Document:

Unassociated Document

    BRIDGE
      LOAN AGREEMENT

    

    

    THIS
      BRIDGE LOAN AGREEMENT,
      dated
      as of December 27, 2006, is entered into by and between NEAH
      POWER SYSTEMS, INC.,
      a
      Nevada corporation with headquarters located at 22122 20th
      Avenue,
      SE, Suite 161, Bothell, Washington 98021 (the “Company”), and each individual or
      entity named on a signature page hereto (as used herein, each such signatory
      is
      referred to as the “Buyer” or a “Buyer”) (each agreement with a Buyer being
      deemed a separate and independent agreement between the Company and such Buyer,
      except that each Buyer acknowledges and consents to the rights granted to each
      other Buyer [each, an “Other Buyer”] under such agreement and the Transaction
      Agreements, as defined below, referred to therein).

    

    W
      I T N E S S E T H:

    

    WHEREAS,
      the
      Company and each of the Buyers are executing and delivering this Agreement
      in
      accordance with and in reliance upon the exemption from securities registration
      for offers and sales to accredited investors afforded, inter alia,
      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”), and/or Section 4(2) of the 1933 Act;
      and

    

    WHEREAS,
      each
      Buyer wishes to lend funds to the Company, subject to and upon the terms and
      conditions of this Agreement and acceptance of this Agreement by the Company,
      the repayment of which will be represented by 6% Secured Promissory Note of
      the
      Company (each, a “Note”), on the terms and conditions referred to herein;
      and

    

    WHEREAS,
      in
      connection with the loan to be made by each Buyer, the Company has agreed to
      issue the Issued Shares (as defined below) to the Buyer; and

    

    WHEREAS,
      the
      Company’s obligations to repay each Note will be guaranteed pursuant to a
      Guaranty and a Security Interest Agreement (as defined below) executed by the
      Subsidiary, as debtor, secured by a senior security interest of the assets
      of
      the Subsidiary; and

    

    WHEREAS,
      the
      Company’s obligations to repay each Note will be guaranteed under a the Pledgor
      Guarantee (as defined below) by one or more guarantors named therein (each,
      a
“Pledgor”) and, pursuant to a Security Interest and Pledge Agreement (the
“Pledge Agreement”) executed by each such Pledgor and acknowledged by the
      Company, secured by a pledge of certain shares of the Company’s Common Stock and
      the Subsidiary Common Stock (the “Pledged Shares”), as to which Pledged Shares
      such Pledgor is the registered and beneficial owner;

    

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

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    1. AGREEMENT
      TO PURCHASE; PURCHASE PRICE.

    

    a. Purchase.

    

    (i) Subject
      to the terms and conditions of this Agreement and the other Transaction
      Agreements, each Buyer hereby agrees to loan to the Company the principal amount
      specified on the Buyer’s signature page hereof (the “Loan Amount”). The
      aggregate Loan Amount of all Buyers shall not exceed $1,550,000 (the “Aggregate
      Loan Amount”).

    

    (ii) The
      obligation to repay the loan from the Buyer shall be evidenced by the Company’s
      issuance of the Note, which shall be shall be in the form of Annex
      I annexed
      hereto. The Note will be guaranteed by each of the Pledgors, as provided in
      Annex
      VI-A
      (each, a
“Pledgor Guarantee”) and secured by the pledge of the Pledged Shares under the
      terms of the Pledge Agreement, which Pledge Agreement shall be substantially
      in
      the form of Annex
      VII hereto
      (the “Pledge Agreement”), which the Company will acknowledge. Repayment of the
      Note shall be secured pursuant to the terms of a Security Interest Agreement,
      to
      which the Company and the Subsidiary shall be a party, which agreements shall
      be
      substantially in the form annexed hereto as Annex
      VIII-A,
      (a
“Security Interest Agreement”).

    

    (iii) In
      consideration of the loan to be made by each Buyer, the Company agrees to issue
      to each Buyer the Initial Issued Shares on the Closing Date. Additional
      provisions relating to the Issued Shares are provided below.

    

    (iv) The
      loan
      to be made by the Buyer and the issuance of the Note and the Issued Shares
      to
      the Buyer and the other transactions contemplated hereby are sometimes referred
      to herein and in the other Transaction Agreements as the purchase and sale
      of
      the Securities (as defined below), and are referred to collectively as the
      “Transactions.”.

    

    b. Certain
      Definitions. As
      used
      herein, each of the following terms has the meaning set forth below, unless
      the
      context otherwise requires:

    

    “Affiliate”
      means, with respect to a specific Person referred to in the relevant provision,
      another Person who or which controls or is controlled by or is under common
      control with such specified Person. 

    

    “Buyer
      Control Person” means each director, executive officer, promoter, and such other
      Persons as may be deemed in control of the Buyer pursuant to Rule 405 under
      the
      1933 Act or Section 20 of the 1934 Act (as defined below).

    

    “Buyer’s
      Allocable Share” means the fraction, of which the numerator is the Buyer’s Loan
      Amount and the denominator is the Aggregate Loan Amount.

     

    
      
        
        

      

      
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    “Certificates”
      means the original ink-signed Note and the Issued Share Certificates, each
      duly
      executed by the Company and issued on the Closing Date in the name of the
      Buyer.

    

    “Closing
      Date” means the date of the closing of the Transactions, as provided
      herein. 

    

    “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.

    

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

    

    "Disclosure
      Annex" means Annex
      V to
      this
      Agreement; provided, however, that the Disclosure Annex shall be arranged in
      sections corresponding to the identified Sections of this Agreement, but the
      disclosure in any such section of the Disclosure Annex shall qualify other
      provisions in this Agreement to the extent that it would be readily apparent
      to
      an informed reader from a reading of such section of the Disclosure Annex that
      it is also relevant to other provisions of this Agreement.

    

    “Escrow
      Agent” means Krieger & Prager LLP, the escrow agent identified in the Joint
      Escrow Instructions attached hereto as Annex
      II
      (the
“Joint Escrow Instructions”).

    

    “Escrow
      Funds” means the Loan Amount delivered to the Escrow Agent as contemplated by
      Sections 1(c) and (d) hereof. 

    

    “Escrow
      Property” means the Escrow Funds and the Certificates delivered to the Escrow
      Agent as contemplated by Section 1(c) hereof.

    

    “Guarantee”
      means each Pledgor Guarantee or any one or more of them, as the context may
      require.

    

    “Holder”
      means the Person holding the relevant Securities at the relevant
      time.

    

    “Initial
      Issued Shares” means, for each Buyer, (i) 500,000 shares of Common Stock,
      multiplied by (ii) the Buyer’s Allocable Share; the Initial Issued Shares are to
      be issued on the Closing Date.

    

    “Issued
      Share Certificates” means one or more stock certificates issued by the Company
      in the name of the Buyer representing, in the aggregate, the relevant Issued
      Shares.

    

    “Issued
      Shares” means the Initial Issued Shares and the Additional Issued Shares, if
      any.

    

    
      
        
        

      

      
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    “Last
      Audited Date” means December 31, 2005.

    

    “Material
      Adverse Effect” means an event or combination of events, which individually or
      in the aggregate, would reasonably be expected to (w) adversely affect the
      legality, validity or enforceability of the Securities or any of the Transaction
      Agreements, (x) have or result in a material adverse effect on the results
      of
      operations, assets, prospects, or condition (financial or otherwise) of the
      Company and its subsidiaries, taken as a whole, (y) adversely impair the
      Company's ability to perform fully on a timely basis its obligations under
      any
      of the Transaction Agreements or the transactions contemplated thereby, or
      (z)
      materially and adversely affect the value of the rights granted to the Buyer
      in
      the Transaction Agreements.

    

    “Maturity
      Date Extension Notice” has the meaning ascribed to in the Note.

    

    “Person”
      means any living person or any entity, such as, but not necessarily limited
      to,
      a corporation, partnership or trust.

    

    “Principal
      Trading Market” means the Over the Counter Bulletin Board or such other market
      on which the Common Stock is principally traded at the relevant time, but shall
      not include the “pink sheets.”

    

    “Registrable
      Securities” means all of the following: (i) the Issued Shares and (ii) the
      Pledged Shares which have been claimed by the Holder as contemplated by the
      Pledge Agreement, except to the extent such shares can then be sold by the
      Holder without volume or other restrictions or limit.

    

    “Registration
      Rights Provisions” means the piggy-back registration rights contemplated by the
      terms of this Agreement, including, but not necessarily limited to, Section
      4(g)
      hereof, and of the other Transaction Agreements.

    

    “Registration
      Statement” means an effective registration statement covering the Registrable
      Securities. 

    

    “Securities”
      means the Note and the Shares. 

    

    “Security
      Interest Agreement” shall mean, as applicable, the Security Interest Agreement,
      the Intellectual Property Security Interest Agreement and Subsidiary Security
      Interest and Pledge Agreement.

    

    “Shares”
      means the shares of Common Stock representing any or all of the Issued Shares
      and, where relevant, the Pledged Shares. 

    

    “State
      of
      Incorporation” means Nevada.

     

    
      
        
        

      

      
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    “Subsidiary”
      means Neah Power Systems, Inc., a Washington corporation.

    

    “Trading
      Day” means any day during which the Principal Trading Market shall be open for
      business.

    

    “Transfer
      Agent” means, at any time, the transfer agent for the Company’s Common
      Stock.

    

    “Transaction
      Agreements” means this Bridge Loan Agreement, each Note, each Guarantee, the
      Joint Escrow Instructions, each Security Interest Agreement, each Pledge
      Agreement, and includes all ancillary documents referred to in those
      agreements.

    

    c. Form
      of Payment; Delivery of Certificates. 

    

    (i) The
      Buyer
      shall pay the Loan Amount by delivering immediately available good funds in
      United States Dollars to the Escrow Agent no later than the date prior to the
      Closing Date. 

    

    (ii) No
      later
      than the Closing Date, but in any event promptly following payment by the Buyer
      to the Escrow Agent of the Loan Amount, the Company shall cause its transfer
      agent to deliver the relevant Certificates, each duly executed on behalf of
      the
      Company and issued in the name of the Buyer, to the Escrow Agent.

    

    (iii) By
      signing this Agreement, each of the Buyer and the Company, subject to acceptance
      by the Escrow Agent, agrees to all of the terms and conditions of, and becomes
      a
      party to, the Joint Escrow Instructions, all of the provisions of which are
      incorporated herein by this reference as if set forth in full.

    

    d. Method
      of Payment.
      Payment
      into escrow of the Loan Amount shall be made by wire transfer of funds
      to:

    

    Bank
      of
      New York

    350
      Fifth
      Avenue

    New
      York,
      New York 10001

    

    ABA#
      

    For
      credit to the account of  

    Account
      No.: 

    Re: NEAH
      POWER SYSTEMS, INC. Dec 06

    

    
      
        
        

      

      
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    2.
      BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION; INDEPENDENT
      INVESTIGATION.

    

    The
      Buyer
      represents and warrants to, and covenants and agrees with, the Company as
      follows:

    

    a. Without
      limiting Buyer's right to sell the Securities pursuant to an effective
      registration statement or otherwise in compliance with the 1933 Act, the Buyer
      is purchasing the Securities for its own account for investment only and not
      with a view towards the public sale or distribution thereof and not with a
      view
      to or for sale in connection with any distribution thereof.

    

    b. The
      Buyer
      is (i) an “accredited investor” as that term is defined in Rule 501 of the
      General Rules and Regulations under the 1933 Act by reason of Rule 501(a)(3),
      (ii) experienced in making investments of the kind described in this Agreement
      and the related documents, (iii) able, by reason of the business and financial
      experience of its officers (if an entity) and professional advisors (who are
      not
      affiliated with or compensated in any way by the Company or any of its
      Affiliates or selling agents), to protect its own interests in connection with
      the transactions described in this Agreement, and the related documents, and
      to
      evaluate the merits and risks of an investment in the Securities, and (iv)
      able
      to afford the entire loss of its investment in the Securities.

    

    c. All
      subsequent offers and sales of the Securities by the Buyer shall be made
      pursuant to registration of the relevant Securities under the 1933 Act or
      pursuant to an exemption from registration.

    

    d. The
      Buyer
      understands that the Securities are being offered and sold to it in reliance
      on
      specific exemptions from the registration requirements of the 1933 Act 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.

    

    e. The
      Buyer
      and its advisors, if any, have been furnished with or have been given access
      to
      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, including those set forth on in any annex attached
      hereto. The Buyer and its advisors, if any, have been afforded the opportunity
      to ask questions of the Company and its management and have received complete
      and satisfactory answers to any such inquiries. Without limiting the generality
      of the foregoing, the Buyer has also had the opportunity to obtain and to review
      the Company's filings on EDGAR listed on Annex
      IV
      hereto
      (the documents listed on such Annex IV, to the extent available on EDGAR or
      otherwise provided to the Buyer as indicated on said Annex IV, collectively,
      the
“Company's SEC Documents”).

    

    
      
        
        

      

      
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    f. The
      Buyer
      understands that its investment in the Securities involves a high degree of
      risk.

    

    g. The
      Buyer
      hereby represents that, in connection with its purchase of the Securities,
      it
      has not relied on any statement or representation by the Company or any of
      its
      officers, directors and employees or any of their respective attorneys or
      agents, except as specifically set forth herein. 

    

    h. The
      Buyer
      understands that no United States federal or state agency or any other
      government or governmental agency has passed on or made any recommendation
      or
      endorsement of the Securities.

    

    i. This
      Agreement and the other Transaction Agreements to which the Buyer is a party,
      and the transactions contemplated thereby, have been duly and validly
      authorized, executed and delivered on behalf of the Buyer and are valid and
      binding agreements of the Buyer enforceable in accordance with their respective
      terms, subject as to enforceability to general principles of equity and to
      bankruptcy, insolvency, moratorium and other similar laws affecting the
      enforcement of creditors' rights generally.

    

    3. COMPANY
      REPRESENTATIONS, ETC. The
      Company represents and warrants to the Buyer as of the date hereof and as of
      the
      Closing Date that, except as otherwise provided in the Disclosure Annex or
      in
      the Company’s SEC Documents:

    

    a. Rights
      of Others Affecting the Transactions. There
      are
      no preemptive rights of any shareholder of the Company, as such, to acquire
      the
      Note or the Issued Shares. No party other than a Buyer or an Other Buyer has
      a
      currently exercisable right of first refusal which would be applicable to any
      or
      all of the transactions contemplated by the Transaction Agreements.

    

    b. Status.
      The
      Company is a corporation duly organized, validly existing and in good standing
      under the laws of the State of Incorporation and has the requisite corporate
      power to own its properties and to carry on its business as now being conducted.
      The Company is duly qualified as a foreign corporation to do business and is
      in
      good standing in each jurisdiction where the nature of the business conducted
      or
      property owned by it makes such qualification necessary, other than those
      jurisdictions in which the failure to so qualify would not have or result in
      a
      Material Adverse Effect. The Company has registered its stock and is obligated
      to file reports pursuant to Section 12 or Section 15(d) of the Securities and
      Exchange Act of 1934, as amended (the “1934 Act”). The Common Stock is quoted on
      the pink sheets and an application has been filed and is pending to have it
      quoted on the Principal Trading Market. The Company has received no notice,
      either oral or written, with respect to the continued eligibility of the Common
      Stock for such quotation on the Principal Trading Market, and the Company has
      maintained all requirements on its part for the continuation of such quotation.
      

    

    c. Authorized
      Shares; Subsidiaries. 

    

    
      
        
        

      

      
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    (i) The
      authorized capital stock of the Company consists of (a) 500,000,000 shares
      of
      Common Stock, $0.001 par value per share, of which approximately 102,662,431
      shares are outstanding as of the date hereof, and (b) 25,000 shares of Series
      A
      Convertible Preferred Stock, par value $.001 per share, of which as of the
      date
      hereof, there are designated and outstanding no shares. 

    

    (ii) All
      issued and outstanding shares of Common Stock have been duly authorized and
      validly issued and are fully paid and non-assessable. The Company has sufficient
      authorized and unissued shares of Common Stock as may be necessary to effect
      the
      issuance of the Shares on the Closing Date. 

    

    (iii) As
      of the
      Closing Date, the Shares shall have been duly authorized by all necessary
      corporate action on the part of the Company, and, when issued on the Closing
      Date or pursuant to other relevant provisions of the Transaction Agreements,
      in
      each case in accordance with their respective terms, will be duly and validly
      issued, fully paid and non-assessable and will not subject the Holder thereof
      to
      personal liability by reason of being such Holder.

    

    (iv) The
      Company has no direct or indirect Subsidiaries other than as specified in the
      Disclosure Annex. Except as disclosed in the Disclosure Annex or in the
      succeeding subparagraph (b), the Company owns, directly or indirectly, all
      of
      the capital stock of each of its Subsidiaries, free and clear of any and all
      liens (other than liens specifically permitted by the relevant Security Interest
      Agreement), and all the issued and outstanding shares of capital stock of each
      of its Subsidiaries are validly issued and are fully paid, non-assessable and
      free of preemptive and similar rights.

    

    d. Transaction
      Agreements and Stock.
      This
      Agreement and each of the other Transaction Agreements, and the transactions
      contemplated thereby, have been duly and validly authorized by the Company,
      this
      Agreement has been duly executed and delivered by the Company and this Agreement
      is, and the Note and each of the other Transaction Agreements, when executed
      and
      delivered by the Company, will be, valid and binding agreements of the Company
      enforceable in accordance with their respective terms, subject as to
      enforceability to general principles of equity and to bankruptcy, insolvency,
      moratorium, and other similar laws affecting the enforcement of creditors'
      rights generally.

     

    e. Non-contravention.
      The
      execution and delivery of this Agreement and each of the other Transaction
      Agreements by the Company, the issuance of the Securities, and the consummation
      by the Company or the Subsidiary of the other transactions contemplated by
      this
      Agreement, each of the Notes and the other Transaction Agreements do not and
      will not conflict with or result in a breach by the Company or the Subsidiary
      of
      any of the terms or provisions of, or constitute a default (or an event that
      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 (with
      or without notice, lapse of time or both) under (i) the certificate of
      incorporation or by-laws of the Company or the Subsidiary, as the case may
      be,
      each as currently in effect, (ii) any indenture, mortgage, deed of trust, or
      other material agreement or instrument to which the Company or the Subsidiary
      is
      a party or by which it or any of its properties or assets are bound, including
      any listing agreement for the Common Stock of the Company except as herein
      set
      forth, or (iii) to its knowledge, any existing applicable law, rule, or
      regulation or any applicable decree, judgment, or order of any court, United
      States federal or state regulatory body, administrative agency, or other
      governmental body having jurisdiction over the Company or the Subsidiary or
      any
      of their respective properties or assets, except such conflict, breach or
      default which would not have or result in a Material Adverse
      Effect.

     

    
      
        
        

      

      
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    f. Approvals.
      No
      authorization, approval or consent of any court, governmental body, regulatory
      agency, self-regulatory organization, or stock exchange or market or the
      shareholders of the Company is required to be obtained by the Company for the
      issuance and sale of the Securities to the Buyer as contemplated by this
      Agreement, except such authorizations, approvals and consents that have been
      obtained.

    

    g. Filings.
      None of
      the reports
      required to be filed by the Company under the Exchange Act, including pursuant
      to Section 13(a)
      or
15(d)
      thereof, for the 12 months preceding the date hereof (the
“SEC
      Documents”) contained, at the time they were filed, any untrue statement of a
      material fact or omitted to state any material fact required to be stated
      therein or necessary to make the statements made therein in light of the
      circumstances under which they were made, not misleading. Since November 10,
      2006, the Company has timely filed all requisite forms, reports and exhibits
      thereto required to be filed by the Company with the SEC.

    

    h. Absence
      of Certain Changes.
      Since
      the Last Audited Date, there has been no material adverse change and no Material
      Adverse Effect, except as disclosed (whether with respect to past events or
      to
      anticipated events) in the Company’s SEC Documents. Since the Last Audited Date,
      except as provided in the Company’s SEC Documents, the Company has not (i)
      incurred or become subject to any material liabilities (absolute or contingent)
      except liabilities incurred in the ordinary course of business consistent with
      past practices; (ii) discharged or satisfied any material lien or encumbrance
      or
      paid any material obligation or liability (absolute or contingent), other than
      current liabilities paid in the ordinary course of business consistent with
      past
      practices; (iii) declared or made any payment or distribution of cash or other
      property to shareholders with respect to its capital stock, or purchased or
      redeemed, or made any agreements to purchase or redeem, any shares of its
      capital stock; (iv) sold, assigned or transferred any other tangible assets,
      or
      canceled any debts owed to the Company by any third party or claims of the
      Company against any third party, except in the ordinary course of business
      consistent with past practices; (v) waived any rights of material value, whether
      or not in the ordinary course of business, or suffered the loss of any material
      amount of existing business; (vi) made any increases in employee compensation,
      except in the ordinary course of business consistent with past practices; or
      (vii) experienced any material problems with labor or management in connection
      with the terms and conditions of their employment.

     

    i. Full
      Disclosure.
      To the
      best of the Company’s knowledge, there is no fact known to the Company (other
      than general economic conditions known to the public generally or as disclosed
      in the Company’s SEC Documents) that has not been disclosed in writing to the
      Buyer that would reasonably be expected to have or result in a Material Adverse
      Effect.

     

    
      
        
        

      

      
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    j. Absence
      of Litigation.
      There is
      no action, suit, proceeding, inquiry or investigation before or by any court,
      public board or body pending or, to the knowledge of the Company, threatened
      against or affecting the Company before or by any governmental authority or
      nongovernmental department, commission, board, bureau, agency or instrumentality
      or any other person, wherein an unfavorable decision, ruling or finding would
      have a Material Adverse Effect or which would adversely affect the validity
      or
      enforceability of, or the authority or ability of the Company to perform its
      obligations under, any of the Transaction Agreements. The Company is not aware
      of any valid basis for any such claim that (either individually or in the
      aggregate with all other such events and circumstances) could reasonably be
      expected to have a Material Adverse Effect. There are no outstanding or
      unsatisfied judgments, orders, decrees, writs, injunctions or stipulations
      to
      which the Company is a party or by which it or any of its properties is bound,
      that involve the transaction contemplated herein or that, alone or in the
      aggregate, could reasonably be expect to have a Material Adverse
      Effect.

    

    k. Absence
      of Events of Default.
      Except
      as set forth in Section 3(e) hereof, (i) neither the Company nor any of its
      subsidiaries is in default in the performance or observance of any material
      obligation, agreement, covenant or condition contained in any material
      indenture, mortgage, deed of trust or other material agreement to which it
      is a
      party or by which its property is bound, and (ii) no Event of Default (or its
      equivalent term), as defined in the respective agreement to which the Company
      or
      its subsidiary is a party, and no event which, with the giving of notice or
      the
      passage of time or both, would become an Event of Default (or its equivalent
      term) (as so defined in such agreement), has occurred and is continuing, which
      would have a Material Adverse Effect.

    

    l. Absence
      of Certain Company Control Person Actions or Events.
      To the
      Company’s knowledge, none of the following has occurred during the past five (5)
      years with respect to a Company Control Person:

    

    (1)
      A
      petition under the federal bankruptcy laws or any state insolvency law was
      filed
      by or against, or a 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;

    

    (2)
      Such
      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);

    

    (3)
      Such
      Company Control Person was the subject of any order, judgment or decree, not
      subsequently reversed, suspended or vacated, of any court of competent
      jurisdiction, permanently or temporarily enjoining him from, or otherwise
      limiting, the following activities:

     

    
      
        
        

      

      
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    (i)
      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;

    

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

    

    (iii)
      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;

    

    (4)
      Such
      Company Control Person was 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

    

    (5)
      Such
      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.

     

    m. No
      Undisclosed Liabilities or Events.
      To the
      best of the Company’s knowledge, the Company has no liabilities or obligations
      other than those disclosed in the Transaction Agreements or the Company's SEC
      Documents or those incurred in the ordinary course of the Company's business
      since the Last Audited Date, or which individually or in the aggregate, do
      not
      or would not have a Material Adverse Effect. No event or circumstances has
      occurred or exists with respect to the Company or its properties, business,
      operations, condition (financial or otherwise), or results of operations, which,
      under applicable law, rule or regulation, requires public disclosure or
      announcement prior to the date hereof by the Company but which has not been
      so
      publicly announced or disclosed. There are no proposals currently under
      consideration or currently anticipated to be under consideration by the Board
      of
      Directors or the executive officers of the Company which proposal would (x)
      change the articles or certificate of incorporation or other charter document
      or
      by-laws of the Company, each as currently in effect, with or without shareholder
      approval, which change would reduce or otherwise adversely affect the rights
      and
      powers of the shareholders of the Common Stock or (y) materially or
      substantially adversely change the business, assets or capital of the Company,
      including its interests in subsidiaries.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    n. No
      Integrated Offering.
      Neither
      the Company nor any of its Affiliates nor any Person acting on its or their
      behalf has, directly or indirectly, at any time since April 1, 2006, made any
      offer or sales of any security or solicited any offers to buy any security
      under
      circumstances that would eliminate the availability of the exemption from
      registration under Regulation D in connection with the offer and sale of the
      Securities as contemplated hereby.

    

    o. Dilution.
      The
      Issued Shares may have a dilutive effect on the ownership interests of the
      other
      shareholders (and Persons having the right to become shareholders) of the
      Company. The Company's executive officers and directors have studied and fully
      understand the nature of the Securities being sold hereby and recognize that
      they have such a potential dilutive effect. The board of directors of the
      Company has concluded, in its good faith business judgment, that such issuance
      is in the best interests of the Company.

    

    p. Recognition
      of Pledge Agreement and Pledged Shares.
      The
      Company acknowledges that the execution and delivery of each Pledge Agreement,
      and the fulfillment o f the terms thereof, is a condition to the closing of
      the
      Transactions. The Company will recognize the terms of each Pledge Agreement
      and,
      as provided therein, the transfer of the Pledged Shares to the Buyers and will
      take no position or give the Transfer Agent any instructions which would be
      inconsistent with the rights of the Buyers to have the Pledged Shares
      transferred to the Buyers in accordance with the terms of the Pledge Agreement.
      

    

    q. Fees
      to Brokers, Finders and Others.
      The
      Company has taken no action which would give rise to any claim by any Person,
      other than Palladium Capital Advisors, for brokerage commission, finder's fees
      or similar payments by Buyer relating to this Agreement or the transactions
      contemplated hereby. Buyer shall have no obligation with respect to such fees
      or
      with respect to any claims made by or on behalf of other Persons for fees of
      a
      type contemplated in this paragraph that may be due in connection with 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, as and when
      incurred.

     

    r. Confirmation.
      The
      Company confirms that all statements of the Company contained herein shall
      survive acceptance of this Agreement by the Buyer. The Company agrees that,
      if
      any events occur or circumstances exist prior to the Closing Date or the release
      of the Loan Amount to the Company which would make any of the Company’s
      representations, warranties, agreements or other information set forth herein
      materially untrue or materially inaccurate as of such date, the Company shall
      immediately notify the Buyer (directly or through its counsel, if any) and
      the
      Escrow Agent in writing prior to such date of such fact, specifying which
      representation, warranty or covenant is affected and the reasons
      therefor.

    

    4. CERTAIN
      COVENANTS AND ACKNOWLEDGMENTS.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    a. Transfer
      Restrictions.
      The
      Buyer acknowledges that (1) the Securities have not been and are not being
      registered under the provisions of the 1933 Act and, except as provided in
      the
      Registration Rights Provisions or otherwise included in an effective
      registration statement, the Shares have not been and are not being registered
      under the 1933 Act, and may not be transferred unless (A) subsequently
      registered thereunder or (B) the Buyer shall have delivered to the Company
      an
      opinion of counsel, reasonably satisfactory in form, scope and substance 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; (2) any sale
      of
      the Securities made in reliance on Rule 144 promulgated under the 1933 Act
      may
      be made only in accordance with the terms of said Rule and further, if said
      Rule
      is not applicable, any resale of such Securities under circumstances in which
      the seller, or the Person through whom the sale is made, may be deemed to be
      an
      underwriter, as that term is used in the 1933 Act, may require compliance with
      some other exemption under the 1933 Act or the rules and regulations of the
      SEC
      thereunder; and (3) neither the Company nor any other Person is under any
      obligation to register the Securities (other than pursuant to the Registration
      Rights Provisions) under the 1933 Act or to comply with the terms and conditions
      of any exemption thereunder.

    

    b. Restrictive
      Legend.
      The
      Buyer acknowledges and agrees that, until such time as the relevant Shares
      have
      been registered under the 1933 Act, as contemplated by the Registration Rights
      Provisions and sold in accordance with an effective Registration Statement
      or
      otherwise in accordance with another effective registration statement, the
      certificates and other instruments representing any of the Securities shall
      bear
      a restrictive legend in substantially the following form (and a stop-transfer
      order may be placed against transfer of any such Securities):

    

    THESE
      SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
      AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED
      FOR
      SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
      OR
      AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH
      REGISTRATION IS NOT REQUIRED.

    

    c. Filings.
      The
      Company undertakes and agrees to take all reasonable action under its control
      to
      make all necessary filings in connection with the sale of the Securities to
      the
      Buyer under any United States laws and regulations applicable to the Company,
      or
      by any domestic securities exchange or trading market, and to provide a copy
      thereof to the Buyer promptly after such filing.

     

    d. Reporting
      Status.
      So long
      as the Buyer beneficially owns any of the Shares or has a security interest
      in
      the Pledged Shares, the Company shall take all reasonable action under its
      control to file all reports required to be filed with the SEC pursuant to
      Section 13 or 15(d) of the 1934 Act, and to ensure that adequate current public
      information with respect to the Company, as required in accordance with Rule
      144(c)(2) of the 1933 Act, is publicly available, and 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.
      The
      Company will take all reasonable action under its control to maintain the
      continued listing and quotation and trading of its Common Stock (including,
      without limitation, all Registrable Securities) on the Principal Trading Market
      or a listing on the NASDAQ/Small Cap or National Markets and, to the extent
      applicable to it, will comply in all material respects with the Company’s
      reporting, filing and other obligations under the by-laws or rules of the
      Principal Trading Market and/or the National Association of Securities Dealers,
      Inc., as the case may be, applicable to it for so long as the Buyer beneficially
      owns any of the Shares or has a security interest in the Pledged
      Shares.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    e. Use
      of Proceeds.
      The
      Company will use the proceeds received hereunder for the purposes set forth
      in
Annex
      IX
      annexed
      hereto. 

    

    f. Issued
      Shares.
      The
      Company agrees to issue the Initial Issued Shares to the Buyer on the Closing
      Date. All of the Issued Shares shall have Registration Rights
      Provisions.

    

    

    g. Registration
      Rights; Rule 144.
      

    

    (i) The
      Company shall include all of the Pledged Shares in a Registration Statement
      to
      be filed within thirty (30) days after the Closing Date, and use reasonable
      effort to have such Registration Statement (and any applicable Blue Sky filings)
      declared effective as soon as feasible.

    

    (ii) The
      Holder shall have piggy-back registration rights with respect to the Issued
      Shares subject to the conditions set forth below. If the Company participates
      (whether voluntarily or by reason of an obligation to a third party) in the
      registration of any shares of the Company’s stock (other than a registration on
      Form S-8 or on Form S-4), the Company shall give written notice thereof to
      the
      Holder and the Holder shall have the right, exercisable within ten (10) Trading
      Days after receipt of such notice, to demand inclusion of all or a portion
      of
      the Holder’s Issued Shares in such registration statement (a “Subsequent
      Registration Statement”), without any cutbacks. If the Holder exercises such
      election, the Issued Shares so designated shall be included in the registration
      statement (without any holdbacks) at no cost or expense to the Holder (other
      than any commissions, if any, relating to the sale of Holder’s shares). Each
      Holder’s rights under this Section 4(g)(i) shall expire at such time as such
      Holder can sell all of such Holder’s remaining Issued Shares under Rule 144 (as
      defined below) without volume or other restrictions or limit.

     

    (iii) The
      parties acknowledge that the damages which may be incurred by the Holder if
      the
      Company does not fulfill its obligations under subparagraph (i) above, which
      will affect the Holder’s ability to sell the shares, may be difficult to
      ascertain. If either (A) the Company fails to give the Buyer the notice referred
      to in the immediately preceding subparagraph (i) which results in any of the
      Holder’s shares not being included in the Subsequent Registration Statement or
      (B) after giving such notice, the Company fails to include all of the Holder’s
      shares (to the extent requested by the Holder) in the Subsequent Registration
      Statement, then the Company will make payment to the Buyer, for each Computation
      Period (as defined below) the amount equal to $15,500.00 multiplied by the
      Buyer’s Allocable Share (the “Periodic Amount”). The term “Computation Period”
means each thirty (30) day period commencing on the effective date of the
      Subsequent Registration Statement and ending on the date on which there are
      one
      or more effective registration statements covering the Buyer’s sale of all of
      the Holder’s shares. The Periodic Amount shall be due without further demand or
      notice from the Buyer. The parties agree that the amounts payable pursuant
      to
      the foregoing provisions of this Section 4(g) represent a reasonable estimate
      on
      the part of the parties, as of the date of this Agreement, of the amount of
      such
      damages.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    (iv) With
      a
      view to making available to the Holder the benefits of Rule 144 promulgated
      under the 1933 Act or any other similar rule or regulation of the SEC that
      may
      at any time permit Holder to sell securities of the Company to the public
      without registration (collectively, “Rule 144”), the Company agrees to take all
      reasonable action under its control to:

    

    (a) make
      and
      keep public information available, as those terms are understood and defined
      in
      Rule 144;

    

    (b) file
      with
      the SEC in a timely manner all reports and other documents required of the
      Company under the 1933 Act and the 1934 Act; and

    

    (c) furnish
      to the Holder so long as such party owns Registrable Securities, promptly upon
      request, (i) a written statement by the Company that it has complied with the
      reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) if
      not
      available on the SEC’s EDGAR system, a copy of the most recent annual or
      quarterly report of the Company and such other reports and documents so filed
      by
      the Company and (iii) such other information as may be reasonably requested
      to
      permit the Holder to sell such securities pursuant to Rule 144 without
      registration; and

    

    (d) at
      the
      request of any Holder then holding Registrable Securities, give the Transfer
      Agent instructions (supported by an opinion of Company counsel, if required
      or
      requested by the Transfer Agent) to the effect that, upon the Transfer Agent’s
      receipt from such Holder of

    

    (i)
      a
      certificate (a “Rule 144 Certificate”) certifying (A) that the Holder’s holding
      period (as determined in accordance with the provisions of Rule 144) for the
      Shares which the Holder proposes to sell (the “Securities Being Sold”) is not
      less than (1) year and (B) as to such other matters as may be appropriate in
      accordance with Rule 144 under the Securities Act, and 

     

    (ii)
      an
      opinion of counsel acceptable to the Company (for which purposes it is agreed
      that Krieger & Prager LLP shall be deemed acceptable if not given by Company
      counsel) that, based on the Rule 144 Certificate, Securities Being Sold may
      be
      sold pursuant to the provisions of Rule 144, even in the absence of an effective
      registration statement, 

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    the
      Transfer Agent is to effect the transfer of the Securities Being Sold and issue
      to the buyer(s) or transferee(s) thereof one or more stock certificates
      representing the transferred Securities Being Sold without any restrictive
      legend and without recording any restrictions on the transferability of such
      shares on the Transfer Agent’s books and records (except to the extent any such
      legend or restriction results from facts other than the identity of the relevant
      Holder, as the seller or transferor thereof, or the status, including any
      relevant legends or restrictions, of the shares of the Securities Being Sold
      while held by the Buyer). If the Transfer Agent reasonably requires any
      additional documentation at the time of the transfer, the Company shall deliver
      or cause to be delivered all such reasonable additional documentation as may
      be
      necessary to effectuate the issuance of an unlegended certificate. 

    

    (v) Notwithstanding
      the foregoing, if at any time or from time to time after the date of
      effectiveness of the registration statement, the Company notifies the Holder
      in
      writing of the existence of a Potential Material Event (as defined below),
      the
      Holder shall not offer or sell any Registrable Securities, or engage in any
      other transaction involving or relating to the Registrable Securities, from
      the
      time of the giving of notice with respect to a Potential Material Event until
      the Holder receives written notice from the Company that such Potential Material
      Event either has been disclosed to the public or no longer constitutes a
      Potential Material Event; provided, however,
      that the
      Company may not so suspend such right other than during a Permitted Suspension
      Period. The term “Potential Material Event” means any of the following: (i) the
      possession by the Company of material information not ripe for disclosure in a
      registration statement, which shall be evidenced by determinations in good
      faith
      by the Board of Directors of the Company that disclosure of such information
      in
      the registration statement would be detrimental to the business and affairs
      of
      the Company; or (ii) any material engagement or activity by the Company which
      would, in the good faith determination of the Board of Directors of the Company,
      be adversely affected by disclosure in a registration statement at such time,
      which determination shall be accompanied by a good faith determination by the
      Board of Directors of the Company that the registration statement would be
      materially misleading absent the inclusion of such information.

    

    h. New
      Transactions; Right to Subscribe; Payment by Offset. 

     

    Any
      other
      provision of this Agreement or any of the other Transaction Agreements to the
      contrary notwithstanding, if prior to the payment in full of the Note, the
      Company offers any financing transaction (each, a “New Transaction,” which term
      includes any financing transaction currently anticipated to be made by the
      Company or currently being negotiated by the Company, whether or not any binding
      agreements have or have not been entered into in connection therewith) to any
      third party (each, a “New Party”), the Company shall give each Buyer at least
      five (5) business days’ notice thereof and give each Buyer, severally and not
      jointly, the opportunity to, subscribe to and participate in the New Transaction
      on the same terms as any other New Party, except that (i) the Buyer may elect
      to
      make all or a portion of the Buyer’s payment therefor by an offset against all
      or a portion of the amount due to the Buyer from the Company under the
      Transaction Agreements, (ii) in the event the New Transaction is a transaction
      other than the sale of Common Stock registered on an effective Registration
      Statement .each Buyer shall be entitled to participate is such New Transaction
      at 90% of the Purchase Price of a New Investor The Company agrees that, if
      the
      Buyer, in the Buyer’s sole discretion, elects to participate in the New
      Transaction and, in connection with the consummation thereof, the Buyer makes
      the representation that the Buyer is an accredited investor, the Company will
      accept the subscription of the Buyer to the New Transaction and make such
      offset, if any. Any offset so made shall be deemed the equivalent as if the
      Buyer had made the cash payment of such amount in connection with the New
      Transaction and the Company had made the payment on account of its obligations
      to the Buyer. Any provision of any New Transaction to the contrary
      notwithstanding, (X) the Buyer shall not be obligated to convert its Note into
      any other security of the Company and may demand payment of all or a part of
      amounts due to it from the Company in cash and (Y) the Buyer shall have a senior
      security interest in the Collateral (as defined in each of the Security Interest
      Agreements, respectively) until such time as the such security interest shall
      terminate in accordance with the provisions of the relevant Security Interest
      Agreement.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    i. Publicity,
      Filings, Releases, Etc.
      Each of
      the parties agrees that it will not disseminate any information relating to
      the
      Transaction Agreements or the transactions contemplated thereby, including
      issuing any press releases, holding any press conferences or other forums,
      or
      filing any reports (collectively, “Publicity”), without giving the other party
      reasonable advance notice and an opportunity to comment on the contents thereof.
      Neither party will include in any such Publicity any statement or statements
      or
      other material to which the other party reasonably objects, unless in the
      reasonable opinion of counsel to the party proposing such statement, such
      statement is legally required to be included. In furtherance of the foregoing,
      the Company will provide to the Buyer drafts of the applicable text of the
      first
      filing of a Current Report on Form 8-K or a Quarterly or Annual Report on Form
      10-Q or 10-K intended to be made with the SEC which refers to the Transaction
      Agreements or the transactions contemplated thereby as soon as practicable
      (but
      at least two (2) Trading Days before such filing will be made) will not include
      in such filing any statement or statements or other material to which the other
      party reasonably objects, unless in the reasonable opinion of counsel to the
      party proposing such statement, such statement is legally required to be
      included. Notwithstanding the foregoing, each of the parties hereby consents
      to
      the inclusion of the text of the Transaction Agreements in filings made with
      the
      SEC as well as any descriptive text accompanying or part of such filing which
      is
      accurate and reasonably determined by the Company’s counsel to be legally
      required. Notwithstanding, but subject to, the foregoing provisions of this
      Section 4(i), the Company will, after the Closing Date, promptly file a Current
      Report on Form 8-K or, if appropriate, a quarterly or annual report on the
      appropriate form, referring to the transactions contemplated by the Transaction
      Agreements.

     

    j. Independent
      Nature of Buyers' Obligations and Rights.
      The
      obligations of each Buyer under the Transaction Agreements 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
      one or more of the Transaction Agreements. The decision of each Buyer or Other
      Buyer to purchase Securities pursuant to the Transaction Agreements has been
      made by such Buyer independently of any Other Buyer. Nothing contained herein
      or
      in any Transaction Agreement, and no action taken by any Buyer pursuant thereto,
      shall be deemed to constitute any two or more 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
      Agreements. Each Buyer acknowledges that no Other Buyer has acted as agent
      for
      such Buyer in connection with making its investment hereunder and that no Buyer
      will be acting as agent of such Other Buyer in connection with monitoring its
      investment in the Securities or enforcing its rights under the Transaction
      Agreements. 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 Agreements, and it shall not be
      necessary for any Other Buyer to be joined as an additional party in any
      proceeding for such purpose. The Company acknowledges that each of the Buyers
      has been provided with the same Transaction Agreements for the purpose of
      closing a transaction with multiple Buyers and not because it was required
      or
      requested to do so by any Buyer.

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    

    k. Equal
      Treatment of Buyers.
      No
      consideration shall be offered or paid to any Buyer to amend or consent to
      a
      waiver or modification of any provision of any of the Transaction Agreements
      unless the same consideration (on a pro rata basis) is also offered to all
      Buyers parties to the Transaction Agreements.

    

    l. Independent
      Investment Decision.
      No Buyer
      has agreed to act with any Other Buyer for the purpose of acquiring, holding,
      voting or disposing of the Securities purchased hereunder for purposes of
      Section 13(d) under the 1934 Act, and each Buyer is acting independently with
      respect to its investment in the Securities. The decision of each Buyer to
      purchase Securities pursuant to this Agreement has been made by such Buyer
      independently of any other purchase and independently of any information,
      materials, statements or opinions as to the business, affairs, operations,
      assets, properties, liabilities, results of operations, condition (financial
      or
      otherwise) or prospects of the Company or its subsidiaries which may have made
      or given by any Other Buyer or by any agent or employee of any Other Buyer,
      and
      no Buyer or any of its agents or employees shall have any liability to any
      Other
      Buyer (or any other person) relating to or arising from any such information,
      materials, statements or opinions.

     

    m. Issuance
      or Transfer of Subsidiary Securities.
      Prior to
      the payment in full of the Note, the Company will not transfer any of the shares
      or other securities of the Subsidiary which the Company beneficially owns on
      the
      date hereof to a third party, except as contemplated by the Security Interest
      Agreement of the Company, and will not permit the Subsidiary to issue any equity
      securities of the Subsidiary (or securities convertible into or exercisable
      for
      equity securities of the Subsidiary) to any third party. On or before the
      Closing Date, the Company will obtain and deliver to the Escrow Agent (to be
      released to the Buyer on the Closing Date) the Subsidiary Certificate. The
      Company understands that a breach of the of the provisions of this paragraph
      by
      the Company or of the provisions of the Subsidiary Certificate by the Subsidiary
      shall be an Event of Default under the Note and the other Transaction
      Agreements. The Company is aware that if such event of default occurs, a Holder
      of the Note will have certain redemption rights contemplated thereby and
      hereby.

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    5. TRANSFER
      AGENT INSTRUCTIONS.

    

    a. The
      Company warrants that, with respect to the Securities, other than the stop
      transfer instructions to give effect to Section 4(a) hereof, it will give its
      transfer agent no instructions inconsistent with instructions to issue Common
      Stock to the Holder as contemplated in the Transaction Agreements. Except as
      so
      provided, the Shares shall otherwise be freely transferable on the books and
      records of the Company as and to the extent provided in this Agreement and
      the
      other Transaction Agreements. Nothing in this Section shall affect in any way
      the Buyer's obligations and agreement to comply with all applicable securities
      laws upon resale of the Securities. If the Buyer provides the Company with
      an
      opinion of counsel reasonably satisfactory to the Company that registration
      of a
      resale by the Buyer of any of the Securities in accordance with clause (1)(B)
      of
      Section 4(a) of this Agreement is not required under the 1933 Act, the Company
      shall (except as provided in clause (2) of Section 4(a) of this Agreement)
      permit the transfer or reissue of the Shares represented by one or more
      certificates for Common Stock without legend (or where applicable, by electronic
      registration) in such name and in such denominations as specified by the
      Buyer.

    

    b. The
      Company will authorize the Transfer Agent to give information relating to the
      Company directly to the Holder or the Holder’s representatives upon the request
      of the Holder or any such representative, to the extent such information relates
      to (i) the status of shares of Common Stock issued or claimed to be issued
      to
      the Holder in connection with a Notice of Exercise or transfer of Pledged Shares
      to the Holder, or (ii) the aggregate number of outstanding shares of Common
      Stock of all shareholders (as a group, and not individually) as of a current
      or
      other specified date. At the request of the Holder, the Company will provide
      the
      Holder with a copy of the authorization so given to the Transfer
      Agent.

    

    6. CLOSING
      DATE.

    

    a.
       The
      Closing Date shall occur on the date which is the first Trading Day after each
      of the conditions contemplated by Sections 7 and 8 hereof shall have either
      been
      satisfied or been waived by the party in whose favor such conditions
      run.

    

    b. The
      closing of the Transactions shall occur on the Closing Date at the offices
      of
      the Escrow Agent and shall take place no later than 3:00 P.M., New York time,
      on
      such day or such other time as is mutually agreed upon by the Company and the
      Buyer.

     

    c. Notwithstanding
      anything to the contrary contained herein, the Escrow Agent will be authorized
      to release the Escrow Funds to the Company and to others and to release the
      other Escrow Property on the Closing Date upon satisfaction of the conditions
      set forth in Sections 7 and 8 hereof and as provided in the Joint Escrow
      Instructions.

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    7. CONDITIONS
      TO THE COMPANY'S OBLIGATION TO SELL.

    

    The
      Buyer
      understands that the Company's obligation to sell the Notes and the Issued
      Shares to the Buyer pursuant to this Agreement on the Closing Date is
      conditioned upon:

    

    a. The
      execution and delivery of this Agreement by the Buyer;

    

    b. Delivery
      by the Buyer to the Escrow Agent of good funds as payment in full of an amount
      equal to the Loan Amount in accordance with this Agreement;

    

    c. The
      Company shall have obtained all requisite third party consents and/or waivers
      described in the Disclosure Annex;

    

    d. The
      accuracy on such Closing Date of the representations and warranties of the
      Buyer
      contained in this Agreement, each as if made on such date, and the performance
      by the Buyer on or before such date of all covenants and agreements of the
      Buyer
      required to be performed on or before such date; and

    

    e. There
      shall not be in effect any law, rule or regulation prohibiting or restricting
      the transactions contemplated hereby, or requiring any consent or approval
      which
      shall not have been obtained.

    

    8. CONDITIONS
      TO THE BUYER'S OBLIGATION TO PURCHASE.

    

    The
      Company understands that the Buyer's obligation to purchase the Notes and the
      Issued Shares on the Closing Date is conditioned upon:

    

    a. The
      execution and delivery of this Agreement and the other Transaction Agreements
      by
      the Company and, where relevant, by the Subsidiary;

    

    b. Delivery
      by the Company to the Escrow Agent of the Certificates in accordance with this
      Agreement;

    

    c. The
      execution and delivery of the Pledgor’s Guarantee and the Pledge Agreement by
      each Pledgor;

    

    d. The
      Company shall have delivered to the Buyer copies of all requisite third party
      consents and/or waivers described in the Disclosure Annex;

     

    e. (i)
      Each
      of the Company and the Subbsidiary shall have filed in the appropriate filing
      office in Nevada a Financing Statements on Form UCC-1 naming such party as
      debtor and the Buyers as secured parties and describing the Collateral referred
      to in the relevant Security Interest Agreement and (ii) the Company shall have
      recorded in the United States Patent and Trademark Office in form acceptable
      to
      the Buyer a security agreement reflecting the security interest of the Buyers
      in
      certain Intellectual Property (as defined in the Security Interest Agreement);
      and evidence of such filings and/or recordings shall have been provided to
      the
      Escrow Agent;

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    f. The
      accuracy in all material respects on the Closing Date of the representations
      and
      warranties of the Company contained in this Agreement, each as if made on such
      date, and the performance by the Company on or before such date of all covenants
      and agreements of the Company required to be performed on or before such date;
      

    

    g. On
      the
      Closing Date, the Buyer shall have received an opinion of counsel for the
      Company and the Subsidiary, dated the Closing Date, in form, scope and substance
      reasonably satisfactory to the Buyer, substantially to the effect set forth
      in
Annex
      III
      attached
      hereto;

    

    h. There
      shall not be in effect any law, rule or regulation prohibiting or restricting
      the transactions contemplated hereby, or requiring any consent or approval
      which
      shall not have been obtained; and

    

    i. From
      and
      after the date hereof to and including the Closing Date, each of the following
      conditions will remain in effect: (i) the trading of the Common Stock shall
      not
      have been suspended by the SEC or on the Principal Trading Market; (ii) trading
      in securities generally on the Principal Trading Market shall not have been
      suspended or limited; (iii) no minimum prices shall been established for
      securities traded on the Principal Trading Market; and (iv) there shall not
      have
      been any material adverse change in any financial market.

    

    9. INDEMNIFICATION
      AND REIMBURSEMENT.

    

    a.          
      (i)
      The
      Company agrees to indemnify and hold harmless the Buyer and its officers,
      directors, employees, and agents, and each Buyer Control Person from and against
      any losses, claims, damages, liabilities or expenses incurred (collectively,
      “Damages”), joint or several, and any action in respect thereof to which the
      Buyer, its partners, Affiliates, officers, directors, employees, and duly
      authorized agents, and any such Buyer Control Person becomes subject to,
      resulting from, arising out of or relating to any misrepresentation, breach
      of
      warranty or nonfulfillment of or failure to perform any covenant or agreement
      on
      the part of Company contained in this Agreement, as such Damages are incurred,
      except to the extent such Damages result primarily from Buyer's failure to
      perform any covenant or agreement contained in this Agreement or the Buyer's
      or
      its officer’s, director’s, employee’s, agent’s or Buyer Control Person’s gross
      negligence, recklessness or bad faith in performing its obligations under this
      Agreement.

     

    (ii) The
      Company hereby agrees that, if the Buyer, other than by reason of its gross
      negligence, illegal or willful misconduct (in each case, as determined by a
      non-appealable judgment to such effect), (x) becomes involved in any capacity
      in
      any action, proceeding or investigation brought by any shareholder of the
      Company, in connection with or as a result of the consummation of the
      transactions contemplated by this Agreement or the other Transaction Agreements,
      or if the Buyer is impleaded in any such action, proceeding or investigation
      by
      any Person, or (y) becomes involved in any capacity in any action, proceeding
      or
      investigation brought by the SEC, any self-regulatory organization or other
      body
      having jurisdiction, against or involving the Company or in connection with
      or
      as a result of the consummation of the transactions contemplated by this
      Agreement or the other Transaction Agreements, or (z) is impleaded in any such
      action, proceeding or investigation by any Person, then in any such case, the
      Company shall indemnify, defend and hold harmless the Buyer from and against
      and
      in respect of all losses, claims, liabilities, damages or expenses resulting
      from, imposed upon or incurred by the Buyer, directly or indirectly, and
      reimburse such Buyer for its reasonable legal and other expenses (including
      the
      cost of any investigation and preparation) incurred in connection therewith,
      as
      such expenses are incurred. The indemnification and reimbursement obligations
      of
      the Company under this paragraph shall be in addition to any liability which
      the
      Company may otherwise have, shall extend upon the same terms and conditions
      to
      any Affiliates of the Buyer who are actually named in such action, proceeding
      or
      investigation, and partners, directors, agents, employees and Buyer Control
      Persons (if any), as the case may be, of the Buyer and any such Affiliate,
      and
      shall be binding upon and inure to the benefit of any successors, assigns,
      heirs
      and personal representatives of the Company, the Buyer, any such Affiliate
      and
      any such Person. The Company also agrees that neither the Buyer nor any such
      Affiliate, partner, director, agent, employee or Buyer Control Person shall
      have
      any liability to the Company or any Person asserting claims on behalf of or
      in
      right of the Company in connection with or as a result of the consummation
      of
      this Agreement or the other Transaction Agreements, except as may be expressly
      and specifically provided in or contemplated by this Agreement.

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    b. All
      claims for indemnification by any Indemnified Party (as defined below) under
      this Section shall be asserted and resolved as follows:

     

    (i) 
      In the
      event any claim or demand in respect of which any Person claiming
      indemnification under any provision of this Section (an "Indemnified Party")
      might seek indemnity under paragraph (a) of this Section is asserted against
      or
      sought to be collected from such Indemnified Party by a Person other than a
      party hereto or an Affiliate thereof (a "Third Party Claim"), the Indemnified
      Party shall deliver a written notification, enclosing a copy of all papers
      served, if any, and specifying the nature of and basis for such Third Party
      Claim and for the Indemnified Party's claim for indemnification that is being
      asserted under any provision of this Section against any Person (the
      "Indemnifying Party"), together with the amount or, if not then reasonably
      ascertainable, the estimated amount, determined in good faith, of such Third
      Party Claim (a "Claim Notice") with reasonable promptness to the Indemnifying
      Party. If the Indemnified Party fails to provide the Claim Notice with
      reasonable promptness after the Indemnified Party receives notice of such Third
      Party Claim, the Indemnifying Party shall not be obligated to indemnify the
      Indemnified Party with respect to such Third Party Claim to the extent that
      the
      Indemnifying Party's ability to defend has been prejudiced by such failure
      of
      the Indemnified Party. The Indemnifying Party shall notify the Indemnified
      Party
      as soon as practicable within the period ending thirty (30) calendar days
      following receipt by the Indemnifying Party of either a Claim Notice or an
      Indemnity Notice (as defined below) (the "Dispute Period") whether the
      Indemnifying Party disputes its liability or the amount of its liability to
      the
      Indemnified Party under this Section and whether the Indemnifying Party desires,
      at its sole cost and expense, to defend the Indemnified Party against such
      Third
      Party Claim. The following provisions shall also apply.

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    (x)
      If
      the Indemnifying Party notifies the Indemnified Party within the Dispute Period
      that the Indemnifying Party desires to defend the Indemnified Party with respect
      to the Third Party Claim pursuant to this paragraph (b) of this Section, then
      the Indemnifying Party shall have the right to defend, with counsel reasonably
      satisfactory to the Indemnified Party, at the sole cost and expense of the
      Indemnifying Party, such Third Party Claim by all appropriate proceedings,
      which
      proceedings shall be vigorously and diligently prosecuted by the Indemnifying
      Party to a final conclusion or will be settled at the discretion of the
      Indemnifying Party (but only with the consent of the Indemnified Party in the
      case of any settlement that provides for any relief other than the payment
      of
      monetary damages or that provides for the payment of monetary damages as to
      which the Indemnified Party shall not be indemnified in full pursuant to
      paragraph (a) of this Section). The Indemnifying Party shall have full control
      of such defense and proceedings, including any compromise or settlement thereof;
      provided, however, that the Indemnified Party may, at the sole cost and expense
      of the Indemnified Party, at any time prior to the Indemnifying Party's delivery
      of the notice referred to in the first sentence of this subparagraph (x), file
      any motion, answer or other pleadings or take any other action that the
      Indemnified Party reasonably believes to be necessary or appropriate protect
      its
      interests; and provided further, that if requested by the Indemnifying Party,
      the Indemnified Party will, at the sole cost and expense of the Indemnifying
      Party, provide reasonable cooperation to the Indemnifying Party in contesting
      any Third Party Claim that the Indemnifying Party elects to contest. The
      Indemnified Party may participate in, but not control, any defense or settlement
      of any Third Party Claim controlled by the Indemnifying Party pursuant to this
      subparagraph (x), and except as provided in the preceding sentence, the
      Indemnified Party shall bear its own costs and expenses with respect to such
      participation. Notwithstanding the foregoing, the Indemnified Party may take
      over the control of the defense or settlement of a Third Party Claim at any
      time
      if it irrevocably waives its right to indemnity under paragraph (a) of this
      Section with respect to such Third Party Claim. 

     

    (y)
      If
      the Indemnifying Party fails to notify the Indemnified Party within the Dispute
      Period that the Indemnifying Party desires to defend the Third Party Claim
      pursuant to paragraph (b) of this Section, or if the Indemnifying Party gives
      such notice but fails to prosecute vigorously and diligently or settle the
      Third
      Party Claim, or if the Indemnifying Party fails to give any notice whatsoever
      within the Dispute Period, then the Indemnified Party shall have the right
      to
      defend, at the sole cost and expense of the Indemnifying Party, the Third Party
      Claim by all appropriate proceedings, which proceedings shall be prosecuted
      by
      the Indemnified Party in a reasonable manner and in good faith or will be
      settled at the discretion of the Indemnified Party (with the consent of the
      Indemnifying Party, which consent will not be unreasonably withheld). The
      Indemnified Party will have full control of such defense and proceedings,
      including any compromise or settlement thereof; provided, however, that if
      requested by the Indemnified Party, the Indemnifying Party will, at the sole
      cost and expense of the Indemnifying Party, provide reasonable cooperation
      to
      the Indemnified Party and its counsel in contesting any Third Party Claim which
      the Indemnified Party is contesting. Notwithstanding the foregoing provisions
      of
      this subparagraph (y), if the Indemnifying Party has notified the Indemnified
      Party within the Dispute Period that the Indemnifying Party disputes its
      liability or the amount of its liability hereunder to the Indemnified Party
      with
      respect to such Third Party Claim and if such dispute is resolved in favor
      of
      the Indemnifying Party in the manner provided in subparagraph(z) below, the
      Indemnifying Party will not be required to bear the costs and expenses of the
      Indemnified Party's defense pursuant to this subparagraph (y) or of the
      Indemnifying Party's participation therein at the Indemnified Party's request,
      and the Indemnified Party shall reimburse the Indemnifying Party in full for
      all
      reasonable costs and expenses incurred by the Indemnifying Party in connection
      with such litigation. The Indemnifying Party may participate in, but not
      control, any defense or settlement controlled by the Indemnified Party pursuant
      to this subparagraph (y), and the Indemnifying Party shall bear its own costs
      and expenses with respect to such participation. 

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

    (z)
      If
      the Indemnifying Party notifies the Indemnified Party that it does not dispute
      its liability or the amount of its liability to the Indemnified Party with
      respect to the Third Party Claim under paragraph (a) of this Section or fails
      to
      notify the Indemnified Party within the Dispute Period whether the Indemnifying
      Party disputes its liability or the amount of its liability to the Indemnified
      Party with respect to such Third Party Claim, the amount of Damages specified
      in
      the Claim Notice shall be conclusively deemed a liability of the Indemnifying
      Party under paragraph (a) of this Section and the Indemnifying Party shall
      pay
      the amount of such Damages to the Indemnified Party on demand. If the
      Indemnifying Party has timely disputed its liability or the amount of its
      liability with respect to such claim, the Indemnifying Party and the Indemnified
      Party shall proceed in good faith to negotiate a resolution of such dispute;
      provided, however, that if the dispute is not resolved within thirty (30) days
      after the Claim Notice, the Indemnifying Party shall be entitled to institute
      such legal action as it deems appropriate. 

     

    (ii) In
      the
      event any Indemnified Party should have a claim under paragraph (a) of this
      Section against the Indemnifying Party that does not involve a Third Party
      Claim, the Indemnified Party shall deliver a written notification of a claim
      for
      indemnity under paragraph (a) of this Section specifying the nature of and
      basis
      for such claim, together with the amount or, if not then reasonably
      ascertainable, the estimated amount, determined in good faith, of such claim
      (an
      "Indemnity Notice") with reasonable promptness to the Indemnifying Party. The
      failure by any Indemnified Party to give the Indemnity Notice shall not impair
      such party's rights hereunder except to the extent that the Indemnifying Party
      demonstrates that it has been irreparably prejudiced thereby. If the
      Indemnifying Party notifies the Indemnified Party that it does not dispute
      the
      claim or the amount of the claim described in such Indemnity Notice or fails
      to
      notify the Indemnified Party within the Dispute Period whether the Indemnifying
      Party disputes the claim or the amount of the claim described in such Indemnity
      Notice, the amount of Damages specified in the Indemnity Notice will be
      conclusively deemed a liability of the Indemnifying Party under paragraph (a)
      of
      this Section and the Indemnifying Party shall pay the amount of such Damages
      to
      the Indemnified Party on demand. If the Indemnifying Party has timely disputed
      its liability or the amount of its liability with respect to such claim, the
      Indemnifying Party and the Indemnified Party shall proceed in good faith to
      negotiate a resolution of such dispute; provided, however, that it the dispute
      is not resolved within thirty (30) days after the Claim Notice, the Indemnifying
      Party shall be entitled to institute such legal action as it deems
      appropriate.

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    c. The
      indemnity agreements contained herein shall be in addition to (i) any cause
      of
      action or similar rights of the indemnified party against the indemnifying
      party
      or others, and (ii) any liabilities the indemnifying party may be subject
      to.

    

    10. JURY
      TRIAL WAIVER. The
      Company and the Buyer hereby waive a trial by jury in any action, proceeding
      or
      counterclaim brought by either of the Parties hereto against the other in
      respect of any matter arising out or in connection with the Transaction
      Agreements.

    

    11. GOVERNING
      LAW: MISCELLANEOUS.

     

    a. (i)
      This
      Agreement shall be governed by and interpreted in accordance with the laws
      of
      the State of New York for contracts to be wholly performed in such state and
      without giving effect to the principles thereof regarding the conflict of laws.
      Each of the parties consents to the exclusive jurisdiction of the federal courts
      whose districts encompass any part of the County of New York or the state courts
      of the State of New York sitting in the County of New York in connection with
      any dispute arising under this Agreement or any of the other Transaction
      Agreements and hereby waives, to the maximum extent permitted by law, any
      objection, including any objection based on
      forum non conveniens,
      to the
      bringing of any such proceeding in such jurisdictions or to any claim that
      such
      venue of the suit, action or proceeding is improper. To the extent determined
      by
      such court, the Company shall reimburse the Buyer for any reasonable legal
      fees
      and disbursements incurred by the Buyer in enforcement of or protection of
      any
      of its rights under any of the Transaction Agreements. Nothing in this Section
      shall affect or limit any right to serve process in any other manner permitted
      by law.

    

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

     

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

     

    b. Failure
      of any party to exercise any right or remedy under this Agreement or otherwise,
      or delay by a party in exercising such right or remedy, shall not operate as
      a
      waiver thereof.

    

    c. This
      Agreement shall inure to the benefit of and be binding upon the successors
      and
      assigns of each of the parties hereto.

    

    d. All
      pronouns and any variations thereof refer to the masculine, feminine or neuter,
      singular or plural, as the context may require.

    

    e. A
      facsimile transmission of this signed Agreement shall be legal and binding
      on
      all parties hereto. 

    

    f. This
      Agreement may be signed in one or more counterparts, each of which shall be
      deemed an original. 

    

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

    

    h. 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. 

    

    i. This
      Agreement may be amended only by an instrument in writing signed by the party
      to
      be charged with enforcement thereof. 

    

    j. This
      Agreement supersedes all prior agreements and understandings among the parties
      hereto with respect to the subject matter hereof.

     

    12. NOTICES.
      Any
      notice required or permitted hereunder shall be given in writing (unless
      otherwise specified herein) and shall be deemed effectively given on the
      earliest of 

    

    (a)
      the
      date delivered, if delivered by personal delivery as against written receipt
      therefor or by confirmed facsimile transmission,

    

    (b)
      the
      fifth Trading Day after deposit, postage prepaid, in the United States Postal
      Service by registered or certified mail, or 

     

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

     

    (c)
      the
      third Trading Day after mailing by domestic or international express courier,
      with delivery costs and fees prepaid, 

    

    in
      each
      case, addressed to each of the other parties thereunto entitled at the following
      addresses (or at such other addresses as such party may designate by ten (10)
      days’ advance written notice similarly given to each of the other parties
      hereto):

    

    COMPANY:                         
      At
      the
      address set forth at the head of this Agreement.

    Attn:
      President 

    Telephone
      No.:

    Telecopier
      No.:

    

    with
      a
      copy to: 

    

    John
      C.
      Kirkland. Esq.

    Greenberg
      Traurig, LLP

    2450
      Colorado Avenue, Suite 400E

    Santa
      Monica, California 90404

    Telephone
      No.: (310) 586-7786

    Telecopier
      No.: (310) 586-0286

    

    BUYER:                                
      At
      the
      address set forth on the signature page of this Agreement.

    

    with
      a
      copy to:

    

    Krieger
      & Prager llp,
      Esqs.

    39
      Broadway 

    Suite
      920

    New
      York,
      NY 10006

    Attn:
      Samuel M. Krieger, Esq.

    Telephone
      No.: (212) 363-2900

    Telecopier
      No. (212) 363-2999

    

    

    ESCROW
      AGENT:            
Krieger
      & Prager llp,
      Esqs.

    39
      Broadway 

    Suite
      1440

    New
      York,
      NY 10006

    Attn:
      Samuel Krieger, Esq.

    Telephone
      No.: (212) 363-2900

    Telecopier
      No. (212) 363-2999

    

    13. SURVIVAL
      OF REPRESENTATIONS AND WARRANTIES.
      The
      Company’s and the Buyer’s representations and warranties herein shall survive
      the execution and delivery of this Agreement and the delivery of the
      Certificates and the payment of the Loan Amount, and shall inure to the benefit
      of the Buyer and the Company and their respective successors and
      assigns.

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

    
 

    [Balance
      of page intentionally left blank]

    

    

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF,
      with
      respect to the Loan Amount specified below, this Agreement has been duly
      executed by the Buyer and the Company as of the date set first above
      written.

     

    
      	LOAN AMOUNT:	
              $

            

    

    
 

    
      	 	Buyer:
	 	 
	 	 
	 	Printed Name of Buyer
	 	 
	 	 
	Telephone No. 
              _________________	By:
              _________________________________
	Telecopier No. _________________	(Signature
              of Authorized Person)
	 	 
	 	_____________________________________
	 	
              Printed
                Name and Title

            
	_____________________________________	 
	
              Jurisdiction
                of Incorporation or
                Organization

            	 
	 	 
	COMPANY	 
	 	 
	 	 
	NEAH POWER SYSTEMS,
              INC.	 
	 	 
	
              By:
                _________________________________

              (Signature
                of Authorized Person)

            	 
	 	 
	
              _____________________________________

              Printed
                Name and Title

            	 

    

      

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

     

    
      
        
          	ANNEX I	FORM OF NOTE
	 	 	 
	ANNEX II	JOINT ESCROW
                  INSTRUCTIONS
	 	 	 
	ANNEX III	OPINION OF COUNSEL OF
                  COMPANY
	 	 	 
	ANNEX IV	COMPANY’S SEC DOCUMENTS AVAILABLE
                  ON EDGAR
	 	 	 
	ANNEX V	COMPANY DISCLOSURE
                  MATERIALS
	 	 	 
	ANNEX VI	GUARANTEES OF EACH PLEDGOR
                  
	 	 	 
	ANNEX VII	PLEDGE AGREEMENT
	 	 	 
	ANNEX VIII	A. 	SECURITY INTEREST AGREEMENT OF THE
                  SUBSIDIARY
	 	 	 
	 	B. 	GUARANTY OF SUBSIDIARY
	 	 	 
	 	
                  C. 

                	COMPANY SECURITY INTEREST AND PLEDGE
AGREEMENT
	 	 	 
	ANNEX IX	USE OF
                  PROCEEDS

        

      

    

    

    
      
        
        

      

      
        30Unassociated Document

    ANNEX
      I

    TO

    BRIDGE
      LOAN AGREEMENT

    <PROTOTYPE
      FOR EACH ISSUANCE>

    

    

    FORM
      OF NOTE

    

    THESE
      SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
      AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED
      FOR
      SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
      OR
      AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH
      REGISTRATION IS NOT REQUIRED.

     

    
      	No.  06-01-
              1	
              US
                $

            

    

     

    NEAH
      POWER SYSTEMS, INC. 

    

    6%
      SECURED PROMISSORY NOTE DUE May 26, 2007

    

    THIS
      NOTE
      is one of a duly authorized issue of up to $1,550,000 of NEAH
      POWER SYSTEMS, INC.,
      a
      corporation organized and existing under the laws of the State of Nevada (the
      "Company"), designated as its 6% Secured Promissory Note Series
      06-01.

    

    FOR
      VALUE
      RECEIVED, the Company promises to pay to ____________________, the registered
      holder hereof (the "Holder"), the principal sum of ______________ Thousand
      and
      00/100 Dollars (US $__________) on the Maturity Date (as defined below) and
      to
      pay interest on the principal sum outstanding from time to time in arrears
      at
      the rate of 6% per annum (computed on the basis of the actual number of days
      elapsed and a year of 365 days), accruing from December 27 , 2006, the date
      of
      initial issuance of this Note (the “Issue Date”), to the date of payment. Such
      interest shall be payable on the date which is the earlier of (i) the Maturity
      Date, or (ii) the date of any prepayment of principal permitted hereunder.
      Accrual of interest shall commence on the Issue Date and shall continue to
      accrue on a daily basis until payment in full of the principal sum has been
      made
      or duly provided for (whether before or after the Maturity Date).

     

    
      

    

    
      
        1Insert
          unique Note number for each issuance.

         

        
          
             

          

          
            1

            
              

            

          

          
             

          

        

         

      

    

    Anything
      herein to the contrary notwithstanding, on the Initial Stated Maturity Date
      (as
      defined below) the Company shall pay the interest on the principal on this
      Note
      in an amount equal to such principal (and such payment shall constitute the
      payment of all interest on this Note through the Initial Maturity Date hereof,
      but not beyond the Initial Stated Maturity Date.

    

    This
      Note
      is being issued pursuant to the terms of the Bridge Loan Agreement, dated as
      of
      December 27, 2006 (the “Loan Agreement”), to which the Company and the Holder
      (or the Holder’s predecessor in interest) are parties. Capitalized terms not
      otherwise defined herein shall have the meanings ascribed to them in the Loan
      Agreement.

    

    This
      Note
      is subject to the following additional provisions:

    

    1. (a) The
      term
“Maturity Date” means the earliest of (i) the Stated Maturity Date (as defined
      below), (ii) the New Transaction Threshold Date (as defined below), or (iii)
      the
      accelerated date as provided in Section 12 hereof.

    

    (b) The
      term
“Stated Maturity Date” means (i) May 26, 2007 (the “Initial Stated Maturity
      Date), unless (ii) the Company gives the Holder, and the Holder receives at
      least ten (10) business days prior to the Initial Stated Maturity Date, a
      Maturity Date Extension Notice (as defined below), in which event it means
      June
      26 , 2007 (the “Extended Stated Maturity Date”). The term “Maturity Date
      Extension Notice” means a written notice of the Company’s election to extend the
      Stated Maturity Date to the Extended Stated Maturity Date; provided, however,
      that such Maturity Date Extension Notice shall be effective if, and only if,
      all
      of the following conditions are true:

    

    (X)
      there
      is no Event of Default (as defined below; but without regard to the last clause
      of Section 12(g) hereof regarding the 30-day time period for dismissal of the
      relevant petition or the vacating of the relevant order) both on the date the
      Maturity Date Extension Notice is received by the Holder and on the Initial
      Stated Maturity Date, and

    

    (Y)
      simultaneously with the giving of such Maturity Date Extension Notice, the
      Company provides to the Holder evidence that all periodic filings with the
      SEC
      have been timely made, and that the Common Stock is listed for trading on the
      OTC Bulletin Board,

     

    (Z)
      no
      later than the business day after the giving of such notice, the Company pays
      to
      the Holder (by wire transfer in accordance with instructions provided by the
      Holder), interest through the Extended Stated Maturity Date, and the amount
      equal to 2% of the outstanding principal of this Note. 

    

    (c) The
      term
“New Transaction Threshold Date” means the date, after the Issue Date, on which
      the Company consummates a financing transaction (including, but not limited
      to,
      any other bridge loan transactions; each, a “Bridge Financing”) in which the
      Company receives, on a cumulative basis after taking into account the gross
      proceeds from all prior financing transactions (including, but not limited
      to,
      any Bridge Financings), if any, after the Issue Date, gross proceeds of at
      least
      Five Hundred Thousand Dollars ($500,000.00), whether or not such transaction
      is
      effected in connection with the current or future issuance of securities. All
      such gross proceeds are determined before deduction of any fees or other
      expenses or disbursements of any kind in connection with the relevant New
      Transaction.

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    2. (a) This
      Note
      may be prepaid in whole or in part at any time prior to the Maturity Date,
      without penalty. Any payment shall be applied as provided in Section
      3.

    

    (b) TIME
      IS OF THE ESSENCE WITH RESPECT TO ANY PAYMENT DUE HEREUNDER.
      The
      Company shall be in default hereunder if any payment is not made in a timely
      manner, without any right to cure unless such right to cure is granted by the
      Holder in each instance; provided, however, that the grant of such right is
      in
      the sole discretion of the Holder and may be withheld for any reason or for
      no
      reason whatsoever.

    

    3. Any
      payment made on account of the Note shall be applied in the following order
      of
      priority: (i) first, to any amounts due hereunder other than principal and
      accrued interest, (ii) then, to accrued interest through and including the
      date
      of payment, and (iii) then, to principal of this Note. 

    

    4. All
      payments contemplated hereby to be made “in cash” shall be made in immediately
      available good funds of United States of America currency by wire transfer
      to an
      account designated in writing by the Holder to the Company (which account may
      be
      changed by notice similarly given). For purposes of this Note, the phrase “date
      of payment” means the date good funds are received in the account designated by
      the notice which is then currently effective.

    

    5. (a) Subject
      to the terms of the Loan Agreement, no provision of this Note shall alter or
      impair the obligation of the Company, which is absolute and unconditional,
      to
      pay the principal of, and interest on, this Note at the time, place, and rate,
      and in the coin or currency, as herein prescribed. This Note is a direct
      obligation of the Company.

    

    (b) Payment
      of this Note is secured pursuant to the terms of (i) a Guaranty, and (ii) the
      Security Interest Agreement, dated as of December 27, 2006, executed by the
      Subsidiary], as debtor, in favor of the Holder, as secured party, the terms
      of
      which are incorporated herein by reference. 

    

    (c) Any
      payments received by the Holder with respect to this Note or on account of
      any
      rights taken with respect to the Security Interest , the Subsidiary’s Guarantee
      (as defined below), the Subsidiary’s Security Interest Agreement, the Pledgor’s
      Guarantee (as defined below) or the Pledge Agreement shall be applied in the
      following order of priority: (i) first, to any amounts due to the Holder under
      any of the Transaction Agreements other than interest and principal on the
      Note,
      (ii) then, to accrued but unpaid interest on the Note, and (iii) then, to
      principal on the Note.

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    6. (a) (i) Each
      Pledgor (as defined below) is personally guarantying to the Holder the timely
      and full fulfillment of all of the obligations of the Company under this Note
      on
      the terms provided above and in (and as limited by) such Pledgor’s Pledgor
      Guarantee, each of which has been executed by the Pledgor in favor of, and
      delivered to, the Holder.

    

    (ii) The
      term
“Pledgor” means the
      Company, Summit
      Trading Limited and Paul Abramowitz, a shareholder of the Company, who is an
      Affiliate of the Company as of the Issue Date.

    

    (iii) The
      obligations of the Company under this Note and of each Pledgor under the
      relevant Pledgor Guarantee are secured under the terms of the Pledge Agreement,
      to which the Holder, the Agent named therein and the relevant Pledgor are
      parties (each such agreement, a “Pledge Agreement”), the terms of which are
      incorporated herein by reference, of which such Pledgor is the record and
      beneficial owner. If the Holder forecloses on any of the Pledged Shares, the
      obligations of the Company will be reduced only to the extent of the proceeds
      actually realized from such foreclosure, in the priority specified in Section
      5
      hereof.

    

    7. Except
      as
      provided in Sections 5 and 6 above or in a separate instrument signed by the
      party to be charged therewith, no recourse shall be had for the payment of
      the
      principal of, or the interest on, this Note, or for any claim based hereon,
      or
      otherwise in respect hereof, against any incorporator, shareholder, officer
      or
      director, as such, past, present or future, of the Company or any successor
      corporation, whether by virtue of any constitution, statute or rule of law,
      or
      by the enforcement of any assessment or penalty or otherwise, all such liability
      being, by the acceptance hereof and as part of the consideration for the issue
      hereof, expressly waived and released.

    

    8. The
      Holder of the Note, by acceptance hereof, agrees that this Note is being
      acquired for investment and that such Holder will not offer, sell or otherwise
      dispose of this Note except under circumstances which will not result in a
      violation of the Securities Act of 1933, as amended, or any applicable state
      Blue Sky or foreign laws or similar laws relating to the sale of
      securities.

    

    9. Any
      notice given by any party to the other with respect to this Note shall be given
      in the manner contemplated by the Loan Agreement in the section entitled
“Notices.”

     

    10. This
      Note
      shall be governed by and construed in accordance with the laws of the State
      of
      New York. Each of the parties consents to the exclusive jurisdiction of the
      federal courts whose districts encompass any part of the County of New York
      or
      the state courts of the State of New York sitting in the County of New York
      in
      connection with any dispute arising under this Agreement and hereby waives,
      to
      the maximum extent permitted by law, any objection, including any objection
      based on forum
      non coveniens,
      to the
      bringing of any such proceeding in such jurisdictions. To the extent determined
      by such court, the Company shall reimburse the Holder for any reasonable legal
      fees and disbursements incurred by the Holder in enforcement of or protection
      of
      any of its rights under any of this Note. 

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    11. JURY
      TRIAL WAIVER. The
      Company and the Holder hereby waive a trial by jury in any action, proceeding
      or
      counterclaim brought by either of the Parties hereto against the other in
      respect of any matter arising out of or in connection with this Note.

    

    12. The
      following shall constitute an "Event of Default":

    

    
      	 	
              a.

            	
              The
                Company shall default in the payment of any amount due on this Note,
                time
                being of the essence; or

            

    

    

    
      	 	
              b.

            	
              Any
                of the representations or warranties made by the Company herein,
                in the
                Loan Agreement or in any of the other Transaction Agreements shall
                be
                false or misleading in any material respect at the time made;
                or

            

    

    

    
      	 	
              c.

            	
              The
                Company shall default in any covenant herein, in the Loan Agreement
                or in
                any of the other Transaction Agreements;
                or

            

    

    

    
      	 	
              d.

            	
              There
                shall be either (i) a material breach by the Grantor Subsidiary of
                the
                terms of the Grantor Subsidiary’s Guarantee or of the Grantor Subsidiary’s
                Certificate or (ii) an Event of Default under the Security Interest
                Agreement to which the Grantor Subsidiary is a party;
                or

            

    

    

    
      	 	
              e.

            	
              Bankruptcy,
                reorganization, insolvency or liquidation proceedings or other proceedings
                for relief under any bankruptcy law or any law for the relief of
                debtors
                shall be instituted, applied for or consented to by the Company;
                or

            

    

    

    
      	 	
              f.

            	
              Any
                governmental agency or any court of competent jurisdiction at the
                instance
                of any governmental agency shall assume custody or control of the
                whole or
                any substantial portion of the properties or assets of the Company;
                or

            

    

     

    
      	 	
              g.

            	
              Bankruptcy,
                reorganization, insolvency or liquidation proceedings or other proceedings
                for relief under any bankruptcy law or any law for the relief of
                debtors
                shall be instituted against the Company without its consent or a
                trustee,
                liquidator or receiver shall be appointed for the Company or for
                a
                substantial part of its property or business without its consent,
                and the
                petition in such proceeding is not dismissed, or such appointment
                is not
                vacated, within thirty (30) days after such filing or such appointment;
                

            

    

    

    If
      an
      Event of Default shall have occurred, then, or at any time thereafter, and
      in
      each and every such case, unless such Event of Default shall have been waived
      in
      writing by the Holder (which waiver shall not be deemed to be a waiver of any
      subsequent default) at the option of the Holder and in the Holder's sole
      discretion, the Holder may consider this Note immediately due and payable (and
      the Maturity Date shall be accelerated accordingly), without presentment,
      demand, protest or notice of any kinds, all of which are hereby expressly
      waived, anything herein or in any note or other instruments contained to the
      contrary notwithstanding, and interest shall accrue on the total amount due
      (the
“Default Amount”) on the date of the Event of Default (the “Default Date”) at
      the rate of 18% per annum or the maximum rate allowed by law, whichever is
      lower, from the Default Date until the date payment is made, and the Holder
      may
      immediately enforce any and all of the Holder's rights and remedies provided
      herein or any other rights or remedies afforded by law. 

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    
 

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        6

        
          

        

      

      
         

      

    

     

    13. In
      the
      event for any reason, any payment by or act of the Company or the Holder shall
      result in payment of interest which would exceed the limit authorized by or
      be
      in violation of the law of the jurisdiction applicable to this Note, then
ipso
      facto
      the
      obligation of the Company to pay interest or perform such act or requirement
      shall be reduced to the limit authorized under such law, so that in no event
      shall the Company be obligated to pay any such interest, perform any such act
      or
      be bound by any requirement which would result in the payment of interest in
      excess of the limit so authorized. In the event any payment by or act of the
      Company shall result in the extraction of a rate of interest in excess of a
      sum
      which is lawfully collectible as interest, then such amount (to the extent
      of
      such excess not returned to the Company) shall, without further agreement or
      notice between or by the Company or the Holder, be deemed applied to the payment
      of principal, if any, hereunder immediately upon receipt of such excess funds
      by
      the Holder, with the same force and effect as though the Company had
      specifically designated such sums to be so applied to principal and the Holder
      had agreed to accept such sums as an interest-free prepayment of this Note.
      If
      any part of such excess remains after the principal has been paid in full,
      whether by the provisions of the preceding sentences of this Section or
      otherwise, such excess shall be deemed to be an interest-free loan from the
      Company to the Holder, which loan shall be payable immediately upon demand
      by
      the Company. The provisions of this Section shall control every other provision
      of this Note.

    

    IN
      WITNESS WHEREOF, the Company has caused this instrument to be duly executed
      by
      an officer thereunto duly authorized this 27th day of December,
      2006.

     

     

    NEAH
      POWER SYSTEMS, INC.

    

    By:_______________________________________

    

    __________________________________________

    (Print
      Name)

    _________________________________________ 

    (Title)

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