at End of Term.  Any Debenture that has not been submitted for Conversion into Common Stock and has not been subjected to a Default Notice by midnight, New York City time, on the Maturity Date (the "Automatic Redemption Date"), shall be automatically redeemed ("Automatic Redemption") for a redemption price, in cash, equal to the outstanding principal amount of this Debenture, plus all accrued and unpaid Interest and other Required Cash Payments (the "Automatic Redemption Amount"). The Automatic Redemption Amount shall be due and payable within 5 Trading Days of the Automatic Redemption Date. 

 

(b) Monthly Redemption. On each Monthly Redemption Date, the Company shall redeem an amount of the Debenture equal to the Monthly Redemption Amount (the "Monthly Redemption"). The Monthly Redemption Amount is payable on each Monthly Redemption Date in cash; provided, however, as to any Monthly Redemption and upon 20 Trading Days' prior written irrevocable notice (the "Monthly Redemption Notice"), in lieu of a cash redemption payment the Company may elect to pay all or part of a Monthly Redemption Amount in shares of Common Stock (the "Monthly Redemption Shares" (such number of shares to be paid on a Monthly Redemption Date in Monthly Redemption Shares, the "Monthly Redemption Share Amount") based on a conversion price equal to the Monthly Redemption Share Conversion Price (subject to adjustment for any stock dividend, stock split, stock combination or other similar event affecting the Common Stock during such 20 Trading Day period); provided, further, that the Company  may not pay the Monthly Redemption Amount in Monthly Redemption Shares unless, on each day from the date the Holder receives the duly delivered Monthly Redemption Notice through and until the date such Monthly Redemption is paid in full, the Equity Payment Conditions have been satisfied, unless waived in writing by the Holder.  The Holder may convert, pursuant to Section 3(b), any principal amount of this Debenture subject to a Monthly Redemption at any time prior to the date that the Monthly Redemption Amount, plus accrued but unpaid interest, liquidated damages and any other amounts then owing to the Holder are due and paid in full.  Unless otherwise indicated by the Holder in the applicable Notice of Conversion, any principal amount of this Debenture converted during the applicable Monthly Conversion Period until the date the Monthly Redemption Amount is paid in full shall be first applied to the principal amount subject to the Monthly Redemption Amount payable in cash and then to the Monthly Redemption Share Amount.  Any principal amount of this Debenture converted during the applicable Monthly Conversion Period in excess of the Monthly Redemption Amount shall be applied against the last principal amount of this Debenture scheduled to be redeemed hereunder, in reverse time order from the Maturity Date.  The Company covenants and agrees that it will honor all Notice of Conversions tendered up until such amounts are paid in full. The Company's determination to pay a Monthly Redemption in cash, shares of Common Stock or a combination thereof shall be applied ratably to all of the holders of the then outstanding Debentures based on their (or their predecessor's) initial purchases of Debentures pursuant to the Purchase Agreement.  At any time the Company delivers a notice to the Holder of its election to pay the Monthly Redemption Amount in shares of Common Stock, the Company shall file a prospectus supplement pursuant to Rule 424 disclosing such election. Each Monthly Redemption Notice shall specifically set forth the manner in which the Company intends to pay the applicable Monthly Redemption Amount (i.e., the amount to be paid in cash and/or the amount to be paid in Common Stock).  Notwithstanding the above, the Holder, at its option upon written notice to the Company, may defer any one or more Monthly Redemptions until the Maturity Date, in which case the Monthly Redemption Date for that Monthly Redemption Amount shall be the Maturity Date.

For purposes hereof,

"Monthly Redemption Amount" shall mean the Original Principal Amount, divided by twelve.

"Monthly Redemption Date" means the 1st of each month, commencing immediately upon September 1, 2008, and continuing until this Debenture is fully redeemed or converted.

"Monthly Redemption Share Conversion Price" shall mean 80% of the average of the three (3) lowest Closing Bid Prices of the Common Stock over the twenty (20) Trading Day period ending on the Trading Day immediately preceding the applicable Monthly Redemption Date. 

Section 8.  Senior Debt; Secured Obligation.

(a) Senior Debt; Priority.  The Debentures shall constitute senior debt of the Company.  There is no debt currently outstanding that is senior to the Debentures except as otherwise set forth on SCHEDULE 8(a).  All future debt issued by the Company or any Subsidiary shall be subordinated and junior to the Debentures.  Neither the Company nor any Subsidiary shall, without the written permission of the Holder, issue any other debt that is senior to, or pari passu with, the Debentures.  From the Original Issue Date of the Debentures through the date that all of the Debentures have been paid in full or converted in full, before entering into, or permitting any Subsidiary to enter into, any future debt with a third party, the Company shall first obtain a subordination agreement, satisfactory to Holder, from the proposed debt holder.  

(b) Secured Obligation.  The obligations of the Company under this Debenture are secured by all assets of the Company and certain of the Subsidiaries pursuant to the Security Agreement ("Security Agreement") of date even herewith, between the Company, certain of the Subsidiaries of the Company and the Secured Parties (as defined therein).

Section 9.  Certain Negative Covenants; Misc.  Without the prior written consent of the Required Holders, until such time as less than 20% of the Debentures remain Outstanding, the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly:

(a)  (i) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock or (ii) directly or indirectly or through any Subsidiary of the Company make any other payment or distribution in respect of its capital stock.  For purposes hereof, each Debenture or any portion thereof shall be deemed to be "Outstanding" until such time as it has been converted, redeemed or otherwise satisfied in accordance with its terms.

(b)  redeem, repay, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Company or any warrants, rights or options to purchase or acquire any such shares, other than as to the Conversion Shares or Warrant Shares as permitted under the Transaction Documents.

(c)  by amendment of its charter documents, including but not limited to the Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Debenture, and will at all times in good faith carry out all of the provisions of the Debenture and take all action as may be required to protect the rights of the Holder of the Debenture.

 (d)  other than securities issued in connection with an Indebtedness Lock-Up Exception (as defined herein) and issuances to the Holders as contemplated by the Transaction Documents, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, including but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom (the "Indebtedness Negative Covenant"); 

(e)  other than Permitted Liens, enter into, create, incur, assume or suffer to exist any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any property or assets (including accounts and contract rights) owned by the Company or any of its Subsidiaries (collectively, "Liens") of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;

 (f)  enter into any transaction with any Affiliate of the Company which would be required to be disclosed in any public filing with the Commission that is not approved by a two-thirds (2/3) majority of the disinterested board of directors, except with respect to standard employment arrangements with officers and directors and employees of the Company; or

 (g)  redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Indebtedness, whether by way of payment in respect of principal of (or premium, if any) or interest on such Indebtedness, if at the time such payment is due or is otherwise made or after giving effect to such payment, an event constituting, or that with the passage of time and without being cured would constitute, an Event of Default has occurred and is continuing.

(h) enter into any agreement with respect to any of the foregoing.

Section 10.   Events of Default.

Unless waived by the Required Holders, each of the following events shall be considered to be an "Event Of Default":  

(a)  Failure to Make Cash Payments When Due.  The Company fails to pay (each, a "Payment Failure") any cash payments due to the Holder under the terms of this Debenture when due under this Debenture, whether on an interest or dividend payment due date, at maturity, upon mandatory prepayment, upon acceleration, or upon any Redemption or otherwise or fails to pay any other cash payments that are due and owing under this Debenture, a Warrant or any other Transaction Document when due, including but not limited to all accrued and unpaid Interest and Redemption Amounts (each cash payment referred to above is referred to as a "Required Cash Payment"), and such Payment Failure continues for a period of fifteen (15) days after the applicable due date; or

(b)  Conversion and Delivery of the Shares.  The Company (i) fails to issue and deliver shares of Common Stock to the Holder upon exercise by the Holder of the Conversion Rights of the Holder in accordance with the terms of this Debenture by the tenth (10th) Business Day after the Conversion Date, or (ii) fails for a period of ten (10) Business days to transfer or cause its Transfer Agent to transfer (electronically or in certificated form) any certificate for shares of Common Stock issued or issuable to the Holder upon Conversion of the Debenture as and when required by the terms of this Debenture or upon exercise the Warrant as and when required by the terms of the Warrant; or

(c)  Failure to Effect and Maintain Registration. If (i) the Initial Registration Statement (as defined in the Registration Rights Agreement) shall not have been declared effective by the Commission on or prior to the 180th calendar day after the Closing Date, or (ii) during the Registration Period (as defined in the Registration Rights Agreement), either (A) the effectiveness of the Registration Statement lapses for any reason or (B) the Holder shall not be permitted to resell Registrable Securities (as defined in the Registration Rights Agreement) under the Registration Statement for a period of more than 20 consecutive Trading Days or 30 non-consecutive Trading Days during any 12 month period; provided, however, that if the Company is negotiating a merger, consolidation, acquisition or sale of all or substantially all of its assets or a similar transaction and, in the written opinion of counsel to the Company, the Registration Statement would be required to be amended to include information concerning such pending transaction(s) or the parties thereto which information is not available or may not be publicly disclosed at the time, the Company shall be permitted an additional 10 consecutive Trading Days during any 12 month period pursuant to this Section 10(c)(ii), or (iii) the Company fails to file any Registration Statement within 20 days of the date that such filing is required under the Registration Rights Agreement, or (iv) the Company fails to provide a commercially reasonable written response to any comments ("SEC Comments") to a Registration Statement submitted by the Commission within 20 days of the date that such SEC Comments are received by the Company; or  

(d)  Receiver or Trustee.  The Company or any Subsidiary of the Company shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed; or

 

(e)  Bankruptcy.  Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company or any "significant Subsidiary" (as defined in Rule 1-02(w) of Regulation S-X promulgated under the 1933 Act) of the Company, or the Company or any Significant Subsidiary shall otherwise be subject to a Bankruptcy Event; or

(f)   Delisting of Common Stock.  A Delisting Event (as defined below) occurs and remains uncured for a period of 10 Trading days, where a "Delisting Event" means that the Common Stock is not listed or traded with an Eligible Market; or

(g) Failure to Authorize and Reserve Common Stock. The Holder's Reserved Share Allocation is less than the number of shares of Common Stock that the Holder would be entitled to receive upon a conversion of the full Conversion Amount of this Debenture and upon an exercise in full of the Warrants held by the Holder (without regard to any Beneficial Ownership Limitations on conversion set forth in Section 3(a)(ii) or otherwise or any analogous provisions of the Warrants), and such shortfall is not cured within ten (10) Business Days; or 

(h)   Legend Removal Failure.   A Legend Removal Failure (as defined below) occurs and remains uncured for a period of ten (10) Business days, where "Legend Removal Failure" means a failure by the Company to issue Conversion Shares, Warrant Shares or Payment Shares without restrictive legends or to remove restrictive legends from Conversion Shares, Warrant Shares or Payment Shares when so required (or to withdraw any stop transfer instructions in respect thereof), in each case pursuant to Section 3(e) hereof, Section 6 of the Securities Purchase Agreement or otherwise pursuant to this Debenture, the Securities Purchase Agreement or any of the other Transaction Documents; or  

(i)  Corporate Existence; Major Transaction.  The Company has effected a Major Transaction without paying the Major Transaction Redemption Price to the Holder pursuant to Section 4(c) or, if the Holder did not elect a Redemption Upon Major Transaction (if applicable), the Company has failed to meet the Assumption Requirements of Section 4(b) prior to effecting a Change of Entity Transaction; or

(j)   Breach of Securities Issuance Restrictions, Limited Issuances, Rights of Participation or Securities Exchange Rights.   A breach of any of Section 4(e)(i - v) of the Securities Purchase Agreement occurs; or

(k)  Impermissible Liens.  The Company creates or suffers to exist any Lien upon any of its properties, except for Permitted Liens; or

(l) Failure to Comply With Dispute Resolution Procedures.  The Company has failed to comply in good faith with the Dispute Resolution Procedures (as defined herein) or has failed to adjust the Conversion Price as required hereunder following a Dilutive Issuance, a Milestone Event, or otherwise (after any applicable Dispute Resolution Procedure required herein), and such failure continues for an additional ten (10) days after the Holder provides written notice (a "Dispute Resolution Procedure Demand") to the Company that such performance by the Company is required.

Section 11.  Mandatory Redemption; Posting of Bond.

(a)  Mandatory Redemption.  If any Events of Default shall occur then, upon the occurrence and during the continuation of any Event of Default, at the option of the Holder, such option exercisable through the delivery of written notice to the Company by such Holders (the "Default Notice"), the Debenture shall become immediately due and payable and the Company shall pay to the Holder (a "Mandatory Redemption"), in full satisfaction of its obligations hereunder, an amount (such amount referred to herein as the "Default Amount" or the "Mandatory Redemption Amount") equal the greater of (i) and (ii) immediately below:

(i)  the Mandatory Redemption Premium, multiplied by the sum (such sum of (x), plus (y), plus (z) immediately below shall be referred to herein as the "Default Conversion Sum") of 

(x) the aggregate outstanding principal amount of this Debenture, PLUS 

(y) all accrued and unpaid Interest thereon for the period beginning on the Original Issue Date and ending on the date of payment of the Default Amount (the "Default Payment Date"), PLUS 

(z) all accrued and unpaid Required Cash Payments, if any, 

and 

(ii) the Conversion Value of the Default Conversion Sum to be prepaid, where "Conversion Value" means 

(x) the Default Conversion Sum divided by the Conversion Price in effect on the date that the Company pays the Default Amount; 

MULTIPLIED BY 

(y) the greater of (i) the Market Price (as defined herein) for the Common Stock on the Default Notice Date or (ii) the Market Price on the date that the Company pays the Default Amount.  

Five (5) Business Days after the Company's receipt of the Holder's Default Notice (the "Default Amount Due Date"), the Default Amount, together with all other amounts payable hereunder, shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity. 

If the Company fails to pay the Default Amount by the Default Amount Due Date, (i) the Conversion Price shall be permanently decreased (but not increased)(each, a "Default Adjustment") on the first Trading Day of each calendar month thereafter (each a "Default Adjustment Date") until the Default Amount is paid in full, to a price equal to the lesser of (i) the Conversion Price then in effect, or (ii) the lowest Market Price that has occurred on any Default Adjustment Date since the date that the Event of Default began and (ii) at any time thereafter, the Holder shall have the right at any time, and from time to time, so long as the Company remains in default (and so long and to the extent that there are sufficient authorized shares), to require the Company, upon written notice ("Default Conversion Notice") (which may be given one or more times, from time to time anytime after the Default Amount Due Date), to immediately issue, in lieu of all or any specified portion (the "Specified Portion") of the unpaid portion (the "Unpaid Portion") of the Default Amount, a number of shares (the "Default Shares") of Common Stock, subject to the Beneficial Ownership Limitation then in effect, equal to the Specified Portion of the Default Amount divided by the Conversion Price in effect on the date such shares are issued to the Holder, PROVIDED THAT, the Holder may require that such payment of shares be made in one or more installments at such time and in such amounts as Holder chooses.   The Default shares are due within five (5) Business Days of the date that the Holder delivers a Default Conversion Notice to the Company (the "Default Share Delivery Deadline").   

To the extent redemptions required by this Section 11 are deemed or determined by a court of competent jurisdiction to be prepayments of the Debenture by the Company, such redemptions shall be deemed to be voluntary prepayments. If the Company is unable to redeem all of the Debenture submitted for redemption, the Company shall redeem a pro rata amount from each Holder based on the principal amount of the Debenture submitted for redemption by such Holder relative to the total principal amount of Debentures submitted for redemption by all Holders.  The parties hereto agree that in the event of the Company's redemption of any portion of the Note under this Section 11, the Holder's damages would be uncertain and difficult to estimate because of the parties' inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder. Accordingly, any Mandatory Redemption Amount due under this Section 11 is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder's actual loss of its investment opportunity and not as a penalty.

The Holder shall not be entitled to receive Default Shares on a given date if and to the extent that such issuance would cause the Beneficial Ownership Limitation then in effect to be exceeded.  If and to the extent that the issuance of Default Shares with respect to a given Specified Portion would result in the a violation of the Beneficial Ownership Limitation, then that particular Specified Portion shall be automatically reduced to a value that would cause the number of Default Shares to be issued to equal the Maximum Percentage, and the amount of such reduction shall be added back to the Unpaid Portion of the Default Amount.

Upon the payment in full of the Mandatory Redemption Amount, the Holder shall promptly surrender this Debenture to or as directed by the Company (or, if applicable, shall submit a signed notice that such Debenture has been lost, stolen or destroyed).  In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law.  Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Debenture until such time, if any, as the Holder receives full payment pursuant to this Section 11.  No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.

(b)  Posting of Bond.  In the event that any Event of Default occurs hereunder or any Event of Default occurs under any of the Transaction Documents (as defined in the Securities Purchase Agreement), then the Company may not raise as a legal defense (in any Lawsuit, as defined below, or otherwise) or justification to such Event of Default any claim that such Holder or anyone associated or affiliated with such Holder has been engaged in any violation of law, unless the Company has posted a surety bond (a "Surety Bond") for the benefit of such Holder in an amount equal to the aggregate Surety Bond Value (as defined below) of all of the Holder's Debenture and Warrants (the "Bond Amount"), which Surety Bond shall remain in effect until the completion of litigation of the dispute and the proceeds of which shall be payable to such Holder to the extent Holder obtains judgment. 

For purposes hereof, a "Lawsuit" shall mean any lawsuit, arbitration or other dispute resolution filed by either party herein pertaining to any of the Transaction Documents (as defined in the Securities Purchase Agreement). 

"Debenture Market Value" shall mean the outstanding principal amount of this Debenture, plus any accrued and unpaid Interest, and other Required Cash Payments, divided by the lowest Conversion Price in effect at any time during the period between the applicable Event of Default and the filing of the Surety Bond required by this subsection (the "Surety Bond Pricing Period"), all multiplied by the highest Closing Price during the Surety Bond Pricing Period.

"Surety Bond Value," for each Debenture, shall mean 130% of the highest Debenture Market Value (as defined above) of each of the Holder's Debenture and for each Warrant, shall mean 130% of the highest Black Scholes value  (as defined in Section 10(b) of the Warrants) of each of the Holder's Warrants (where, in each case, such highest market value represents the highest value determined during the period from the date of the subject Event of Default through the Trading Day preceding the date that such Surety Bond goes into effect).

(c)    Injunction and Posting of Bond.  In the event that the Event of Default referred to in subsection 11(b) above pertains to the Company's failure to deliver unlegended shares of Common Stock to the Holder pursuant to a Debenture Conversion, Warrant Exercise, legend removal request, or otherwise, the Company may not refuse such unlegended share delivery based on any claim that such Holder or any one associated or affiliated with such Holder has been engaged in any violation of law, unless an injunction from a court, on prior notice to Holder, restraining and or enjoining Conversion of all or part of said Debenture shall have been sought and obtained by the Company and the Company has posted a Surety Bond for the benefit of such Holder in the amount of the Bond Amount (as described above), which bond shall remain in effect until the completion of litigation of the dispute and the proceeds of which shall be payable to such Holder to the extent Holder obtains judgment.   

(d)    Redemption by Other Holders.  Upon the Company's receipt of notice from any of the holders of the Other Debentures for redemption or repayment as a result of an event or occurrence of an Event of Default or a Major Transaction (each, an "Other Redemption Notice"), the Company shall immediately, but no later than one (1) Business Day of its receipt thereof, forward to the Holder by facsimile a copy of such notice.  If the Company receives a Redemption Notice and one or more Other Redemption Notices, during the seven (7) Business Day period beginning on and including the date which is three (3) Business Days prior to the Company's receipt of the Holder's Redemption Notice and ending on and including the date which is three (3) Business Days after the Company's receipt of the Holder's Redemption Notice and the Company is unable to redeem all principal, interest and other amounts designated in such Redemption Notice and such Other Redemption Notices received during such seven (7) Business Day period, then the Company shall redeem a pro rata amount from each holder of the Debentures (including the Holder) based on the principal amount of the Debentures submitted for redemption pursuant to such Redemption Notice and such Other Redemption Notices received by the Company during such seven (7) Business Day period.

Section 12.Holder's Redemptions.  

(a)  Mechanics of Holder's Redemptions.  In the event that the Holder has sent a Major Transaction Redemption Notice to the Company pursuant to Section 4(d) or a Default Notice pursuant to Section 11(a), respectively (each, a "Redemption Notice"), the Holder shall promptly submit this Debenture to the Company.  In the event of a redemption of less than all of the outstanding principal amount of this Debenture, the Company shall promptly cause to be issued and delivered to the Holder a new Debenture representing the outstanding principal amount which has not been redeemed.  

(b) Warrants Detachable.  Neither a Forced Conversion, an MFN Exchange (as defined in the Securities Purchase Agreement) nor any Redemption of the Debenture shall have any effect on the Holder's Warrants.  The Warrants constitute a separate, detachable security from the Debentures.  Notwithstanding any MFN Exchange, Forced Conversion or Redemption of the Debenture, the Holder shall retain all of the outstanding Warrants which it received upon Closing, or otherwise, that have not been exercised by the Holder or redeemed in accordance with their terms.

Section 13.  Dispute Resolution.  In the case of a dispute as to the determination of the Conversion Price or the arithmetic calculation of the number of Conversion Shares issuable upon any conversion of this Debenture, the Company shall promptly issue to the Holder the number of Conversion Shares that are not disputed and resolve such dispute in accordance with this section.  In the case of a dispute as to the determination of the Closing Price, Closing Bid Price or the Volume Weighted Average Price or the arithmetic calculation of the Conversion Price, Conversion Price Adjustment, the amount of any Required Cash Payment amount, Interest or dividend calculation, or any redemption price, redemption amount, Default Amount or similar calculation, or the determination of whether or not a Dilutive Issuance, a Milestone Failure, any other event which would lead to an adjustment or the Conversion Price, or any issuance of Variable Equity Securities (as defined in the Securities Purchase Agreement) has occurred, the Company shall submit the disputed determinations or arithmetic calculations via facsimile within two (2) Business Days of receipt, or deemed receipt, of the Conversion Notice, any redemption notice, Default Notice or other event giving rise to such dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon such determination or calculation within two (2) Business Days of such disputed determination or arithmetic calculation being submitted to the Holder, then the Company shall, within two (2) Business Days submit via facsimile (a) the disputed determination of the Closing Price, Closing Bid Price or the Volume Weighted Average Price to an independent, reputable investment bank selected by the Company and approved by the Holder, which approval shall not be unreasonably withheld, (b) the disputed arithmetic calculation of the Conversion Price, Conversion Price Adjustment or any redemption price, redemption amount or Default Amount to the Company's independent, outside accountant or (c) the disputed facts regarding the occurrence of a Dilutive Issuance, Milestone Failure or issuance of Variable Equity Securities (or any other matter mentioned above which is not specifically required to be submitted to the investment bank or the accountant) to an expert attorney from a nationally recognized outside law firm (having at least 100 attorneys and having with no prior relationship with the Company) selected by the Company and approved by the Lead Investor as defined in the Securities Purchase Agreement). The Company, at the Company's expense, shall cause the investment bank, the accountant, the law firm, or other expert, as the case may be, to perform the determinations or calculations and notify the Company and the Holder of the results no later than five (5) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties absent demonstrable error (collectively, the "Dispute Resolution Procedures").

Section 14.   Miscellaneous.

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

(b)  Notices.  Any notice herein required or permitted to be given shall be in writing and may be personally served or delivered by courier or sent by United States mail and shall be deemed to have been given upon receipt if personally served (which shall include telephone line facsimile transmission) or sent by courier or five (5) days after being deposited in the United States mail, certified, with postage pre-paid and properly addressed, if sent by mail.  For the purposes hereof, the address of the Holder shall be as shown on the records of the Company; and the address of the Company shall be Universal Energy Corp., 30 Skyline Drive, Lake Mary, FL 32746; Phone: 800-975-2076; Fax: 800-805-4561. Both the Holder and the Company may change the address for service by service of written notice to the other as herein provided.  The Company shall provide the Holder with prompt written notice of all actions taken pursuant to this Debenture, including in reasonable detail a description of such action and the reason therefore.  Without limiting the generality of the foregoing, the Company will give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least twenty  (20) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Major Transaction, dissolution or liquidation, provided in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided to the Holder.

(c)Payments.  Whenever any payment of cash is to be made by the Company to any Person pursuant to this Debenture or otherwise pursuant to the Transaction Documents, such payment shall be made in lawful money of the United States of America by a check drawn on the account of the Company and sent via overnight courier service to such Person at such address as previously provided to the Company in writing (which address, in the case of each of the Buyers, shall initially be as set forth on the Schedule of Buyers attached to the Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash via wire transfer of immediately available funds by providing the Company with prior written notice setting out such request and the Holder's wire transfer instructions.  Whenever any amount expressed to be due by the terms of this Debenture is due on any day which is not a Business Day, the same shall instead be due on the next succeeding day which is a Business Day and, in the case of any Interest Payment Date which is not the date on which this Debenture is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of Interest due on such date.  

(d)   Amendments.  Except as otherwise expressly provided herein, the Debentures, the Other Debentures, and any provision hereof or thereof may only be amended by an instrument in writing signed by the Company and the Required Holders.  

(e)   Assignability.  This Debenture shall be binding upon the Company and its successors and assigns, and shall inure to be the benefit of the Holder and its successors and assigns.

(f)   Payment of Collection, Enforcement and Other Costs.  If (i) this Debenture is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Debenture or to enforce the provisions of this Debenture or (ii) there occurs any bankruptcy, reorganization, receivership of the Company or other proceedings affecting Company creditors' rights and involving a claim under this Debenture, then the Company shall pay the costs incurred by the Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including, but not limited to, attorneys' fees and disbursements.

(g)  Governing Law; Equitable Relief.  All questions concerning the construction, validity, enforcement and interpretation of this Debenture or the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof.  Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York.  Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.  The parties hereby waive all rights to a trial by jury.  If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys' fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

(h)  Certain Amounts.  Whenever pursuant to this Debenture the Company is required to pay an amount in excess of the principal amount of the outstanding Debenture (or the portion thereof required to be paid at that time) plus accrued and unpaid Interest (including but not limited to any Required Cash Payments), the Company and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this Debenture may be difficult to determine and the amount to be so paid by the Company represents stipulated damages and not a penalty and is intended to compensate the Holder in part for loss of the opportunity to convert this Debenture and to earn a return from the sale of shares of Common Stock acquired upon Conversion of this Debenture at a price in excess of the price paid for such Shares pursuant to this Debenture.  The Company and the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to the Holder from the receipt of a cash payment without the opportunity to convert this Debenture into shares of Common Stock.

(i) Rule 144 Hold Period.  For purposes of Rule 144, it is intended, understood and acknowledged that the Common Stock issuable upon Conversion of this Debenture shall be deemed to have been acquired at the time the Debenture was issued.  Moreover, it is intended, understood and acknowledged that the holding period for the Common Stock issuable upon Conversion of this Debenture shall be deemed to have commenced on the date this Debenture was issued.  

(j)  Purchase Agreement.  By its acceptance of the Debenture, the Holder agrees to be bound by the applicable terms of the Securities Purchase Agreement.

(k)  Notice of Corporate Events.  Except as otherwise provided in this Debenture, the Holder of this Debenture shall have no rights as a Holder of Common Stock unless and only to the extent that it converts this Debenture into Common Stock. The Company shall provide the Holder with prior notification of any meeting of the Company's shareholders (and copies of proxy materials and other information sent to shareholders).  In the event the Company takes a record of its shareholders for the purpose of determining shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Company or any proposed liquidation, dissolution or winding up of the Company, the Company shall mail a notice to the Holder, at least twenty (20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to the extent known at such time.  The Company shall make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this Section 17(l).

(l)  Remedies.  The remedies provided in this Debenture shall be cumulative and in addition to all other remedies available under this Debenture and the other Transaction Documents, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder right to pursue actual damages for any failure by the Company to comply with the terms of this Debenture or the Transaction Documents.  The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby.  Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Debenture will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Debenture or the other Transaction Documents, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, to an injunction or injunctions restraining, preventing or curing any breach of the Debenture and the other Transaction Documents and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.

(m)  Construction; Headings.  This Debenture shall be deemed to be jointly drafted by the Company and all the Purchasers and shall not be construed against any person as the drafter hereof.  The headings of this Debenture are for convenience of reference and shall not form part of, or affect the interpretation of, this Debenture.

IN WITNESS WHEREOF, Company has caused the Debenture to be signed in its name by its duly authorized officer this _____ day of September, 2007.

COMPANY: 
UNIVERSAL ENERGY CORP.

By:__________________________________

Print Name: ___________________________

Title: _________________________________        

EXHIBIT A

NOTICE OF CONVERSION

(To be Executed by the Registered Holder in order to Convert the Debenture)

The undersigned hereby irrevocably elects to convert $__________ in principal amount of the Debenture (defined herein) into shares of Common Stock, par value $0.0001 per share ("Common Stock"), of UNIVERSAL ENERGY CORP. (the "Company"), plus:

- $_________ in accrued and unpaid Interest Payments, plus

- $_________ in other Required Cash Payments (specify): _____________

______________________________________________________.

all according to the conditions of the convertible Debenture of the Company dated as of September _____, 2007 (the "Debenture"), as of the date written below. If securities are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates. No fee will be charged to the Holder for any Conversion, except for transfer taxes, if any.  By submitting this Notice of Conversion, the Holder certifies that the issuance of the number of shares of Common Stock requested hereby will not result in a violation of the Beneficial Ownership Limitation.

The Company shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC Transfer").

         Name of DTC Prime Broker:______________________________

         Account Number:________________________________________

         In lieu of receiving shares of Common Stock issuable pursuant to this

         Notice of Conversion by way of a DWAC Transfer, the undersigned hereby

         requests that the Company issue a certificate or certificates for the

         number of shares of Common Stock set forth above (which numbers are

         based on the Holder's calculation attached hereto) in the name(s)

         specified immediately below or, if additional space is necessary, on an

         attachment hereto:

         Name: _________________________________________________

         Address: _______________________________________________

The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable to the undersigned upon Conversion of the Debenture shall be made pursuant to registration of the securities under the Securities Act of 1933, as amended (the "ACT"), or pursuant to an exemption from registration under the Act.

                  (i) Date of Conversion:_______________________________

                  Applicable Conversion Price:________________________

                  Number of Shares of Common ______________________

                  Stock to be Issued Pursuant to (i): ____________________

                  Conversion of the Debenture:_______________________

(ii) Conversion of accrued and unpaid Interest Payments, in accrued and unpaid Required Cash Payments:  ______________________________________________________________.

                  Signature: ______________________________________________________
      Name: _________________________________________________________

                  Address: _______________________________________________________

Upon Conversion of the Debenture in accordance with the terms thereof, the Holder shall not be required to physically surrender the Debenture (or evidence of loss, theft or destruction thereof) to the Company unless all of the Debenture is converted, in which case such Holder shall deliver the Debenture being converted to the Company promptly following the Conversion Date at issue.  The Company shall issue and deliver shares of Common Stock to an overnight courier not later than the third Business Days following receipt of the Notice of Conversion with respect to the Debenture(s) to be converted, and shall make payments pursuant to the Debenture for the number of Business Days such issuance and delivery is late.

 

SCHEDULE 6(c) 

MILESTONES

 

 

	
Milestone Date
	
Milestone Goals

	
 

 

 

March 31, 2008
	
$1,750,000 in revenues, from any combination of the oil and gas prospects listed in the Company's Form 10-Q for the period ending June 30, 2007 and from Lone Oak, for the two fiscal quarter period ending on March 31, 2008.

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