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ex4_1.htm

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    Exhibit
4.1

     

    SECURITIES
PURCHASE AGREEMENT

     

    This
Securities Purchase Agreement (this “Agreement”) is dated
as of April ___, 2008 between Axis Technologies Group, Inc. a Delaware
corporation (the “Company”), and each
purchaser identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and
collectively the “Purchasers”).

     

    WHEREAS,
subject to the terms and conditions set forth in this Agreement and pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and
Rule 506 promulgated thereunder, the Company desires to issue and sell to each
Purchaser, and each Purchaser, severally and not jointly, desires to purchase
from the Company, securities of the Company as more fully described in this
Agreement.

     

    NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the Company and each Purchaser agree as
follows:

     

    ARTICLE
I.

    DEFINITIONS

     

    1.1           Definitions.  In
addition to the terms defined elsewhere in this Agreement: (a) capitalized terms
that are not otherwise defined herein have the meanings given to such terms in
the Notes (as defined herein), and (b) the following terms have the meanings set
forth in this Section 1.1:

     

    “Action” shall have
the meaning ascribed to such term in Section 3.1(j).

     

    “Affiliate” means any
Person that, directly or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with a Person, as such terms are
used in and construed under Rule 405 under the Securities Act.  With
respect to a Purchaser, any investment fund or managed account that is managed
on a discretionary basis by the same investment manager as such Purchaser will
be deemed to be an Affiliate of such Purchaser.

     

    “Board of Directors”
means the board of directors of the Company.

     

    “Business Day” means
any day except any Saturday, any Sunday, any day which is a federal legal
holiday in the United States or any day on which banking institutions in the
State of New York are authorized or required by law or other governmental action
to close.

     

    “Closing” means the
closing of the purchase and sale of the Securities pursuant to Section
2.1.

     

    “Closing Date” means
the Trading Day when all of the Transaction Documents have been executed and
delivered by the applicable parties thereto, and all conditions precedent to (i)
the Purchasers’ obligations to pay the Subscription Amount and (ii) the
Company’s obligations to deliver the Securities, have been satisfied or
waived.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    “Commission” means the
Securities and Exchange Commission.

     

    “Common Stock” means
the common stock of the Company, par value $0.001 per share, and any other class
of securities into which such securities may hereafter be reclassified or
changed into.

     

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

     

    “Company Counsel”
means Axelrod, Smith & Kirshbaum, with offices located at 5300 Memorial
Drive, Suite 700, Houston, Texas 77007, fax: 713-552-0202.

     

    “Conversion Price”
shall have the meaning ascribed to such term in the Notes.

     

    “Disclosure Schedules”
shall have the meaning ascribed to such term in Section 3.1.

     

    “EBITDA” for any
period means (a) the Company’s net income for such period determined in
accordance with GAAP consistently applied, plus (b) any interest, taxes,
depreciation and amortization deducted from revenues as expenses in determining
such net income.

     

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

     

    “Exempt Issuance”
means the issuance of (a) shares of Common Stock or options to employees,
officers or directors of the Company pursuant to any existing stock or option
plan duly adopted for such purpose by a majority of the non-employee members of
the Board of Directors or a majority of the members of a committee of
non-employee directors established for such purpose, and up to 10 million shares
of Common Stock or options to employees, officers or directors of the Company
pursuant to any stock or option plan hereafter duly adopted for such purpose by
a majority of the non-employee members of the Board of Directors or a majority
of the members of a committee of non-employee directors established for such
purpose, (b) securities upon the exercise or exchange of or conversion of any
Securities issued hereunder and/or other securities exercisable or exchangeable
for or convertible into shares of Common Stock issued and outstanding on the
date of this Agreement, provided that such securities have not been amended
since the date of this Agreement to directly or indirectly effectively increase
the number of such securities or to decrease the exercise, exchange or
conversion price of such securities, and (c) up to 300,000 shares of Common
Stock in the aggregate as consideration for investor or public relations
services.

     

    “Form 10” means Form
10 prescribed by the Commission under the Exchange Act.

    
      
         

      

      
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    “GAAP” shall have the
meaning ascribed to such term in Section 3.1(h).

     

    “Indebtedness” shall
have the meaning ascribed to such term in Section 3.1(aa).

     

    “Intellectual Property
Rights” shall have the meaning ascribed to such term in Section
3.1(o).

     

    “IP Security
Agreement” means the Intellectual Property Security Agreement, dated the
date hereof, by the Company in favor of the Purchasers, in the form of Exhibit D attached
hereto, securing the obligations of the Company under the Notes and other
Transaction Documents.

     

    “Legend Removal Date”
shall have the meaning ascribed to such term in Section 4.1(c).

     

    “Liens” means a lien,
charge, security interest, encumbrance, right of first refusal, preemptive right
or other restriction.

     

    “Lock Up Agreement”
means each agreement executed and delivered by beneficial owners of Common
Stock, dated the date hereof and in the form of Exhibit E attached
hereto, irrevocably agreeing not to sell or otherwise dispose of any shares of
Common Stock until such time as set forth in such Lock Up
Agreement.

     

    “Material Adverse
Effect” shall have the meaning assigned to such term in Section
3.1(b).

     

    “Material Permits”
shall have the meaning ascribed to such term in Section 3.1(m).

     

    “Maximum Rate” shall
have the meaning ascribed to such term in Section 5.17.

     

    “MFN Transaction”
shall have the meaning ascribed to
such term in Section 4.13(b).

     

    “Notes” means the 10%
Senior Secured Convertible Notes due, subject to the terms therein, two (2)
years from their date of issuance, issued by the Company to the Purchasers
hereunder and pursuant to any Second Tranche, in the form of Exhibit A attached
hereto.

     

    “Participation
Maximum” shall have the meaning ascribed to such term in Section
4.12.

     

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

     

    “Principal Amount”
shall mean, as to each Purchaser, the amounts set forth below such Purchaser’s
signature block on the signature pages hereto and next to the heading “Principal
Amount,” in United States Dollars, which shall equal such Purchaser’s
Subscription Amount multiplied by 1.11111111.

    
      
         

      

      
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    “Proceeding” means an
action, claim, suit, investigation or proceeding (including, without limitation,
an informal investigation or partial proceeding, such as a deposition), whether
commenced or threatened.

     

    “Purchaser Party”
shall have the meaning ascribed to such term in Section 4.10.

     

    “Required Approvals”
shall have the meaning ascribed to such term in Section 3.1(e).

     

    “Required Minimum”
means, as of any date, the maximum aggregate number of shares of Common Stock
then issued or potentially issuable in the future pursuant to the Transaction
Documents, including any Underlying Shares issuable upon exercise or conversion
in full of all Warrants and Notes (including Underlying Shares issuable as
payment of interest, and including all Warrants and Notes which may be issued as
part of the Second Tranche), ignoring any conversion or exercise limits set
forth therein, and assuming that the Conversion Price is at all times on and
after the date of determination 75% of the then Conversion Price on the Trading
Day immediately prior to the date of determination.

     

    “Regulation 13D-G”
means Regulation 13D-G promulgated by the Commission pursuant to the Exchange
Act, as such Regulation and the Rules thereunder may be amended from time to
time, or any similar rule or regulation hereafter adopted by the Commission
having substantially the same effect as such Regulation.

     

    “Rule 144” means Rule
144 promulgated by the Commission pursuant to the Securities Act, as such Rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such
Rule.

     

    “Securities” means the
Notes, the Warrants and the Underlying Shares.

     

    “Securities Act” means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.

     

    “Security Agreement”
means the Security Agreement, dated the date hereof, by the Company in favor of
the Purchasers, in the form of Exhibit C attached
hereto, securing the obligations of the Company under the Notes and other
Transaction Documents.

     

    “Security Documents”
means any and all means any and all security agreements, pledge agreements,
hypothecation agreements, collateral assignments, mortgages, deeds of trust,
control agreements and similar such agreements, executed and delivered by the
Company, any of its Subsidiaries and/or any third party in favor of the
Purchasers pursuant to the Transaction Documents which secures the Company’s
obligations under the Transaction Documents and/or any of the Securities, and
other documents executed, delivered and/or filed by the Company, any of its
Subsidiaries, any third party and/or the Purchasers as permitted or required
under any of the foregoing, including without limitation the Security Agreement
and the IP Security Agreement.

    
      
         

      

      
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    “Shell Company” means
an entity that has (a) no or nominal operations, and (b) either (i) no
or nominal assets, (ii) assets consisting solely of cash and cash equivalents,
or (iii) assets consisting of any amount of cash and cash equivalents and
nominal other assets.

     

    “Short Sales” means
all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange
Act (but shall not be deemed to include the location and/or reservation of
borrowable shares of Common Stock).

     

    “Subscription Amount”
means, as to each Purchaser, the
aggregate amount to be paid
for Notes and Warrants purchased hereunder as
specified below such Purchaser’s name on the signature page of this Agreement
and next to the heading “Subscription Amount,” in United States dollars and in immediately available
funds.

     

    “Subsequent
Financing” shall have the meaning
ascribed to such term in
Section 4.13.

     

    “Subsidiary” means any
subsidiary of the Company as set forth on Schedule 3.1(a) and
shall, where applicable, include any direct or indirect subsidiary of the
Company formed or acquired after the date hereof.

     

    “Subsidiary Guarantee”
means the Subsidiary Guarantee, in the form attached hereto as Exhibit F, executed
by each Subsidiary in favor of the Purchasers, guaranteeing the Company’s
obligations under the Notes.

     

    “Trading Day” means a
day on which the Nasdaq Capital Market is open for trading.

     

    “Trading Market” means
the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the American Stock Exchange, the Nasdaq
Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the
New York Stock Exchange or the OTC Bulletin Board.

     

    “Transaction
Documents” means this Agreement, the Notes, the Warrants, the Security
Documents, the Lock Up Agreements and all exhibits and schedules thereto and
hereto and any other documents or agreements executed in connection with the
transactions contemplated hereunder.

     

    “Transfer Agent” means
Holiday Stock Transfer, the current transfer agent of the Company with a mailing
address of 2939 North 67th Place,
Suite C, Scottsdale, AZ 85251 and a facsimile number of 480-481-3941, and any
successor transfer agent of the Company.

    
      
         

      

      
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    “Underlying Shares”
means the shares of Common Stock issued and issuable upon conversion or
redemption of the Notes and upon exercise of the Warrants and issued and
issuable in lieu of the cash payment of interest on the Notes in accordance with
the terms of the Notes.

     

    “Variable Rate
Transaction” shall have the
meaning ascribed to such term in Section 4.13(b).

     

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

     

    “Warrants” means the
Common Stock purchase warrants delivered to the Purchasers at the Closing in
accordance with Section 2.2(a) hereof, and pursuant to any Second Tranche, in
the form of Exhibit
B attached hereto.

     

    “Warrant Shares” means
the shares of Common Stock issuable upon exercise of the Warrants.

     

    “Weisman” means Peter
J. Weisman, P.C. with offices located at 153 East 53rd Street,
29th
Floor, New York, New York 10022.

     

    ARTICLE
II.

    PURCHASE
AND SALE

     

    2.1           Closing.  On
the Closing Date, upon the terms and subject to the conditions set forth herein,
substantially concurrent with the execution and delivery of this Agreement by
the parties hereto, the Company agrees to sell, and the Purchasers, severally
and not jointly, agree to purchase, up to, in the aggregate, $1,388,888.89 in
principal amount of the Notes.  Each Purchaser shall deliver to the
Company, via wire transfer or a certified check, immediately available funds
equal to its Subscription Amount and the Company shall deliver to each Purchaser
its respective Note and a Warrant, as determined pursuant to Section 2.2(a), and
the Company and each Purchaser shall deliver the other items set forth in
Section 2.2 deliverable at the Closing.  Upon satisfaction of the
conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the
offices of Weisman or such other location as the parties shall mutually
agree.

    
      
         

      

      
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    2.2          
 Deliveries.

     

    (a)   On
the Closing Date, the Company shall deliver or cause to be delivered to each
Purchaser the following:

     

    (b)   this
Agreement duly executed by the Company;

     

    (c)    a
legal opinion of Company Counsel, in substantially the form of Exhibit G attached
hereto;

     

    (d)    a
Note with a principal amount equal to such Purchaser’s Principal Amount,
registered in the name of such Purchaser;

     

    (e)    a
Warrant, registered in the name of such Purchaser to purchase up to a number of
shares of Common Stock equal to 100% of such Purchaser’s Principal Amount
divided by the initial Conversion Price of the Notes, with an exercise price
equal to the initial Conversion Price under the Notes, subject to adjustment
therein, exercisable commencing 6 months and 1 day from the date hereof for a
term of five years;

     

    (f)    
the Security Documents, including without limitation the Security Agreement and
the IP Security Agreement, duly executed by the Company and each
Subsidiary;

     

    (g)    the
Subsidiary Guarantee, duly executed by each Subsidiary of the Company;
and

     

    (h)   
irrevocable Lock Up Agreement(s) duly executed and delivered by each of the
Persons listed on Schedule 3.1(kk) attached hereto.

     

    (i)     On
the Closing Date, each Purchaser shall deliver or cause to be delivered to the
Company the following:

     

    
      (i)          this
Agreement duly executed by such Purchaser;

    

     

    (ii)         such
Purchaser’s Subscription Amount by wire transfer to the account as specified in
writing by the Company; and

     

    (iii)        the
Security Documents to which each Purchaser is a party and required by law to be
signed by such Party in order to be binding.

     

    
      	
               
      

            	
              2.3

            	
              Closing
      Conditions.

            

    

     

    (a)    The
obligations of the Company hereunder in connection with the Closing are subject
to the following conditions being met:

     

    (i)  
       the accuracy in all material respects
on the Closing Date of the representations and warranties of the Purchasers
contained herein;

    
      
         

      

      
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    (ii)    
    all obligations, covenants and agreements of each
Purchaser required to be performed at or prior to the Closing Date shall have
been performed; and

     

    (iii)        the
delivery by each Purchaser of the items set forth in Section 2.2(b) of this
Agreement.

     

    (b)    The
respective obligations of the Purchasers hereunder in connection with the
Closing are subject to the following conditions being met:

     

    (i)          the
accuracy in all material respects when made and on the Closing Date of the
representations and warranties of the Company contained herein;

     

    (ii)         all
obligations, covenants and agreements of the Company required to be performed at
or prior to the Closing Date shall have been performed;

     

    (iii)        the
delivery by the Company of the items set forth in Section 2.2(a) of this
Agreement;

     

    (iv)        there
shall have been no Material Adverse Effect with respect to the Company since the
date hereof; and

     

    (v)  
      from the date hereof to the Closing Date,
trading in the Common Stock shall not have been suspended by the Commission or
Pink Sheets, LLC, and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg L.P. shall not have been suspended
or limited, or minimum prices shall not have been established on securities
whose trades are reported by such service, or on any Trading Market, nor shall a
banking moratorium have been declared either by the United States or New York
State authorities nor shall there have occurred any material outbreak or
escalation of hostilities or other national or international calamity of such
magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of each Purchaser, makes
it impracticable or inadvisable to purchase the Securities at the
Closing.

     

    ARTICLE
III.

    REPRESENTATIONS
AND WARRANTIES

     

    3.1          
Representations
and Warranties of the Company.  Except as set forth under the
corresponding section of the disclosure schedules delivered to the Purchasers
concurrently herewith (“Disclosure Schedules”) which Disclosure Schedules shall
be deemed a part hereof, the Company hereby makes the following representations
and warranties to each Purchaser:

     

    (a)    Subsidiaries.  All
of the direct and indirect subsidiaries of the Company are set forth on Schedule
3.1(a).  The Company owns, directly or indirectly, all of the
capital stock or other equity interests of each Subsidiary free and clear of any
Liens, and all of the issued and outstanding shares of capital stock of each
Subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights to subscribe for or purchase
securities.  If the Company has no subsidiaries, all other references
to the Subsidiaries or any of them in this Section 3.1 shall be
disregarded.

    
      
         

      

      
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    (b)    Organization and
Qualification.  The Company and each of the Subsidiaries is an
entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently
conducted.  Neither the Company nor any Subsidiary is in violation or
default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter
documents.  Each of the Company and the Subsidiaries is duly qualified
to conduct business and is in good standing as a foreign corporation or other
entity in each jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be, could not
have or reasonably be expected to result in (i) a material adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business,
prospects or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) a material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its
obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse
Effect”) and no Proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail such
power and authority or qualification.  The Company has furnished to
the Purchasers true and correct copies of the Company's Certificate of
Incorporation and the Company's By-Laws, as each is currently in
effect.

     

    (c)    Authorization;
Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder.  The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further action is required by
the Company, the Board of Directors or the Company’s stockholders in connection
therewith other than in connection with the Required Approvals.  Each
Transaction Document has been (or upon delivery will have been) duly executed by
the Company and, when delivered in accordance with the terms hereof and thereof,
will constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except (i) as limited by
general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may be
limited by applicable law.

     

    (d)    No
Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
other transactions contemplated hereby and thereby do not and will not: (i)
conflict with or violate any provision of the Company’s or any Subsidiary’s
certificate or articles of incorporation, bylaws or other organizational or
charter documents, or (ii) conflict with, or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, result
in the creation of any Lien upon any of the properties or assets of the Company
or any Subsidiary, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of,
any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected (other than Liens in favor of the
Purchasers), or (iii) subject to the Required Approvals, conflict with or result
in a violation of any law, rule, regulation, order, judgment, injunction, decree
or other restriction of any court or governmental authority to which the Company
or a Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a Subsidiary
is bound or affected; except in the case of each of clauses (ii) and (iii), such
as could not have or reasonably be expected to result in a Material Adverse
Effect.

    
      
         

      

      
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    (e)    Filings, Consents and
Approvals.  The Company is not required to obtain any consent,
waiver, authorization or order of, give any notice to, or make any filing or
registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) filings required pursuant to Section 4.6, (ii) the notice and/or
application(s) to each applicable Trading Market for the issuance and sale of
the Securities and the listing of the Underlying Shares for trading thereon in
the time and manner required thereby, (iii) the filing of Form D with the
Commission and such filings as are required to be made under applicable state
securities laws, and (iv) filings required under the terms of the Security
Documents (collectively, the “Required
Approvals”).

     

    (f)     Issuance of the
Securities.  The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear of
all Liens imposed by the Company other than restrictions on transfer provided
for in the Transaction Documents.  The Underlying Shares, when issued
in accordance with the terms of the Transaction Documents, will be validly
issued, fully paid and nonassessable, free and clear of all Liens imposed by the
Company other than restrictions on transfer provided for in the Transaction
Documents.  The Company has reserved from its duly authorized capital
stock a number of shares of Common Stock for issuance of the Underlying Shares
at least equal to the Required Minimum on the date hereof.

     

    (g)   
Capitalization.  The
capitalization of the Company is as set forth on Schedule 3.1(g),
which Schedule
3.1(g) shall also include the number of shares of Common Stock owned
beneficially, and of record, by Affiliates of the Company as of the date
hereof.  Except as set forth on Schedule 3.1(g), the
Company has not issued any capital stock since December 31, 2006, other than pursuant to the
exercise of employee stock options under the Company’s stock option plans, the
issuance of shares of Common Stock to employees pursuant to the Company’s
employee stock purchase plans and pursuant to the conversion or exercise of
Common Stock Equivalents outstanding as of December 31, 2006.  No
Person has any right of first refusal, preemptive right, right of participation,
or any similar right to participate in the transactions contemplated by the
Transaction Documents.  Except as a result of the purchase and sale of
the Securities, there are no outstanding options, warrants, scrip rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities, rights or obligations convertible into or exercisable or
exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock or Common Stock Equivalents. The
issuance and sale of the Securities will not obligate the Company to issue
shares of Common Stock or other securities to any Person (other than the
Purchasers) and will not result in a right of any holder of Company securities
to adjust the exercise, conversion, exchange or reset price under any of such
securities. All of the outstanding shares of capital stock of the Company are
validly issued, fully paid and nonassessable, have been issued in compliance
with all federal and state securities laws, and none of such outstanding shares
was issued in violation of any preemptive rights or similar rights to subscribe
for or purchase securities.  No further approval or authorization of
any stockholder, the Board of Directors or others is required for the issuance
and sale of the Securities.  There are no stockholders agreements,
voting agreements or other similar agreements with respect to the Company’s
capital stock to which the Company is a party or, to the knowledge of the
Company, between or among any of the Company’s stockholders.

    
      
         

      

      
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    (h)    Non-Reporting; Financial
Statements.  The Company is not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act.  The
financial statements of the Company furnished to the Purchasers for the years
ended December 31, 2005 and December 31, 2006 have been prepared in accordance
with United States generally accepted accounting principles applied on a
consistent basis during the periods involved (“GAAP”), except as may
be otherwise specified in such financial statements or the notes thereto and
except that unaudited financial statements may not contain all footnotes
required by GAAP, and fairly present in all material respects the financial
position of the Company and its consolidated Subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments.

     

    (i)     Material
Changes.  Since the date of the latest audited financial
statements delivered to the Purchasers, (i) there has been no event, occurrence
or development that has had or that could reasonably be expected to result in a
Material Adverse Effect, (ii) the Company has not incurred any liabilities
(contingent or otherwise) other than (A) trade payables and accrued expenses
incurred in the ordinary course of business consistent with past practice and
(B) liabilities not required to be reflected in the Company’s financial
statements pursuant to GAAP or disclosed in filings made with the Commission,
(iii) the Company has not altered its method of accounting, (iv) the Company has
not declared or made any dividend or distribution of cash or other property to
its stockholders or purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock and (v) the Company has not issued any
equity securities to any officer, director or Affiliate, except pursuant to
existing Company stock option plans. The Company does not have pending before
the Commission any request for confidential treatment of
information.  Except for the issuance of the Securities contemplated
by this Agreement or as set forth on Schedule 3.1(i), no
event, liability or development has occurred or exists with respect to the
Company or its Subsidiaries or their respective business, properties, operations
or financial condition, that would be required to be disclosed by the Company
under applicable securities laws at the time this representation is made or
deemed made that has not been publicly disclosed at least two Trading Days prior
to the date that this representation is made.

     

    (j)    
Litigation.  Except
as set forth on Schedule 3.1(j),
there is no action, suit, inquiry, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or
affecting the Company, any Subsidiary or any of their respective properties
before or by any court, arbitrator, governmental or administrative agency or
regulatory authority (federal, state, county, local or foreign) (collectively,
an “Action”)
which (i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents or the Securities or (ii)
could, if there were an unfavorable decision, have or reasonably be expected to
result in a Material Adverse Effect.  Neither the Company nor any
Subsidiary, nor any director or officer thereof, is or has been the subject of
any Action involving a claim of violation of or liability under federal or state
securities laws or a claim of breach of fiduciary duty.  There has not
been, and to the knowledge of the Company, there is not pending or contemplated,
any investigation by the Commission involving the Company or any current or
former director or officer of the Company.  The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the Exchange
Act or the Securities Act.

    
      
         

      

      
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    (k)    Labor
Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect.  None of the Company’s or its Subsidiaries’ employees is a
member of a union that relates to such employee’s relationship with the Company
or such Subsidiary, and neither the Company nor any of its Subsidiaries is a
party to a collective bargaining agreement, and the Company and its Subsidiaries
believe that their relationships with their employees are good.  No
executive officer, to the knowledge of the Company, is, or is now expected to
be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement or
non-competition agreement, or any other contract or agreement or any restrictive
covenant in favor of any third party, and the continued employment of each such
executive officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.  The Company
and its Subsidiaries are in compliance with all U.S. federal, state, local and
foreign laws and regulations relating to employment and employment practices,
terms and conditions of employment and wages and hours, except where the failure
to be in compliance could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.

     

    (l)     Compliance.  Neither
the Company nor any Subsidiary (i) is in default under or in violation of (and
no event has occurred that has not been waived that, with notice or lapse of
time or both, would result in a default by the Company or any Subsidiary under),
nor has the Company or any Subsidiary received notice of a claim that it is in
default under or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) is in violation of any order of any court,
arbitrator or governmental body, or (iii) is or has been in violation of any
statute, rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws applicable to its business
and all such laws that affect the environment, except in each case as could not
have or reasonably be expected to result in a Material Adverse
Effect.

     

    (m)   Regulatory
Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as currently conducted and contemplated to be conducted,
except where the failure to possess such permits could not reasonably be
expected to result in a Material Adverse Effect (“Material Permits”),
and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material
Permit.

    
      
         

      

      
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    (n)   
Title to
Assets.  The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for (a) Liens that do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by the Company and the Subsidiaries, (b) Liens for the
payment of federal, state or other taxes, the payment of which is neither
delinquent nor subject to penalties, and (c) that certain Lien in favor of
Enterprise Bank, N.A. to secure the loan outstanding from such entity in the
amount of approximately $198,000, which loan shall be repaid in full, and such
Lien irrevocably removed, at or prior to Closing.  Any real property
and facilities held under lease by the Company and the Subsidiaries are held by
them under valid, subsisting and enforceable leases with which the Company and
the Subsidiaries are in compliance.

     

    (o)    Patents and
Trademarks.  The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions, copyrights,
licenses and other intellectual property rights and similar rights necessary or
material for use in connection with their respective businesses as currently
conducted and contemplated to be conducted and which the failure to so have
could have a Material Adverse Effect (collectively, the “Intellectual Property
Rights”).  Neither the Company nor any Subsidiary has received
a notice (written or otherwise) that any of the Intellectual Property Rights
used by the Company or any Subsidiary violates or infringes upon the rights of
any Person. To the knowledge of the Company, all such Intellectual Property
Rights are enforceable and there is no existing infringement by another Person
of any of the Intellectual Property Rights.  The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties, except where
failure to do so could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.

     

    (p)    Insurance.  The
Company and the Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiaries are
engaged.  Neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business without a significant increase in
cost.

     

    (q)    Transactions with Affiliates
and Employees.  None of the officers or directors of the
Company and, to the knowledge of the Company, none of the employees of the
Company is presently a party to any transaction with the Company or any
Subsidiary (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner, in each case in excess of $10,000
other than for (i) payment of salary or consulting fees for services rendered,
(ii) reimbursement for expenses incurred on behalf of the Company and (iii)
other employee benefits, including stock option agreements under any stock
option plan of the Company.

    
      
         

      

      
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    (r)     [Intentionally
Omitted.]

     

    (s)    Certain
Fees.  Except as set forth on Schedule 3.1(s), no
brokerage or finder’s fees or commissions are or will be payable by the Company
to any broker, financial advisor or consultant, finder, placement agent,
investment banker, bank or other Person with respect to the transactions
contemplated by the Transaction Documents.  The Purchasers shall have
no obligation with respect to any fees or with respect to any claims made by or
on behalf of other Persons for fees of a type contemplated in this Section that
may be due in connection with the transactions contemplated by the Transaction
Documents.

     

    (t)     Private
Placement.  Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the Pink
Sheets or any Trading Market.

     

    (u)    Investment Company.
The Company is not, and is not an Affiliate of, and immediately after receipt of
payment for the Securities, will not be or be an Affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as
amended.  The Company shall conduct its business in a manner so that
it will not become subject to the Investment Company Act of 1940, as
amended.

     

    (v)    Registration
Rights.  No Person has any right to cause the Company to effect
the registration under the Securities Act of any securities of the
Company.

     

    (w)   Listing and Maintenance
Requirements.  The Common Stock is eligible to be traded on the
Pink Sheets, and the Company has taken no action designed to, or which to its
knowledge is likely to have the effect of, terminating the trading or quotation
of the Common Stock on the Pink Sheets, nor has the Company received any
notification that Pink Sheets LLC is contemplating terminating such trading or
quotation.

     

    (x)    Application of Takeover
Protections.  The Company does not have in place and is not
subject to any anti-takeover provisions (including without limitation control
share acquisition, business combination, poison pill (including any distribution
under a rights agreement) or other similar agreement or provision) under the
Company’s certificate of incorporation or the laws of its state of incorporation
that is or could become applicable to the Purchasers as a result of the
Purchasers and the Company fulfilling their obligations or exercising their
rights under the Transaction Documents, including without limitation as a result
of the Company’s issuance of the Securities and the Purchasers’ ownership of the
Securities.

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

    (y)    Disclosure.  Except
with respect to the material terms and conditions of the transactions
contemplated by the Transaction Documents, the Company confirms that neither it
nor any other Person acting on its behalf has provided any of the Purchasers or
their agents or counsel with any information that it believes constitutes or
might constitute material, nonpublic information.  The Company
understands and confirms that the Purchasers will rely on the foregoing
representation in effecting transactions in securities of the
Company.  All disclosure furnished by or on behalf of the Company to
the Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Disclosure Schedules to this Agreement, is
true and correct and does not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.   The press releases disseminated by the Company
during the twelve months preceding the date of this Agreement taken as a whole
do not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made and
when made, not misleading.  The Company acknowledges and agrees that
no Purchaser makes or has made any representations or warranties with respect to
the transactions contemplated hereby other than those specifically set forth in
Section 3.2 hereof.

     

    (z)    No Integrated
Offering. Assuming the accuracy of the Purchasers’ representations and
warranties set forth in Section 3.2, neither the Company, nor any of its
Affiliates, nor any Person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of
(i) the Securities Act which would require the registration of any such
securities under the Securities Act, or (ii) any applicable shareholder approval
provisions of the Pink Sheets or any Trading Market on which any of the
securities of the Company are listed or designated.

     

    (aa)  Solvency.  Based
on the consolidated financial condition of the Company as of the Closing Date
after giving effect to the receipt by the Company of the proceeds from the sale
of the Securities hereunder, (i) the fair saleable value of the Company’s assets
exceeds the amount that will be required to be paid on or in respect of the
Company’s existing debts and other liabilities (including known contingent
liabilities) as they mature, (ii) the Company’s assets do not constitute
unreasonably small capital to carry on its business as now conducted and as
proposed to be conducted including its capital needs taking into account the
particular capital requirements of the business conducted by the Company, and
projected capital requirements and capital availability thereof, and (iii) the
current cash flow of the Company, together with the proceeds the Company would
receive, were it to liquidate all of its assets, after taking into account all
anticipated uses of the cash, would be sufficient to pay all amounts on or in
respect of its liabilities when such amounts are required to be
paid.  The Company does not intend to incur debts beyond its ability
to pay such debts as they mature (taking into account the timing and amounts of
cash to be payable on or in respect of its debt).  The Company has no
knowledge of any facts or circumstances which lead it to believe that it will
file for reorganization or liquidation under the bankruptcy or reorganization
laws of any jurisdiction within one year from the Closing Date.  Schedule 3.1(aa) sets
forth as of the date hereof all outstanding secured and unsecured Indebtedness
of the Company or any Subsidiary, or for which the Company or any Subsidiary has
commitments.  For the purposes of this Agreement, “Indebtedness” means
(a) any liabilities for borrowed money or amounts owed in excess of $50,000
(other than trade accounts payable incurred in the ordinary course of business),
(b) all guaranties, endorsements and other contingent obligations in respect of
indebtedness of others, whether or not the same are or should be reflected in
the Company’s balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business, and (c) the present value of
any lease payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP.  Neither the Company nor any
Subsidiary is in default with respect to any Indebtedness.

    
      
         

      

      
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    (bb) Tax
Status.  Except for matters that would not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns and has paid or accrued all taxes
shown as due thereon, and the Company has no knowledge of a tax deficiency which
has been asserted or threatened against the Company or any
Subsidiary.

     

    (cc)  No General
Solicitation. Neither the Company nor any person acting on behalf of the
Company has offered or sold any of the Securities by any form of general
solicitation or general advertising.  The Company has offered the
Securities for sale only to the Purchasers and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.

     

    (dd) Foreign Corrupt
Practices.  Neither the Company, nor to the knowledge of the
Company, any agent or other person acting on behalf of the Company, has (i)
directly or indirectly, used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is  in violation of law, or (iv)
violated in any material respect any provision of the Foreign Corrupt Practices
Act of 1977, as amended.

     

    (ee)  Accountants.  The
Company’s accounting firm is Carver Moquist & O’Connor, LLC.  To
the knowledge and belief of the Company, such accounting firm (i) is a
registered public accounting firm as required by the Exchange Act and (ii) shall
express its opinion with respect to the financial statements to be included in
the Company’s Annual Report for the year ending December 31, 2007.

     

    (ff)   Seniority.  As
of the Closing Date, no Indebtedness or other claim against the Company is
senior to the Notes in right of payment, whether with respect to interest or
upon liquidation or dissolution, or otherwise, other than indebtedness secured
by purchase money security interests (which is senior only as to underlying
assets covered thereby) and capital lease obligations (which is senior only as
to the property covered thereby).

     

    (gg) No Disagreements with
Accountants and Lawyers.  There are no disagreements of any
kind presently existing, or reasonably anticipated by the Company to arise,
between the Company and the accountants and lawyers formerly or presently
employed by the Company, and the Company is not aware of any circumstances with
respect to its accountants which could affect the Company’s ability to perform
any of its obligations under any of the Transaction Documents.

    
      
         

      

      
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    (hh) Acknowledgment Regarding
Purchasers’ Purchase of Securities.  The Company acknowledges
and agrees that each of the Purchasers is acting solely in the capacity of an
arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated thereby.  The Company further acknowledges
that no Purchaser is acting as a financial advisor or fiduciary of the Company
(or in any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by any Purchaser or any
of their respective representatives or agents in connection with the Transaction
Documents and the transactions contemplated thereby is merely incidental to the
Purchasers’ purchase of the Securities.  The Company further
represents to each Purchaser that the Company’s decision to enter into this
Agreement and the other Transaction Documents has been based solely on the
independent evaluation of the transactions contemplated hereby by the Company
and its representatives.

     

    (ii)   
Acknowledgment
Regarding Purchasers’ Trading Activity.  Notwithstanding anything in this Agreement or elsewhere
herein to the contrary (except for Sections 3.2(f) and 4.15 hereof), it is understood and
acknowledged by the
Company that (i) none of
the Purchasers has been
asked to agree by the
Company, nor has any
Purchaser agreed, to desist from purchasing or selling, long and/or short,
securities of the Company, or “derivative” securities based on securities issued
by the Company or to hold the Securities for any specified term, (ii) past or future open market or
other transactions by any Purchaser, specifically including, without limitation,
Short Sales or “derivative” transactions, before or after the closing of this or
future private placement transactions, may negatively impact the market price of
the Company’s
publicly-traded securities,
(iii) any Purchaser, and
counter-parties in
“derivative” transactions to which any such Purchaser is a party, directly or
indirectly, may presently have a “short” position in the Common Stock, and (iv)
each Purchaser shall not be deemed to have any affiliation with or control over
any arm’s length counter-party in any “derivative”
transaction.  The Company further understands and acknowledges
that (a) one or more Purchasers may engage in hedging activities at various
times during the period that the Securities are outstanding, including, without
limitation, during the periods that the value of the Underlying Shares
deliverable with respect to Securities are being determined and (b) such hedging
activities (if any) could reduce the value of the existing stockholders' equity
interests in the Company at and after the time that the hedging activities are
being conducted.  The Company acknowledges that such aforementioned
hedging activities do not constitute a breach of any of the Transaction
Documents.

     

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

    
      
         

      

      
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    (kk)  Significant
Shareholders.    Except for those Persons set forth
on Schedule 3.1(kk) attached hereto, no Person has any direct or indirect
beneficial ownership (as determined in accordance with Regulation 13D-G) of
shares of Common Stock which exceeds in the aggregate (together with other
Persons which would constitute a “group” under Regulation 13D-G) 5% of the total
number of outstanding shares of Common Stock as of the date hereof and the
Closing Date, including without limitation as a result of any Person’s
beneficial interest in a trust. For purposes of the calculations under this
paragraph, any limitations on beneficial ownership contained in any instrument
directly or indirectly convertible, exchangeable or exercisable into or for
Common Stock shall be ignored and any such instruments shall be deemed to be
currently convertible, exchangeable or exercisable in full.

     

    (ll)    No “Shell”.  To
the Company’s knowledge, the Company is not and has not at any time previously
been a Shell Company.

     

    3.2           Representations and
Warranties of the Purchasers.    Each Purchaser, for
itself and for no other Purchaser, hereby represents and warrants as of the date
hereof and as of the Closing Date to the Company as follows:

     

    (a)    Organization;
Authority.  Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with full right, corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations hereunder and thereunder.
The execution and delivery of the Transaction Documents and performance by such
Purchaser of the transactions contemplated by the Transaction Documents have
been duly authorized by all necessary corporate or similar action on the part of
such Purchaser.  Each Transaction Document to which it is a party has
been duly executed by such Purchaser, and when delivered by such Purchaser in
accordance with the terms hereof, will constitute the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except (i) as limited by general equitable principles and applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors’ rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.

     

    (b)    Own
Account.  Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Securities as principal
for its own account and not with a view to or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of
such Securities in violation of the Securities Act or any applicable state
securities law and has no direct or indirect arrangement or understandings with
any other persons to distribute or regarding the distribution of such Securities
(this representation and warranty not limiting such Purchaser’s right to sell
the Securities pursuant to any registration statement filed under the Securities
Act or otherwise in compliance with applicable federal and state securities
laws) in violation of the Securities Act or any applicable state securities
law.  Such Purchaser is acquiring the Securities hereunder in the
ordinary course of its business.

    
      
         

      

      
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    (c)    Purchaser
Status.  At the time such Purchaser was offered the Securities,
it was, and at the date hereof it is, and on each date on which it exercises any
Warrants or converts any Notes it will be either: (i) an “accredited investor”
as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the
Securities Act or (ii) a “qualified institutional buyer” as defined in Rule
144A(a) under the Securities Act.  Such Purchaser is not required to
be registered as a broker-dealer under Section 15 of the Exchange
Act.

     

    (d)    Experience of Such
Purchaser.  Such Purchaser, either alone or together with its
representatives, has such knowledge, sophistication and experience in business
and financial matters so as to be capable of evaluating the merits and risks of
the prospective investment in the Securities, and has so evaluated the merits
and risks of such investment.  Such Purchaser is able to bear the
economic risk of an investment in the Securities and, at the present time, is
able to afford a complete loss of such investment.

     

    (e)    General
Solicitation.  Such Purchaser is not purchasing the Securities
as a result of any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media
or broadcast over television or radio or presented at any seminar or any other
general solicitation or general advertisement.

     

    (f)    
Short Sales and
Confidentiality Prior To The Date Hereof.  Other than
consummating the transactions contemplated hereunder, such Purchaser has not
directly or indirectly, nor has any Person acting on behalf of or pursuant to
any understanding with such Purchaser, executed any purchases or sales,
including Short Sales, of the securities of the Company during the period
commencing from the time that such Purchaser first received a term sheet
(written or oral) from the Company or any other Person representing the Company
setting forth the material terms of the transactions contemplated hereunder
until the date hereof (“Discussion
Time”).  Notwithstanding the foregoing, in the case of a
Purchaser that is a multi-managed investment vehicle whereby separate portfolio
managers manage separate portions of such Purchaser's assets and the portfolio
managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Purchaser's assets, the
representation set forth above shall only apply with respect to the portion of
assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement.  Other than to
other Persons party to this Agreement, such Purchaser has maintained the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this
transaction).

     

    ARTICLE
IV.

    OTHER
AGREEMENTS OF THE PARTIES

     

    
      	
               
      

            	
              4.1

            	
              Transfer
      Restrictions.

            

    

     

    (a)    The
Securities may only be disposed of in compliance with state and federal
securities laws.  In connection with any transfer of Securities other
than pursuant to an effective registration statement or Rule 144, to the Company
or to an Affiliate of a Purchaser or in connection with a pledge as contemplated
in Section 4.1(b), the Company may require the transferor thereof to provide to
the Company an opinion of counsel selected by the transferor and reasonably
acceptable to the Company, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer does
not require registration of such transferred Securities under the Securities
Act.  As a condition of transfer, any such transferee shall agree in
writing to be bound by the terms of this Agreement and shall have the rights of
a Purchaser under this Agreement.

    
      
         

      

      
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    (b)    The
Purchasers agree to the imprinting, so long as is required by this Section 4.1,
of a legend on any of the Securities in the following form:

     

    [NEITHER]
THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS [EXERCISABLE]
[CONVERTIBLE]] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.  THIS SECURITY [AND THE SECURITIES
ISSUABLE UPON [EXERCISE] [CONVERSION] OF THIS SECURITY] MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.

     

    The
Company acknowledges and agrees that a Purchaser may from time to time pledge
pursuant to a bona fide margin agreement with a registered broker-dealer or
grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and, if required under the terms of such arrangement, such Purchaser may
transfer pledged or secured Securities to the pledgees or secured
parties.  Such a pledge or transfer would not be subject to approval
of the Company and no legal opinion of legal counsel of the pledgee, secured
party or pledgor shall be required in connection therewith.  Further,
no notice shall be required of such pledge.  At the appropriate
Purchaser’s expense, the Company will execute and deliver such reasonable
documentation as a pledgee or secured party of Securities may reasonably request
in connection with a pledge or transfer of the Securities, including, if the
Securities are subject to a registration statement filed under the Securities
Act, the preparation and filing of any required prospectus supplement under Rule
424(b)(3) under the Securities Act or other applicable provision of the
Securities Act to appropriately amend the list of Selling Stockholders
thereunder.

     

    (c)    Certificates
evidencing the Underlying Shares shall not contain any legend (including the
legend set forth in Section 4.1(b) hereof): (i) while a registration statement
covering the resale of such security is effective under the Securities Act, or
(ii) if such Underlying Shares are eligible for resale under Rule 144, or (iii)
if such legend is not required under applicable requirements of the Securities
Act (including judicial interpretations and pronouncements issued by the staff
of the Commission).  If required by the Transfer Agent to effect the
removal of the legend hereunder, the Company shall cause its counsel to issue a
legal opinion to the Transfer Agent promptly after the date on which the
applicable holder of Underlying Shares may sell such securities pursuant to Rule
144.  If all or any portion of a Note or Warrant is converted or
exercised (as applicable) at a time when there is an effective registration
statement to cover the resale of the Underlying Shares, or if such Underlying
Shares may be sold under Rule 144 or if such legend is not otherwise required
under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission) then
such Underlying Shares shall be issued free of all legends.  The
Company agrees that at such time as such legend is no longer required under this
Section 4.1(c), it will, no later than three Trading Days following the delivery
by a Purchaser to the Company or the Transfer Agent of a certificate
representing Underlying Shares, as applicable, issued with a restrictive legend
(such third Trading Day, the “Legend Removal
Date”), deliver or cause to be delivered to such Purchaser a certificate
representing such shares that is free from all restrictive and other
legends.  The Company may not make any notation on its records or give
instructions to the Transfer Agent that enlarge the restrictions on transfer set
forth in this Section.  Certificates for Underlying Shares subject to
legend removal hereunder shall be transmitted by the Transfer Agent to the
Purchaser by crediting the account of the Purchaser’s prime broker with the
Depository Trust Company System as directed by such Purchaser.

    
      
         

      

      
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    (d)    In
addition to such Purchaser’s other available remedies, the Company shall pay to
a Purchaser, in cash, as partial liquidated damages and not as a penalty, for
each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on the
date such Securities are submitted to the Transfer Agent) delivered for removal
of the restrictive legend and subject to Section 4.1(c), $10 per Trading Day
(increasing to $20 per Trading Day 5 Trading Days after such damages have begun
to accrue) for each Trading Day after the Legend Removal Date until such
certificate is delivered without a legend.  Nothing herein shall limit
such Purchaser’s right to pursue actual damages for the Company’s failure to
deliver certificates representing any Securities as required by the Transaction
Documents, and such Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.

     

    (e)  
Each Purchaser, severally and not jointly with the other Purchasers, agrees that
such Purchaser will sell any Securities pursuant to either Rule 144 or the
registration requirements of the Securities Act, including any applicable
prospectus delivery requirements, or an exemption therefrom, and that if
Securities are sold pursuant to a registration statement filed under the
Securities Act, they will be sold in compliance with the plan of distribution
set forth therein, and acknowledges that the removal of the restrictive legend
from certificates representing Securities as set forth in this Section 4.1 is
predicated upon the Company’s reliance upon this understanding.

     

    4.2           Acknowledgment of
Dilution.  The Company acknowledges that the issuance of the
Securities may result in dilution of the outstanding shares of Common Stock,
which dilution may be substantial under certain market
conditions.  The Company further acknowledges that its obligations
under the Transaction Documents, including without limitation its obligation to
issue the Underlying Shares pursuant to the Transaction Documents, are
unconditional and absolute and not subject to any right of set off,
counterclaim, delay or reduction, regardless of the effect of any such dilution
or any claim the Company may have against any Purchaser and regardless of the
dilutive effect that such issuance may have on the ownership of the other
stockholders of the Company.

    
      
         

      

      
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    4.3           Furnishing of
Information.  The Company shall file a Form 10 to register the
Common Stock under the Exchange Act on or prior July 15, 2008.  At all
times after June 30, 2008 until such time as no Purchaser owns any Securities,
the Company shall cause itself to be subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act and timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed thereunder.  Without limiting the foregoing, as
long as any Purchaser owns Securities, if the Company is not required to file
reports pursuant to the Exchange Act, it will prepare and furnish to the
Purchasers and make publicly available in accordance with Rule 144(c) such
information as is required for the Purchasers to sell the Securities under Rule
144.  The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, to the extent
required from time to time to enable such Person to sell such Securities without
registration under the Securities Act within the requirements of the exemption
provided by Rule 144.

     

    4.4           Integration.  The
Company shall not sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the Securities
Act) that would be integrated with the offer or sale of the Securities to the
Purchasers in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchasers or that would be integrated
with the offer or sale of the Securities for purposes of the rules and
regulations of any Trading Market.

     

    4.5           Conversion and Exercise
Procedures.  The form of Notice of Exercise included in the
Warrants and the form of Notice of Conversion included in the Notes set forth the totality
of the procedures required of the Purchasers in order to exercise the Warrants
or convert the Notes.  No additional legal opinion or other
information or instructions shall be required of the Purchasers to exercise
their Warrants or convert their Notes.  The Company shall honor
exercises of the Warrants and conversions of the Notes and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.

     

    4.6           Securities Laws Disclosure;
Publicity.  The Company shall, by 8:30 a.m. (New York City
time) on the Trading Day following the date hereof, issue a press release
disclosing the material terms of the transactions contemplated hereby and
attaching the Transaction Documents as exhibits thereto.  The Company
and each Purchaser shall consult with each other in issuing any other press
releases with respect to the transactions contemplated hereby, and neither the
Company nor any Purchaser shall issue any such press release or otherwise make
any such public statement without the prior consent of the Company, with respect
to any press release of any Purchaser, or without the prior consent of each
Purchaser, with respect to any press release of the Company, which consent shall
not unreasonably be withheld or delayed, except if such disclosure is required
by law, in which case the disclosing party shall promptly provide the other
party with prior notice of such public statement or
communication.  Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the Commission or any regulatory agency or Trading
Market, without the prior written consent of such Purchaser, except (i) as
required by federal securities law in connection with (A) any registration
statement filed under the Securities Act covering the resale of the Securities,
and (B) the filing of final Transaction Documents (including signature pages
thereto) with the Commission and (ii) to the extent such disclosure is required
by law or Trading Market regulations, in which case the Company shall provide
the Purchasers with prior notice of such disclosure permitted under this clause
(ii).

    
      
         

      

      
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    4.7           Shareholder Rights
Plan.  No claim will be made or enforced by the Company or,
with the consent of the Company, any other Person, that any Purchaser is an
“Acquiring Person” under any control share acquisition, business combination,
poison pill (including any distribution under a rights agreement) or similar
anti-takeover plan or arrangement in effect or hereafter adopted by the Company,
or that any Purchaser could be deemed to trigger the provisions of any such plan
or arrangement, by virtue of receiving Securities under the Transaction
Documents or under any other agreement between the Company and the
Purchasers.

     

    4.8           Non-Public
Information.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and agrees that neither it nor any other Person acting on its
behalf will provide any Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information.  The Company
understands and confirms that each Purchaser shall be relying on the foregoing
covenant in effecting transactions in securities of the Company.

     

    4.9          
Use of
Proceeds.  Except as set forth on Schedule 4.9 attached
hereto, the Company shall use the net proceeds from the sale of the Securities
hereunder for working capital purposes and shall not use such proceeds for (a)
the satisfaction of any portion of the Company’s debt (other than payment of
trade payables in the ordinary course of the Company’s business and prior
practices), (b) the redemption of any Common Stock or Common Stock Equivalents,
(c) the settlement of any outstanding litigation, or (d) making any investments
in securities or otherwise purchasing any equity or debt securities, including
without limitation purchasing any corporate, governmental or municipal bonds or
other debts instruments (whether at auction, in the open market or otherwise),
any commercial or chattel paper, or any certificates of deposit, or investing in
any money market or mutual funds.

     

    4.10         Indemnification of
Purchasers.   Subject to the provisions of this Section
4.10, the Company will indemnify and hold each Purchaser and its directors,
officers, shareholders, members, partners, employees and agents (and any other
Persons with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling person (each, a
“Purchaser
Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a Purchaser
in any capacity, or any of them or their respective Affiliates, by any
stockholder of the Company who is not an Affiliate of such Purchaser, with
respect to any of the transactions contemplated by the Transaction Documents
(unless such action is based upon a breach of such Purchaser’s representations,
warranties or covenants under the Transaction Documents or any agreements or
understandings such Purchaser may have with any such stockholder or any
violations by the Purchaser of state or federal securities laws or any conduct
by such Purchaser which constitutes fraud, gross negligence, willful misconduct
or malfeasance).  If any action shall be brought against any Purchaser
Party in respect of which indemnity may be sought pursuant to this Agreement,
such Purchaser Party shall promptly notify the Company in writing, and the
Company shall have the right to assume the defense thereof with counsel of its
own choosing reasonably acceptable to the Purchaser Party.  Any
Purchaser Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Purchaser Party except to the extent
that (i) the employment thereof has been specifically authorized by the Company
in writing, (ii) the Company has failed after a reasonable period of time to
assume such defense and to employ counsel or (iii) in such action there is, in
the reasonable opinion of such separate counsel, a material conflict on any
material issue between the position of the Company and the position of such
Purchaser Party, in which case the Company shall be responsible for the
reasonable fees and expenses of no more than one such separate
counsel.  The Company will not be liable to any Purchaser Party under
this Agreement (i) for any settlement by a Purchaser Party effected without the
Company’s prior written consent, which shall not be unreasonably withheld or
delayed; or (ii) to the extent, but only to the extent that a loss, claim,
damage or liability is attributable to any Purchaser Party’s breach of any of
the representations, warranties, covenants or agreements made by such Purchaser
Party in this Agreement or in the other Transaction Documents.

    
      
         

      

      
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              4.11

            	
              Reservation and
      Listing of Securities.

            

    

     

    (a)    The
Company shall maintain a reserve from its duly authorized shares of Common Stock
for issuance pursuant to the Transaction Documents in such amount as may be
required to fulfill its obligations in full under the Transaction
Documents.

     

    (b)    If,
on any date, the number of authorized but unissued (and otherwise unreserved)
shares of Common Stock is less than the Required Minimum on such date, then the
Board of Directors shall use commercially reasonable efforts to amend the
Company’s certificate or articles of incorporation to increase the number of
authorized but unissued shares of Common Stock to at least the Required Minimum
at such time, as soon as possible and in any event not later than the 75th day
after such date.

     

    (c)    The
Company shall apply for and use its best efforts to cause its shares of Common
Stock to be listed, quoted and traded on a Trading Market prior to December 31,
2008, and upon such listing or quotation the Company shall (1) take all steps
necessary to cause the Underlying Shares to be approved for listing on such
Trading Market at such time or as soon as possible thereafter, (2) provide to
the Purchasers evidence of such listing, and (3) maintain such listing on any
date at least equal to the Required Minimum on such date on such Trading Market
or another Trading Market.  Prior to such listing, quoting and
trading, the Company shall, if applicable (i) in the time and manner required by
the Pink Sheets operated by Pink Sheets, LLC, prepare and file with such market
an additional shares listing application covering a number of shares of Common
Stock at least equal to the Required Minimum on the date of such application,
(ii) take all steps necessary to cause such shares of Common Stock to be
approved for listing on such market as soon as possible thereafter, (iii)
provide to the Purchasers evidence of such listing, and (iv) maintain the
listing of such Common Stock on any date at least equal to the Required Minimum
on such date on such market or a Trading Market.

    
      
         

      

      
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              4.12

            	
              [Intentionally
      Omitted.]

            

    

     

    
      	
               
      

            	
              4.13

            	
              Subsequent Equity
      Sales.

            

    

     

    (a)    From
the date hereof until the date which is six months following the Closing Date,
neither the Company nor any Subsidiary shall issue shares of Common Stock or
Common Stock Equivalents without the prior written consent of the
Purchasers.

     

    (b)   From
the date hereof until such time as no Purchaser holds any of the Securities, the
Company shall be prohibited from effecting or entering into an agreement to
effect any financing by it or any of its Subsidiaries by the issuance of Common
Stock, Common Stock Equivalents or Indebtedness (“Subsequent
Financing”) involving a Variable Rate Transaction or MFN
Transaction.  “Variable Rate
Transaction” means a transaction in which the Company issues or sells (i)
any debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock or (ii) enters into any agreement, including, but not limited
to, an equity line of credit, whereby the Company may sell securities at a
future determined price.  “MFN Transaction”
means a transaction in which the Company issues or sells any securities to an
investor in one or a series of related capital raising transactions which grants
to such investor the right to receive additional securities or better terms
based in some manner upon future sales or issuances of Common Stock or Common
Stock Equivalents on terms more favorable than those granted to such investor in
such capital raising transaction(s).

     

    (c)    From
the date hereof until such time as no Purchaser holds any of the Securities, in
the event the Company issues or sells any shares of Common Stock or Common Stock
Equivalents or amends the transaction documents relating to any sale or issuance
of Common Stock or Common Stock Equivalents, if a Purchaser reasonably believes
that any of the terms and conditions thereunder are more favorable to such
investors as the terms and conditions granted under the Transaction Documents,
upon notice to the Company by such Purchaser the Company shall amend the terms
of this transaction and the Transaction Documents so as to give the Purchasers
the benefit of such more favorable terms or conditions.

    
      
         

      

      
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    (d)    Notwithstanding
the foregoing, this Section 4.13 shall not apply in respect of an Exempt
Issuance, except that no Variable Rate Transaction or MFN Transaction shall be
an Exempt Issuance.

     

    4.14        
Equal Treatment
of Purchasers.  No consideration shall be offered or paid to
any Person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration is also offered
to all of the parties to the Transaction Documents. Further, the Company shall
not make any payment of principal or interest on the Notes in amounts which are
disproportionate to the respective principal amounts outstanding on the Notes at
any applicable time.  For clarification purposes, this provision
constitutes a separate right granted to each Purchaser by the Company and
negotiated separately by each Purchaser, and is intended for the Company to
treat the Purchasers as a class and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.

     

    4.15        
 Short Sales and
Confidentiality After The Date Hereof.  Each Purchaser,
severally and not jointly with the other Purchasers, covenants that neither it
nor any Affiliate acting on its behalf or pursuant to any understanding with it
will execute any Short Sales during the period commencing at the Discussion Time
and ending at the time that the transactions contemplated by this Agreement are
first publicly announced as described in Section 4.6.  Each Purchaser,
severally and not jointly with the other Purchasers, covenants that until such
time as the transactions contemplated by this Agreement are publicly disclosed
by the Company as described in Section 4.6, such Purchaser will maintain the
confidentiality of the existence and terms of this transaction and the
information included in the Disclosure Schedules.  Notwithstanding the
foregoing, no Purchaser makes any representation, warranty or covenant hereby
that it will not engage in Short Sales in the securities of the Company after
the time that the transactions contemplated by this Agreement are first publicly
announced as described in Section 4.6.  Notwithstanding the foregoing,
in the case of a Purchaser that is a multi-managed investment vehicle whereby
separate portfolio managers manage separate portions of such Purchaser’s assets
and the portfolio managers have no direct knowledge of the investment decisions
made by the portfolio managers managing other portions of such Purchaser’s
assets, the covenant set forth above shall only apply with respect to the
portion of assets managed by the portfolio manager that made the investment
decision to purchase the Securities covered by this Agreement.

     

    4.16         Form D; Blue Sky
Filings.  The Company agrees to timely file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof, promptly upon request of any Purchaser. The Company shall take such
action as the Company shall reasonably determine is necessary in order to obtain
an exemption for, or to qualify the Securities for, sale to the Purchasers at
the Closing under applicable securities or “Blue Sky” laws of the states of the
United States, and shall provide evidence of such actions promptly upon request
of any Purchaser.

     

    
      	
               
      

            	
              4.17

            	
              [Intentionally
      Omitted.]

            

    

    
      
         

      

      
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              4.18

            	
              Registration.

            

    

     

    (a)     Demand
Registration.  Without limiting any other remedies available to
any Purchaser hereunder, at law, in equity or otherwise, in the event that after
October 15, 2008 it is determined that the Company is or has at any time
previously been a Shell Company (or that counsel to the Company will not issue a
legal opinion to the Transfer Agent that it may deliver unlegended freely
tradable Underlying Shares to the Purchaser under Rule 144, due to the fact that
the Company was or may have been a Shell Company), then the Company shall (a)
within 30 days following demand by any Purchaser, prepare and file with the
Commission a registration statement registering the resale by the Purchasers of
all Underlying Shares under the Securities Act, and (b) cause such registration
statement to be declared effective by the Commission as promptly as possible
thereafter (but no later than 90 days after such filing).

     

    (b)    Piggy-Back
Registration If the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities (other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or its then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans), then the Company shall send to each Purchaser written notice of
such determination and, if within seven (7) Business Days after receipt of such
notice, any such Purchaser shall so request in writing (which request shall
specify the Underlying Shares intended to be disposed of by the Purchaser), the
Company will cause the registration under the Securities Act of all Underlying
Shares which the Company has been so requested to register by the Purchaser, to
the extent required to permit the disposition of such Underlying Shares so to be
registered.  The Company shall include in such registration statement
all or any part of such Underlying Shares such Purchaser requests to be
registered; provided, however, that the Company shall not be required to
register any Underlying Shares pursuant to this Section that are eligible for
sale pursuant to Rule 144 of the Securities Act.  In the case of an
underwritten public offering, if the managing underwriter(s) or underwriter(s)
should reasonably object to the inclusion of the Underlying Shares in such
registration statement, then if the Company after consultation with the managing
underwriter should reasonably determine that the inclusion of such Underlying
Shares would materially adversely affect the offering contemplated in such
registration statement, and based on such determination recommends inclusion in
such registration statement of fewer or none of the Underlying Shares of the
Purchasers, then (x) the number of Underlying Shares of the Purchasers included
in such registration statement shall be reduced pro-rata among such Purchasers
(based upon the number of Underlying Shares requested to be included in the
registration), if the Company after consultation with the underwriter(s)
recommends the inclusion of fewer Underlying Shares, or (y) none of the
Underlying Shares of the Purchasers shall be included in such registration
statement, if the Company after consultation with the underwriter(s) recommends
the inclusion of none of such Underlying Shares; provided, however, that if
securities are being offered for the account of other persons or entities as
well as the Company, such reduction shall not represent a greater fraction of
the number of Underlying Shares intended to be offered by the Purchasers than
the fraction of similar reductions imposed on such other persons or entities
(other than the Company).

    
      
         

      

      
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    (c)   
Registration Rights
Agreement.  The Company shall keep any registration statement
filed pursuant to this Section 4.18 continuously effective under the Securities
Act until such date as is the earlier of (x) the date when all Underlying Shares
covered by such Registration Statement have been sold or (y) the date on which
all Underlying Shares may be sold without any restriction pursuant to Rule 144
as determined by the counsel to the Company pursuant to a written opinion
letter, addressed to the Company's transfer agent to such effect.  In
connection with any registration of Underlying Shares pursuant to this Section,
promptly following any demand or request by any Purchaser hereunder, the Company
and the Purchasers shall enter into a registration rights agreement containing
customary and reasonable provisions regarding the registration of securities
(including reasonable liquidated damages provisions).

     

    4.19       
 Lock-Up
Agreements.  The Company shall enforce the provisions of the
Lock-Up Agreements and shall place or cause to be placed “stop orders” on its
books to prevent any transfer of shares of Common Stock or other securities of
the Company in violation of the Lock-Up Agreements.  The Company
agrees not to take any action or allow any act to be taken which would be
inconsistent with the Lock-Up Agreements nor amend or terminate any Lock-Up
Agreement without the consent of the Purchasers.

     

    4.20          Security.  The
Company’s and any Subsidiaries’ obligations under the Notes and other
Transaction Documents shall be secured by all the assets of the Company and its
Subsidiaries as set forth in the Security Documents.  As of the
Closing, the Purchasers shall be granted a security interest in all the assets
of the Company, including without limitation all of its Intellectual Property
Rights and its ownership of any and all Subsidiaries, and in the assets of any
such Subsidiaries, to be memorialized in the Security Documents.  The
Company shall execute such other agreements, documents and financing statements
reasonably requested by Purchasers, which will be filed at the Company’s expense
with the applicable jurisdictions and authorities.  The Company shall
also execute all such documents reasonably necessary in the opinion of the
Purchasers to memorialize and further protect the security interests described
herein.  The Purchasers may appoint a collateral agent to represent
them collectively in connection with the security interests being granted to the
Purchasers.

     

    4.21          Additional
Guarantors.   The Company shall cause each of its
Subsidiaries formed or acquired on or after the date hereof to execute and
deliver to the Purchasers a Subsidiary Guarantee and a Security Agreement in
conformity with those executed and delivered at Closing.

     

    4.22        
Insurance.  So
long as any Securities remain outstanding, the Company and its Subsidiaries
shall maintain in full force and effect insurance reasonably believed by the
Company to be adequate coverage (a) on all assets and activities, covering
property loss or damage and loss of income by fire or other hazards or casualty,
and (b) against all liabilities, claims and risks for which it is customary for
companies similarly situated to the Company to insure, including without
limitation applicable product liability insurance, required workmen’s
compensation insurance, and other insurance covering injury or damage to persons
or property, but excluding directors and officers insurance
coverage.  The Company shall promptly furnish or cause to be furnished
evidence of such insurance to each Purchaser so requesting same, in form and
substance reasonably satisfactory to such Purchaser.

    
      
         

      

      
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    ARTICLE
V.

    MISCELLANEOUS

     

    5.1          
Termination.  This
Agreement may be terminated by any Purchaser, as to such Purchaser’s obligations
hereunder only and without any effect whatsoever on the obligations between the
Company and the other Purchasers, by written notice to the other parties, if the
Closing has not been consummated on or before April 30, 2008; provided, however, that such
termination will not affect the right of any party to sue for any breach by the
other party (or parties).

     

    5.2          
Fees and
Expenses.  At the Closing, the Company has agreed to reimburse
Gemini Strategies, LLC and/or Gemini Master Fund Ltd. (collectively, “Gemini”) the
non-accountable sum of $35,000 for its legal fees and expenses, $5,000 of which
has been paid prior to the Closing.  Accordingly, in lieu of the
foregoing payments, the aggregate amount that Gemini is to pay for the
Securities at the Closing shall be reduced by $30,000 in lieu
thereof.  In addition, the Company shall reimburse Gemini and the
Purchasers for estimated UCC searches and filing fees, fees and expenses of any
local or third party patent and trademark counsel engaged by Purchasers in
connection with the security interests granted to the Purchasers, which will be
payable on the Closing Date out of funds otherwise deliverable by Gemini for its
Subscription Amount hereunder.  Except as expressly set forth in the
Transaction Documents to the contrary, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this
Agreement.  The Company shall pay all transfer agent fees, stamp taxes
and other taxes and duties levied in connection with the delivery of any
Securities to the Purchasers.  Gemini’s actual out-of pocket expenses
in connection with the transactions contemplated hereby shall be payable
regardless of whether the Closing occurs (subject to the maximum amount set
forth above).

     

    5.3           Entire
Agreement.  The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and
schedules.

     

    5.4           Notices.  Any
and all notices or other communications or deliveries required or permitted to
be provided hereunder shall be in writing and shall be deemed given and
effective on the earliest of (a) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number set forth on
the signature pages attached hereto prior to 5:30 p.m. (New York City time) on a
Trading Day, (b) the next Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number set
forth on the signature pages attached hereto on a day that is not a Trading Day
or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the third
Trading Day following the date of mailing, if sent by regular mail, or (d) the
Trading Day following the date on which such notice or communication is
deposited with a nationally recognized overnight courier service.  The
address for such notices and communications shall be as set forth on the
signature pages attached hereto.

    
      
         

      

      
        29

        
          

        

      

      
         

      

    

    5.5           Amendments;
Waivers.  No provision of this Agreement may be waived,
modified, supplemented or amended except in a written instrument signed, in the
case of an amendment, by the Company and the Purchasers of at least 67% in
interest of the Securities still held by Purchasers or, in the case of a waiver,
by the party against whom enforcement of any such waived provision is sought,
provided that no amendment affecting the Collateral (as defined in the Security
Documents) or the security interest granted in the Security Documents may be
effected without the prior written consent of all the Purchasers.  No
waiver of any default with respect to any provision, condition or requirement of
this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any subsequent default or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such
right.

     

    5.6           Headings.  The
headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof.

     

    5.7           Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and permitted
assigns.  The Company may not assign this Agreement or any rights or
obligations hereunder without the prior written consent of each Purchaser (other
than by merger).  Any Purchaser may assign any or all of its rights
under this Agreement to any Person to whom such Purchaser assigns or transfers
any Securities, provided that such transferee agrees in writing to be bound,
with respect to the transferred Securities, by the provisions of the Transaction
Documents that apply to the “Purchasers.”

     

    5.8           No Third-Party
Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except as otherwise set forth in Section 4.10.

     

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

    
      
         

      

      
        30

        
          

        

      

      
         

      

    

    5.10          Survival.  The
representations and warranties shall survive the Closing and the delivery of the
Securities for the applicable statue of limitations.

     

    5.11          Execution.  This
Agreement may be executed in two or more counterparts, all of which when taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart.  In the event that any signature is delivered by
facsimile transmission or by e-mail delivery of a “.pdf” or other document image
format data file, such signature shall create a valid and binding obligation of
the party executing (or on whose behalf such signature is executed) with the
same force and effect as if such facsimile or “.pdf” or other document image
format data file signature page were an original thereof.

     

    5.12          Severability. If any
term, provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their commercially reasonable
efforts to find and employ an alternative means to achieve the same or
substantially the same result as that contemplated by such term, provision,
covenant or restriction.  It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.

     

    5.13          Rescission and Withdrawal
Right.  Notwithstanding anything to the contrary contained in
(and without limiting any similar provisions of) any of the other Transaction
Documents, whenever any Purchaser exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Purchaser may rescind
or withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights; provided, however, in the case
of a rescission of a conversion of a Note or exercise of a Warrant, the
Purchaser shall be required to return any shares of Common Stock delivered in
connection with any such rescinded conversion or exercise notice.

     

    5.14          Replacement of
Securities.  If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
thereof (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction.  The
applicant for a new certificate or instrument under such circumstances shall
also pay any reasonable third-party costs (including customary indemnity)
associated with the issuance of such replacement Securities.

    
      
         

      

      
        31

        
          

        

      

      
         

      

    

    5.15          Remedies.  In
addition to being entitled to exercise all rights provided herein or granted by
law, including recovery of damages, each of the Purchasers and the Company will
be entitled to specific performance under the Transaction
Documents.  The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations contained in the Transaction Documents and hereby agrees to waive
and not to assert in any action for specific performance of any such obligation
the defense that a remedy at law would be adequate.

     

    5.16          Payment Set Aside. To
the extent that the Company makes a payment or payments to any Purchaser
pursuant to any Transaction Document or a Purchaser enforces or exercises its
rights thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
a trustee, receiver or any other person under any law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.

     

    5.17          Usury.  To
the extent it may lawfully do so, the Company hereby agrees not to insist upon
or plead or in any manner whatsoever claim, and will resist any and all efforts
to be compelled to take the benefit or advantage of, usury laws wherever
enacted, now or at any time hereafter in force, in connection with any claim,
action or proceeding that may be brought by any Purchaser in order to enforce
any right or remedy under any Transaction Document.  Notwithstanding
any provision to the contrary contained in any Transaction Document, it is
expressly agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (the “Maximum Rate”), and,
without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate.  It is agreed that if
the maximum contract rate of interest allowed by law and applicable to the
Transaction Documents is increased or decreased by statute or any official
governmental action subsequent to the date hereof, the new maximum contract rate
of interest allowed by law will be the Maximum Rate applicable to the
Transaction Documents from the effective date forward, unless such application
is precluded by applicable law.  If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser’s election.

     

    5.18         Independent Nature of
Purchasers’ Obligations and Rights.  The obligations of each
Purchaser under any Transaction Document are several and not joint with the
obligations of any other Purchaser, and no Purchaser shall be responsible in any
way for the performance or non-performance of the obligations of any other
Purchaser under any Transaction Document.  Nothing contained herein or
in any other Transaction Document, and no action taken by any Purchaser pursuant
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents.  Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation the
rights arising out of this Agreement or out of the other Transaction Documents,
and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose.  Each Purchaser
has been represented by its own separate legal counsel in their review and
negotiation of the Transaction Documents.  For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through Weisman.  Weisman does
not represent all of the Purchasers but only Gemini.  The Company has
elected to provide all Purchasers with the same terms and Transaction Documents
for the convenience of the Company and not because it was required or requested
to do so by the Purchasers.

    
      
         

      

      
        32

        
          

        

      

      
         

      

    

    5.19       
 Liquidated
Damages.  The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been
canceled.

     

    5.20       
  Saturdays, Sundays,
Holidays, etc.   If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall not be a Business Day, then such action may be taken or such right may be
exercised on the next succeeding Business Day.

     

    5.21          Construction. The
parties agree that each of them and/or their respective counsel has reviewed and
had an opportunity to revise the Transaction Documents and, therefore, the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of the Transaction Documents or any amendments hereto.

     

    5.22        
Waiver of
Jury Trial.  In any action, suit or
proceeding in any jurisdiction brought by any party against any other party, the
parties each knowingly and intentionally, to the greatest extent permitted by
applicable law, hereby absolutely, unconditionally, irrevocably and expressly
waives forever trial by jury.

     

    

    (Signature
Pages Follow)

    
      
         

      

      
        33

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

     

    
      	
              AXIS
      TECHNOLOGIES GROUP, INC.

            	 	
              Address for
      Notice:

            
	 
      	 
      	 	
              2055
      S Folsom Street

            
	 
      	 
      	 	
              Lincoln,
      NE 68522

            
	
              By:

            	 /s/
      Jim Erickson	 	
              Fax:
      866-458-9881

            
	 
      	
              Name:

            	 	 
      
	 
      	
              Title:

            	 	 
      
	 
      	 
      	 	 
      
	
              With
      a copy to (which shall not constitute
notice):

            

    

    

    

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK

    SIGNATURE
PAGES FOR PURCHASERS FOLLOWS]

    
      
         

      

      
        34

        
          

        

      

      
         

      

    

    [PURCHASER
SIGNATURE PAGES TO AXTG SECURITIES PURCHASE AGREEMENT]

    

    IN
WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
to be duly executed by their respective authorized signatories as of the date
first indicated above.

     

    
      	
              Name
      of Purchaser:

            	 	
              GEMINI
      MASTER FUND, LTD.

            
	 
      	 	
              By:
      GEMINI STRATEGIES, LLC, as investment
manager

            

    

    

    Signature of Authorized Signatory of
Purchaser:  /s/ Steven
Winters

     

    Name of
Authorized Signatory: Steven Winters

     

    Title of
Authorized Signatory: President

     

    Email
Address of Purchaser: steve@geministrategies.com

     

    Facsimile
Number of Purchaser: (858) 509-8808

     

    Address
for Notice of Purchaser:

    

    
      	
              c/o
      Gemini Strategies, LLC

            	
              with
      copy to

            
	
              135
      Liverpool Drive, Suite C

            	
              Peter
      J. Weisman, P.C.

            
	
               Cardiff,
      CA  92007

            	
              153
      East 53rd
      Street, 29th
      Floor

            
	
              Attn:  Steven
      Winters

            	
              New
      York, NY  10022

            
	
              Fax:
      (858) 509-8808

            	
              Fax:
      (212) 433-1361

            
	
              Email:  steve@geministrategies.com

            	
              Email:  pweisman@pweisman.com

            

    

    

    Address
for Delivery of Securities for Purchaser (if not same as address for
notice):

    

    

    Subscription
Amount: $1,250,000

    

    Principal
Amount (Subscription Amount multiplied by 1.11111111):
$1,388,888.89

    

    Warrant
Shares: 5,341,880

     

     

     35ex4_2.htm

    
      
        
          

        

      

      NEITHER
THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
LAWS.  THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF
THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN SECURED BY SUCH SECURITIES.

      

      Original
Issue Date:  April 25, 2008

      Original
Conversion Price (subject to adjustment herein): $0.26

      

      $1,388,888.89

      

      AXIS
TECHNOLOGIES GROUP, INC.

      10%
SENIOR SECURED CONVERTIBLE NOTE

      

      THIS NOTE
is one of a series of duly authorized and validly issued 10% Senior Secured
Convertible Notes of Axis Technologies Group, Inc., a Delaware corporation (the
“Company”),
having its principal place of business at 2055 S Folsom Street, Lincoln, NE
68522, designated as its 10% Senior Secured Convertible Notes (this Note, the
“Note” and,
collectively with the other Notes of such series, the “Notes”).

      

      FOR VALUE
RECEIVED, the Company promises to pay to GEMINI MASTER FUND, LTD. or its
registered assigns (the “Holder”), or shall
have paid pursuant to the terms hereunder, the principal sum of $1,388,888.89 on
the date which is two years following the Original Issue Date of this Note (the
“Maturity
Date”) or such earlier date as this Note is required or permitted to be
repaid as provided hereunder, or such later date as may be permitted by the
Holder as set forth in Section 2 hereof, and to pay interest to the Holder on
the aggregate unconverted and then outstanding principal amount of this Note in
accordance with the provisions hereof.

      

      The
Company’s and its Subsidiaries’ obligations under this Note and the other
Transaction Documents are secured by the Collateral (as defined in the Security
Agreement, including without limitation all Intellectual Property Rights)
pursuant to the terms of the Security Documents and the obligations under this
Note are guaranteed by the Company’s Subsidiaries pursuant to the Subsidiary
Guarantee.

      

      This Note
is subject to the following additional provisions:

      

      Section
1.          
  Definitions.  For
the purposes hereof, in addition to the terms defined elsewhere in this Note (a)
capitalized terms not otherwise defined herein shall have the meanings set forth
in the Purchase Agreement and (b) the following terms shall have the following
meanings:

      
        
           

        

        
          1

          
            

          

        

        
           

        

      

      “Alternate
Consideration” shall have the meaning set forth in Section
5(e).

      

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

      

      “Base Conversion
Price” shall have the meaning set forth in Section 5(b).

      

      “Business Day” means
any day except any Saturday, any Sunday, any day which shall be a federal legal
holiday in the United States or any day on which banking institutions in the
State of New York are authorized or required by law or other governmental action
to close.

      

      “Buy-In” shall have
the meaning set forth in Section 4(d)(v).

      

      “Change of Control
Transaction” means the occurrence after the date hereof of any of (i) an
acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company (other than by means of conversion or exercise
of the Notes and the Securities issued together with the Notes) (other than
currently existing officers of the Company, so long as such officers do not
beneficially own in the aggregate greater than 50% of the voting securities of
the Company), or (ii) the Company merges into or consolidates with any other
Person, or any Person merges into or consolidates with the Company and, after
giving effect to such transaction, the stockholders of the Company immediately
prior to such transaction own less than 66% of the aggregate voting power of the
Company or the successor entity of such transaction, or (iii) the Company sells
or transfers all or substantially all of its assets to another Person and the
stockholders of the Company immediately prior to such transaction own less than
66% of the aggregate voting power of the acquiring entity immediately after the
transaction, or (iv) a replacement at one time or within a three year period of
more than one-half of the members of the Company’s board of directors which is
not approved by a majority of those individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date hereof), or (v) the execution by the Company of an agreement
to which the Company  is a party or by which it is bound, providing
for any of the events set forth in clauses (i) through (iv)
above.

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

      “Conversion Date”
shall have the meaning set forth in Section 4(a).

      

      “Conversion Price”
shall have the meaning set forth in Section 4(b).

      

      “Conversion Shares”
means, collectively, the shares of Common Stock issued or issuable upon
conversion or redemption of this Note in accordance with the terms hereof,
including without limitation shares of Common Stock issued or issuable as
interest hereunder or as damages under the Transaction Documents.

      

      “Note Register” shall
have the meaning set forth in Section 2(c).

      

      “Dilutive Issuance”
shall have the meaning set forth in Section 5(b).

      

      “Dilutive Issuance
Notice” shall have the meaning set forth in Section 5(b).

      

      “Equity Conditions”
means, during the period in question, (i) the Company shall have duly honored
all conversions and redemptions scheduled to occur or occurring by virtue of one
or more Notices of Conversion of the Holder, if any, (ii) the Company shall have
paid all liquidated damages and other amounts owing to the Holder in respect of
this Note, (iii) all of the shares of Common Stock issued or issuable
pursuant to the Transaction Documents may be sold by the Holder pursuant to
either (a) clause (i) or (ii) of Section (b)(1) of Rule 144 and, with respect to
such clause (i), the Company has been subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act for the then preceding 90 days and has
filed all reports required to be filed thereunder during the then preceding 12
months (or such shorter period that the Company was required to file such
reports) or (b) an effective Registration Statement (and the Company believes,
in good faith, that such effectiveness will continue uninterrupted for the
foreseeable future), (iv) the Common Stock is trading on a Trading Market and
all of the shares issuable pursuant to the Transaction Documents are listed or
quoted for trading on such Trading Market (and the Company believes, in good
faith, that trading of the Common Stock on a Trading Market will continue
uninterrupted for the foreseeable future), (v) there is a sufficient number of
authorized but unissued and otherwise unreserved shares of Common Stock for the
issuance of all of the shares issuable pursuant to the Transaction Documents,
(vi) there is no existing Event of Default or no existing event which, with the
passage of time or the giving of notice, would constitute an Event of Default,
(vii) the issuance of the shares in question (or, in the case of a Monthly
Redemption or Forced Conversion, the shares issuable upon conversion in full of
the Monthly Redemption Amount or Forced Conversion Amount) to
the Holder would not violate the limitations set forth in Section 4(c) below,
(viii) there has been no public announcement of a pending or proposed
Fundamental Transaction or Change of Control Transaction that has not been
consummated, (ix) the Holder is not in possession of any information provided by
the Company that constitutes, or may constitute, material non-public
information, and (x) the closing bid price per share of Common Stock on the
Trading Market for each of the ten (10) Trading Days immediately preceding the
applicable date in question shall be greater than $0.25.

      
        
           

        

        
          3

          
            

          

        

        
           

        

      

      “Event of Default”
shall have the meaning set forth in Section 8.

      

      “Forced Conversion”
shall have the meaning set forth in Section 6(d).

      

      “Forced Conversion
Amount” shall have the meaning set forth in Section 6(d).

      

      “Forced Conversion
Date” shall have the meaning set forth in Section 6(d).

      

      “Forced Conversion
Notice” shall have the meaning set forth in Section 6(d).

      

      “Forced Conversion Notice
Date” shall have the meaning set forth in Section 6(d).

      

      “Fundamental
Transaction” shall have the meaning set forth in Section
5(e).

      

      “Late Fees” shall have
the meaning set forth in Section 2(d).

      

      “Mandatory Default
Amount”  means the sum of (i) the greater of (A) 130% of the
outstanding principal amount of this Note, plus 100% of accrued and unpaid
interest hereon, or (B) the outstanding principal amount of this Note, plus all
accrued and unpaid interest hereon, divided by the lesser of the Conversion
Price and the Market Redemption Price on the date the Mandatory Default Amount
is either (a) demanded (if demand or notice is required to create an Event of
Default) or otherwise due or (b) paid in full, whichever has a lower price,
multiplied by the VWAP on the date the Mandatory Default Amount is either (x)
demanded or otherwise due or (y) paid in full, whichever has a higher VWAP, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
this Note.

      

      “Market Redemption
Price” means 80% of the lowest closing bid price
occurring during the ten (10) consecutive Trading Days immediately preceding the
date as of which the Market Redemption Price is being determined (subject to
appropriate and equitable adjustment for any stock dividend, stock split, stock
combination or other similar event affecting the Common Stock during such 10
Trading Day period).

      

      “Monthly Redemption”
means the redemption of this Note pursuant to Section 6(b) hereof.

      

      “Monthly Redemption
Amount” means, as to a Monthly Redemption, 1/12th of the
original principal amount of this Note, plus all accrued but unpaid interest,
liquidated damages and any other amounts then owing to the Holder in respect of
this Note.

      
        
           

        

        
          4

          
            

          

        

        
           

        

      

      “Monthly Redemption
Date” means the first day of each calendar month, commencing on the first
day of the first full calendar month occurring after the date which is one (1)
year following the Original Issue Date, and terminating upon the full redemption
of 100% of the principal amount of this Note.

      

      “Monthly Redemption
Notice” shall have the meaning set forth in Section 6(b)
hereof.

      

      “New York Courts”
shall have the meaning set forth in Section 9(d).

      

      “Notice of Conversion”
shall have the meaning set forth in Section 4(a).

      

      “Original Issue Date”
means the date of the issuance of this Note, regardless of any transfers of any
Note and regardless of the number of instruments which may be issued to evidence
this Note.

      

      “Permitted
Indebtedness” means (a) the indebtedness evidenced by the Notes, (b) the
Indebtedness existing on the Closing Date which is set forth on Schedule 3.1(aa)
attached to the Purchase Agreement, provided that the terms of any such
Indebtedness have not been changed from the terms existing on the Closing Date,
(c) lease obligations and purchase money indebtedness of up to $100,000, in the
aggregate, incurred in connection with the acquisition of capital assets and
lease obligations with respect to newly acquired or leased assets, (d) purchase
order non-convertible (nor otherwise equity-linked) debt financing in which a
third party lender advances funds solely for financing the manufacture,
production and/or purchase of inventory pursuant to purchase orders previously
received by the Company, repayment of which is (i) secured solely by such
inventory manufactured, produced or purchased and accounts receivables from the
sales thereof, and (ii) due promptly following such sales, and (e) indebtedness
that (i) is expressly subordinate to the Notes pursuant to a written
subordination agreement with the Purchasers that is acceptable to each Purchaser
in its sole and absolute discretion and (ii) matures at a date later than the
Maturity Date, provided
that the aggregate amount of Permitted Indebtedness pursuant to this clause (e)
shall not at any time exceed 500% of the Company’s EBITDA for the 12-month
period ending on the last day of the immediately preceding full calendar
quarter.

      

      “Permitted Lien” means
the individual and collective reference to the following: (a) Liens for taxes,
assessments and other governmental charges or levies not yet due or Liens for
taxes, assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves (in the
good faith judgment of the management of the Company) have been established in
accordance with GAAP; (b) Liens imposed by law which were incurred in the
ordinary course of the Company’s business, such as carriers’, warehousemen’s and
mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in
the ordinary course of the Company’s business, and which (x) do not individually
or in the aggregate materially detract from the value of such property or assets
or materially impair the use thereof in the operation of the business of the
Company and its consolidated Subsidiaries or (y) are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing for the foreseeable future the forfeiture or sale of the property or
asset subject to such Lien; (c) Liens incurred in connection with Permitted
Indebtedness under clauses (a), (b), (c) and (d) thereunder, provided that such
Liens are not secured by assets of the Company or its Subsidiaries other than
the assets so acquired or leased.

       

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

      “Purchase Agreement”
means the Securities Purchase Agreement, dated as of April 25, 2008, among the
Company and the original purchasers of Notes, as amended, modified or
supplemented from time to time in accordance with its terms.

      

      “Registration
Statement” means an effective registration statement under the Securities
Act that registers the resale of all Conversion Shares of the Holder, names the
Holder as a “selling stockholder” therein, and contains a current prospectus not
subject to any blackout, suspension or stop order.

      

      “Securities Act” means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.

      

      “Share Delivery Date”
shall have the meaning set forth in Section 4(d).

      

      “Subsidiary” shall
have the meaning set forth in the Purchase Agreement.

      

      “Threshold Period”
shall have the meaning set forth in Section 6(d).

      

      “Trading Day” means a
day on which the principal Trading Market is open for business.

      

      “Trading Market” means
the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the American Stock Exchange, the Nasdaq
Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the
New York Stock Exchange or the OTC Bulletin Board.

      

      “Transaction
Documents” shall have the meaning set forth in the Purchase
Agreement.

      

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

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

      Section
2.        
    Interest; No
Prepayment.

      

      a)           Interest
Rate.  Interest shall accrue daily on the outstanding principal
amount of this Note at a rate per annum equal to 10%.

      

      b)           Payment of
Interest.  On the first day of each calendar quarter after the
Closing Date and on each Monthly Redemption Date and on the Maturity Date, the
Company shall pay to the Holder any accrued but unpaid interest hereunder on the
aggregate unconverted and then outstanding principal amount of this Note, and on
each Conversion Date the Company shall pay to the Holder any accrued but unpaid
interest hereunder on that portion of the principal amount then being converted
or redeemed, as the case may be.  The amount of interest payable on
each Monthly Redemption Date, Conversion Date and Maturity Date (“Interest Amount”)
shall be added to and included in the principal amount being so converted or
redeemed on such date.

      

      c)           Interest
Calculations. Interest shall be calculated on the basis of a 360-day
year, consisting of twelve 30 calendar day periods, and shall accrue daily
commencing on the Original Issue Date until payment in full of the outstanding
principal, together with all accrued and unpaid interest, liquidated damages and
other amounts which may become due hereunder, has been made.  Interest
hereunder will be paid to the Person in whose name this Note is registered on
the records of the Company regarding registration and transfers of this Note
(the “Note
Register”). Except as otherwise provided herein, if at any time the
Company pays interest partially in cash and partially in shares of Common Stock
to the holders of the Notes, then such payment of cash shall be distributed
ratably among the holders of the then-outstanding Notes based on their (or their
predecessor’s) original principal amounts of Notes.

      

      d)           Late
Fees.  All overdue accrued and unpaid interest to be paid
hereunder shall entail a late fee at an interest rate equal to the lesser of 24%
per annum or the maximum rate permitted by applicable law (“Late Fees”) which
shall accrue daily from the date such interest is due hereunder through and
including the date of actual payment in full.

      

      e)           No
Prepayment.  Except as otherwise set forth in this Note, the
Company may not prepay any portion of the principal amount of this Note without
the prior written consent of the Holder.

      

      Section
3.             Registration of Transfers
and Exchanges.

      

      a)           Different
Denominations. This Note is exchangeable for an equal aggregate principal
amount of Notes of different authorized denominations, as requested by the
Holder surrendering the same.  No service charge will be payable for
such exchange.

      

      b)           Investment
Representations.  This Note has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Purchase Agreement and applicable federal and state securities laws and
regulations.

      
        
           

        

        
          7

          
            

          

        

        
           

        

      

      c)           Reliance on Note
Register.  Prior to due presentment for transfer to the Company
of this Note, the Company and any agent of the Company may treat the Person in
whose name this Note is duly registered on the Note Register as the owner hereof
for the purpose of receiving payment as herein provided and for all other
purposes, whether or not this Note is overdue, and neither the Company nor any
such agent shall be affected by notice to the contrary.

      

      Section
4.             Conversion.

      

      a)           Voluntary Conversion.
At any time after the Original Issue Date until this Note is no longer
outstanding, this Note shall be convertible, in whole or in part, into shares of
Common Stock at the option of the Holder, at any time and from time to time
(subject to the conversion limitations set forth in Section 4(c)
hereof).  The Holder shall effect conversions by delivering to the
Company a Notice of Conversion, the form of which is attached hereto as Annex A (a “Notice of
Conversion”), specifying therein the principal amount of this Note to be
converted and the date on which such conversion shall be effected (such date,
the “Conversion
Date”).  If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder.  To effect conversions hereunder, the
Holder shall not be required to physically surrender this Note to the Company
unless the entire principal amount of this Note, plus all accrued and unpaid
interest thereon, has been so converted. Conversions hereunder shall have the
effect of lowering the outstanding principal amount of this Note in an amount
equal to the applicable conversion.  The Holder and the Company shall
maintain records showing the principal amount(s) converted and the date of such
conversion(s).  In the event of any dispute or discrepancy, the
records of the Holder shall be controlling and determinative in the absence of
manifest error. The Holder, and any assignee by acceptance of this Note,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Note, the unpaid and unconverted
principal amount of this Note may be less than the amount stated on the face
hereof.

      

      b)           Conversion
Price.  The conversion price shall be equal to $0.26, subject
to adjustment herein (the “Conversion
Price”).

      

      c)           Conversion Limitation –
Holder’s Restriction on Conversion. The Company shall not effect any
conversion of this Note, and a Holder shall not have the right to convert any
portion of this Note, to the extent that after giving effect to the conversion
set forth on the applicable Notice of Conversion, the Holder (together with the
Holder’s Affiliates, and any other person or entity acting as a group together
with the Holder or any of the Holder’s Affiliates) would beneficially own in
excess of the Beneficial Ownership Limitation (as defined below).  For
purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its Affiliates shall include the number of
shares of Common Stock issuable upon conversion of this Note with respect to
which such determination is being made, but shall exclude the number of shares
of Common Stock which are issuable upon (A) conversion of the remaining,
unconverted principal amount of this Note beneficially owned by the Holder or
any of its Affiliates and (B) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company subject to a
limitation on conversion or exercise analogous to the limitation contained
herein (including, without limitation, any other Notes or the Warrants)
beneficially owned by the Holder or any of its Affiliates.  Except as set
forth in the preceding sentence, for purposes of this Section 4(c), beneficial
ownership shall be calculated in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder.  To the
extent that the limitation contained in this paragraph applies, the
determination of whether this Note is convertible (in relation to other
securities owned by the Holder together with any Affiliates) and of which
principal amount of this Note is convertible shall be in the sole discretion of
the Holder, and the submission of a Notice of Conversion shall be deemed to be
the Holder’s determination of whether this Note may be converted (in relation to
other securities owned by the Holder together with any Affiliates) and which
principal amount of this Note is convertible, in each case subject to the
Beneficial Ownership Limitation.  To ensure compliance with this
restriction, the Holder will be deemed to represent to the Company each time it
delivers a Notice of Conversion that such Notice of Conversion has not violated
the restrictions set forth in this paragraph and the Company shall have no
obligation to verify or confirm the accuracy of such
determination.  In addition, a determination as to any group status as
contemplated above shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated
thereunder.  For purposes of this paragraph, in determining the number
of outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as stated in the most recent of the
following: (A) the Company’s most recent periodic or annual report, as the case
may be; (B) a more recent public announcement by the Company; or (C) a more
recent notice by the Company or the Company’s transfer agent setting forth the
number of shares of Common Stock outstanding.  Upon the written or oral
request of a Holder, the Company shall within two Trading Days confirm orally
and in writing to the Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Note, by the Holder or its Affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported. The “Beneficial Ownership
Limitation” shall be 4.9% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares of Common
Stock issuable upon conversion of this Note held by the Holder.  By
written notice to the Company, the Holder may at any time and from time to time
increase or decrease the Beneficial Ownership Limitation to any other percentage
specified in such notice (or specify that the Beneficial Ownership Limitation
shall no longer be applicable), provided, however, that (A) any such increase
(or inapplicability) shall not be effective until the sixty-first (61st) day
after such notice is delivered to the Company, and (B) any such increase or
decrease shall apply only to the Holder and not to any other holder of
Notes.  The provisions of this paragraph shall be construed and
implemented in a manner otherwise than in strict conformity with the terms of
this paragraph to correct this paragraph (or any portion hereof) which may be
defective or inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation.  The limitations contained in
this paragraph shall apply to a successor holder of this Note.

      
        
           

        

        
          8

          
            

          

        

        
           

        

      

      
        	
                 
      

              	
                d)

              	
                Mechanics of
      Conversion.

              

      

      

      i.           Conversion Shares Issuable
Upon Conversion of Principal Amount.  The number of Conversion
Shares issuable upon a conversion hereunder shall be determined by the quotient
obtained by dividing (x) the outstanding principal amount of this Note to be
converted plus any accrued but unpaid interest thereon, by (y) the Conversion
Price.

      

      ii.           Delivery of Certificate Upon
Conversion. Not later than three Trading Days after each Conversion Date
(the “Share Delivery
Date”), the Company shall deliver, or cause to be delivered, to the
Holder a certificate or certificates representing the Conversion Shares which,
on or after the Legend Removal Date, shall be free of restrictive legends and
trading restrictions (other than those which may then be required by the
Purchase Agreement) representing the number of Conversion Shares being acquired
upon the conversion of this Note.  On or after the date on which the
Holder may sell the Conversion Shares pursuant to Rule 144, the Company shall
use its best efforts to deliver any certificate(s) or shares required to be
delivered by the Company under this Section 4 electronically through the
Depository Trust Company or another established clearing corporation performing
similar functions.

      

      iii.           Failure to Deliver
Certificates.  If in the case of any Notice of Conversion such
certificate(s) or shares are not delivered to or as directed by the applicable
Holder by the third Trading Day after the Conversion Date, the Holder shall be
entitled to elect by written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such Conversion, in
which event the Company shall promptly return to the Holder any original Note
delivered to the Company and the Holder shall promptly return to the Company the
Common Stock certificates representing the principal amount of this Note
unsuccessfully tendered for conversion to the Company.

      

      iv.           Obligation Absolute; Partial
Liquidated Damages.  The Company’s obligations to issue and
deliver the Conversion Shares upon conversion of this Note in accordance with
the terms hereof are absolute and unconditional, irrespective of any action or
inaction by the Holder to enforce the same, any waiver or consent with respect
to any provision hereof, the recovery of any judgment against any Person or any
action to enforce the same, or any setoff, counterclaim, recoupment, limitation
or termination, or any breach or alleged breach by the Holder or any other
Person of any obligation to the Company or any violation or alleged violation of
law by the Holder or any other Person, and irrespective of any other
circumstance which might otherwise limit such obligation of the Company to the
Holder in connection with the issuance of such Conversion Shares; provided, however, that such
delivery shall not operate as a waiver by the Company of any such action the
Company may have against the Holder.  In the event the Holder of this
Note shall elect to convert any or all of the outstanding principal amount
hereof, the Company may not refuse conversion based on any claim that the Holder
or anyone associated or affiliated with the Holder has been engaged in any
violation of law, agreement or for any other reason, unless an injunction from a
court, on notice to Holder, restraining and or enjoining conversion of all or
part of this Note shall have been sought and obtained, and the Company posts a
surety bond for the benefit of the Holder in the amount of 150% of the
outstanding principal amount of this Note, which is subject to the injunction,
which bond shall remain in effect until the completion of arbitration/litigation
of the underlying dispute and the proceeds of which shall be payable to the
Holder to the extent it obtains judgment.  In the absence of such
injunction, the Company shall issue Conversion Shares or, if applicable, cash,
upon a properly noticed conversion.  If the Company fails for any
reason to deliver to the Holder such certificate(s) or shares pursuant to
Section 4(d)(ii) by the second Trading Day after the Share Delivery Date, the
Company shall pay to the Holder, in cash, as liquidated damages and not as a
penalty, for each $1000 of principal amount being converted, $10 per Trading Day
(increasing to $20 per Trading Day on the fifth Trading Day after such
liquidated damages begin to accrue) for each Trading Day after such second
Trading Day after the Share Delivery Date until such certificates are
delivered.  Nothing herein shall limit a Holder’s right to pursue
actual damages or declare an Event of Default pursuant to Section 8 hereof for
the Company’s failure to deliver Conversion Shares within the period specified
herein and the Holder shall have the right to pursue all remedies available to
it hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.  The exercise of any
such rights shall not prohibit the Holder from seeking to enforce damages
pursuant to any other Section hereof or under applicable law.

      
        
           

        

        
          9

          
            

          

        

        
           

        

      

      v.           Compensation for Buy-In on
Failure to Timely Deliver Certificates Upon Conversion. In addition to
any other rights available to the Holder, if the Company fails for any reason to
deliver to the Holder such certificate(s) or shares by the Share Delivery Date
pursuant to Section 4(d)(ii), and if after such Share Delivery Date the Holder
is required by its brokerage firm to purchase (in an open market transaction or
otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common
Stock to deliver in satisfaction of a sale by the Holder of the Conversion
Shares which the Holder was entitled to receive upon the conversion relating to
such Share Delivery Date (a “Buy-In”), then the
Company shall (A) pay in cash to the Holder (in addition to any other remedies
available to or elected by the Holder) the amount by which (x) the Holder’s
total purchase price (including any brokerage commissions) for the Common Stock
so purchased exceeds (y) the product of (1) the aggregate number of shares of
Common Stock that the Holder was entitled to receive from the conversion at
issue multiplied by (2) the actual sale price at which the sell order giving
rise to such purchase obligation was executed (including any brokerage
commissions) and (B) at the option of the Holder, either reissue (if
surrendered) this Note in a principal amount equal to the principal amount of
the attempted conversion or deliver to the Holder the number of shares of Common
Stock that would have been issued if the Company had timely complied with its
delivery requirements under Section 4(d)(ii).  For example, if the
Holder purchases Common Stock having a total purchase price of $11,000 to cover
a Buy-In with respect to an attempted conversion of this Note with respect to
which the actual sale price of the Conversion Shares (including any brokerage
commissions) giving rise to such purchase obligation was a total of $10,000
under clause (A) of the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000.  The Holder shall provide the
Company written notice indicating the amounts payable to the Holder in respect
of the Buy-In and, upon request of the Company, evidence of the amount of such
loss.  Nothing herein shall limit a Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to the Company’s failure to timely deliver certificates representing
shares of Common Stock upon conversion of this Note as required pursuant to the
terms hereof.

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

      vi.           Reservation of Shares
Issuable Upon Conversion. The Company covenants that it will at all times
reserve and keep available out of its authorized and unissued shares of Common
Stock for the sole purpose of issuance upon conversion of this Note and payment
of interest on this Note, each as herein provided, free from preemptive rights
or any other actual contingent purchase rights of Persons other than the Holder
(and the other holders of the Notes), not less than such aggregate number of
shares of the Common Stock as shall (subject to the terms and conditions set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments of Section 5) upon the conversion of the outstanding principal
amount of this Note and payment of interest hereunder.  The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly authorized, validly issued, fully paid and nonassessable and, if
the Registration Statement is then effective under the Securities Act, shall be
registered for public sale in accordance with such Registration
Statement.

      

      vii.           Fractional Shares. No
fractional shares or scrip representing fractional shares shall be issued upon
the conversion of this Note.  As to any fraction of a share which
Holder would otherwise be entitled to purchase upon such conversion, the Company
shall at its election, either pay a cash adjustment in respect of such final
fraction in an amount equal to such fraction multiplied by the Conversion Price
or round up to the next whole share.

      

      viii.           Transfer
Taxes.  The issuance of certificates for shares of the Common
Stock on conversion of this Note shall be made without charge to the Holder
hereof for any documentary stamp or similar taxes that may be payable in respect
of the issue or delivery of such certificates, provided that the Company shall
not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion in
a name other than that of the Holder of this Note and the Company shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.

      
        
           

        

        
          11

          
            

          

        

        
           

        

      

      Section
5.             Certain
Adjustments.

      

      a)           Stock Dividends and Stock
Splits.  If the Company, at any time while this Note is
outstanding: (A) pays a stock dividend or otherwise makes a distribution or
distributions payable in shares of Common Stock on shares of Common Stock or any
Common Stock Equivalents (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company upon conversion of, or payment of
interest on, the Notes); (B) subdivides outstanding shares of Common Stock into
a larger number of shares; (C) combines (including by way of a reverse stock
split) outstanding shares of Common Stock into a smaller number of shares; or
(D) issues, in the event of a reclassification of shares of the Common Stock,
any shares of capital stock of the Company, then the Conversion Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of
Common Stock (excluding any treasury shares of the Company) outstanding
immediately before such event and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such
event.  Any adjustment made pursuant to this Section shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

      

      b)           Subsequent Equity
Sales.  If, at any time while this Note is outstanding, the
Company or any Subsidiary, as applicable, sells or grants any option to purchase
or sells or grants any right to reprice, or otherwise disposes of or issues (or
announces any sale, grant or any option to purchase or other disposition), any
Common Stock or Common Stock Equivalents entitling any Person to acquire shares
of Common Stock at an effective price per share that is lower than the then
Conversion Price (such lower price, the “Base Conversion
Price” and such issuances, collectively, a “Dilutive Issuance”)
(if the holder of the Common Stock or Common Stock Equivalents so issued shall
at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise, or
due to warrants, options or rights per share which are issued in connection with
such issuance, be entitled to receive shares of Common Stock at an effective
price per share that is lower than the Conversion Price, such issuance shall be
deemed to have occurred for less than the Conversion Price on such date of the
Dilutive Issuance), then the Conversion Price shall be reduced to equal the Base
Conversion Price.  Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents are issued.  Notwithstanding the
foregoing, no adjustment will be made under this Section 5(b) in respect of an
Exempt Issuance.  If the Company enters into a Variable Rate
Transaction or MFN Transaction, despite the prohibition set forth in the
Purchase Agreement, the Company shall be deemed to have issued Common Stock or
Common Stock Equivalents at the lowest possible conversion price at which such
securities may be converted or exercised. The Company shall notify the Holder in
writing, no later than 2 Business Day following the issuance of any Common Stock
or Common Stock Equivalents subject to this Section 5(b), indicating therein the
applicable issuance price, or applicable reset price, exchange price, conversion
price and other pricing terms (such notice, the “Dilutive Issuance
Notice”).  For purposes of clarification, whether or not the
Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon
the occurrence of any Dilutive Issuance, the Holder is entitled to receive a
number of Conversion Shares based upon the Base Conversion Price on or after the
date of such Dilutive Issuance, regardless of whether the Holder accurately
refers to the Base Conversion Price in the Notice of Conversion.

       

      
        
           

        

        
          12

          
            

          

        

        
           

        

      

      c)           Subsequent Rights
Offerings.  If the Company, at any time while the Note is
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of
Common Stock at a price per share that is lower than the VWAP on the record date
referenced below, then the Conversion Price shall be multiplied by a fraction of
which the denominator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of additional shares of Common Stock offered for subscription or purchase, and
of which the numerator shall be the number of shares of the Common Stock
outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares
issued (assuming delivery to the Company in full of all consideration payable
upon exercise of such rights, options or warrants) would purchase at such
VWAP.  Such adjustment shall be made whenever such rights or warrants
are issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights, options or
warrants.

      

      d)           Pro Rata
Distributions. If the Company, at any time while this Note is
outstanding, distributes to all holders of Common Stock (and not to the Holders)
evidences of its indebtedness or assets (including cash and cash dividends) or
rights or warrants to subscribe for or purchase any security (other than the
Common Stock, which shall be subject to Section 5(b)), then in each such case
the Conversion Price shall be adjusted by multiplying such Conversion Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to 1 outstanding share of the Common
Stock as determined by the Board of Directors of the Company in good
faith.  In either case the adjustments shall be described in a
statement delivered to the Holder describing the portion of assets or evidences
of indebtedness so distributed or such subscription rights applicable to 1 share
of Common Stock.  Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above.

      

      e)           Fundamental
Transaction. If, at any time while this Note is outstanding, (A) the
Company effects any merger or consolidation of the Company with or into another
Person, (B) the Company effects any sale of all or substantially all of its
assets in one transaction or a series of related transactions, (C) any tender
offer or exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to tender or exchange
their shares for other securities, cash or property, or (D) the Company effects
any reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or exchanged
for other securities, cash or property (in any such case, a “Fundamental
Transaction”), then, upon any subsequent conversion of this Note, the
Holder shall have the right to receive, for each Conversion Share that would
have been issuable upon such conversion immediately prior to the occurrence of
such Fundamental Transaction, the same kind and amount of securities, cash or
property as it would have been entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of 1 share of Common Stock (the “Alternate
Consideration”).  For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of 1 share of Common Stock in such Fundamental Transaction,
and the Company shall apportion the Conversion Price among the Alternate
Consideration in a reasonable manner reflecting the relative value of any
different components of the Alternate Consideration.  If holders of
Common Stock are given any choice as to the securities, cash or property to be
received in a Fundamental Transaction, then the Holder shall be given the same
choice as to the Alternate Consideration it receives upon any conversion of this
Note following such Fundamental Transaction.  To the extent necessary
to effectuate the foregoing provisions, any successor to the Company or
surviving entity in such Fundamental Transaction shall issue to the Holder a new
Note consistent with the foregoing provisions and evidencing the Holder’s right
to convert such Note into Alternate Consideration. The terms of any agreement
pursuant to which a Fundamental Transaction is effected shall include terms
requiring any such successor or surviving entity to comply with the provisions
of this Section 5(e) and insuring that this Note (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction.

      
        
           

        

        
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      f)           Calculations.  All
calculations under this Section 5 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be.  For purposes of this
Section 5, the number of shares of Common Stock deemed to be issued and
outstanding as of a given date shall be the sum of the number of shares of
Common Stock (excluding any treasury shares of the Company) issued and
outstanding.

      

      g)           Notice to the
Holder.

      

      i.           Adjustment to Conversion
Price.  Whenever the Conversion Price is adjusted pursuant to
any provision of this Section 5, the Company shall promptly deliver to each
Holder a notice setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such
adjustment.

      
        
           

        

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

      

      Section
6.             Redemption and Forced
Conversion.

      

      a)           No
Prepayment/Redemption.  The Company may not prepay or redeem
this Note in whole or in part without the prior written consent of the Holder,
and to the extent the Company agrees with any other holder of Notes to prepay or
redeem such holder’s Notes in whole or in part, the Company shall offer such
prepayment or redemption of this Note on a pro rata basis on the same terms and
conditions as agreed upon for such other Notes.

      

      b)           Monthly
Redemption.  On each Monthly Redemption Date, the Company shall
redeem the Monthly Redemption Amount (the “Monthly Redemption”).
The Monthly Redemption Amount payable on each Monthly Redemption Date shall be
paid in cash; provided, however, as to any
Monthly Redemption and upon 15 Trading Days’ prior written irrevocable notice
(the “Monthly
Redemption Notice”), in lieu of a cash redemption payment the Company may
elect to pay all or part of a Monthly Redemption Amount in Conversion Shares
based on a conversion price equal to the lesser of (i) the then Conversion Price
and (ii) the Market Redemption Price; provided, further, that the
Company may not pay the Monthly Redemption Amount in Conversion Shares unless
from the date the Holder receives the duly delivered Monthly Redemption Notice
through and until the date such Monthly Redemption is paid in full, the Equity
Conditions have been satisfied, unless waived in writing by the
Holder.  The Holder may convert, pursuant to Section 4(a) (at the
Conversion Price, subject to adjustment as provided herein), any principal
amount of this Note at any time prior to the date that the Monthly Redemption
Amount, plus accrued but unpaid interest, liquidated damages and any other
amounts then owing to the Holder are due and paid in full.  At the
Holder’s election, any conversions of the principal amount of this Note pursuant
to Section 4(a) may be applied against either the next upcoming Monthly
Redemption Amount(s) due or the last principal amounts of this Note scheduled to
be redeemed hereunder, in reverse time order from the Maturity
Date.  In the event that the Holder elects to have conversions of the
principal amount of this Note pursuant to Section 4(a) applied against the next
upcoming Monthly Redemption Amount(s) due, then on such Monthly Redemption Date
the Monthly Redemption Amount shall consist of any remaining portion of the
principal amount due on such Monthly Redemption Date plus all accrued and unpaid
interest on the entire outstanding principal amount of this Note as of such
date.  The Company covenants and agrees that it will honor all Notices
of Conversion tendered up until such amounts are paid in full.  The
Company’s determination to pay a Monthly Redemption in cash, shares of Common
Stock or a combination thereof shall be applied ratably to all of the holders of
the then outstanding Notes based on their (or their predecessor’s) original
principal amount of Notes.  If a Registration Statement is effective
covering the resale of the Conversion Shares by the Holder, at any time the
Company delivers a notice to the Holder of its election to pay the Monthly
Redemption Amount in shares of Common Stock, the Company shall file a prospectus
supplement pursuant to Rule 424 disclosing such election.

      
        
           

        

        
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      c)           Redemption
Procedure.  The payment of cash or Common Stock pursuant to a
Monthly Redemption shall be payable on the Monthly Redemption
Date.  If any portion of the payment pursuant to a Monthly Redemption
shall not be paid by the Company by the applicable due date, interest shall
accrue thereon at an interest rate equal to the lesser of 24% per annum or the
maximum rate permitted by applicable law until such amount is paid in
full.

      

      d)           Forced Conversion.
Notwithstanding anything herein to the contrary, if, after one year following
the Original Issue Date of this Note, the VWAP for any 20 out of 30 consecutive
Trading Days (such 30 Trading Day period being the “Threshold Period”)
exceeds 300% of the initial Conversion Price hereunder (subject to appropriate
and equitable adjustment for reverse and forward stock splits, stock dividends,
stock combinations and other similar transactions of the Common Stock that occur
after the Original Issue Date), then the Company may, within 1 Trading Day after
the end of any such Threshold Period, deliver a written notice to the Holder (a
“Forced Conversion
Notice” and the date such notice is delivered to the Holder, the “Forced Conversion Notice
Date”) to cause the Holder to convert all or part of the then outstanding
principal amount of this Note as specified in such Forced Conversion Notice
(“Forced Conversion
Amount”) at the Conversion Price (“Forced Conversion”)
on or prior to the tenth Trading Day following the Holder’s receipt of such
Forced Conversion Notice (such date, the “Forced Conversion
Date”).  The Company may not deliver a Forced Conversion
Notice, and any Forced Conversion Notice delivered by the Company shall not be
effective, unless all of the Equity Conditions are met (unless waived in writing
by the Holder) on each Trading Day occurring during the applicable Threshold
Period through and including the later of the Forced Conversion Date and the
Trading Day after the date such Conversion Shares pursuant to such conversion
are delivered to the Holder.  Any Forced Conversion shall be applied
ratably to all Holders based on their original principal amount of Notes,
provided that any voluntary conversions by a Holder shall be applied against the
Holder’s pro rata allocation, thereby decreasing the aggregate amount forcibly
converted hereunder if only a portion of this Note is forcibly
converted.  For purposes of clarification, a Forced Conversion shall
be subject to all of the provisions of Section 4, including, without limitation,
the provision requiring payment of liquidated damages and limitations on
conversions.

      
        
           

        

        
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      Section
7.             Negative Covenants.
As long as any portion of this Note remains outstanding, unless the holders of
at least 67% in principal amount of the then outstanding Notes shall have
otherwise given prior written consent, the Company shall not, and shall not
permit any of its subsidiaries (whether or not a Subsidiary on the Original
Issue Date) to, directly or indirectly:

      

      a)           other
than Permitted Indebtedness, enter into, create, incur, assume, guarantee or
suffer to exist any indebtedness for borrowed money of any kind, including but
not limited to, a guarantee, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom;

      

      b)           other
than Permitted Liens, enter into, create, incur, assume or suffer to exist any
Liens of any kind, on or with respect to any of its property or assets now owned
or hereafter acquired or any interest therein or any income or profits
therefrom;

      

      c)           amend
its charter documents, including, without limitation, its certificate of
incorporation and bylaws, in any manner that materially and adversely affects
any rights of the Holder;

      

      d)           repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of
shares of its Common Stock or Common Stock Equivalents other than as to (a) the
Conversion Shares or Warrant Shares as permitted or required under the
Transaction Documents and (b) repurchases of Common Stock or Common Stock
Equivalents of departing employees of the Company, provided that such
repurchases shall not exceed an aggregate of $100,000 for all officers and
directors during the term of this Note;

      
        
           

        

        
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      e)           repay,
repurchase or offer to repay, repurchase or otherwise acquire any Indebtedness
(except for the Notes in accordance with the terms of the Notes), other than
regularly scheduled principal and interest payments as such terms are in effect
as of the Closing Date;

      

      f)           repay,
repurchase or offer to repay, repurchase or otherwise acquire any indebtedness
to any current or former employees, officers or directors of the Company,
including without limitation any loans from Kipton P. Hirschbach, James A.
Erickson or Mark B. Gruenewald;

      

      g)           pay
cash dividends or distributions on any equity securities of the
Company;

      

      h)           enter
into any transaction with any Affiliate of the Company which would be required
to be disclosed in any public filing with the Commission, unless such
transaction is made on an arm’s-length basis and expressly approved by a
majority of the disinterested directors of the Company (even if less than a
quorum otherwise required for board approval); or

      

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

      

      Section
8.             Events of
Default.

      

      a)           “Event of Default”
means, wherever used herein, any of the following events (whatever the reason
for such event and whether such event shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):

      

      i.           any
default in the payment of (A) the principal amount of any Note or (B) interest,
liquidated damages and other amounts owing to a Holder on any Note, as and when
the same shall become due and payable (whether on a Conversion Date or the
Maturity Date or by acceleration or otherwise) which default, solely in the case
of an interest payment or other default under clause (B) above, is not cured
within 3 Trading Days;

      

      ii.           the
Company shall fail to observe or perform any other covenant or agreement
contained in the Notes (other than a breach by the Company of its obligations to
deliver shares of Common Stock to the Holder upon conversion, which breach is
addressed in clause (xii) below) which failure is not cured, if possible to
cure, within the earlier to occur of (A) 5 Trading Days after notice of such
failure sent by the Holder or by any other Holder and (B) 10 Trading Days after
the Company has become or should have become aware of such failure;

      

      iii.           a
default or event of default (subject to any grace or cure period provided in the
applicable agreement, document or instrument) shall occur under (A) any of the
Transaction Documents or (B) any other material agreement, lease, document or
instrument to which the Company or any Subsidiary is obligated (and not covered
by clause (vi) below);

      
        
           

        

        
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      iv.           any
representation or warranty made in this Note, any other Transaction Documents,
any written statement pursuant hereto or thereto or any other report, financial
statement or certificate made or delivered to the Holder or any other Holder
shall be untrue or incorrect in any material respect as of the date when made or
deemed made;

      

      v.           the
Company or any Significant Subsidiary shall be subject to a Bankruptcy
Event;

      

      vi.           the
Company or any Subsidiary shall default on any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued, or by which there
may be secured or evidenced, any indebtedness for borrowed money or money due
under any long term leasing or factoring arrangement that (a) involves an
obligation greater than $100,000, whether such indebtedness now exists or shall
hereafter be created, and (b) results in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;

      

      vii.           if
at any time after November 1, 2008 the Common Stock shall not be eligible for
listing or quotation for trading on the Pink Sheets and shall not be eligible to
resume listing or quotation for trading thereon within five (5) Trading Days, or
the Company fails to use its best efforts to cause the Common Stock to be listed
or quoted on a Trading Market after December 31, 2008;

      

      viii.           the
Company shall be a party to any Change of Control Transaction or Fundamental
Transaction or shall agree to sell or dispose of all or in excess of 33% of its
assets in one transaction or a series of related transactions (whether or not
such sale would constitute a Change of Control Transaction);

      

      ix.           if
at any time after November 1, 2008 the Company is not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act or has failed to file
all reports required to be filed thereunder during the then preceding 12 months
(or such shorter period that the Company was required to file such
reports);

      

      x.           if
the Company shall have failed to file a Form 10 with the Commission to register
the Common Stock under the Exchange Act by July 15, 2008 (or thereafter fails to
reasonably diligently respond to all Commission comments or otherwise use its
best efforts to cause the Common Stock to be and remain registered under the
Exchange Act);

      
        
           

        

        
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      xi.           if
any of the Security Documents or any Subsidiary Guarantee ceases
to be in full force and effect (including failure to create a valid and
perfected first priority lien on and security interest in all the Collateral (as
defined in the Security Agreement) and Intellectual Property Rights of the
Company and its Subsidiaries) at any time for any reason;

      

      xii.           any
material adverse change in the condition, value or operation of a material
portion of the Collateral or Intellectual Property Rights;

      

      xiii.           the
Company shall fail for any reason to deliver certificates to a Holder prior to
the fifth Trading Day after a Conversion Date or any Forced Conversion Date
pursuant to Section 4(d) or the Company shall provide at any time notice to the
Holder, including by way of public announcement, of the Company’s intention to
not honor requests for conversions of any Notes in accordance with the terms
hereof; or

      

      xiv.           any
monetary judgment, writ or similar final process shall be entered or filed
against the Company, any subsidiary or any of their respective property or other
assets for more than $100,000, and such judgment, writ or similar final process
shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days.

      

      b)           Remedies Upon Event of
Default. If any Event of Default occurs, the outstanding principal amount
of this Note, plus accrued but unpaid interest, liquidated damages and other
amounts owing in respect thereof through the date of acceleration, shall become,
at the Holder’s election, immediately due and payable in cash at the Mandatory
Default Amount.  After the occurrence and during the continuance of
any Event of Default, the interest rate on this Note shall accrue at an interest
rate equal to the lesser of 24% per annum or the maximum rate permitted under
applicable law.  Upon the payment in full of the Mandatory Default
Amount, the Holder shall promptly surrender this Note to or as directed by the
Company.  In connection with such acceleration described herein, the
Holder need not provide, and the Company hereby waives, any presentment, demand,
protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable
law.  Such acceleration may be rescinded and annulled by Holder at any
time prior to payment hereunder and the Holder shall have all rights as a holder
of the Note until such time, if any, as the Holder receives full payment
pursuant to this Section 8(b).  No such rescission or annulment shall
affect any subsequent Event of Default or impair any right consequent
thereon.

      

      Section
9.             Miscellaneous.

      

      a)           Notices.  Any
and all notices or other communications or deliveries to be provided by the
Holder hereunder, including, without limitation, any Notice of Conversion, shall
be in writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address
set forth above, or such other facsimile number or address as the Company may
specify for such purpose by notice to the Holder delivered in accordance with
this Section 9.  Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or address of
the Holder appearing on the books of the Company, or if no such facsimile number
or address appears, at the principal place of business of the
Holder.  Any notice or other communication or deliveries hereunder
shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section 9 prior to 5:30 p.m. (New York City
time), (ii) the date immediately following the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number
specified in this Section 9 between 5:30 p.m. (New York City time) and 11:59
p.m. (New York City time) on any date, (iii) the second Business Day following
the date of mailing, if sent by U.S. nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.  The address for such notices and communications
shall be as set forth on the signature pages attached to the Purchase
Agreement.

      
        
           

        

        
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      b)           Absolute Obligation.
Except as expressly provided herein, no provision of this Note shall alter or
impair the obligation of the Company, which is absolute and unconditional, to
pay the principal of, liquidated damages and accrued interest, as applicable, on
this Note at the time, place, and rate, and in the coin or currency, herein
prescribed.  This Note is a direct debt obligation of the
Company.  This Note ranks pari passu with all other
Notes now or hereafter issued under the terms set forth herein.

      

      c)           Lost or Mutilated
Note.  If this Note shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Note, or in lieu of or in substitution
for a lost, stolen or destroyed Note, a new Note for the principal amount of
this Note so mutilated, lost, stolen or destroyed, but only upon receipt of
evidence of such loss, theft or destruction of such Note, and of the ownership
hereof, reasonably satisfactory to the Company.

      

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

      
        
           

        

        
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      e)           Waiver.  Any
waiver by the Company or the Holder of a breach of any provision of this Note
shall not operate as or be construed to be a waiver of any other breach of such
provision or of any breach of any other provision of this Note.  The
failure of the Company or the Holder to insist upon strict adherence to any term
of this Note on one or more occasions shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Note.  Any waiver by the Company
or the Holder must be in writing.

      

      f)           Severability.  If
any provision of this Note is invalid, illegal or unenforceable, the balance of
this Note shall remain in effect, and if any provision is inapplicable to any
Person or circumstance, it shall nevertheless remain applicable to all other
Persons and circumstances.  If it shall be found that any interest or
other amount deemed interest due hereunder violates the applicable law governing
usury, the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum rate of interest permitted under applicable law.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on this Note as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully do
so) hereby expressly waives all benefits or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impeded
the execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been
enacted.

      

      g)           Next Business
Day.  Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day.

      
        
           

        

        
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      h)           Headings.  The
headings contained herein are for convenience only, do not constitute a part of
this Note and shall not be deemed to limit or affect any of the provisions
hereof.

      

      i)           Assumption.  Any
successor to the Company or any surviving entity in a Fundamental Transaction
shall (i) assume, prior to such Fundamental Transaction, all of the obligations
of the Company under this Note and the other Transaction Documents pursuant to
written agreements in form and substance satisfactory to the Holder (such
approval not to be unreasonably withheld or delayed) and (ii) issue to the
Holder a new Note of such successor entity evidenced by a written instrument
substantially similar in form and substance to this Note, including, without
limitation, having a principal amount and interest rate equal to the principal
amount and the interest rate of this Note and having similar ranking to this
Note, which shall be satisfactory to the Holder (any such approval not to be
unreasonably withheld or delayed).  The provisions of this Section 9(i)
shall apply similarly and equally to successive Fundamental Transactions and
shall be applied without regard to any limitations of this Note.

      

      j)           Usury.  This
Note shall be subject to the anti-usury limitations contained in the Purchase
Agreement.

      

      *********************

      
        
           

        

        
          23

          
            

          

        

        
           

        

      

      IN
WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly
authorized officer as of the date first above indicated.

      

      

      
        	 
      	
                AXIS
      TECHNOLOGIES GROUP, INC.

              
	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      
	 
      	
                By:

              	 /s/
      Jim Erickson 
	 
      	 
      	
                Name:
      

              	 Jim
      Erickson
	 
      	 
      	
                Title:  
      

              	 President

      

      
        	 
      	
                Facsimile
      No. for delivery of Notices:

              	 866-458-9881
      

      

       

      
        
           

        

        
          24

          
            

          

        

        
           

        

      

      ANNEX
A

      

      NOTICE
OF CONVERSION

      

      The
undersigned hereby elects to convert principal under the 10% Senior Secured
Convertible Note due _______________________ of Axis Technologies Group, Inc., a
Delaware corporation (the Company”), into
shares of common stock (the “Common Stock”), of
the Company according to the conditions hereof, as of the date written
below.  If shares of Common Stock are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates and
opinions as reasonably requested by the Company in accordance
therewith.  No fee will be charged to the holder for any conversion,
except for such transfer taxes, if any.

      

      By the delivery of this Notice of
Conversion the undersigned represents and warrants to the Company that its
ownership of the Common Stock does not exceed the amounts specified under
Section 4 of this Note, as determined in accordance with Section 13(d) of the
Exchange Act.

      

      The undersigned agrees to comply with
the prospectus delivery requirements under the applicable securities laws in
connection with any transfer of the aforesaid shares of Common Stock pursuant to
any prospectus.

      

      Conversion
calculations:

      
        	 
      	
                Date
      to Effect Conversion: _______________________

              
	 
      	 
      
	 
      	
                Principal
      Amount of Note to be Converted: __________

              
	 
      	 
      
	 
      	
                Interest
      Accrued on Account

              
	 
      	
                of
      Conversion at Issue: _________________________

              
	 
      	 
      
	 
      	
                Number
      of shares of Common Stock to be issued:______

              
	 
      	
                ___________________________________________

              
	 
      	 
      
	 
      	
                Signature:
      ___________________________________

              
	 
      	 
      
	 
      	
                Name:
      ______________________________________

              
	 
      	 
      
	 
      	
                Address
      for Delivery of Common Stock Certificates:____

              
	 
      	
                ___________________________________________

              
	 
      	
                ___________________________________________

              
	 
      	 
      
	 
      	
                Or

              
	 
      	 
      
	 
      	
                DWAC
      Instructions:

              
	 
      	 
      
	 
      	
                Broker
      No:________________

              
	 
      	
                Account
      No:______________

              

      

       

       

         25

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