Document:

Exhibit 10.2

 

THIRD
AMENDMENT TO SENIOR SECURED

TERM LOAN
AGREEMENT

 

This Third Amendment to Senior Secured Term Loan
Agreement (this “Amendment”), made as of September 30,
2008 among CALIFORNIA COASTAL COMMUNTIES, INC., a Delaware corporation (“Borrower”), the undersigned
Guarantors, KEYBANK NATIONAL ASSOCIATION, a national banking association (“KeyBank”),
the other financial institutions which are or may become lender parties
to the Credit Agreement (each individually a “Lender”
and collectively, the “Lenders”),
and KEYBANK NATIONAL ASSOCIATION, a national banking association, as Agent for
the Lenders (the “Agent”).

 

W I T N E S S E T H:

 

WHEREAS, the parties entered into that certain
$125,000,000 Senior Secured Term Loan Agreement dated as of September 15,
2006, as amended by First Amendment to Senior Secured Term Loan Agreement dated
as of October 30, 2007, and by letter amendment dated as of June 11,
2008 (as amended the “Loan Agreement”);
and

 

WHEREAS, Borrower has requested that certain terms of
the Loan Agreement be modified and amended as hereinafter set forth; and

 

WHEREAS, the Lenders and the Agent have agreed to such
amendments as set forth herein and subject to the terms and conditions set
forth herein; and

 

NOW, THEREFORE, in consideration of the premises set
forth above, the terms and conditions contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree that all capitalized terms used but not
otherwise defined herein shall have the meanings ascribed thereto in the Loan
Agreement, and further agree as follows:

 

1.             Amendment
to Section 1 of Credit Agreement. Section 1.1 of the Loan
Agreement, Definitions, is hereby amended as follows:

 

a.             A
new definition, “Availability”, is hereby inserted in proper
alphabetical order as follows:

 

“Availability.  The excess, if any, of the Borrowing Base (as
defined in the Senior Project Revolver Loan Documents) over the Outstanding (as
defined in the Senior Project Revolver Loan Documents).”

 

b.             A
new definition, “Cumulative Closed Plus Backlog”, is hereby inserted in
proper alphabetical order as follows:

 

“Cumulative
Closed Plus Backlog.  The sum of (x) the
cumulative number of Homes sold and closed at the Brightwater Project plus (y) fifty
percent (50%) of the number of Homes at the Brightwater Project subject to a
Housing Purchase Contract but

 

 

not closed at any time of measurement, with any fractional number being
rounded up to the next whole number.”

 

c.             A
new definition, “Excess Liquidity”, is hereby inserted in proper
alphabetical order as follows:

 

“Excess Liquidity.  At any
time the amount by which the sum of the Borrower’s cash, excluding restricted
cash, plus Availability exceeds $20,000,000.”

 

d.             A
new definition, “HHI”, is hereby inserted in proper alphabetical order
as follows:

 

“HHI.  Hearthside Homes, Inc., a California
corporation.”

 

e.             A
new definition, “Hellman”, is hereby inserted in proper alphabetical
order as follows:

 

“Hellman. 
HHI Hellman, LLC, a California limited liability company.”

 

f.              A
new definition, “Hellman Project Debt”, is hereby inserted in proper
alphabetical order as follows:

 

“Hellman
Project Debt.  The Indebtedness of
Hellman that is non-recourse with respect to the Borrower, including but not
limited to, that certain Building Loan Agreement dated as of December 19,
2006 between Hellman and Indymac Bank, F.S.B., as modified or amended, and any
refinancing of such Indebtedness so long as it is non-recourse with respect to
the Borrower.”

 

g.             A
new definition, “Lancaster”, is hereby inserted in proper alphabetical
order as follows:

 

“Lancaster.  HHI Lancaster I, LLC, a California limited
liability company.”

 

h.             A
new definition, “Lancaster Project Debt,” is hereby inserted in proper
alphabetical order as follows:

 

“Lancaster
Project Debt.  The Indebtedness of
Lancaster that is non-recourse with respect to the Borrower, including but not
limited to, that certain Building Loan Agreement dated as of November 23,
2005 between Lancaster and Indymac Bank, F.S.B., as modified or amended, and
any refinancing of such Indebtedness so long as it is non-recourse to the
Borrower.”

 

i.              A
new definition, “Net Sale Proceeds”, is hereby inserted in proper
alphabetical order as follows:

 

“Net Sale
Proceeds.  With respect to the sale
of any Unit, the gross sales price payable by the purchaser thereof (net of any
rebates or discounts), less all customary and reasonable costs of sale that are
charged to sellers of property in the given jurisdiction, 

 

2

 

including, without limitation, title insurance charges, escrow fees,
legal fees, real estate taxes, transfer taxes and real estate brokers’
commissions.”

 

j.              The
definition of Applicable Margin is hereby amended by deleting the
existing language thereof in its entirety and inserting in lieu thereof the
following:

 

“Applicable
Margin.  For a LIBOR Rate Loan or a
Prime Rate Loan for each Fiscal Quarter, the margin corresponding to the
Project Indebtedness to Project Value Ratio for the prior Fiscal Quarter as
determined by reference to the following table:

 

	
  Project Indebtedness

  To

  Project Value Ratio

  	
   

  	
  LIBOR Applicable

  Margin

  	
   

  	
  Prime Applicable Margin

  	
   

  
	
  < 50%

  	
   

  	
  3.50

  	
  %

  	
  2.00

  	
  %

  
	
  > 50 to < 65%

  	
   

  	
  4.00

  	
  %

  	
  2.50

  	
  %

  
	
  > 65 to < 70%

  	
   

  	
  4.50

  	
  %

  	
  3.00

  	
  %

  

 

k.             The
definition of Asset Value is hereby amended by deleting the existing
language thereof in its entirety and substituting in lieu thereof the
following:

 

“Asset Value.  The most recent Appraised Value for the
Projects plus (x) Hard Costs incurred subsequent to the most recent
Appraisal allocated to the Projects minus (y) an amount equal to
seventy-two percent (72%) of the listed base price of any Spec Homes in the
Brightwater Project the construction of which commenced more than eighteen (18)
months prior to the most recent Borrowing Base Report submitted pursuant to the
Senior Project Revolver Loan Documents (except that in the case of any Spec
Home existing as of the date of the Third Amendment to this Agreement, such
aging period shall be twelve (12) months from the date of such Third
Amendment), and minus (z) an amount equal to seventy-two percent (72%) of
the gross proceeds from the closing of any Unit, except that if such Unit was a
Spec Home subject to a deduction under clause (y), the amount deducted under
clause (y) shall first be added back to the Borrowing Base Value before
deduction under this clause (z); provided however, if such gross sales proceeds
are less than ninety percent (90%) of the projected gross sales proceeds as set
forth in the Project Budget for such Unit, Agent may reset the percentages set
forth above for purposes of determining the Asset Value in its commercially
reasonable discretion; and provided further that for any Qualified Project the
ratio may be set at such percentage as Agent may elect in its commercially
reasonable discretion.”

 

l.              The
definition of Consolidated Tangible Net Worth is hereby amended by
adding a provision at the end thereof as follows:

 

“; provided, however, that in calculating Consolidated Tangible Net
Worth and the components thereof impairments realized by Borrower from and
after the 

 

3

 

Third Amendment to this Agreement with respect to the Hellman and
Lancaster development projects and with respect to deferred tax assets will not
be taken into account.”

 

m.            The
definition of Majority Lenders is hereby deleted and the term Required
Lenders is substituted therefor throughout the Loan Agreement and is
defined as follows:

 

“Required
Lenders.  As of any date, the Lender
or Lenders whose aggregate principal amount of the outstanding Loans is greater
than sixty-six and two-thirds percent (66 2/3%)
of the total outstanding Loans; provided that in the event that one Lender has
an aggregate principal amount of the outstanding Loans equal to or greater than
such percentage (the “Sole Required Lender”) then this definition of Required
Lender shall include the Sole Required Lender and a minimum of one other
Lender.

 

2.             Amendment
to Section 4 of the Loan Agreement.  Section 4.2 of the Loan Agreement, Mandatory
Prepayments, is amended as follows:

 

a.             Section 4.2(a) of
the Loan Agreement, Required Amortization, is hereby amended by deleting
the existing language thereof in its entirety and inserting in lieu thereof the
following:

 

“Borrower shall pay principal installments to the Agent for the benefit
of the Lenders in an amount sufficient to cause the outstanding principal
balance of the Loans to be at or below the following levels by the following
dates:

 

	
  Date

  	
   

  	
  Maximum Principal Balance

  	
   

  
	
  December 31,
  2008

  	
   

  	
  $

  	
  115,000,000

  	
   

  
	
  June 30,
  2009

  	
   

  	
  $

  	
  110,000,000

  	
   

  
	
  September 30,
  2009

  	
   

  	
  $

  	
  105,000,000

  	
   

  
	
  December 31,
  2009

  	
   

  	
  $

  	
  90,000,000

  	
   

  
	
  March 31,
  2010

  	
   

  	
  $

  	
  75,000,000

  	
   

  
	
  June 30,
  2010

  	
   

  	
  $

  	
  65,000,000

  	
   

  
	
  September 30,
  2010

  	
   

  	
  $

  	
  50,000,000

  	
   

  
	
  December 31,
  2010

  	
   

  	
  $

  	
  37,500,000

  	
   

  
	
  March 31,
  2011

  	
   

  	
  $

  	
  25,000,000

  	
   

  
	
  June 30,
  2011

  	
   

  	
  $

  	
  12,500,000”

  	
   

  

 

b.             A new Section 4.2(c) is
hereby added to Section 4.2 as follows:

 

4

 

“(c)         Mandatory Payments
from Unit Sales.  The Loans shall be
subject to mandatory prepayment to the extent of sixty (60) percent of the
Release Price as provided in Section 5.4(d).”

 

c.             A new Section 4.2(d) is
hereby added to Section 4.2 as follows:

 

“(d)         Mandatory Payments
from Excess Liquidity.  The Loans
shall be subject to mandatory prepayment to the extent of sixty (60) percent of
the amount of any Excess Liquidity.”

 

3.             Amendment
to Section 5 of the Loan Agreement. 
Section 5.4(d) of the Loan Agreement, Minimum Release Price,
is hereby amended by deleting the existing language thereof in its entirety and
inserting in lieu thereof the following:

 

“(d)         Minimum Release Prices.  At such time that Borrower delivers a Unit,
Borrower shall pay the following amount to the Agent under the Senior Project
Revolver at the time of such sale, transfer or conveyance equal to (the Release
Price)”:

 

(i)            $600,000.00
per Unit until such time as seventy (70) Units are delivered; and

 

(ii)           $1,000,000.00
per Unit thereafter.

 

The Net Sale Proceeds shall be delivered to the Agent of the Senior
Project Revolver.  A portion of Net Sale
Proceeds equal to the Release Price shall be divided as follows:  (i) sixty (60) percent to the Loans and (ii) forty
(40) percent to the Senior Project Revolver. 
The Agent under the Senior Project Revolver shall immediately deliver
the portion of the Release Price applicable to the Loans to the Agent for
application to the Obligations.  During
the pendency of a Monetary Event of Default or an Uncured Non-Monetary Event of
Default, the Net Sale Proceeds shall be retained by the Agent under the Senior
Project Revolver and applied in accordance with the agreements governing the
Senior Project Revolver.  During this
period the Lenders shall have no right to any of the Net Sale Proceeds.

 

4.             Amendment
to Section 7 of the Loan Agreement. 
Section 7.6(d) of the Loan Agreement is hereby amended by
deleting “month” in the first line thereof and inserting in lieu thereof “Fiscal
Quarter”.

 

5.             Amendments
to Section 8 of the Loan Agreement. 
Section 8 of the Loan Agreement, Certain Negative Covenants of
the Borrower and Guarantors, is amended as follows:

 

a.             Section 8.4
of the Loan Agreement, Distributions, is hereby amended by deleting the
existing language thereof in its entirety and inserting in lieu thereof the
following:

 

5

 

“8.4 Distributions

 

a.             Borrower
Distributions.  The Borrower shall
not make or pay any Distributions.

 

b.             Signal
Landmark Distributions.  Signal
Landmark shall not make or pay any Distributions except for Distributions to
the Borrower for the payment of required payments hereunder and with respect to
the Senior Project Revolver and to pay the tax obligations of Signal Landmark.”

 

b.             Section 8.13 of the Loan Agreement, Spec
Homes per Project, is hereby amended by deleting the existing language
thereof in its entirety and inserting in lieu thereof the following:

 

“8.13 Spec
Homes.  There shall be no more than
seventeen (17) Spec Homes in the Brightwater Project at any one time; provided
that such limit may be increased by up to eight (8) additional Spec Homes
that were previously subject to a Housing Purchase Contract; and provided
further that for purposes of this Section 8.13 Spec Homes shall not
include Homes meeting the classification for inclusion as Model Homes
herein.  In the Brightwater Project, at
no time shall the sum of Spec Homes plus Homes subject to a Housing Purchase
Contract but not closed exceed sixty (60). 
In the Brightwater Project at no time shall there exist more than forty
(40) Housing Purchase Contracts that contain a contingency for the sale of a
purchaser’s existing home.”

 

c.             A
new Section 8.15, Cumulative Sales, is hereby added as follows:

 

“8.15
Cumulative Sales.  Cumulative Closed
Plus Backlog shall not be less than the following as of the following dates:

 

	
  Date

  	
   

  	
  Cumulative Closed Plus Backlog

  	
   

  
	
  December 31,
  2008

  	
   

  	
  32

  	
   

  
	
  March 31,
  2009

  	
   

  	
  40

  	
   

  
	
  June 30,
  2009

  	
   

  	
  50

  	
   

  
	
  September 30,
  2009

  	
   

  	
  64

  	
   

  
	
  December 31,
  2009

  	
   

  	
  80

  	
   

  
	
  March 31,
  2010

  	
   

  	
  96”

  	
   

  

 

d.             A
new Section 8.16, Restrictions on Cash, is hereby added as follows:

 

“8.16 Restrictions
on Cash.  The Borrower shall not
permit its cash, excluding its restricted cash, to exceed $10,000,000 at any
time.”

 

6

 

6.             Amendment
to Section 9 of the Loan Agreement. 
Section 9 of the Loan Agreement, Financial Covenants, is
amended as follows:

 

a.             Section 9.1
of the Loan Agreement, Leverage Ratio, is hereby amended by deleting the
existing language thereof in its entirety and inserting in lieu thereof the
following:

 

“9.1 Leverage
Ratio.  The Borrower shall not, at
the end of any Fiscal Quarter, permit the Leverage Ratio to exceed the
following amounts:  2.75 to 1.00 prior to
March 31, 2009, and 2.50 to 1.00 on or after March 31, 2009.

 

b.             Section 9.3
of the Loan Agreement, Project Indebtedness to Project  Value Ratio,
is hereby amended by deleting the existing language thereof in its entirety and
inserting in lieu thereof the following:

 

“9.3 Project
Indebtedness to Project Value Ratio. 
The Borrower shall maintain a Project Indebtedness to Value Ratio of (i) equal
to or less than 70% at all times prior to December 31, 2009, (ii) equal
to or less than 65% on and after December 31, 2009, but prior to March 31,
2010, (iii) equal to or less than 60% on and after March 31, 2010,
but prior to September 30, 2010, and (iv) equal to or less than 45%
on and after September 30, 2010.”

 

c.             Section 9.4
of the Loan Agreement, Minimum EBITDA/Interest Incurred, is hereby
amended by deleting the existing language thereof in its entirety and inserting
in lieu thereof the following:

 

“9.4 Minimum
EBITDA/Interest Incurred.  Borrower
shall maintain on a rolling four quarter basis, commencing as of the dates set
forth below, a minimum ratio of EBITDA to Interest Incurred of equal to or
greater than the following:

 

	
  Commencing as of

  	
   

  	
  Minimum Ratio

  	
   

  
	
  September 30,
  2008

  	
   

  	
  .25 to 1.0

  	
   

  
	
  March 31,
  2009

  	
   

  	
  1.0 to 1.0

  	
   

  
	
  June 30,
  2009

  	
   

  	
  1.25 to 1.0

  	
   

  
	
  September 30,
  2009

  	
   

  	
  1.50 to 1.0

  	
   

  
	
  December 31,
  2009

  	
   

  	
  2.0 to 1.0

  	
   

  

 

d.             A
new Section 9.5, Minimum Liquidity, is hereby added as follows:

 

“9.5 Minimum
Liquidity.  The Borrower shall at all
times cause the sum of its cash plus Availability to equal or exceed
$4,000,000.”

 

7.             Amendments
to Section 26 of the Loan Agreement. 
Section 26 of the Loan Agreement, Consents, Amendments, Waivers,
Etc., is amended in the fourth sentence thereof by:

 

7

 

(i)            changing
the clause “a change in the rate of interest on or term of the Notes” to the
following:  “a decrease in the rate of
interest on, or other change in the term of, the Notes.”

 

8.             New
Exhibit “H”.  The existing Exhibit “H”,
Project Budget for the Brightwater Project, is deleted and the Exhibit “H”
attached to this Amendment is substituted therefor.

 

9.             Exclusion
of Hellman, Hellman Project Debt, Lancaster, Lancaster Project Debt and HHI for
Certain Purposes.  The parties
acknowledge and agree that Hellman, Lancaster and HHI are Guarantors, but the
parties have agreed that certain provisions of the Loan Agreement otherwise
applicable to all Guarantors shall not be applicable with respect to Hellman
and/or the Hellman Project Debt, Lancaster and/or the Lancaster Project Debt,
or HHI to the extent HHI guarantees the Hellman Project Debt or the Lancaster
Project Debt so that certain events with respect to Hellman and a default on
the Hellman Project Debt, Lancaster and a default on the Lancaster Project
Debt, or HHI with respect to its guarantee of the Hellman Project Debt or the
Lancaster Project Debt, by themselves, will not result in a Default or Event of
Default.  Accordingly, the parties agree
that the Loan Agreement is amended and modified as follows:

 

(i)            The
first sentence of Section 7.12 of the Loan Agreement shall not apply to
Hellman with respect to the Hellman Project Debt, to Lancaster with respect to
the Lancaster Project Debt or to HHI with respect to its guarantee of the
Hellman Project Debt or the Lancaster Project Debt;

 

(ii)           Clause
(ii) of the second sentence of Section 7.12 of the Loan Agreement
shall not apply to Hellman or to Lancaster or to HHI with respect to its
guarantee of the Hellman Project Debt or the Lancaster Project Debt;

 

(iii)          Section 11.1(f) of the Loan
Agreement shall not apply with respect to the Hellman Project Debt or the
Lancaster Project Debt, including, without limitation, any guarantee thereof by
HHI; and

 

(iv)          Sections
11.1(g), 11.1(h), 11.1(i), 11.1(j), 11.1(l) and 11.l(m) of the Loan
Agreement shall not apply with respect to Hellman or to Lancaster.

 

10.           No
other Amendments.  The execution,
delivery and effectiveness of this Amendment shall not, except as expressly
provided above, operate as an amendment or waiver of any right, power or remedy
of Agent or Lenders under the Loan Agreement or any of the other Loan
Documents, nor constitute an amendment or waiver of any provision of the Loan
Agreement or any of the other Loan Documents. 
Except for the amendments and waiver expressly set forth above, the text
of the Loan Agreement and all other Loan Documents shall remain unchanged and
in full force and effect and Borrower hereby ratifies and confirms its
obligations thereunder.  This Amendment
shall not constitute a modification of the Loan Agreement or a course of
dealing with Agent or Lenders at variance with the Loan Agreement such as to
require further notice by Agent or Lenders to require strict compliance with
the terms of the Loan Agreement and the other Loan Documents in the future.

 

8

 

11.           Conditions
of Effectiveness.  This Amendment
shall become effective as of the date hereof when, and only when, Agent, on
behalf of Lenders, shall have received, in form and substance satisfactory to
it, the following:

 

a.             Counterparts
of this Amendment duly executed by Borrower, the Guarantors and the appropriate
Lenders; and

 

b.             Payment
of all reasonable and documented expenses incurred by Agent in connection with
the execution and delivery of this Amendment, together with fees and actually
incurred expenses of Agent’s counsel with respect to this Amendment and other
post-closing matters through the date of this Amendment.

 

12.           Representations
and Warranties.  Each of Borrower and
the Guarantors represents and warrants as follows:

 

a.             The
execution, delivery and performance by Borrower and each such Guarantor of this
Amendment and the Loan Documents, as amended hereby, are within each such party’s
legal powers, have been duly authorized by all necessary member action and do
not contravene (i) Borrower’s or any such Guarantor’s organizational
documents, respectively, or (ii) any law or contractual restriction
binding on or affecting such Person;

 

b.             Except
for approvals which have been obtained, no authorization, approval or other
action by, and no notice to or filing with, any governmental authority or
regulatory body, is required for the due execution, delivery and performance by
Borrower or any Guarantor of this Amendment or any of the Loan Documents, as
amended hereby, to which such Person is or will be a party;

 

c.             This
Amendment and each of the other Loan Documents, as amended hereby, to which
Borrower and each Guarantor is a party, respectively, constitute legal, valid
and binding obligations of each such party, enforceable against such Person in
accordance with their respective terms, provided that enforcement may be
limited by bankruptcy, insolvency, liquidation, reorganization, reconstruction
and other similar laws affecting enforcement of creditor’s rights generally;
and

 

d.             As
of the effective date of this Amendment, no Default or Event of Default is
existing.

 

13.           Reference
to and Effect on the Loan Documents. 
Upon the effectiveness of this Amendment, on and after the date hereof
each reference in the Loan Agreement to “this Agreement,” “hereunder,” “hereof”
or words of like import referring to the Loan Agreement, and each reference in
the other Loan Documents to the “Loan Agreement,” “thereunder,” “thereof” or
words of like import referring to the Loan Agreement, shall mean and be a
reference to the Loan Agreement as amended hereby.

 

14.           Costs,
Expenses and Taxes.  Borrower agrees
to pay on demand all reasonable out-of-pocket expenses of Agent actually
incurred in connection with the preparation, execution and delivery of this
Amendment and the other instruments and documents to be delivered hereunder,
including, without limitation, the reasonable fees and out-of-pocket expenses
of 

 

9

 

Agent’s counsel with respect thereto and with respect
to advising Agent as to its rights and responsibilities hereunder and
thereunder.

 

15.           Governing
Law.  This Amendment shall be
governed by and construed in accordance with the laws of the State of
California, without regard to the conflict of laws principles thereof.

 

16.           Loan
Document.  This Amendment shall be
deemed to be a Loan Document for all purposes.

 

17.           Counterparts.  This Amendment may be executed by one or more
of the parties hereto on any number of separate counterparts, each of which
shall be deemed an original and all of which, taken together, shall be deemed
to constitute one and the same instrument. 
Delivery of an executed counterpart of this Amendment by facsimile
transmission shall be as effective as delivery of a manually executed
counterpart hereof.

 

10

 

IN WITNESS WHEREOF, the
undersigned have duly executed this Amendment as a sealed instrument the date
first set forth above.

 

	
   

  	
  BORROWER:  

  
	
   

  	
   

  
	
   

  	
  CALIFORNIA COASTAL
  COMMUNITIES, INC., a 

  
	
   

  	
  Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  
				

 

 

[SIGNATURES
CONTINUED ON FOLLOWING PAGE]

 

	
   

  	
  GUARANTORS:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SIGNAL LANDMARK
  HOLDINGS INC., a 

  Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

 

[SIGNATURES
CONTINUED ON FOLLOWING PAGE]

 

Signature page for Third
Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  SIGNAL LANDMARK,

  
	
   

  	
  a California
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

 

[SIGNATURES
CONTINUED ON FOLLOWING PAGE]

 

Signature page for Third Amendment to Senior Secured Term Loan
Agreement

 

 

	
   

  	
  HEARTHSIDE HOLDINGS,
  INC., a Delaware

  
	
   

  	
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

 

[SIGNATURES
CONTINUED ON FOLLOWING PAGE]

 

Signature page for Third
Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  HEARTHSIDE HOMES, INC.,
  a California

  
	
   

  	
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

 

[SIGNATURES CONTINUED
ON FOLLOWING PAGE]

 

Signature page for Third
Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  HHI CHANDLER, LLC, a
  California limited 

  
	
   

  	
  liability company

  
	
   

  	
   

  
	
   

  	
  By: Hearthside Homes, Inc.,
  its managing 

  
	
   

  	
  member

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

 

[SIGNATURES CONTINUED ON FOLLOWING PAGE]

 

Signature page for Third
Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  HHI CHINO II, LLC, a
  California limited liability 

  
	
   

  	
  company

  
	
   

  	
   

  
	
   

  	
  By: Hearthside Homes, Inc.,
  its managing 

  
	
   

  	
  member

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

 

[SIGNATURES
CONTINUED ON FOLLOWING PAGE]

 

Signature page for Third
Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  HHI CROSBY, LLC, a
  California limited liability

  
	
   

  	
  company

  
	
   

  	
   

  
	
   

  	
  By: Hearthside Homes, Inc.,
  its managing 

  
	
   

  	
  member

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

 

[SIGNATURES
CONTINUED ON FOLLOWING PAGE]

 

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  HHI HELLMAN, LLC, a
  California limited liability

  
	
   

  	
  company

  
	
   

  	
   

  
	
   

  	
  By: Hearthside Homes, Inc.,
  its managing 

  
	
   

  	
  member

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

 

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  HHI LANCASTER I, LLC, a
  California limited liability

  
	
   

  	
  company

  
	
   

  	
   

  
	
   

  	
  By: Hearthside Homes, Inc.,
  its managing 

  
	
   

  	
  member

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

 

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  HHI SENECA, LLC, a
  California limited liability

  
	
   

  	
  company

  
	
   

  	
   

  
	
   

  	
  By: Hearthside Homes, Inc.,
  its managing 

  
	
   

  	
  member

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
						

 

 

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Signature page for Third
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  AGENT:

  
	
   

  	
   

  
	
   

  	
  KEYBANK NATIONAL
  ASSOCIATION, a national

  banking association, as the Agent

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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Signature page for Third
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  LENDERS:

  
	
   

  	
   

  
	
   

  	
  KEYBANK NATIONAL
  ASSOCIATION, a national

  banking association, as a Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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Signature page for Third
Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  WACHOVIA BANK NATIONAL
  ASSOCIATION,

  as a Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  GUARANTY BANK, as a
  Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  COMERICA BANK, as a
  Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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Signature page for Third
Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  FRANKLIN BANK, SSB, as
  a Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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Signature page for Third
Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  LASALLE BANK, N.A., a
  national banking

  association, as a Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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  PREFERRED BANK, as a
  Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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  VAN KAMPEN SENIOR
  INCOME TRUST, as a

  Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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Signature page for Third
Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  VAN KAMPEN SENIOR LOAN
  FUND, as a Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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Signature page for Third
Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  MORGAN STANLEY PRIME
  INCOME TRUST, as a 

  Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

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Amendment to Senior Secured Term Loan Agreement

 

 

	
   

  	
  GRAND BANK, as a Lender

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  
	
   

  	
  Name: 

  	
   

  
	
   

  	
  Its: 

  	
   

  
	
   

  	
   

  
	
   

  	
  [SEAL]

  

 

 

[END
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Signature page for Third
Amendment to Senior Secured Term Loan Agreementex101.htm

    
      Exhibit
10.1

       

      SECURITIES
PURCHASE AGREEMENT

       

      This
SECURITIES PURCHASE
AGREEMENT (the “Agreement”), dated as of
September 29, 2008, is by and among Valley Forge Composite Technologies, Inc., a
Florida corporation with offices located at 50 East River Center Blvd., Suite
820, Covington, Kentucky 41011 (the “Company”), and the investors
listed on the Schedule of Buyers attached hereto (individually, a “Buyer” and collectively, the
“Buyers”).

       

      RECITALS

       

      A.           The
Company and each Buyer is executing and delivering this Agreement in reliance
upon the exemption from securities registration afforded by Section 4(2) of the
Securities Act of 1933, as amended (the “1933 Act”), and Rule 506 of
Regulation D (“Regulation D”) as
promulgated by the U.S. Securities and Exchange Commission (the “SEC”) under the 1933
Act.

       

      B.           The
Company has authorized senior secured convertible notes, in the form attached
hereto as Exhibit
A (the “Notes”),
which Notes shall be convertible into shares of the Company’s common stock, par
value $.001 per share (the “Common Stock”) (as converted,
collectively, the “Conversion
Shares”), in accordance with the terms of the Notes.

       

      C.           Each
Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, (i) the aggregate original principal amount
of the Notes set forth opposite such Buyer’s name in column (3) on the Schedule
of Buyers, and (ii) a warrant to acquire up to that number of additional shares
of Common Stock set forth opposite such Buyer’s name in column (4) on the
Schedule of Buyers, in the form attached hereto as Exhibit
B (the “Warrants”) (as exercised,
collectively, the “Warrant
Shares”).  The Notes, the Conversion Shares, the Warrants and
the Warrant Shares are collectively referred to herein as the “Securities.”

       

      D.           Pursuant
to the terms of that certain Securities Purchase Agreement (the “Prior Agreement”), dated as of
July 3, 2008 by and between the Company and MKM Opportunity Master Fund, LLC
(“MKM”), the Company has
heretofore authorized and issued to MKM (i) a senior convertible note in the
aggregate original principal amount of $500,000 (the “Prior Note”), which Prior Note
is convertible into shares of the Company’s Common Stock, in accordance with the
terms of the Prior Note, and (ii) a warrant to acquire up to 1,000,000
additional shares of Common Stock (the “Prior Warrants”) (as
exercised, collectively, the “Prior Warrant
Shares”).

       

      E.           To
induce MKM to enter into this Agreement, the Company has agreed to secure the
Notes and the Prior Notes by a first priority perfected security interest in
substantially all of the assets of the Company and the Subsidiaries (as defined
herein) as evidenced by a security agreement as the Buyers shall require in form
and substance acceptable to MKM and each Buyer (such security agreement,
together with the other security documents and agreements entered into in
connection with this Agreement, as each may be amended or modified from time to
time, collectively, the “Security Documents”), and each
of the Subsidiaries (as defined below) will execute a guaranty (collectively,
the “Guaranties”)
pursuant to which each of them guarantees the obligations of the Company under
the Notes and the Prior Notes.

      
        
          
          

        

        
          -1-

          
            

          

        

        
          
          

        

      

       

      AGREEMENT

       

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

       

      1.           PURCHASE
AND SALE OF NOTES AND WARRANTS.

       

      (a)           Notes and
Warrants. Subject
to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7
below, the Company shall issue and sell to each Buyer, and each Buyer severally,
but not jointly, shall purchase from the Company on the Closing Date (as defined
below), a Note in the principal amount as is set forth opposite such Buyer’s
name in column (3) on the Schedule of Buyers, along with the Warrants to acquire
up to that number of Warrant Shares as is set forth opposite such Buyer’s name
in column (4) on the Schedule of Buyers.

       

      (b)           Closing. The
closing (the “Closing”)
of the purchase of the Notes and the Warrants by the Buyers shall occur at the
offices of Greenberg Traurig, LLP, The MetLife Building, 200 Park Avenue,
15th
Floor, New York, New York 10166.  The date and time of the Closing
(the “Closing Date”)
shall be 10:00 a.m., New York time, on the first (1st)
Business Day on which the conditions to the Closing set forth in Sections 6 and
7 below are satisfied or waived (or such later date as is mutually agreed to by
the Company and each Buyer). As used herein, “Business Day” means any day
other than a Saturday, Sunday or other day on which commercial banks in New
York, New York are authorized or required by law to remain closed.

       

      (c)           Purchase
Price. The
aggregate purchase price for the Notes and the Warrants to be purchased by each
Buyer (the “Purchase
Price”) shall be the amount set forth opposite such Buyer’s name in
column (5) on the Schedule of Buyers. Each Buyer shall pay its respective
Purchase Price for the Note and related Warrants to be purchased by such Buyer
at the Closing.

       

      (d)           Form of
Payment. On the
Closing Date, (i) each Buyer shall deliver its respective Purchase Price to the
Escrow Agent (as defined below) pursuant to Section 1.3 of the Escrow Agreement,
dated as of September 26, 2008, by and among the Company, the Buyers and
Richardson & Patel LLP ("Escrow Agent"), attached
hereto as Exhibit
C (the "Escrow
Agreement") for the Note and the Warrants to be issued and sold to such
Buyer at the Closing, by wire transfer of immediately available funds in
accordance with the Escrow Agent’s written wire instructions and (ii) the
Company shall deliver to each Buyer (A) a Note (in such amount as is set forth
opposite such Buyer’s name in column (3) of the Schedule of Buyers), and (B) a
Warrant pursuant to which such Buyer shall have the right to acquire up to such
number of Warrant Shares as is set forth opposite such Buyer’s name in column
(4) of the Schedule of Buyers, in all cases, duly executed on behalf of the
Company and registered in the name of such Buyer or its designee.

       

      2.           BUYER’S
REPRESENTATIONS AND WARRANTIES.

       

      Each
Buyer, severally and not jointly, represents and warrants to the Company with
respect to only itself that:

       

      (a)           Organization;
Authority. Such
Buyer is an entity duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization with the requisite power and
authority to enter into and to consummate the transactions contemplated by the
Transaction Documents (as defined below) to which it is a party and otherwise to
carry out its obligations hereunder and thereunder.

       

      (b)           No Public Sale or
Distribution. Such
Buyer is (i) acquiring its Note and Warrants, (ii) upon conversion of its Note
will acquire the Conversion Shares issuable upon conversion thereof, and
(iii) upon exercise of its Warrants will acquire the Warrant Shares
issuable upon exercise thereof, in each case, for its own account and not with a
view towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempted under the 1933 Act;
provided, however, that by making the representations herein, such Buyer does
not agree, or make any representation or warranty, to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act. Such Buyer is acquiring the
Securities hereunder in the ordinary course of its business. Such Buyer does not
presently have any agreement or understanding, directly or indirectly, with any
Person to distribute any of the Securities.

      
        
          
          

        

        
          -2-

          
            

          

        

        
          
          

        

      

       

      (c)           Accredited Investor
Status.  Such
Buyer is an “accredited investor” as that term is defined in Rule 501(a) of
Regulation D.

       

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

       

      (e)           Information. Such
Buyer and its advisors, if any, have been furnished with all materials relating
to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities which have been requested by such Buyer.
Such Buyer and its advisors, if any, have been afforded the opportunity to ask
questions of the Company. Neither such inquiries nor any other due diligence
investigations conducted by such Buyer or its advisors, if any, or its
representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained herein or any representations
and warranties contained in any other Transaction Document or any other document
or instrument executed and/or delivered in connection with this Agreement or the
consummation of the transaction contemplated hereby. Such Buyer understands that
its investment in the Securities involves a high degree of risk. Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.

       

      (f)           No Governmental
Review.  Such
Buyer understands that no United States federal or state agency or any other
government or governmental agency has passed on or made any recommendation or
endorsement of the Securities or the fairness or suitability of the investment
in the Securities nor have such authorities passed upon or endorsed the merits
of the offering of the Securities.

       

      (g)           Transfer or
Resale. Such
Buyer understands that except as provided in Sections 4(h) and 4(n) hereof: (i)
the Securities have not been and are not being registered under the 1933 Act or
any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such Buyer shall
have delivered to the Company (if requested by the Company) an opinion of
counsel to such Buyer, in a form reasonably acceptable to the Company, to the
effect that such Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration, or (C)
such Buyer provides the Company with reasonable assurance that such Securities
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the 1933 Act (or a successor rule thereto) (collectively,
“Rule 144”); (ii) any
sale of the Securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the seller
(or the Person (as defined in Section 3(s)) through whom the sale is made) may
be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC promulgated thereunder; and (iii) neither the Company nor
any other Person is under any obligation to register the Securities under the
1933 Act or any state securities laws or to comply with the terms and conditions
of any exemption thereunder.

       

      (h)           Validity;
Enforcement.  This
Agreement has been duly and validly authorized, executed and delivered on behalf
of such Buyer and constitutes the legal, valid and binding obligations of such
Buyer enforceable against such Buyer in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or
to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
and other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.

       

      (i)           No
Conflicts.  The
execution, delivery and performance by such Buyer of this Agreement and the
consummation by such Buyer of the transactions contemplated hereby will not (i)
result in a violation of the organizational documents of such Buyer or (ii)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule, regulation, order,
judgment  or decree (including federal and state securities laws)
applicable to such Buyer, except in the case of clauses (ii) and (iii) above,
for such conflicts, defaults, rights or violations which would not, individually
or in the aggregate, reasonably be expected to have a material adverse effect on
the ability of such Buyer to perform its obligations hereunder.

      
        
          
          

        

        
          -3-

          
            

          

        

        
          
          

        

      

       

      (j)           Residency. Such
Buyer is a resident of that jurisdiction specified below its address on the
Schedule of Buyers.

       

      (k)           Certain Trading
Activities.  Such
Buyer has not directly or indirectly, nor has any Person acting on behalf of or
pursuant to any understanding with such Buyer, engaged in any transactions in
the securities of the Company (including, without limitation, any Short Sales
involving the Company’s securities) since the time that such Buyer was first
contacted by the Company regarding the investment in the Company contemplated
herein. “Short Sales” include, without limitation, all “short sales” as defined
in Rule 200 promulgated under Regulation SHO under the 1934 Act (“Regulation
SHO”) and all types of direct and indirect stock pledges, forward sale
contracts, options, puts, calls, swaps and similar arrangements (including on a
total return basis), and sales and other transactions through non-U.S. broker
dealers or foreign regulated brokers (but shall not be deemed to include the
location and/or reservation of borrowable shares of Common Stock). Such Buyer
does not as of the date hereof, and will not immediately following the Closing,
own 10% or more of the Company’s issued and outstanding shares of Common Stock
(calculated based on the assumption that all Equivalents (as defined below)
owned by such Buyer, whether or not presently exercisable or convertible, have
been fully exercised or converted (as the case may be) but taking into account
any limitations on exercise or conversion (including “blockers”) contained
therein).

       

      (l)           General
Solicitation. Such
Buyer 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.

       

      3.           REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.

       

      The
Company represents and warrants to each of the Buyers that:

       

      (a)           Organization and
Qualification. Each of
the Company and each of the Subsidiaries are entities duly organized and validly
existing and in good standing under the laws of the jurisdiction in which they
are formed, and have the requisite power and authorization to own their
properties and to carry on their business as now being conducted and as
presently proposed to be conducted. Each of the Company and each of the
Subsidiaries is duly qualified as a foreign entity to do business and is in good
standing in every jurisdiction in which its ownership of property or the nature
of the business conducted by it makes such qualification necessary, except to
the extent that the failure to be so qualified or be in good standing would not
have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means
any material adverse effect on (i) the business, properties, assets,
liabilities, operations (including results thereof), condition (financial or
otherwise) or prospects of the Company or any Subsidiary, individually or taken
as a whole, (ii) the transactions contemplated hereby or in the other
Transaction Documents or (iii) the authority or ability of the Company or any of
the Subsidiaries to perform their respective obligations under the Transaction
Documents (as defined below). Other than the Subsidiaries, there is no Person in
which the Company, directly or indirectly, owns capital stock or holds an equity
or similar interest. For purposes of this Agreement, Valley Forge Detection
Systems, Inc., Valley Forge Aerospace, Inc., Valley Forge Imaging, Inc. and
Valley Forge Imaging Technologies, Inc. are collectively referred to herein as
the “Subsidiaries” and
each individually as a “Subsidiary.”

       

      (b)           Authorization; Enforcement;
Validity. The
Company has the requisite power and authority to enter into and perform its
obligations under this Agreement and the other Transaction Documents to which it
is a party and to issue the Securities in accordance with the terms hereof and
thereof.  Each Subsidiary has the requisite power and authority to
enter into and perform its obligations under the Transaction Documents to which
it is a party.  The execution and delivery of this Agreement and the
other Transaction Documents by the Company and the Subsidiaries and the
consummation by the Company and the Subsidiaries of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the Notes and the reservation for issuance and issuance of the Conversion Shares
issuable upon conversion of the Notes, the issuance of the Warrants and the
reservation for issuance and issuance of the Warrant Shares issuable upon
exercise of the Warrants) have been duly authorized by the Company’s board of
directors or other governing body, as applicable, and (other than the filing
with the SEC of a Notice on Form D and one or more registration statements in
accordance with Section 4(n) hereof and any other filings as may be required by
any state securities agencies) no further filing, consent or authorization is
required by the Company, the Subsidiaries, their respective Boards of Directors
or their stockholders or other governing body. This Agreement and the other
Transaction Documents to which it is a party have been duly executed and
delivered by the Company and constitutes the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies and except as rights to
indemnification and to contribution may be limited by federal or state
securities law.  The Transaction Documents to which each Subsidiary is
a party have been duly executed and delivered by each such Subsidiary, and
constitutes the legal, valid and binding obligations of such Subsidiary in
accordance with their respective terms, except as such
enforceability  may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights and remedies and except as rights to indemnification and to
contribution may be limited by federal or state securities
law.  “Transaction
Documents” means, collectively, this Agreement, the Notes, the Warrants,
the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)) and
each of the other agreements and instruments entered into by the parties hereto
in connection with the transactions contemplated hereby and
thereby.

      
        
          
          

        

        
          -4-

          
            

          

        

        
          
          

        

      

       

      (c)           Issuance of
Securities. The
issuance of the Notes and the Warrants are duly authorized and upon issuance in
accordance with the terms of the Transaction Documents shall be validly issued,
fully paid and non-assessable and free from all taxes, liens, charges and other
encumbrances with respect to the issue thereof. As of the Closing, the Company
shall have reserved from its duly authorized capital stock not less than 120% of
the sum of (i) the maximum number of Conversion Shares issuable upon conversion
of the Notes (assuming for purposes hereof that the Notes are convertible at the
initial Conversion Price (as defined in the Notes) and without taking into
account any limitations on the conversion of the Notes set forth therein) and
(ii) the maximum number of Warrant Shares issuable upon exercise of the Warrants
(without regard to any limitations on the exercise of the Warrants set forth
therein). Upon conversion in accordance with the Notes or exercise in accordance
with the Warrants (as the case may be), the Conversion Shares and the Warrant
Shares, respectively, when issued, will be validly issued, fully paid and
nonassessable and free from all preemptive or similar rights, taxes, liens,
charges and other encumbrances with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock.
Subject to the accuracy of the representations and warranties of the Buyers in
this Agreement, the offer and issuance by the Company of the Securities is
exempt from registration under the 1933 Act.

       

      (d)           No
Conflicts. The
execution, delivery and performance of the Transaction Documents by the Company
and the Subsidiaries and the consummation by the Company and the Subsidiaries of
the transactions contemplated hereby and thereby (including, without limitation,
the issuance of the Notes, the Warrants, the Conversion Shares and Warrant
Shares and the reservation for issuance of the Conversion Shares and Warrant
Shares) will not (i) result in a violation of the Articles of Incorporation (as
defined in Section 3(r)) or other organizational documents of the Company or any
of the Subsidiaries, any capital stock of the Company or any of the Subsidiaries
or Bylaws (as defined in Section 3(r)) of the Company or any of the
Subsidiaries, (ii) conflict with, or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
any agreement, indenture or instrument to which the Company or any of the
Subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including foreign, federal and state
securities laws and regulations and the rules and regulations of the
Over-the-Counter Bulletin Board (the “Principal Market”))
applicable to the Company or any of the Subsidiaries or by which any property or
asset of the Company or any of the Subsidiaries is bound or affected except, in
the case of clause (ii) or (iii) above, to the extent such violations that could
not reasonably be expected to have a Material Adverse Effect.

       

      (e)           Consents.  Neither
the Company nor any Subsidiary is required to obtain any consent, authorization
or order of, or make any filing or registration with, any court, governmental
agency or any regulatory or self-regulatory agency or any other Person in order
for it to execute, deliver or perform any of its respective obligations under or
contemplated by the Transaction Documents, in each case, in accordance with the
terms hereof or thereof. All consents, authorizations, orders, filings and
registrations which the Company or any Subsidiary is required to obtain pursuant
to the preceding sentence have been obtained or effected on or prior to the
Closing Date, and neither the Company nor any of the Subsidiaries are aware of
any facts or circumstances which might prevent the Company or any Subsidiary
from obtaining or effecting any of the registration, application or filings
pursuant to the preceding sentence. The Company is not in violation of the
requirements of the Principal Market and has no knowledge of any facts or
circumstances which could reasonably lead to delisting or suspension of the
Common Stock in the foreseeable future.

       

      (f)           Acknowledgment Regarding
Buyer’s Purchase of Securities. The
Company acknowledges and agrees that each Buyer is acting solely in the capacity
of an arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company or any of the Subsidiaries, (ii) an “affiliate” (as
defined in Rule 144) of the Company or any of the Subsidiaries or (iii) to its
knowledge, a “beneficial owner” of more than 10% of the shares of Common Stock
(as defined for purposes of Rule 13d-3 of the Securities Exchange Act of 1934,
as amended (the “1934
Act”)). The Company further acknowledges that no Buyer is acting as a
financial advisor or fiduciary of the Company or any of the Subsidiaries (or in
any similar capacity) with respect to the Transaction Documents and the
transactions contemplated hereby and thereby, and any advice given by a Buyer or
any of its representatives or agents in connection with the Transaction
Documents and the transactions contemplated hereby and thereby is merely
incidental to such Buyer’s purchase of the Securities. The Company further
represents to each Buyer that the Company’s decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.

      
        
          
          

        

        
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      (g)           No General Solicitation; No
Placement Agent’s Fees. Neither
the Company, nor any of the Subsidiaries or affiliates, nor any Person acting on
its or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D) in connection with the offer or
sale of the Securities. The Company shall be responsible for the payment of any
placement agent’s fees, financial advisory fees, or brokers’ commissions (other
than for persons engaged by any Buyer or its investment advisor) relating to or
arising out of the transactions contemplated hereby.  Neither the
Company nor any of the Subsidiaries has engaged any placement agent or other
agent in connection with the sale of the Securities.

       

      (h)           No Integrated
Offering. None of
the Company, the Subsidiaries or any of their affiliates, nor any Person acting
on their behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances that
would require registration of the issuance of any of the Securities under the
1933 Act, whether through integration with prior offerings or otherwise, or
cause this offering of the Securities to require approval of stockholders of the
Company under any applicable stockholder approval provisions, including, without
limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed or
designated. None of the Company, the Subsidiaries, their affiliates nor any
Person acting on their behalf will take any action or steps referred to in the
preceding sentence that would require registration of the issuance of any of the
Securities under the 1933 Act or cause the offering of any of the Securities to
be integrated with other offerings.

       

      (i)           Dilutive
Effect. The
Company understands and acknowledges that the number of Conversion Shares and
Warrant Shares will increase in certain circumstances. The Company further
acknowledges that its obligation to issue the Conversion Shares upon conversion
of the Notes and the Warrant Shares upon exercise of the Warrants in accordance
with this Agreement, the Notes and the Warrants is, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.

       

      (j)           Application of Takeover
Protections; Rights Agreement. The
Company and its board of directors have taken all necessary action, if any, in
order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Articles of Incorporation or
other organizational document or the laws of the jurisdiction of its
incorporation or otherwise which is or could become applicable to any Buyer as a
result of the transactions contemplated by this Agreement, including, without
limitation, the Company’s issuance of the Securities and any Buyer’s ownership
of the Securities. The Company and its board of directors have taken all
necessary action, if any, in order to render inapplicable any stockholder rights
plan or similar arrangement relating to accumulations of beneficial ownership of
shares of Common Stock or a change in control of the Company or any of the
Subsidiaries.

       

      (k)           SEC Documents; Financial
Statements. During
the two (2) years prior to the date hereof, the Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the 1934 Act (all
of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements, notes and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the “SEC Documents”). The Company
has delivered to the Buyers or their respective representatives true, correct
and complete copies of each of the SEC Documents not available on the EDGAR
system. As of their respective dates, the SEC Documents complied in all material
respects with the requirements of the 1934 Act and the rules and regulations of
the SEC promulgated thereunder applicable to the SEC Documents, and none of the
SEC Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto as in effect as of the time of filing. Such financial statements
have been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments which will not be material, either individually or in the
aggregate). No other information provided by or on behalf of the Company to the
Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(e) of this Agreement, contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein not misleading, in the light
of the circumstance under which they are or were made.

      
        
          
          

        

        
          -6-

          
            

          

        

        
          
          

        

      

       

      (l)           Absence of Certain
Changes. Since
the date of the Company’s most recent audited or reviewed financial statements
contained in a Form 10-K, there has been no material adverse change and no
material adverse development in the business, assets, liabilities, properties,
operations (including results thereof), condition (financial or otherwise) or
prospects of the Company or any of the Subsidiaries, except as may be disclosed
in the SEC Documents filed after the date of such Form 10-K but prior to the
date hereof. Since the date of the Company’s most recent audited financial
statements contained in a Form 10-K, neither the Company nor any of the
Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, outside of the ordinary course of business or
(iii) made any material capital expenditures, individually or in the aggregate.
Neither the Company nor any of the Subsidiaries has taken any steps to seek
protection pursuant to any law or statute relating to bankruptcy, insolvency,
reorganization, liquidation or winding up, nor does the Company or any
Subsidiary have any knowledge or reason to believe that any of their respective
creditors intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact which would reasonably lead a creditor to do so. The
Company and the Subsidiaries, individually and on a consolidated basis, are not
as of the date hereof, and after giving effect to the transactions contemplated
hereby to occur at the Closing, will not be Insolvent (as defined below). For
purposes of this Section 3(l), “Insolvent” means, (I) with
respect to the Company and the Subsidiaries, on a consolidated basis, (i) the
present fair saleable value of the Company’s and the Subsidiaries’ assets is
less than the amount required to pay the Company’s and the Subsidiaries’ total
Indebtedness (as defined in Section 3(s)), (ii) the Company and the Subsidiaries
are unable to pay their debts and liabilities, subordinated, contingent or
otherwise, as such debts and liabilities become absolute and matured or (iii)
the Company and the Subsidiaries intend to incur or believe that they will incur
debts that would be beyond their ability to pay as such debts mature; and (II)
with respect to the Company and each Subsidiary, individually, (i) the present
fair saleable value of the Company’s or any of the Subsidiaries’ assets is less
than the amount required to pay each of their respective total Indebtedness,
(ii) the Company or any of the Subsidiaries are unable to pay their respective
debts and liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured or (iii) the Company or any of the
Subsidiaries intend to incur or believe that they will incur debts that would be
beyond their respective ability to pay as such debts mature. Neither the Company
nor any of the Subsidiaries has engaged in business or in any transaction, and
is not about to engage in business or in any transaction, for which the
Company’s or such Subsidiary’s remaining assets constitute unreasonably small
capital.

       

      (m)           No Undisclosed Events,
Liabilities, Developments or Circumstances. No
event, liability, development or circumstance has occurred or exists, or is
reasonably expected to exist or occur with respect to the Company, any of the
Subsidiaries or their respective business, properties, liabilities, prospects,
operations (including results thereof) or condition (financial or otherwise),
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced or which would have a material adverse effect on
any Buyer’s investment hereunder.

       

      (n)           Conduct of Business;
Regulatory Permits. Neither
the Company nor any of the Subsidiaries is in violation of any material term of
or in default under its Articles of Incorporation, any certificate of
designation, preferences or rights of any other outstanding series of preferred
stock of the Company or any of the Subsidiaries or Bylaws or their
organizational charter, certificate of formation or articles or certificate of
incorporation or bylaws, respectively. Neither the Company nor any of the
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or any of the
Subsidiaries, and neither the Company nor any of the Subsidiaries will conduct
its business in violation of any of the foregoing, except in all cases for
possible violations which could not, individually or in the aggregate, have a
Material Adverse Effect. Without limiting the generality of the foregoing, the
Company is not in violation of any of the rules, regulations or requirements of
the Principal Market and has no knowledge of any facts or circumstances that
could reasonably lead to delisting or suspension of the Common Stock by the
Principal Market in the foreseeable future.  Since January 1, 2007,
(i) the Common Stock has been designated for quotation on the Principal Market,
(ii) trading in the Common Stock has not been suspended by the SEC or the
Principal Market and (iii) the Company has received no communication, written or
oral, from the SEC or the Principal Market regarding the suspension or delisting
of the Common Stock from the Principal Market. The Company and each of the
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.

       

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

      
        
          
          

        

        
          -7-

          
            

          

        

        
          
          

        

      

       

      (p)           Sarbanes-Oxley
Act. The
Company and each Subsidiary is in material compliance with all applicable
requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date
hereof, and all applicable rules and regulations promulgated by the SEC
thereunder that are effective as of the date hereof.

       

      (q)           Transactions With
Affiliates. Other
than the grant of stock options disclosed on Schedule 3(q) and except as
disclosed in the SEC Documents, none of the officers, directors or employees of
the Company or any of the Subsidiaries is presently a party to any transaction
with the Company or any of the Subsidiaries (other than for ordinary course
services as employees, officers or 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 such officer, director or employee or, to the
knowledge of the Company or any of the Subsidiaries, any corporation,
partnership, trust or other entity in which any such officer, director, or
employee has a substantial interest or is an officer, director, trustee or
partner.

       

      (r)           Equity
Capitalization.  As
of the date hereof, the authorized capital stock of the Company consists of
100,000,000 shares of Common Stock, of which 52,882,016 shares are issued and
outstanding and 42,000 shares are reserved for issuance pursuant to securities
(other than the Notes, the Prior Notes, the Warrants and the Prior Warrants)
exercisable or exchangeable for, or convertible into, Common
Stock.  No shares of Common Stock are held in treasury.  All
of such outstanding shares are duly authorized and have been, or upon issuance
will be, validly issued and are fully paid and
non-assessable.  37,760,000 shares of the Company’s issued and
outstanding Common Stock on the date hereof are as of the date hereof owned by
Persons who are “affiliates” (as defined in Rule 405 of the 1933 Act and
calculated based on the assumption that only officers, directors and holders of
at least 10% of the Company’s issued and outstanding Common Stock are
“affiliates” without conceding that any such Persons are “affiliates” for
purposes of federal securities laws) of the Company or any of the Subsidiaries.
To the Company’s knowledge, as of the date hereof no Person owns 10% or more of
the Company’s issued and outstanding shares of Common Stock (calculated based on
the assumption that all Equivalents, whether or not presently exercisable or
convertible, have been fully exercised or converted (as the case may
be) taking account of any limitations on exercise or conversion (including
“blockers”) contained therein without conceding that such identified Person is a
10% stockholder for purposes of federal securities laws). Except as disclosed in
Schedule 3(r): (i) none of the
Company’s or any Subsidiary’s capital stock is subject to preemptive rights or
any other similar rights or any liens or encumbrances suffered or permitted by
the Company or any Subsidiary; (ii) except as disclosed in the SEC Documents,
there are no outstanding options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of the Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of the Subsidiaries is or may become
bound to issue additional capital stock of the Company or any of the
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of the Subsidiaries; (iii) there are no outstanding debt
securities, notes, credit agreements, credit facilities or other agreements,
documents or instruments evidencing Indebtedness (as defined in Section 3(s)) of
the Company or any of the Subsidiaries or by which the Company or any of the
Subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any amounts filed in connection with the Company or any
of the Subsidiaries; (v) there are no agreements or arrangements under which the
Company or any of the Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except pursuant to Section 4(n) hereof);
(vi) there are no outstanding securities or instruments of the Company or any of
the Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the
Company or any of the Subsidiaries is or may become bound to redeem a security
of the Company or any of the Subsidiaries; (vii) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities; (viii) neither the Company nor any
Subsidiary has any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; and (ix) neither the Company nor
any of the Subsidiaries have any liabilities or obligations required to be
disclosed in the SEC Documents which are not so disclosed in the SEC Documents,
other than those incurred in the ordinary course of the Company’s or the
Subsidiaries’ respective businesses and which, individually or in the aggregate,
do not or could not have a Material Adverse Effect.  The Company has
furnished to the Buyers true, correct and complete copies of the Company’s
Articles of Incorporation, as amended and as in effect on the date hereof (the
“Articles of
Incorporation”), and the Company’s bylaws, as amended and as in effect on
the date hereof (the “Bylaws”), and the terms of all
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock and the material rights of the holders thereof in respect thereto
that have not been disclosed in the SEC Documents.

      
        
          
          

        

        
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      (s)           Indebtedness and Other
Contracts. Except
as disclosed on Schedule 3(s) or in the SEC
Documents, neither the Company nor any of the Subsidiaries (i) has any
outstanding Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument could reasonably be
expected to result in a Material Adverse Effect, (iii) is in violation of any
term of or in default under any contract, agreement or instrument relating to
any Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect.  For purposes of this
Agreement:  (x) “Indebtedness” of any Person
means, without duplication, (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services (including, without limitation, “capital leases” in
accordance with generally accepted accounting principles) (other than trade
payables entered into in the ordinary course of business), (C) all reimbursement
or payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (D) all obligations evidenced by notes, bonds, debentures
or similar instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses, (E) all
indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (F) all
monetary obligations under any leasing or similar arrangement which, in
connection with generally accepted accounting principles, consistently applied
for the periods covered thereby, is classified as a capital lease, (G) all
indebtedness referred to in clauses (A) through (F) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which
owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (H) all Contingent Obligations in respect of indebtedness
or obligations of others of the kinds referred to in clauses (A) through (G)
above; (y) “Contingent
Obligation” means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease,
dividend or other obligation of another Person if the primary purpose or intent
of the Person incurring such liability, or the primary effect thereof, is to
provide assurance to the obligee of such liability that such liability will be
paid or discharged, or that any agreements relating thereto will be complied
with, or that the holders of such liability will be protected (in whole or in
part) against loss with respect thereto; and (z) “Person” means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization, any other entity and a government or any
department or agency thereof.

       

      (t)           Absence of
Litigation. Except
as set forth on Schedule 3(t) or in the SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by the Principal Market, any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of the Subsidiaries,
the Common Stock or any of the Company’s or the Subsidiaries’ officers or
directors which is outside of the ordinary course of business or individually or
in the aggregate could have a Material Adverse Effect.

       

      (u)           Insurance. The
Company and each of the Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company and the Subsidiaries are engaged. Neither the Company nor
any such Subsidiary has been refused any insurance coverage sought or applied
for, and neither the Company nor any such Subsidiary has any reason to believe
that it will be unable 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 at a cost that would not have a Material
Adverse Effect.

      
        
          
          

        

        
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      (v)           Employee
Relations.  Neither
the Company nor any of the Subsidiaries is a party to any collective bargaining
agreement or employs any member of a union. The Company believe that its and its
Subsidiaries’ relations with their respective employees are good. No executive
officer (as defined in Rule 501(f) promulgated under the 1933 Act) or other key
employee of the Company or any of the Subsidiaries has notified the Company or
any such Subsidiary that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer’s employment with the Company or
any such Subsidiary. No executive officer or other key employee of the Company
or any of the Subsidiaries is,  to the Company’s knowledge, in
violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or
any other contract or agreement or any restrictive covenant, and the continued
employment of each such executive officer or other key employee (as the case may
be) to the Company’s knowledge does not subject the Company or any of the
Subsidiaries to any liability with respect to any of the foregoing
matters.  The Company and the Subsidiaries are in compliance with all
federal, state, local and foreign laws and regulations respecting labor,
employment and employment practices and benefits, terms and conditions of
employment and wages and hours, except where failure to be in compliance would
not, either individually or in the aggregate, reasonably be expected to result
in a Material Adverse Effect.

       

      (w)           Title. The
Company and the Subsidiaries have good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned by
them which is material to the business of the Company and the Subsidiaries, in
each case, free and clear of all liens, encumbrances and defects except for
Permitted Liens (as defined in the Notes) and such as do not materially affect
the value of such property and do not interfere with the use made and proposed
to be made of such property by the Company and any of the Subsidiaries. Any real
property and facilities held under lease by the Company or any of the
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company or any of
the Subsidiaries.

       

      (x)           Intellectual Property
Rights. The
Company and the Subsidiaries own or possess adequate rights or licenses to use
all trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, original works, inventions, licenses,
approvals, governmental authorizations, trade secrets and other intellectual
property rights and all applications and registrations therefor (“Intellectual Property Rights”)
necessary to conduct their respective businesses as now conducted and as
presently proposed to be conducted.  None of the Company’s or the
Subsidiaries’ material Intellectual Property Rights have expired, terminated or
been abandoned, or are expected to expire, terminate or be abandoned, within
three years from the date of this Agreement.  The Company has no
knowledge of any infringement by the Company or any of the Subsidiaries of
Intellectual Property Rights of others.  There is no claim, action or
proceeding being made or brought, or to the knowledge of the Company or any of
the Subsidiaries, being threatened, against the Company or any of the
Subsidiaries regarding their Intellectual Property Rights, except as disclosed
in the SEC Documents.  The Company is not aware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and each of the Subsidiaries have
taken reasonable security measures to protect the secrecy, confidentiality and
value of all of their Intellectual Property Rights.

       

      (y)           Environmental
Laws. The
Company and the Subsidiaries (i) are in compliance with all Environmental Laws
(as defined herein), (ii) have received all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any such
permit, license or approval where, in each of the foregoing clauses (i), (ii)
and (iii), the failure to so comply could be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect.  The term
“Environmental Laws”
means all federal, state, local or foreign laws relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws relating to emissions, discharges, releases
or threatened releases of chemicals, pollutants, contaminants, or toxic or
hazardous substances or wastes (collectively, “Hazardous Materials”) into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved
thereunder.

       

      (z)           Subsidiary
Rights. The
Company or one of the Subsidiaries has the unrestricted right to vote, and
(subject to limitations imposed by applicable law) to receive dividends and
distributions on, all capital securities of the Subsidiaries as owned by the
Company or such Subsidiary.

      
        
          
          

        

        
          -10-

          
            

          

        

        
          
          

        

      

       

      (aa)           Tax
Status. The
Company and each of the Subsidiaries (i) has timely made or filed all foreign,
federal and state income and all other tax returns, reports and declarations
required by any jurisdiction to which it is subject, (ii) has timely paid all
taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply,
except in each case where the failure to file, pay or set aside would not have a
Material Adverse Effect. There are no unpaid taxes in any material amount
claimed to be due by the taxing authority of any jurisdiction, and the officers
of the Company and the Subsidiaries know of no basis for any such claim. The
Company is not operated in such a manner as to qualify as a passive foreign
investment company, as defined in Section 1297 of the U.S. Internal Revenue Code
of 1986, as amended.

       

      (bb)           Internal Accounting and
Disclosure Controls. The
Company and each of the Subsidiaries maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset and liability accountability, (iii) access to assets or
incurrence of liabilities is permitted only in accordance with management’s
general or specific authorization and (iv) the recorded accountability for
assets and liabilities is compared with the existing assets and liabilities at
reasonable intervals and appropriate action is taken with respect to any
difference. The Company maintains disclosure controls and procedures (as such
term is defined in Rule 13a-14 under the 1934 Act) that are effective in
ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the 1934 Act is recorded, processed, summarized
and reported, within the time periods specified in the rules and forms of the
SEC, including, without limitation, controls and procedures designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the 1934 Act is accumulated and communicated to the
Company’s management, including its principal executive officer or officers and
its principal financial officer or officers, as appropriate, to allow timely
decisions regarding required disclosure. Neither the Company nor any of the
Subsidiaries has received any notice or correspondence from any accountant
relating to any potential material weakness in any part of the system of
internal accounting controls of the Company or any of the
Subsidiaries.

       

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

       

      (dd)           Investment Company
Status. The
Company is not, and upon consummation of the sale of the Securities will not be,
an “investment company,” an affiliate of an “investment company,” a company
controlled by an “investment company” or an “affiliated person” of, or
“promoter” or “principal underwriter” for, an “investment company” as such terms
are defined in the Investment Company Act of  1940, as
amended.

       

      (ee)           Acknowledgement Regarding
Buyers’ Trading Activity. It is
understood and acknowledged by the Company (i) that, other than as contemplated
by Section 2(k), following the public disclosure of the transactions
contemplated by the Transaction Documents, in accordance with the terms thereof,
none of the Buyers have been asked by the Company or any of the Subsidiaries to
agree, nor has any Buyer agreed with the Company or any of the Subsidiaries, 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) that any Buyer, and counter parties
in “derivative” transactions to which any such Buyer is a party, directly or
indirectly, presently may have a “short” position in the Common Stock which were
established prior to such Buyer’s knowledge of the transactions contemplated by
the Transaction Documents, and (iii) that each Buyer 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
following the public disclosure of the transactions contemplated by the
Transaction Documents pursuant to the Press Release (as defined in Section 4(i),
one or more Buyers may engage in hedging and/or trading activities at various
times during the period that the Securities are outstanding, including, without
limitation, during the periods that the value of the Warrant Shares or
Conversion Shares, as applicable, deliverable with respect to the Securities are
being determined and (b) such hedging and/or trading activities, if any, can
reduce the value of the existing stockholders’ equity interest in the Company
both at and after the time the hedging and/or trading activities are being
conducted. The Company acknowledges that such aforementioned hedging and/or
trading activities do not constitute a breach of this Agreement or any other
Transaction Document or any of the documents executed in connection herewith or
therewith.

      
        
          
          

        

        
          -11-

          
            

          

        

        
          
          

        

      

       

      (ff)           Manipulation of
Price. Neither
the Company nor any of the Subsidiaries has, and, to the knowledge of the
Company, no Person acting on their 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 or any of the
Subsidiaries 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, or (iii) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company or any of the Subsidiaries.

       

      (gg)           Transfer
Taxes.  On
the Closing Date, all stock transfer or other taxes (other than income or
similar taxes) which are required to be paid in connection with the sale and
transfer of the Securities to be sold to each Buyer hereunder will be, or will
have been, fully paid or provided for by the Company, and all laws imposing such
taxes will be or will have been complied with.

       

      (hh)           Shell Company
Status. The
Company is not, and has not, since July 6, 2006, been, an issuer identified in
Rule 144(i)(1).

       

      (ii)           Seniority of
Notes. Other
than the Prior Notes, which shall rank pari passu in all respects
with the Notes, no Indebtedness of the Company or any of the Subsidiaries, at
the Closing, will rank senior to, or pari passu with, the Notes in
right of payment, whether with respect to payment or redemptions, interest,
damages, upon liquidation or dissolution or otherwise.

       

      (jj)           Disclosure.  The
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Buyers or their agents or counsel with any information that
constitutes or could reasonably be expected to constitute material, nonpublic
information concerning the Company or any of its Subsidiaries, other than the
existence of the transactions contemplated by this Agreement and the other
Transaction Documents.  The Company understands and confirms that each
of the Buyers will rely on the foregoing representations in effecting
transactions in securities of the Company.  All disclosure provided to
the Buyers regarding the Company and the Subsidiaries, their businesses and the
transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company or any of the Subsidiaries is true and
correct and does not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
Each press release issued by the Company or any of the Subsidiaries during the
twelve (12) months preceding the date of this Agreement did not at the time of
release contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading.  No event or circumstance has occurred or information
exists with respect to the Company or any of the Subsidiaries or its or their
business, properties, liabilities, prospects, operations (including results
thereof) or conditions (financial or otherwise), which, under applicable law,
rule or regulation, requires public disclosure at or before the date hereof or
announcement by the Company but which has not been so publicly announced or
disclosed. The Company acknowledges and agrees that no Buyer makes or has made
any representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Sections 2.

       

      4.           COVENANTS.

       

      (a)           Best
Efforts. Each
party shall use its best efforts timely to satisfy each of the conditions to be
satisfied by it as provided in Sections 6 and 7 of this Agreement.

       

      (b)           Form D and Blue
Sky.  The
Company agrees to file a Form D with respect to the Securities as required under
Regulation D and to provide a copy thereof to each Buyer promptly after such
filing. The Company shall, on or before the Closing Date, take such action as
the Company shall reasonably determine is necessary in order to obtain an
exemption for, or to, qualify the Securities for sale to the Buyers at the
Closing pursuant to this Agreement under applicable securities or “Blue Sky”
laws of the states of the United States (or to obtain an exemption from such
qualification), and shall provide evidence of any such action so taken to the
Buyers on or prior to the Closing Date.  The Company shall make all
filings and reports relating to the offer and sale of the Securities required
under applicable securities or “Blue Sky” laws of the states of the United
States following the Closing Date.

      
        
          
          

        

        
          -12-

          
            

          

        

        
          
          

        

      

       

      (c)           Reporting
Status. Until
the date on which the Buyers shall have sold all of the Registrable Securities
(as defined in Section 4(n) below) (the “Reporting Period”), the
Company shall timely file all reports required to be filed with the SEC pursuant
to the 1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would no longer require or otherwise permit such
termination.

       

      (d)           Use of
Proceeds. The
Company shall use the net proceeds from the sale of the Securities solely as set
forth on Schedule
4(d).

       

      (e)           Financial
Information. The
Company agrees to send the following to each Buyer during the Reporting Period
(i) unless the following are filed with the SEC through EDGAR and are available
to the public through the EDGAR system, within one (1) Business Day after the
filing thereof with the SEC, a copy of its Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q, any interim reports or any consolidated balance
sheets, income statements, stockholders’ equity statements and/or cash flow
statements for any period other than annual, any Current Reports on Form 8-K and
any registration statements (other than on Form S-8) or amendments filed
pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimile
copies of all press releases issued by the Company or any of the Subsidiaries,
unless such press release is otherwise available to the public through the EDGAR
system, and (iii) copies of any notices and other information made available or
given to the shareholders of the Company generally, contemporaneously with the
making available or giving thereof to the shareholders, unless such notices or
other information is otherwise available to the public through the EDGAR
system.

       

      (f)           Listing.  The
Company shall promptly secure the listing of all of the Registrable Securities
upon each national securities exchange and automated quotation system, if any,
upon which the shares of Common Stock are then listed (subject to official
notice of issuance) and shall maintain such listing of all Registrable
Securities from time to time issuable under the terms of the Transaction
Documents on such national securities exchange or automated quotation system.
The Company shall maintain the Common Stock’s authorization for quotation on the
Principal Market, the New York or American Stock Exchange, the Nasdaq Global
Market, the Nasdaq Global Select Market or the Nasdaq Capital Market (each, an
“Eligible Market”). The
Company shall not take any action which could be reasonably expected to result
in the delisting or suspension of the Common Stock on an Eligible Market. The
Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(f).

       

      (g)           Fees.  The
Company shall reimburse MKM or its designee(s) (in addition to any other expense
amounts paid to any Buyer prior to the date of this Agreement) for all
reasonable costs and expenses incurred by it or its affiliates in connection
with the transactions contemplated by the Transaction Documents in an amount not
to exceed $15,000 (including, without limitation, all reasonable legal fees,
documentation and implementation of the transactions contemplated by the
Transaction Documents and due diligence in connection therewith), of which
$10,000 has previously been paid by the Company to MKM, which remaining amount
shall be withheld by MKM from its Purchase Price at the Closing.  The
Company shall be responsible for the payment of any placement agent’s fees,
financial advisory fees, or broker’s commissions (other than for Persons engaged
by any Buyer or Persons claiming rights due to the acts of a Buyer) relating to
or arising out of the transactions contemplated hereby. The Company shall pay,
and hold each Buyer harmless against, any liability, loss or expense (including,
without limitation, reasonable attorneys’ fees and out-of-pocket expenses)
arising in connection with any claim relating to any such payment. Except as
otherwise set forth in the Transaction Documents, each party to this Agreement
shall bear its own expenses in connection with the sale of the Securities to the
Buyers.

       

      (h)           Pledge of
Securities.
Notwithstanding anything to the contrary contained in Section 2(g), the Company
acknowledges and agrees that the Securities may be pledged by a Buyer in
connection with a bona fide margin agreement or other bona fide loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, except as may otherwise be required under applicable
securities laws, and no Buyer effecting a pledge of Securities shall be required
to provide the Company with any notice thereof or otherwise make any delivery to
the Company pursuant to this Agreement or any other Transaction Document. The
Company hereby agrees to execute and deliver such documentation as a pledgee of
the Securities may reasonably request in connection with a pledge of the
Securities to such pledgee by a Buyer.

      
        
          
          

        

        
          -13-

          
            

          

        

        
          
          

        

      

       

      (i)           Disclosure of Transactions
and Other Material Information. The
Company shall, on or before 8:30 a.m., New York time, on the first (1st)
Business Day after the date of this Agreement, issue a press release (the “Press Release”) reasonably
acceptable to the Buyers disclosing all the material terms of the transactions
contemplated by the Transaction Documents. On or before 8:30 a.m., New York
time, on the second (2nd)
Business Day following the date of this Agreement, the Company shall file a
Current Report on Form 8-K describing all the material terms of the transactions
contemplated by the Transaction Documents in the form required by the 1934 Act
and attaching all the material Transaction Documents (including, without
limitation, this Agreement (and all schedules to this Agreement), the form of
the Notes and the form of Warrants) (including all attachments, the “8-K Filing”). From and after
the issuance of the Press Release, the Company shall have disclosed all
material, nonpublic information delivered to any of the Buyers by the Company or
any of the Subsidiaries, or any of their respective officers, directors,
employees or agents (if any) in connection with the transactions contemplated by
the Transaction Documents. The Company shall not, and the Company shall cause
each of the Subsidiaries and each of its and their respective officers,
directors, employees and agents not to, provide any Buyer with any material,
nonpublic information regarding the Company or any of the Subsidiaries from and
after the issuance of the Press Release without the express prior written
consent of such Buyer, except as expressly contemplated by Section 4(m)(viii).
If a Buyer has, or believes it has, received any material, nonpublic information
regarding the Company or any of its Subsidiaries in breach of the immediately
preceding sentence, such Buyer shall provide the Company with written notice
thereof in which case the Company shall, within one (1) Trading Day of the
receipt of such notice, make a public disclosure of all such material nonpublic
information so provided. In the event of a breach of any of the foregoing
covenants by the Company, any of the Subsidiaries, or any of its or their
respective officers, directors, employees and agents (as determined in the
reasonable good faith judgment of such Buyer), in addition to any other remedy
provided herein or in the Transaction Documents, such Buyer shall have the right
to make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material, nonpublic information without the
prior approval by the Company, any of the Subsidiaries, or any of its or their
respective officers, directors, employees or agents. No Buyer shall have any
liability to the Company, any of the Subsidiaries, or any of its or their
respective officers, directors, employees, stockholders or agents, for any such
disclosure of such information.  Subject to the foregoing, neither the
Company nor any Buyer shall issue any press releases or any other public
statements with respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Buyer, to make any
press release or other public disclosure with respect to such transactions (i)
in substantial conformity with the 8-K Filing and contemporaneously therewith
and (ii) as is required by applicable law and regulations (provided that, in the
case of clause (i), each Buyer shall have received a draft of any such press
release or other public disclosure prior to its release).  Without the
prior written consent of any applicable Buyer, the Company shall not (and shall
cause each of the Subsidiaries and affiliates to not) disclose the name of such
Buyer in any filing (other than the 8-K Filing), announcement, release or
otherwise, except as otherwise required by any law, rule or regulation
applicable to the Company after consultation with the Buyer.

       

      (j)           Reservation of
Shares. So long
as any Notes or Warrants remain outstanding, the Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 120% of (i) the maximum number of shares of Common Stock
issuable upon conversion of all the Notes (assuming for purposes hereof, that
the Notes are convertible at the Conversion Price (as defined in the Notes) and
without regard to any limitations on the exercise of the Notes set forth
therein) and (ii) the maximum number of shares of Common Stock issuable upon
exercise of all the Warrants (without regard to any limitations on the exercise
of the Warrants set forth therein).

       

      (k)           Conduct of
Business.  The
business of the Company and the Subsidiaries shall not be conducted in violation
of any law, ordinance or regulation of any governmental entity, except where
such violations would not result, either individually or in the aggregate, in a
Material Adverse Effect.

       

      (l)           Variable Rate
Transaction. Until
all of the Notes have been converted, redeemed or otherwise satisfied in
accordance with their terms, the Company and each Subsidiary shall be prohibited
from effecting or entering into an agreement to effect any Subsequent Placement
involving a “Variable Rate
Transaction,” except in the case where there is a “floor” price
(reasonably acceptable to the Buyers) set in such Variable Rate Transaction. The
term “Variable Rate
Transaction” shall mean a transaction in which the Company or any
Subsidiary (i) issues or sells any Equivalents 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 Equivalents, 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 Equivalents 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, other than pursuant to a
customary “weighted average” anti-dilution provision or (ii) enters into any
agreement (including, but not limited to, an equity line of credit) whereby the
Company or any Subsidiary may sell securities at a future determined price
(other than standard and customary “preemptive” or “participation” rights). Each
Buyer shall be entitled to obtain injunctive relief against the Company and the
Subsidiaries to preclude any such issuance, which remedy shall be in addition to
any right to collect damages.

      
        
          
          

        

        
          -14-

          
            

          

        

        
          
          

        

      

       

      (m)           Participation
Right. From
and after the date hereof and to and through the date that is two (2) years
after the date hereof, neither the Company nor any of the Subsidiaries shall,
directly or indirectly, issue, offer, sell, grant any option to purchase, or
otherwise dispose of (or announce any issuance, offer, sale, grant or any option
to purchase or other disposition of) any of their respective equity or equity
equivalent securities, including, without limitation, any debt, preferred stock,
rights, options, warrants or other instrument that is at any time and under any
circumstances convertible into or exchangeable for, or otherwise entitles the
holder thereof to receive, capital stock and other securities of the Company
(including, without limitation, any securities of the Company or any Subsidiary
which entitle the holder thereof to acquire Common Stock at any time, including
without limitation, any debt, preferred stock, rights, options, warrants or
other instrument that is at any time convertible into or exchangeable for, or
otherwise entitles the holder thereof to receive, Common Stock or other
securities that entitle the holder to receive, directly or indirectly, Common
Stock) (collectively with such capital stock or other securities of the Company,
“Equivalents”) (any such
issuance, offer, sale, grant, disposition or announcement being referred to as a
“Subsequent Placement”),
unless the Company shall have first complied with this Section 4(m). The Company
acknowledges and agrees that the right set forth in this Section 4(m) is a right
granted by the Company, separately, to each Buyer.

       

      (i)           At
least five (5) Trading Days prior to the closing of the Subsequent Placement,
the Company shall deliver to each Buyer a written notice of its intention to
effect a Subsequent Placement (each such notice, a “Pre-Notice”), which Pre-Notice
shall ask such Buyer if it wants to review the details of such financing. 
Upon the request of a Buyer, which shall be within two (2) Trading Days of its
receipt of the Pre-Notice, and only upon a request by such Buyer, the Company
shall promptly, but no later than one (1) Trading Day after such request,
deliver to such Buyer an irrevocable written notice (the “Offer Notice”) of any proposed
or intended issuance or sale or exchange (the “Offer”) of the securities
being offered (the “Offered
Securities”) in a Subsequent Placement, which Offer Notice shall (w)
identify and describe the Offered Securities, (x) describe the price and other
terms upon which they are to be issued, sold or exchanged, and the number or
amount of the Offered Securities to be issued, sold or exchanged, (y) identify
the Persons (if known) to which or with which the Offered Securities are to be
offered, issued, sold or exchanged and (z) offer to issue and sell to or
exchange with such Buyer in accordance with the terms of the Offer all of the
Offered Securities, provided that the
number of Offered Securities which such Buyer shall have the right to subscribe
for under this Section 4(m) shall be (a) based on such Buyer’s pro rata portion
of the aggregate original principal amount of the Notes purchased hereunder by
all Buyers (the “Basic
Amount”), and (b) with respect to each Buyer that elects to purchase its
Basic Amount, any additional portion of the Offered Securities attributable to
the Basic Amounts of other Buyers as such Buyer shall indicate it will purchase
or acquire should the other Buyers subscribe for less than their Basic Amounts
(the “Undersubscription
Amount”).

       

      (ii)           To
accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the fifth (5th)
Business Day after such Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth
the portion of such Buyer’s Basic Amount that such Buyer elects to purchase and,
if such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the “Notice of
Acceptance”). If the Basic Amounts subscribed for by all Buyers are less
than the total of all of the Basic Amounts, then such Buyer who has set forth an
Undersubscription Amount in its Notice of Acceptance shall be entitled to
purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the “Available Undersubscription
Amount”), such Buyer who has subscribed for any Undersubscription Amount
shall be entitled to purchase only that portion of the Available
Undersubscription Amount as the Basic Amount of such Buyer bears to the total
Basic Amounts of all Buyers that have subscribed for Undersubscription Amounts,
subject to rounding by the Company to the extent it deems reasonably necessary.
Notwithstanding the foregoing, if the Company desires to modify or amend the
terms and conditions of the Offer prior to the expiration of the Offer Period,
the Company may deliver to each Buyer a new Offer Notice and the Offer Period
shall expire on the fifth (5th)
Business Day after such Buyer’s receipt of such new Offer Notice.

      
        
          
          

        

        
          -15-

          
            

          

        

        
          
          

        

      

       

      (iii)           The
Company shall have (i) twenty (20) Business Days from the expiration of the
Offer Period above to offer, issue, sell or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by a
Buyer (the “Refused
Securities”) pursuant to a definitive agreement(s) (the “Subsequent Placement
Agreement”), but only to the offerees described in the Offer Notice (if
so described therein) and only upon terms and conditions (including, without
limitation, unit prices and interest rates) that are not more favorable to the
acquiring Person or Persons or less favorable to the Company than those set
forth in the Offer Notice and (ii) fifteen (15) Business Days from the
expiration of the Offer Period to publicly announce (a) the execution of such
Subsequent Placement Agreement, and (b) either (x) the consummation of the
transactions contemplated by such Subsequent Placement Agreement or (y) the
termination of such Subsequent Placement Agreement, which shall be filed with
the SEC on a Current Report on Form 8-K with such Subsequent Placement Agreement
and any documents contemplated therein filed as exhibits thereto.

       

      (iv)           In
the event the Company shall propose to sell less than all the Refused Securities
(any such sale to be in the manner and on the terms specified in Section
4(m)(iii) above), then such Buyer may, at its sole option and in its sole
discretion, reduce the number or amount of the Offered Securities specified in
its Notice of Acceptance to an amount that shall be not less than the number or
amount of the Offered Securities that such Buyer elected to purchase pursuant to
Section 4(m)(ii) above multiplied by a fraction, (i) the numerator of which
shall be the number or amount of Offered Securities the Company actually
proposes to issue, sell or exchange (including Offered Securities to be issued
or sold to Buyers pursuant to this Section 4(m) prior to such reduction) and
(ii) the denominator of which shall be the original amount of the Offered
Securities. In the event that any Buyer so elects to reduce the number or amount
of Offered Securities specified in its Notice of Acceptance, the Company may not
issue, sell or exchange more than the reduced number or amount of the Offered
Securities unless and until such securities have again been offered to the
Buyers in accordance with Section 4(m)(i) above.

       

      (v)           Upon
the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, such Buyer shall acquire from the Company, and the Company
shall issue to such Buyer, the number or amount of Offered Securities specified
in its Notice of Acceptance. The purchase by such Buyer of any Offered
Securities is subject in all cases to the preparation, execution and delivery by
the Company and such Buyer of a separate purchase agreement relating to such
Offered Securities reasonably satisfactory in form and substance to such Buyer
and its counsel.

       

      (vi)           Any
Offered Securities not acquired by a Buyer or other Persons in accordance with
this Section 4(m) may not be issued, sold or exchanged until they are again
offered to such Buyer under the procedures specified in this
Agreement.

       

      (vii)           The
Company and each Buyer agree that if any Buyer elects to participate in the
Offer, neither the Subsequent Placement Agreement with respect to such Offer nor
any other transaction documents related thereto (collectively, the “Subsequent Placement
Documents”) shall include any term or provision whereby such Buyer shall
be required to agree to any restrictions on trading as to any securities of the
Company owned by such Buyer prior to such Subsequent Placement.

       

      (viii)           Notwithstanding
anything to the contrary in this Section 4(m) and unless otherwise agreed to by
such Buyer, the Company shall either confirm in writing to such Buyer that the
transaction with respect to the Subsequent Placement has been abandoned or shall
publicly disclose its intention to issue the Offered Securities, in either case
in such a manner such that such Buyer will not be in possession of any material,
non-public information, by the tenth (10th) day
following delivery of the Offer Notice. If by such twenty-fifth (25th) day,
no public disclosure regarding a transaction with respect to the Offered
Securities has been made, and no notice regarding the abandonment of such
transaction has been received by such Buyer, such transaction shall be deemed to
have been abandoned and such Buyer shall not be deemed to be in possession of
any material, non-public information with respect to the Company or any of the
Subsidiaries. Should the Company decide to pursue such transaction with respect
to the Offered Securities, the Company shall provide such Buyer with another
Offer Notice and such Buyer will again have the right of participation set forth
in this Section 4(m). The Company shall not be permitted to deliver more than
one such Offer Notice to such Buyer in any sixty (60) day period.

       

      (ix)           The
restrictions contained in this Section 4(m) shall not apply in connection with
the issuance of any Excluded Securities (as defined in the Notes). The Company
shall not circumvent the provisions of this Section 4(m) by providing terms or
conditions to one Buyer that are not provided to all.

      
        
          
          

        

        
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      (n)           Piggyback
Registrations.  If,
at any time during the three (3) year period following the date hereof, there is
not an existing and effective registration statement covering all of the
Registrable Securities and the Company shall determine to prepare and file with
the SEC a registration statement relating to an offering for its own account or
the account of others under the 1933 Act of any of its equity securities (other
than on Form S-4 or Form S-8 (each as promulgated under the 1933 Act) or their
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 the company’s stock option or other employee benefit plans),
then the Company shall deliver to each Buyer a written notice of such
determination and, if within fifteen (15) days after the date of the delivery of
such notice, any such Buyer shall so request in writing, the Company shall
include in such registration statement all or any part of such Registrable
Securities such Buyer requests to be registered; provided, however, that the
Company shall not be required to register any Registrable Securities pursuant to
this Section 4(n) that are eligible for resale pursuant to Rule 144 (without
volume restrictions).  For purposes hereof, “Registrable Securities” means
(i) the Conversion Shares issued or issuable upon conversion of the Notes, (ii)
the Warrant Shares issued or issuable upon exercise of the Warrants and (iii)
any capital stock of the Company issued or issuable with respect to the
Conversion Shares, the Warrant Shares, the Notes or the Warrants, including,
without limitation, (1) as a result of any share split, share dividend,
recapitalization, exchange or similar event or otherwise and (2) shares of
capital stock of the Company into which the shares of Common Stock are converted
or exchanged and shares of capital stock of a Successor Entity (as defined in
the Warrants) into which the shares of Common Stock are converted or exchanged,
in each case, without regard to any limitations on conversion of the Notes or
exercise of the Warrants.

       

      (o)           Passive Foreign Investment
Company.  The
Company shall conduct its business in such a manner as will ensure that the
Company will not be deemed to constitute a passive foreign investment company
within the meaning of Section 1297 of the U.S. Internal Revenue Code of 1986, as
amended.

       

      (p)           Restriction on Redemption
and Cash Dividends. So long
as any Notes are outstanding, the Company shall not, directly or indirectly,
redeem, or declare or pay any cash dividend or distribution on, the Common Stock
without the prior express written consent of the Required Holders (as defined in
the Notes).

       

      (q)           DTC
Eligibility. The
Company shall pay all fees to DTC (as defined below) required to be paid, and
shall take all other necessary actions, so that the Company is eligible to
participate in DTC’s Fast Automated Securities Transfer Program no later than
thirty (30) days after the Closing Date.

       

      5.           REGISTER;
TRANSFER AGENT INSTRUCTIONS; LEGEND.

       

      (a)           Register. The
Company shall maintain at its principal executive offices (or such other office
or agency of the Company as it may designate by notice to each holder of
Securities), a register for the Notes and the Warrants in which the Company
shall record the name and address of the Person in whose name the Notes and the Warrants have been
issued (including the name and address of each transferee), the principal amount
of the Notes held by such Person, the number of Conversion Shares issuable upon
conversion of the Notes and the number of Warrant Shares issuable upon exercise
of the Warrants held by such Person. The Company shall keep the register open
and available at all times during business hours for inspection of any Buyer or
its legal representatives, provided such Buyer continues to hold any Notes or
Warrants.

       

      (b)           Transfer Agent
Instructions. The
Company shall issue irrevocable instructions to its transfer agent and any
subsequent transfer agent in the form acceptable to the Buyers (the “Irrevocable Transfer Agent
Instructions”) to issue certificates or credit shares to the applicable
balance accounts at The Depository Trust Company (“DTC”), registered in the name
of each Buyer or its respective nominee(s), for the Conversion Shares and the
Warrant Shares in such amounts as specified from time to time by each Buyer to
the Company upon conversion of the Notes or the exercise of the Warrants (as the
case may be). The Company represents and warrants that no instruction other than
the Irrevocable Transfer Agent Instructions referred to in this Section 5(b),
and stop transfer instructions to give effect to Section 2(g) hereof, will be
given by the Company to its transfer agent with respect to the Securities, and
that the Securities shall otherwise be freely transferable on the books and
records of the Company to the extent provided in this Agreement and the other
Transaction Documents. If a Buyer effects a sale, assignment or transfer of the
Securities in accordance with Section 2(g), the Company shall permit the
transfer and shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such denominations as specified by such Buyer to effect such sale,
transfer or assignment. In the event that such sale, assignment or transfer
involves Conversion Shares or Warrant Shares sold, assigned or transferred
pursuant to an effective registration statement or in compliance with Rule 144,
the transfer agent shall issue such shares to such Buyer, assignee or transferee
(as the case may be) without any restrictive legend in accordance with Section
5(d) below. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to a Buyer. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 5(b) will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 5(b), that a
Buyer shall be entitled, in addition to all other available remedies, to an
order and/or injunction restraining any breach and requiring immediate issuance
and transfer, without the necessity of showing economic loss and without any
bond or other security being required. The Company shall cause its counsel to
issue the legal opinion referred to in the Irrevocable Transfer Agent
Instructions to the Company’s transfer agent on each Effective Date. Any fees
(with respect to the transfer agent, counsel to the Company or otherwise)
associated with the issuance of such opinion or the removal of any legends on
any of the Securities shall be borne by the Company.

      
        
          
          

        

        
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      (c)           Legends. Each
Buyer understands that the certificates or other instruments representing the
Notes and the Warrants and, until such time as the resale of the Conversion
Shares and the Warrant Shares (as the case may be) have been registered under
the 1933 Act as contemplated by Section 4(n) hereof or are eligible for sale
pursuant to Rule 144, the stock certificates representing the Conversion Shares
and the Warrant Shares (as the case may be), except as set forth below, shall
bear any legend as required by the “blue sky” laws of any state and a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):

       

      [NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE
BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

       

      (d)           Removal of
Legends.
Certificates evidencing Securities shall not be required to contain the legend
set forth in Section 5(c) above or any other legend (i) while a registration
statement (including the Registration Statement) covering the resale of such
Securities is effective under the Securities Act, (ii) if such Securities are
eligible to be sold, assigned or transferred under Rule 144 (provided that a
Buyer provides the Company with reasonable assurances that such Securities are
eligible for sale, assignment or transfer under Rule 144 which shall not include
an opinion of counsel), (iii) in connection with a sale, assignment or other
transfer (other than under Rule 144) provided such Buyer provides the Company
with an opinion of counsel to such Buyer, in a generally acceptable form, to the
effect that such sale, assignment or transfer of the Securities may be made
without registration under the applicable requirements of the 1933 Act or (iv)
if such legend is not required under applicable requirements of the 1933 Act
(including, without limitation, controlling judicial interpretations and
pronouncements issued by the SEC). If a legend is not required pursuant to the
foregoing, the Company shall no later than three (3) Trading Days (as defined
below) following the delivery by a Buyer to the Company or the transfer agent
(with notice to the Company) of a legended certificate representing such
Securities (endorsed or with stock powers attached, signatures guaranteed, and
otherwise in form necessary to affect the reissuance and/or transfer, if
applicable), together with any other deliveries from such Buyer as may be
required above in this Section 5(d), as directed by such Buyer, either: (A)
deliver (or cause to be delivered to) such Buyer a certificate representing such
Securities that is free from all restrictive and other legends or (B) credit the
balance account of such Buyer’s or such Buyer’s nominee with DTC with a number
of shares of Common Stock equal to the number of Conversion Shares or Warrant
Shares (as the case may be) represented by the certificate, the conversion
notice or exercise notice (as the case may be) so delivered by such Buyer (the
date by which such certificate is required to be delivered to such Buyer or such
credit is so required to be made to the balance account of such Buyer’s or such
Buyer’s nominee with DTC pursuant to the foregoing is referred to herein as the
“Required Delivery
Date”).

       

      (e)           Failure to Timely Deliver;
Buy-In. If the
Company fails to (i) issue and deliver (or cause to be delivered) to a Buyer by
the Required Delivery Date a certificate representing the Securities so
delivered to the Company by such Buyer that is free from all restrictive and
other legends or (ii) credit the balance account of such Buyer’s or such Buyer’s
nominee with DTC for such number of shares of Conversion Shares or Warrant
Shares so delivered to the Company, then, in addition to all other remedies
available to such Buyer, the Company shall pay in cash to such Buyer on each day
after the Required Delivery Date that the issuance or credit of such shares is
not timely effected an amount equal to 2% of the average VWAP of the Conversion
Shares for the five (5) Trading Day period immediately preceding the Required
Delivery Date multiplied by the number of Conversion Shares or Warrant Shares
(as the case may be) required to be delivered on the Required Delivery Date. In
addition to the foregoing, if the Company fails to so properly deliver such
unlegended certificates or so properly credit the balance account of such
Buyer’s or such Buyer’s nominee with DTC by the Required Delivery Date, and if
on or after the Required Delivery Date such Buyer purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of a
sale by such Buyer of shares of Common Stock that such Buyer anticipated
receiving from the Company without any restrictive legend (a “Buy-In”), then the Company
shall, within three (3) Trading Days after such Buyer’s request and in such
Buyer’s sole discretion, either (i) pay cash to such Buyer in an amount equal to
such Buyer’s total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased (the “Buy-In Price”), at which point
the Company’s obligation to deliver such certificate or credit such Buyer’s
balance account shall terminate and such shares shall be cancelled, or (ii)
promptly honor its obligation to deliver to such Buyer a certificate or
certificates or credit such Buyer’s DTC account representing such number of
shares of Common Stock that would have been issued if the Company timely
complied with its obligations hereunder and pay cash to such Buyer in an amount
equal to the excess (if any) of the Buy-In Price over the product of (A) such
number of shares of Conversion Shares or Warrant Shares (as the case may be)
that the Company was required to deliver to such Buyer by the Required Delivery
Date times (B) the average VWAP of the Common Stock for the five (5) Trading Day
period immediately preceding the Required Delivery Date.

      
        
          
          

        

        
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      For
purposes of this Section 5(e), “VWAP” means, for any security
as of any date, the dollar volume-weighted average price for such security on
the Principal Market (or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded) during the period
beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York
time, as reported by Bloomberg Financial Markets (“Bloomberg”) through its
“Volume at Price” function or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as
reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the
highest closing bid price and the lowest closing ask price of any of the market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC
(formerly the National Quotation Bureau, Inc.). If VWAP cannot be calculated for
such security on such date on any of the foregoing bases, the VWAP of such
security on such date shall be the fair market value as mutually determined by
the Company and the Buyer. If the Company and the Buyer are unable to agree upon
the fair market value of such security, then they shall agree in good faith on a
reputable investment bank to make such determination of fair market value, whose
determination shall be final and binding and whose fees and expenses shall be
borne by the Company. All such determinations shall be appropriately adjusted
for any share dividend, share split or other similar transaction during such
period.  “Trading
Day” means any day on which the Common Stock is traded on the Principal
Market, or, if the Principal Market is not the principal trading market for the
Common Stock, then on the principal securities exchange or securities market on
which the Common Stock is then traded; provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York time).

       

      6.           CONDITIONS
TO THE COMPANY’S OBLIGATION TO SELL.

       

      (a)           The
obligation of the Company hereunder to issue and sell the Notes and the related Warrants
to each Buyer at the Closing is subject to the satisfaction, at or before the
Closing Date, of each of the following conditions, provided that these
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in their sole discretion by providing each Buyer with prior written
notice thereof:

       

      (i)           Such
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company.

       

      (ii)           Such
Buyer shall have delivered to the Escrow Agent the Purchase Price (less, in the
case of MKM, the amount withheld pursuant to Section 4(g)) for the Note and the
related Warrants being purchased by such Buyer at the Closing by wire transfer
of immediately available funds pursuant to the wire instructions provided by the
Company.

       

      (iii)           MKM
shall have entered into a letter agreement with the Company pursuant to which
MKM (i) acknowledges that the Company has complied with Section 4(m) of the
Prior Agreement with respect to the transactions contemplated by this Agreement,
(ii) amends the definition of “Permitted Indebtedness” contained in the Prior
Note so as to provide that the aggregate indebtedness of the Company and its
subsidiaries shall not exceed $1,750,000 and (iii) amends the definition of
“Permitted Liens” and such other terms and provisions of the Prior Notes and
Prior Agreement so as to provide that that the Notes shall be pari passu in all respects
with the Prior Notes.

       

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

       

      7.           CONDITIONS
TO EACH BUYER’S OBLIGATION TO PURCHASE.

       

      (b)           The
obligation of each Buyer hereunder to purchase its Note and its related Warrants
at the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for each
Buyer’s sole benefit and may be waived by such Buyer at any time in its sole
discretion by providing the Company with prior written notice
thereof:

      
        
          
          

        

        
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      (i)           The
Company and each Subsidiary (as the case may be) shall have duly executed and
delivered to such Buyer each of the Transaction Documents to which it is a party
and the Company shall have duly executed and delivered to such Buyer a Note (in
such amount as is set forth across from such Buyer’s name in column (3) of the
Schedule of Buyers and the related Warrants
(for such number of shares of Common Stock as is set forth across from such
Buyer’s name in column (4) of the Schedule of Buyers) being purchased by such
Buyer at the Closing pursuant to this Agreement.

       

      (ii)           Such
Buyer shall have received the opinion of Richardson & Patel LLP, the
Company’s counsel, dated as of the Closing Date, in the form of Exhibit
D attached hereto.

       

      (iii)           The
Company shall have delivered to such Buyer a copy of the Irrevocable Transfer
Agent Instructions, in form acceptable to such Buyer, which instructions shall
have been delivered to and acknowledged in writing by the Company’s transfer
agent.

       

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

       

      (v)           The
Company shall have delivered to such Buyer a certificate evidencing the
Company’s and each Subsidiary’s qualification as a foreign corporation and good
standing issued by the Secretary of State (or comparable office) of each
jurisdiction in which the Company and each Subsidiary conducts business and is
required to so qualify, as of a date within ten (10) days of the Closing
Date.

       

      (vi)           The
Company shall have delivered to such Buyer a certified copy of the Articles of
Incorporation as certified by the Florida Department of State.

       

      (vii)           Each
of the Subsidiaries shall have delivered to such Buyer a certified copy of its
articles or certificate of incorporation as certified by the Secretary of State
(or comparable office) of such Subsidiary’s jurisdiction of
incorporation.

       

      (viii)           The
Company shall have delivered to such Buyer a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as adopted by the Company’s board of
directors in a form reasonably acceptable to such Buyer, (ii) the Articles of
Incorporation of the Company and the organizational documents of each Subsidiary
and (iii) the Bylaws of the Company and the bylaws of each Subsidiary, each as
in effect at the Closing, in the form attached hereto as Exhibit
E.

       

      (ix)           Each
and every representation and warranty of the Company shall be true and correct
in all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall be true and correct as of such date) and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required to be performed,
satisfied or complied with by the Company at or prior to the Closing Date. Such
Buyer shall have received a certificate, executed by the Chief Executive Officer
of the Company, dated as of the Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by such Buyer in the form
attached hereto as Exhibit
F.

       

      (x)           The
Company shall have delivered to such Buyer a letter from the Company’s transfer
agent certifying the number of shares of Common Stock outstanding on the Closing
Date immediately prior to the Closing.

       

      (xi)           The
Common Stock (I) shall be designated for quotation or listed on the Principal
Market and (II) shall not have been suspended, as of the Closing Date, by the
SEC or the Principal Market from trading on the Principal Market nor shall
suspension by the SEC or the Principal Market have been threatened, as of the
Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by
falling below the minimum maintenance requirements of the Principal
Market.

      
        
          
          

        

        
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      (xii)           The
Company shall have obtained all governmental, regulatory or third-party consents
and approvals, if any, necessary for the sale of the Securities, including
without limitation, those required by the Principal Market.

       

      (xiii)           No
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any of
the transactions contemplated by the Transaction Documents.

       

      (xiv)           Since
the date of execution of this Agreement, no event or series of events shall have
occurred that reasonably would have or result in a Material Adverse
Effect.

       

      (xv)           The
Company shall have obtained approval of the Principal Market to list the
Conversion Shares and the Warrant Shares, if required.

       

      (xvi)           The
Company shall have delivered to MKM, an acknowledgment that the consummation of
the transactions contemplated by this Agreement shall constitute a “Dilutive
Issuance” (as such term is defined in each of the Prior Note and Prior Warrant)
which shall, immediately upon the issuance of the Notes and Warrants at the
Closing, result in an adjustment to the  (A) “Conversion Price” (as
defined in the Prior Note) of the Prior Note in accordance with the provisions
of Section 7 of the Prior Note, (B) “Exercise Price” (as defined in the Prior
Warrant) of the Prior Warrant in accordance with the provisions of Section 2 of
the Prior Warrant, and (C) number of Prior Warrant Shares that may be purchased
upon exercise of the Prior Warrant in accordance with the terms of Section 2(c)
of the Prior Warrant.

       

      (xvii)         The
Company and the Subsidiaries shall have delivered to such Buyer such other
documents relating to the transactions contemplated by this Agreement as such
Buyer or its counsel may reasonably request.

       

      8.           TERMINATION.

       

      In the
event that the Closing shall not have occurred with respect to a Buyer on or
before ten (10) days from the date hereof due to the Company’s or such Buyer’s
failure to satisfy the conditions set forth in Sections 6 and 7 above (and a
non-breaching party’s failure to waive such unsatisfied condition(s)), any such
non-breaching party at any time shall have the right to terminate its
obligations under this Agreement with respect to such breaching party on or
after the close of business on such date without liability of such non-breaching
party to any other party; provided, however, that the
abandonment of the sale and purchase of the Notes and the Warrants shall be
applicable only to such non-breaching party providing such written notice; provided further,
notwithstanding any such termination the Company shall remain obligated to
reimburse the non-breaching Buyers for the expenses described in Section 4(g)
above. Nothing contained in this Section 8 shall be deemed to release any party
from any liability for any breach by such party of the terms and provisions of
this Agreement or the other Transaction Documents or to impair the right of any
party to compel specific performance by any other party of its obligations under
this Agreement or the other Transaction Documents.

      
        
          
          

        

        
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      9.           MISCELLANEOUS.

       

      (a)           Governing Law; Jurisdiction;
Jury Trial. All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State 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, 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 brought in an
inconvenient forum or that the venue of such suit, action or proceeding is
improper. 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 to such party at the address for such 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 manner permitted by law.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

       

      (b)           Counterparts. This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party. In
the event that any signature is delivered by facsimile transmission or by an
e-mail which contains a portable document format (.pdf) file of an executed
signature page, such signature page 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 signature page were an original
thereof.

       

      (c)           Headings;
Gender. The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement. Unless the context
clearly indicates otherwise, each pronoun herein shall be deemed to include the
masculine, feminine, neuter, singular and plural forms thereof. The terms
“including,” “includes,” “include” and words of like import shall be construed
broadly as if followed by the words “without limitation.”  The terms
“herein,” “hereunder,” “hereof” and words of like import refer to this entire
Agreement instead of just the provision in which they are found.

       

      (d)           Severability.  If
any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.  Notwithstanding anything to the contrary contained in
this Agreement or any other Transaction Document (and without implication that
the following is required or applicable), it is the intention of the parties
that in no event shall amounts and value paid by the Company and/or the
Subsidiaries (as the case may be), or payable to or received by the Buyers,
under the Transaction Documents, including without limitation, any amounts that
would be characterized as “interest” under applicable law, exceed amounts
permitted under any such applicable law. Accordingly, if any obligation to pay,
payment made to such Buyer, or collection by such Buyer pursuant the Transaction
Documents is finally judicially determined to be contrary to any such applicable
law, such obligation to pay, payment or collection shall be deemed to have been
made by mutual mistake of such Buyer, the Company and the Subsidiaries and such
amount shall be deemed to have been adjusted with retroactive effect to the
maximum amount or rate of interest, as the case may be, as would not be so
prohibited by the applicable law. Such adjustment shall be effected, to the
extent necessary, by reducing or refunding, at the option of such Buyer, the
amount of interest or any other amounts which would constitute unlawful amounts
required to be paid or actually paid to such Buyer under the Transaction
Documents. For greater certainty, to the extent that any interest, charges,
fees, expenses or other amounts required to be paid to or received by such Buyer
under any of the Transaction Documents or related thereto are held to be within
the meaning of “interest” or another applicable term to otherwise be violative
of applicable law, such amounts shall be pro-rated over the period of time to
which they relate.

      
        
          
          

        

        
          -22-

          
            

          

        

        
          
          

        

      

       

      (e)           Entire Agreement;
Amendments. This
Agreement, the other Transaction Documents and the schedules and exhibits
attached hereto and thereto and the instruments referenced herein and therein
supersede all other prior oral or written agreements between the Buyers, the
Company, the Subsidiaries, their affiliates and Persons acting on their behalf
with respect to the matters contained herein and therein (provided that the
foregoing shall not have any effect on any agreements any Buyer has entered into
with the Company or any of its Subsidiaries prior to the date hereof with
respect to any prior investment made by such Buyer in the Company), and this
Agreement, the other Transaction Documents, the schedules and exhibits attached
hereto and thereto and the instruments referenced herein and therein contain the
entire understanding of the parties with respect to the matters covered herein
and therein and, except as specifically set forth herein or therein, neither the
Company nor any Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters.  No provision of this
Agreement may be amended or waived other than by an instrument in writing signed
by the Company and the holders of at least eighty percent (80%) of the then
outstanding principal amount of the Notes issued hereunder, and any amendment or
to, or waiver of any provision of, this Agreement made in conformity with the
provisions of this Section 9(e) shall be binding on all Buyers and holders of
Securities, as applicable, provided that any party may give a waiver in writing
as to itself. No such amendment or waiver (unless given pursuant to the
foregoing proviso) shall be effective to the extent that it applies to less than
all of the holders of the Notes then outstanding. 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
also is offered to all of the parties to the Transaction Documents, holders of
the Notes or holders of the Warrants (as the case may be). The Company has not,
directly or indirectly, made any agreements with any Buyers relating to the
terms or conditions of the transactions contemplated by the Transaction
Documents except as set forth in the Transaction Documents. Without limiting the
foregoing, the Company confirms that, except as set forth in this Agreement, no
Buyer has made any commitment or promise or has any other obligation to provide
any financing to the Company, any Subsidiary or otherwise.

       

      (f)           Notices. Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided confirmation
of transmission is mechanically or electronically generated and kept on file by
the sending party); or (iii) one (1) Business Day after deposit with an
overnight courier service with next day delivery specified, in each case,
properly addressed to the party to receive the same. The addresses and facsimile
numbers for such communications shall be:

       

      If to the
Company:

       

      Valley
Force Composite Technologies, Inc.

      50 East
River Center Blvd., Suite 820

      Covington,
Kentucky 41011

      Telephone:  (859)
581-5111

       

      Facsimile:  (859)
_______

       

      Attention:  Chief
Executive Officer

       

      With a
copy (for informational purposes only) to:

       

      Richardson
& Patel LLP

      The
Chrysler Building

      405
Lexington Avenue, 26th
Floor

      New York,
New York 10174

      Telephone:  (212)
907-6686

       

      Facsimile:  (212)
907-6687

       

      Attention:  Jody
R. Samuels, Esq.

      
        
          
          

        

        
          -23-

          
            

          

        

        
          
          

        

      

       

      If to the
Transfer Agent:

       

      Florida
Atlantic Stock Transfer Inc.

      7130 N.
Nob Hill Road

      Fort
Lauderdale, FL 33321

      Telephone:  (954)
726-4954

       

      Facsimile:  _________________

       

      Attention:  _________________

       

      If to a
Buyer, to its address and facsimile number set forth on the Schedule of Buyers,
with copies to such Buyer’s representatives as set forth on the Schedule of
Buyers,

       

      with a
copy (for informational purposes only) to:

       

      Greenberg
Traurig, LLP

      The
MetLife Building

      200 Park
Avenue, 15th
Floor

      New York,
New York 10166

      Telephone:  (212)
801-9200

      Facsimile:  (212)
801-6400

      Attention:  Spencer
G. Feldman, Esq.

      

      or to
such other address and/or facsimile number and/or to the attention of such other
Person as the recipient party has specified by written notice given to each
other party five (5) days prior to the effectiveness of such change; provided, that
Greenberg Traurig, LLP shall only be provided copies of notices sent to
MKM.  Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be rebuttable
evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

       

      (g)           Successors and
Assigns. This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns, including any purchasers of any of the
Securities. The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the holders of at
least eighty percent (80%) of the aggregate number of Registrable Securities
issued and issuable under the Transaction Documents, including, without
limitation, by way of a Fundamental Transaction (as defined in the Warrants)
(unless the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Warrants). A Buyer may assign some or
all of its rights hereunder in connection with transfer of any of its Securities
without the consent of the Company, in which event such assignee shall be deemed
to be a Buyer hereunder with respect to such assigned rights.

      
        
          
          

        

        
          -24-

          
            

          

        

        
          
          

        

      

       

      (h)           No Third-Party
Beneficiaries. This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns, and is not for the benefit of, nor may any
provision hereof be enforced by, any other Person, other than the Indemnitees
referred to in Section 9(k).

       

      (i)           Survival. The
representations, warranties, agreements and covenants shall survive the Closing.
Each Buyer shall be responsible only for its own representations, warranties,
agreements and covenants hereunder.

       

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

       

      (k)           Indemnification.  In
consideration of each Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each holder of any
Securities and all of their stockholders, partners, members, officers,
directors, employees and direct or indirect investors and any of the foregoing
Persons’ agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”) from and against
any and all actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees
and disbursements (the “Indemnified Liabilities”),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company or any Subsidiary in any of the Transaction Documents, (b) any breach of
any covenant, agreement or obligation of the Company or any Subsidiary contained
in any of the Transaction Documents or (c) any cause of action, suit or claim
brought or made against such Indemnitee by a third party (including for these
purposes a derivative action brought on behalf of the Company or any Subsidiary)
and arising out of or resulting from (i) the execution, delivery, performance or
enforcement of any of the Transaction Documents, (ii) any transaction financed
or to be financed in whole or in part, directly or indirectly, with the proceeds
of the issuance of the Securities, (iii) any disclosure properly made by such
Buyer pursuant to Section 4(i), (iv) the status of such Buyer or holder of the
Securities as an investor in the Company pursuant to the transactions
contemplated by the Transaction Documents, (v) any untrue statement or alleged
untrue statement of a material fact in a registration statement or prospectus
(as amended or supplemented) covering all or any portion of the Registrable
Securities or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(vi) any violation or alleged violation by the Company of the 1933 Act, the 1934
Act, any other law, including without limitation, any state securities law, or
any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities pursuant to a registration statement, except, with
respect to clause (c), to the extent such Indemnified Liability arises from an
Indemnitee’s gross negligence, bad faith or willful misconduct. To the extent
that the foregoing undertaking by the Company may be unenforceable for any
reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.

       

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

       

      (m)           Remedies.  Each
Buyer and each holder of any Securities shall have all rights and remedies set
forth in the Transaction Documents and all rights and remedies which such
holders have been granted at any time under any other agreement or contract and
all of the rights which such holders have under any law. Any Person having any
rights under any provision of this Agreement shall be entitled to enforce such
rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. Furthermore, the Company recognizes
that in the event that it or any Subsidiary fails to perform, observe, or
discharge any or all of its or such Subsidiary’s (as the case may be)
obligations under the Transaction Documents, any remedy at law may prove to be
inadequate relief to the Buyers. The Company therefore agrees that the Buyers
shall be entitled to seek specific performance and/or temporary, preliminary and
permanent injunctive or other equitable relief from any court of competent
jurisdiction in any such case without the necessity of proving actual damages
and without posting a bond or other security.

      
        
          
          

        

        
          -25-

          
            

          

        

        
          
          

        

      

       

      (n)           Withdrawal
Right.
Notwithstanding anything to the contrary contained in (and without limiting any
similar provisions of) the Transaction Documents, whenever any Buyer exercises a
right, election, demand or option under a Transaction Document and the Company
or any Subsidiary does not timely perform its related obligations within the
periods therein provided, then such Buyer may rescind or withdraw, in its sole
discretion from time to time upon written notice to the Company or such
Subsidiary (as the case may be), any relevant notice, demand or election in
whole or in part without prejudice to its future actions and rights

       

      (o)           Payment Set
Aside. To the
extent that the Company or any Subsidiary makes a payment or payments to any
Buyer hereunder or pursuant to any of the other Transaction Documents or any of
the Buyers enforce or exercise their rights hereunder or 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 or any Subsidiary, a trustee, receiver or
any other Person under any law (including, without limitation, any bankruptcy
law, foreign, 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. Unless otherwise expressly indicated, all dollar amounts
referred to in this Agreement and the other Transaction Documents are in United
States Dollars (“US
Dollars”), and all amounts owing under this Agreement and all other
Transaction Documents shall be paid in US Dollars. All amounts denominated in
other currencies shall be converted in the US Dollar equivalent amount in
accordance with the Exchange Rate on the date of calculation. “Exchange Rate” means, in relation to
any amount of currency to be converted into US Dollars pursuant to this
Agreement, the US Dollar exchange rate as published in the Wall Street Journal
on the relevant date of calculation.

       

      (p)           Independent Nature of
Buyers’ Obligations and Rights.  The
obligations of each Buyer under the Transaction Documents are several and not
joint with the obligations of any other Buyer, and no Buyer shall be responsible
in any way for the performance of the obligations of any other Buyer under any
Transaction Document.  Nothing contained herein or in any other
Transaction Document, and no action taken by any Buyer pursuant hereto or
thereto, shall be deemed to constitute the Buyers as, and the Company
acknowledges that the Buyers do not so constitute, a partnership, an
association, a joint venture or any other kind of group or entity, or create a
presumption that the Buyers are in any way acting in concert or as a group or
entity with respect to such obligations or the transactions contemplated by the
Transaction Documents or any matters, and the Company acknowledges that the
Buyers are not acting in concert or as a group, and the Company shall not assert
any such claim, with respect to such obligations or the transactions
contemplated by the Transaction Documents. The decision of each Buyer to
purchase Securities pursuant to the Transaction Documents has been made by such
Buyer independently of any other Buyer. Each Buyer acknowledges that no other
Buyer has acted as agent for such Buyer in connection with such Buyer making its
investment hereunder and that no other Buyer will be acting as agent of such
Buyer in connection with monitoring such Buyer’s investment in the Securities or
enforcing its rights under the Transaction Documents. The Company and each Buyer
confirms that each Buyer has independently participated with the Company in the
negotiation of the transaction contemplated hereby with the advice of its own
counsel and advisors. Each Buyer shall be entitled to independently protect and
enforce its rights, including, without limitation, the rights arising out of
this Agreement or out of any other Transaction Documents, and it shall not be
necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose. The use of a single agreement to effectuate the
purchase and sale of the Securities contemplated hereby was solely in the
control of the Company, not the action or decision of any Buyer, and was done
solely for the convenience of the Company and not because it was required or
requested to do so by any Buyer.  It is expressly understood and
agreed that each provision contained in this Agreement and in each other
Transaction Document is between the Company and a Buyer, solely, and not between
the Company and the Buyers collectively and not between and among the
Buyers.

       

      [signature pages
follow]

      
        
          
          

        

        
          -26-

          
            

          

        

        
          
          

        

      

       

      IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Agreement to
be duly executed as of the date first written above.

       

      COMPANY:

      

      VALLEY FORGE COMPOSITE TECHNOLOGIES,
INC.

       

      By:________________________________________

      Name:

      Title:

       

      Each of
the undersigned, being the Subsidiaries named in the foregoing Securities
Purchase Agreement, hereby acknowledges that it will receive substantial benefit
from the loan described in the Securities Purchase Agreement, and absolutely and
unconditionally guarantees the payment and performance by the Company of all of
its obligations under the Securities Purchase Agreement.  This is a
guaranty of payment and performance (and not merely of collection), and the
Buyers may proceed directly against the undersigned without any requirement to
first proceed or obtain any judgment against or exhaust any remedies with
respect to the Company.  This guaranty shall in no manner be affected
or impaired by (a) any amendment, modification, waiver, consent, compromise or
other indulgence granted to the Company under or in respect of the Securities
Purchase Agreement or any related agreement, (b) any failure by the Buyers to
insist upon strict performance or observance by the Company of any of the terms
of the Securities Purchase Agreement or any related agreement, (c) any
forbearance by the Buyers, (d) any bankruptcy, insolvency, receivership,
reorganization, liquidation or other such proceeding relating to the Company, or
(e) any relief of the Company from any of its obligations as aforesaid by
operation of law, in equity or otherwise.  This guaranty shall be
subject in all cases to any defenses (other than defenses based upon or arising
out of any bankruptcy, insolvency or reorganization of the Company) available to
the Company had the Buyers proceeded directly against the Company rather than
pursuant to this guaranty.

       

      VALLEY FORGE DETECTION SYSTEMS,
INC.

       

      By:________________________________________

      Name:

      Title:

       

      VALLEY FORGE AEROSPACE,
INC.

       

      By:________________________________________

      Name:

      Title:

       

      VALLEY FORGE IMAGING,
INC.

       

      By:________________________________________

      Name:

      Title:

       

      VALLEY FORGE EMERGING TECHNOLOGIES,
INC.

       

      By:________________________________________

      Name:

      Title:

      
        
          
          

        

        
          -27-

          
            

          

        

        
          
          

        

      

      

      IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Agreement to
be duly executed as of the date first written above.

       

      

      
        	 
      	
                BUYERS:

                 

              
	 
      	
                MKM
      OPPORTUNITY MASTER FUND, LLC

                 

                By:______________________________________

                Name:

                Title:

                 

              
	 
      	 
      

      

      

       

       

      

       

      [ADDITIONAL
BUYER SIGNATURE PAGES FOLLOW]

      
        
          
          

        

        
          -28-

          
            

          

        

        
          
          

        

      

       

      IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Agreement to
be duly executed as of the date first written above.

       

      

      
        	 
      	
                BUYERS:

                 

              
	 
      	
                 

                ______________________________________

                Signature

                 

                 

                 

                ______________________________________

                Print
      Name

                 

              
	 
      	 
      

      

      

      

       

      [ADDITIONAL
BUYER SIGNATURE PAGES FOLLOW]

      
        
          
          

        

        
          -29-

          
            

          

        

        
          
          

        

      

       

      SCHEDULE
OF BUYERS

       

       

      
        
           

        

        
          -30-

          
            

          

        

        
           

        

      

       

      EXHIBITS

       

      Exhibit
A                      Form
of Note

      Exhibit
B                      Form
of Warrant

      Exhibit
C                      Form
of Escrow Agreement

      Exhibit
D                     Form
of Company’s Counsel Opinion

      Exhibit
E                      Form
of Secretary’s Certificate

      Exhibit
F                      Form
of Officer’s Certificate

      

      Schedule
3(q)                               Transactions
with Affiliates

      Schedule
3(r)                                Capitalization

      Schedule
3(s)                               Indebtedness
and Other Contracts

      Schedule
3(t)                                Litigation

      Schedule
4(d)                               Use
of Proceeds

      

       

      
        
          
          

        

        
          -31-

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