Document:

Exhibit
10.26

EMPLOYMENT
AGREEMENT

This  EMPLOYMENT AGREEMENT (this “Agreement”), effective as of May 15,
2007, is by and between VNR  Holdings,
LLC, a Delaware limited liability company (“VNR”), Vanguard Natural Resources,
LLC, a Delaware limited liability company (“Parent”), and Britt Pence  (the “Executive”).

WHEREAS, VNR
desires to employ Executive and Executive desires to be employed by VNR in said
capacity;

WHEREAS, the
parties desire to set forth in writing the terms and conditions of their
understandings and agreements;

NOW,
THEREFORE, in consideration of the mutual covenants and obligations contained
herein, VNR hereby agrees to employ Executive and Executive hereby accepts such
employment upon the terms and conditions set forth in this Agreement:

1.               Employment
Period.

(a)           Subject to Sections
8 and 9, VNR hereby agrees to employ Executive, and Executive hereby
agrees to be employed by VNR, in accordance with the terms and provisions of
this Agreement, for the period commencing as of the date hereof (the “Effective Date”) and
ending on  May 15, 2010  (the “Employment Period”); provided, however,
that the Employment Period shall automatically be renewed and extended for a
period of 12 months commencing on May 15, 
2010  and on each subsequent
12-month period thereafter  unless at least ninety (90) days prior to the ensuing expiration date (but no
more than nine (9) months
prior to such expiration date), VNR or Executive shall have given ninety (90)
days written notice to the other that it or he, as applicable, does not wish to
extend, or continue to extend, this Agreement (a “Non-Renewal
Notice”), in which case Executive’s employment
shall terminate on the expiration date of the 12-month Employment Period in
which such Non-Renewal Notice is given. 
The term “Employment Period,”
as utilized in this Agreement, shall refer to the Employment Period as so
automatically extended.

(b)           During the
term of Executive’s employment with VNR, Executive shall serve as the  Vice President, Engineering of VNR and the
Parent (together, the “Company”)  and in
so doing, shall report to the Chief Executive Officer, the Executive Vice
President and the Board of Directors (“Board”), as applicable, of the
Company.  Executive shall have
supervision and control over, and responsibility for, such management and
operational functions of the Company currently assigned to such position, and
shall have such other powers and duties (including holding officer positions
with the Company and one or more subsidiaries of the Company) as may from time
to time be prescribed by the Chief Executive Officer or the Executive Vice
President, and, to the extent necessary, as acted on by the Board of the
Company or the Board of 

a subsidiary of the Company, so long as such powers and duties are
reasonable and customary for the Executive 
of an enterprise comparable to the Company.

(c)           During the
term of Executive’s employment with VNR, and excluding any periods of vacation
and sick leave to which Executive is entitled, Executive agrees to devote
substantially all of his business time to the business and affairs of VNR and,
to the extent necessary to discharge the responsibilities assigned to Executive
hereunder, to use Executive’s  best
efforts to perform faithfully, effectively and efficiently such responsibilities.  During the term of Executive’s employment
with VNR, it shall not be a violation of this Agreement for Executive to (i)
serve on corporate, civic or charitable boards or committees, (ii) deliver
lectures or fulfill speaking engagements and (iii) manage personal investments,
so long as such activities do not materially interfere with the performance of
Executive’s responsibilities as an employee of the Company in accordance with
this Agreement, as determined by the Chief Executive Officer in his sole
discretion.

(d)           The parties
expressly acknowledge that any performance of Executive’s responsibilities
hereunder shall necessitate, and the Company shall provide, access to or the
disclosure of Confidential Information (as defined in Section 14(a) below)
to Executive and that Executive’s responsibilities shall include the
development of the Company’s goodwill through Executive’s contacts with the
Company’s customers and suppliers.

2.               Compensation.

VNR shall pay Executive a base salary (“Base Salary”) at the
rate of $200,000 per annum for the period commencing on the Effective Date and
ending on the Date of Termination (as defined in Section 8(i)
below).  Base Salary shall be payable in
accordance with the ordinary payroll practices of VNR.  Any increase in Base Salary shall be in the
discretion of the Board and, as so increased, shall constitute “Base Salary”
hereunder.

3.               Employee
Benefits.

(a)           During the
Employment Period, VNR shall provide Executive with coverage under all employee
pension and welfare benefit programs, plans and practices, which VNR makes
available to its senior executives (including, without limitation,
participation in health, dental, group life, disability, retirement and all
other plans and fringe benefits to the extent generally provided to such senior
executives), commensurate with his position in the Company,  to the extent permitted under the employee
benefit plan or program, and in accordance with the terms of the program and/or
plan.

(b)           Executive
shall be entitled to vacation time generally available to executive employees
of VNR (but no less than 15 business days paid vacation in each calendar year,
to be pro-rated for the 2007 calendar year). 
Such vacation time shall accrue at a rate of 1.25 vacation days for each
calendar month worked; provided, however, that during any given calendar
year, Executive shall be able to take vacation days that will accrue during
that calendar year, even if such days have not yet accrued.  A maximum of five  (5) business days of accrued but
unused vacation may be carried over from one calendar year to the next.

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(c)           Executive is
authorized to incur reasonable expenses in carrying out his duties and
responsibilities under this Agreement and promoting the business of the
Company, including, without limitation, reasonable expenses for travel,
lodgings, entertainment and similar items related to such duties and
responsibilities, in accordance with the Company’s policies that are in effect
from time to time.  VNR will reimburse
Executive for all such expenses upon presentation by Executive from time to
time of appropriately itemized and approved (consistent with VNR’s policy)
accounts of such expenditures.

4.               Class
B Units and Unit Options. As a matter of separate inducement and not
in lieu of any salary or other compensation for Executive’s services:

(a)           Upon
completion of an IPO, Executive shall be granted 50,000 Class B common units of
the Parent. if still employed on the IPO date. The Class B common units will be
entitled to all distributions and other rights as set forth in the limited
liability agreement for Parent (the “LLC Agreement”). The Class B units are
non-transferable until such time as they have become vested and converted to
common units of Parent at the election of the Executive. Executive’s Class B
common units will vest on the third anniversary date of this agreement however,
in the event of Executive’s death or disability, any unvested Class B common
units will become fully vested.

(b)           In the event
Parent, or its successors or assigns undertakes a successful IPO, resulting in
the establishment of a publicly traded company, the Executive will be granted
options to purchase 75,000 common units of Parent at the IPO Price if still
employed on the IPO date. Said options will expire five (5) years after
issuance or upon termination of employment, if earlier.

(c)           For purposes hereof:

(i)            “IPO” means a qualified public offering of the Parent’s
common units;

(ii)           “IPO Price” means the price of the Parent’s common units
at the offering price in the IPO; and

(iii)          The rights hereunder to
Executive’s Class B common units are not transferable and may not be assigned,
transferred, pledged or hypothecated in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment or similar
proceeding.  Any attempted assignment,
transfer, pledge, hypothecation or other disposition of such rights contrary to
the provisions hereof, and the levy of any attachment or similar proceeding
upon such rights, shall be null and void and without effect.

5.             Acceleration
and Termination of Rights to Class B common units.

(a)           Acceleration and
Termination.  In addition to the
foregoing, Executive’s Class B common units shall immediately and automatically
become fully vested and unrestricted, upon the earlier of:

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(i)            the time
immediately prior to the consummation of a “Change of Control” (being defined
herein as such time as an offer to purchase the assets or the securities of the
Parent (“Offer”) has been approved by the Board and accepted and approved by
unitholders owning not less than 66 2/3% of the total outstanding common units,
it being expressly understood that an IPO does not constitute a Change of
Control of the Parent) of the Parent or its successors or assigns, that results
in net proceeds to each Member  equal to
or greater than the greater of (A) the Fair Market Value (as such term is
defined in the  LLC Agreement) of such
Member’s Membership Interests (as such term is defined in the  LLC Agreement) and (B) the aggregate capital
contributions made to the Parent as of such date by the party making the Offer;
or

(ii)           the date Executive’s
employment is terminated by VNR for reasons other than Cause (as defined in Section
8(b) below); or

(iii)          the date Executive’s
employment is terminated by Executive for Good Reason (as defined in Section
8(e) below).

(b)           Notwithstanding
anything to the contrary in this Agreement, Executive’s rights hereunder to the
unvested Class B units and options shall terminate automatically and without
notice upon termination of Executive’s employment prior to the third
anniversary of this Agreement if such termination is:

(i)            by VNR for Cause
pursuant to Section 8(b); or

(ii)           by Executive for
other than Good Reason pursuant to Section 8(e).

6.             Sale of Parent Prior
to an IPO.

Notwithstanding anything
herein to the contrary, in the event a sale of the Parent, or substantially all
of the assets of the Parent, occurs prior to an IPO, then Executive shall be
entitled to 0.42% of the net proceeds of such sale, provided that Executive is
employed by VNR on the date of such. 
Said net proceeds shall consist of any cash and stock (including any
limited liability company or limited partnership units) consideration paid for
the assets of the Parent in excess of any outstanding debt burdening such
assets. Such payment shall be made to Executive within ten (10) business days
following consummation of the transaction. 
In this event, this payment shall be the sole compensation paid to Executive.

7.             Sale of Parent
Subsequent to an IPO.

Notwithstanding anything herein to the contrary, in the event of a sale
of the Parent, or substantially all of the assets of the Parent, or its
successors or assigns, after the IPO, then Executive shall be entitled to (i)
his Accrued Compensation and Reimbursements as defined in Section 8(a)
plus (ii) a Severance Payment as defined in Section 8(a), provided that
Executive is employed by VNR on the date of such sale.  Such payment shall be made to Executive
within ten (10) business days following consummation of the transaction.

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8.             Termination of
Employment.

(a)           Either
Executive or VNR, by action of the Board, may terminate this Agreement, and
Executive’s employment by VNR, for any reason after providing thirty (30) days
written notice to the non-terminating party. 
If pursuant to this provision Executive terminates this Agreement and,
thereby, his employment  for any reason
other than Good Reason (as defined in Section 8(e) below), VNR will pay
Executive on the Date of Termination (i) all accrued but unpaid Base Salary,
(ii) a prorated amount of Executive’s Base Salary for accrued but unused
vacation days, and (iii) reimbursements for any reasonable and necessary
business expenses incurred by Executive in accordance with the Company’s
policies prior to the Date of Termination in connection with his duties
hereunder (such amounts collectively, “Accrued Compensation and Reimbursements”).  If
Executive terminates this Agreement and, thereby, his employment for Good
Reason as defined in Section 8(e), the provisions of Section 8(e) shall
apply to such termination of employment. 
Upon termination by VNR of this Agreement and a resulting termination of
Executive’s employment pursuant to this Section 8(a) for any reason other
than for Cause (as defined in Section 8(b) below),  within ten (10) business days after the Date
of Termination, VNR shall pay (i) Executive’s Accrued Compensation and
Reimbursements plus (ii) a payment (a “Severance Payment”) equal to the greater of
Executive’s Base Salary (at the rate in effect hereunder at the Date of
Termination) (i) for thirty-six (36) months or (ii) the remaining duration of
the Employment Period.  Upon such
payments by VNR, Executive shall not be entitled to any additional payments or
consideration from the Company (such as additional vesting of the units or
options, if any, issued pursuant to Section 4), except as required as a
result of Executive’s participation in any employee benefit plans or programs
of the Company.  If VNR terminates this
Agreement and Executive’s employment for Cause as defined in Section 8(b), the
provisions of Sections 8(b), (c), and (d) shall apply to such termination of
employment.

(b)           VNR, by
action of the Board, may terminate this Agreement and, thereby, Executive’s
employment at any time for Cause, subject to the applicable cure periods
following written demand as described in this Section 8(b) and the
notice requirement described in Section 8(d) below.  Upon termination by VNR for Cause, Executive
shall only be entitled to Accrued Compensation and Reimbursements, which amount
shall be paid within ten (10) business days after the Date of Termination.  For purposes hereof, “Cause” means any of
the following:

(i)            Executive’s commission of
theft, embezzlement, any other act of dishonesty relating to his employment
with VNR or any willful violation of any law, rules or regulation applicable to
the Company, including, but not limited to, those laws, rules or regulations
established by the Securities and Exchange Commission, or any self-regulatory organization
having jurisdiction or authority over Executive or the Company; or

(ii)           Executive’s conviction of, or
Executive’s plea of guilty or nolo contendere to, any felony or of any other
crime involving fraud, dishonesty or moral turpitude; or

(iii)          A determination by the Board
that Executive has materially breached this Agreement where such breach is not
remedied within ten (10) days after written demand by the Board for substantial
performance is actually received by Executive which specifically identifies the
manner in which the Board believes Executive has so breached; or

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(iv)          Executive’s willful and
continued failure to perform his reasonable and customary duties as the Vice
President, Engineering which such failure is not remedied within ten (10) days
after written demand by the Chief Executive Officer for substantial performance
is actually received by Executive which specifically identifies the nature of
such failure.

(c)           For purposes
of this provision, no act or failure to act, on the part of Executive, shall be
considered “willful” unless it is done, or omitted to be done, by Executive in
bad faith or without reasonable belief that Executive’s action or omission was
in, or not opposed to, the best interests of the Company.  Any act, or failure to act, based upon
authority given by the Board or based upon the advice of counsel for VNR shall
be conclusively presumed to be done, or omitted to be done, by Executive in
good faith and in the best interests of the Company.

(d)           VNR, by
action of the Board, may terminate Executive’s employment for Cause
after providing written notice to Executive, which identifies the Cause
for Executive’s termination (which notice must be given within ninety (90) days
after the actual discovery of the act(s) or omission(s) constituting such
Cause).

(e)           Executive may
terminate this Agreement for Good Reason, and thereby resign his employment,
after providing thirty (30) days’ written notice to the Company (which notice
must be given within ninety (90) days after the occurrence of the act(s) or
omission(s) constituting Good Reason). 
For purposes hereof, “Good Reason” means any of the following reasons
occurring without the written consent of Executive:

(i)            A material diminution in
Executive’s Base Salary; or

(ii)           Executive’s removal from his
position as Vice President, Engineering of the Company, other than for Cause,
as set forth in Section 8(b), or by death or disability, as set forth in
Sections 8(g) and 8(h), during the term of this Agreement, which
results in a material diminution in Executive’s authority, duties, or
responsibilities; or

(iii)          Any other material diminution
in Executive’s authority, duties, or responsibilities; or

(iv)          A change in Executive’s
principal place of business to a location 50 or more miles from its location as
of the Effective Date; or

(v)           Any action or inaction that
constitutes a material breach by VNR of this Agreement (other than a failure to
make a payment to Executive required under this Agreement, which is subject to
the provisions described in paragraph (vi) below), which materially adversely
affects Executive, if the breach is not cured within twenty (20) days after
Executive provides written notice to VNR which identifies in reasonable detail
the nature of the breach; or

(vi)          A material breach by VNR of
this Agreement resulting from VNR’sfailure to make any payment to Executive
required to be made under the terms of this Agreement, if the breach is not
cured within thirty (30) days after Executive provides written notice to the
VNR which provides in reasonable detail the nature of the payment.

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(f)               In the
event Executive terminates this Agreement and, thereby, his employment for Good
Reason, within ten (10) business days after the Date of Termination, VNR shall
pay Executive (i) his Accrued Compensation and Reimbursements plus (ii) a
Severance Payment.

(g)              VNR, by
action of the Board, may terminate this Agreement and, thereby, Executive’s
employment at any time if Executive shall be deemed in the reasonable judgment
of the Board to have sustained a “disability.” 
Executive shall be deemed to have sustained a “disability” if and only
if he shall have been unable to substantially perform his duties as an employee
of VNR as a result of sickness or injury, and shall have remained unable to
perform any such duties for a period of more than 180 consecutive days in any
12-month period.  Upon termination of
this Agreement and Executive’s employment for disability, if such termination
constitutes a “separation from service” within the meaning of § 409A of the
Internal Revenue Code of 1986, as amended (the “Code”) and the applicable
Treasury regulations thereunder, VNR shall pay Executive (i) his Accrued
Compensation and Reimbursements plus (ii) a payment equal to Executive’s
Base Salary for twelve (12) months. 
Notwithstanding the foregoing, if Executive is a “specified employee”
within the meaning of Treas. Reg. § 1.409A-1(i), such 12-month Base Salary
payment may not be made before the date that is six (6) months after the date
of Executive’s separation from service due to disability.

(h)              This
Agreement will terminate automatically upon Executive’s death.  Upon termination of this Agreement because of
Executive’s death, VNR shall pay Executive’s estate (i) Executive’s Accrued
Compensation and Reimbursements, plus (ii) a payment equal to Executive’s Base
Salary for twelve (12) months.

(i)                As used
in this Agreement, “Date
of Termination” means (i) if Executive’s employment is
terminated by his death, the date of his death; (ii) if Executive’s employment is
terminated as a result of a disability or by VNR for Cause or without Cause,
then the date specified in a notice delivered to Executive by VNR of such
termination, (iii) if Executive’s employment is terminated by Executive for
Good Reason, then the date specified in the notice of such termination
delivered to VNR by Executive, or the end of an applicable cure period
available to VNR under Section 8(e), if later, (iv) if Executive’s
employment terminates due to the giving of a Non-Renewal Notice, the last day
of the Employment Period, and (v) if Executive’s employment is terminated for
any other reason, the date specified therefore in the notice of such
termination.

9.               Early Termination
Option.

Notwithstanding
the terms and conditions of Section 8 above, it is hereby agreed and
understood between VNR and Executive that in the event an IPO of Parent has not
occurred prior to October 1, 2007, VNR can elect to terminate this Agreement in
its entirety provided VNR will make a payment of one (1) year’s Base Salary to
Executive upon said termination.  Should
VNR elect this option, it will provide Executive with written notice by
September 1, 2007, and the termination will be effective as of October 1, 2007.

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10.             Repurchase and Forfeiture of Securities.

(a)           If this Agreement is terminated
pursuant to Sections 8(g) or 8(h), the Company shall have the
right, but not the obligation, for a period ninety (90) days after the date of
such termination to redeem or repurchase, as the case may be, or to assign to
any other person the right to purchase, all or any number of the securities of
Parent held by Executive at an aggregate purchase price equal to the Fair
Market Value thereof.  If Executive, or
his heirs and assigns, and the Company cannot agree within ten (10) business
days of the Date of Termination, the Company shall select an independent
investment banking firm to determine the fair market value, which determination
shall be final and binding upon both parties.

(b)           If
this Agreement is terminated by Executive pursuant to Section 8(a) at
any time prior to the second anniversary of the date of this Agreement, then
any restricted securities or rights to acquire securities of Parent will
immediately and automatically and without notice be forfeited or if this
Agreement is terminated by VNR pursuant to Section 8(b), all of
Executive’s unvested rights, title and interest in, under and to the Company,
the LLC Agreement and securities of Parent shall be forfeited.

(c)           The
closing of a purchase and sale under this Section 10 shall take place on
the tenth business day following the determination of fair market value at
10:00 a.m., local time, in the offices of the Company, or on such other date
and at such other time and place as may be agreed upon by the Company and
Executive (the “Closing
Date”).  On the Closing
Date (i) Executive shall take all action necessary to convey the
securities, free and clear of all Liens (as defined in the LLC Agreement) and
(ii) the Company shall tender the purchase price to Executive in cash.

11.             Employment.

Upon
termination of this Agreement, Executive’s employment shall also terminate and
cease, and Executive shall be deemed to have voluntarily resigned as an officer
and from the Board, if Executive is a member of the Board.

12.             Mitigation.

Upon
termination of this Agreement for any reason, amounts to be paid per the
express terms of this Agreement shall not be reduced whether or not Executive
obtains other employment.

13.             Release.

Notwithstanding
any other provision in this Agreement to the contrary, as a condition precedent
to receiving the Severance Payment set forth in this Agreement, Executive
agrees to execute (and not revoke) a customary severance and release agreement,
including a waiver of all claims, reasonably acceptable to the Company (the “Release”).  If Executive fails to execute and deliver the
Release, or revokes the Release, Executive agrees that he shall not be entitled
to receive the Severance Payment.  For
purposes of this Agreement, the Release shall be considered to have been executed
by Executive if it is signed by his legal representative in the case of legal
incompetence or on behalf of Executive’s estate in the case of his death.

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14.             Nondisclosure.

(a)           Executive
shall, immediately upon executing this Agreement, receive access to some or all
of the Company’s various trade secrets and confidential or proprietary
information, including information he has not received before, consisting of,
but not limited to, information relating to (i) business operations and
methods, (ii) existing and proposed investments and investment strategies,
(iii) financial performance, (iv) compensation arrangements and
amounts (whether relating to the Company or to any of its employees),
(v) contractual relationships, (vi) business partners and relationships,
and (vii) marketing strategies (all of the forgoing, “Confidential Information”).  Confidential Information shall not include:
(A) information that Executive may furnish to third parties regarding his
obligations under this Section 14 and under Section 15
or (B) information that (1) is general knowledge of Executive or
information that becomes generally available to the public by means other than
Executive’s breach of this Section 14 (for example, not as a result
of Executive’s unauthorized release of marketing materials), (2) is in
Executive’s possession, or becomes available to Executive, on a
non-confidential basis, from a source other than the Company or
(3) Executive is required by law, regulation, court order or discovery
demand to disclose; provided, however, that in the case of
clause (3), Executive gives the Company, to the extent permitted by law,
reasonable notice prior to the disclosure of the Confidential Information and
the reasons and circumstances surrounding such disclosure to provide the
Company an opportunity to seek a protective order or other appropriate request
for confidential treatment of the applicable Confidential Information.

(b)           Executive
agrees that all Confidential Information, whether prepared by Executive or
otherwise coming into his possession, shall remain the exclusive property of
the Company during Executive’s employment with the Company.  Executive further agrees that Executive shall
not, except for the benefit of the Company pursuant to the exercise of his
duties in accordance with this Agreement or with the prior written consent of
the Company, use or disclose to any third party any of the Confidential
Information described herein, directly or indirectly, either during Executive’s
employment with the Company or at any time following the termination of
Executive’s employment with the Company.

(c)           Upon
termination of this Agreement, Executive agrees that all Confidential
Information and other files, documents, materials, records, notebooks, customer
lists, business proposals, contracts, agreements and other repositories
containing information concerning the Company or the business of the Company
(including all copies thereof) in Executive’s possession, custody or control,
whether prepared by Executive or others, shall remain with or be returned to
the Company as soon as practicable after the Date of Termination.

15.           Non-Competition and Non-solicitation.

(a)           As
part of the consideration for the compensation and benefits to be paid to
Executive hereunder, to protect Confidential Information of the Company and its
customers and clients that have been and will be entrusted to Executive, the
business goodwill of the Company and its subsidiaries that will be developed in
and through Executive and the business opportunities that will be disclosed or
entrusted to Executive by the Company and its subsidiaries, and as an
additional incentive for the Company to enter into this Agreement, if
termination is (i) as a result of Executive’s voluntary termination under Section
8(a) and a 

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termination of employment by Executive for Good Reason under Section
8(e).  or (ii) by the Company for
Cause under Section 8(b), from the date hereof through the first
anniversary of the Date of Termination (the “Restricted Period”), Executive will not
(other than for the benefit of the Company pursuant to this Agreement),
directly or indirectly:

(i)            engage in, or carry on or
assist, individually or as a principal, owner, officer, director, employee,
shareholder, consultant, contractor, partner, member, joint venturer, agent,
equity owner or in any other capacity whatsoever (in any such capacity, an “Investor”), any (1) any
business directly competitive with the business in which the Company is engaged
from time to time (“Competing
Business”) or (2) Business Enterprise (as defined below) that is
otherwise directly competitive with the Company within the States of Tennessee
and Kentucky;

(ii)           perform for any corporation,
partnership, limited liability company, sole proprietorship, joint venture or
other business association or entity (a “Business
Enterprise”) engaged in any Competing Business any duty
Executive has performed for the Company that involved Executive’s access to, or
knowledge or application of, Confidential Information;

(iii)          induce or attempt to induce any
customer, supplier, licensee or other business relation of the Company to cease
doing business with the Company or in any way interfere with the relationship
between any such customer, supplier, licensee or business relation and the
Company;

(iv)          induce or attempt to induce any
customer, supplier, licensee or other business relation of the Company with
whom Executive had direct business contact in dealings during the Employment
Period in the course of his employment with the Company to cease doing business
with the Company or in any way interfere with the relationship between any such
customer, supplier, licensee or business relation and the Company; or

(v)           solicit with the purpose of
hiring or hire any person who is or, within 180 days after such person ceased
to be an employee of the Company, was an employee of the Company.

(b)           Notwithstanding
the foregoing restrictions of this Section 15, nothing in this Section
15 shall prohibit (A) any investment by Executive, directly or indirectly,
in securities which are issued by a Business Enterprise involved in or
conducting a Competing Business, provided that Executive, directly or
indirectly, does not own more than 5% of the outstanding equity or voting
securities of such Business Enterprise or (B) Executive, directly or
indirectly, from owning any interest in any Business Enterprise which conducts
a Competing Business if such interest in such Business Enterprise is owned as
of the date of this Agreement and Executive does not have the right, in the case
of (A) or (B), through the ownership of a voting interest or otherwise, to
direct the activities of or associated with the business of such Business
Enterprise.

 

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(c)           Executive
acknowledges that each of the covenants of Section 15(a) are in addition
to, and shall not be construed as a limitation upon, any other covenant
provided in Section 15(a). 
Executive agrees that the geographic boundaries, scope of prohibited
activities, and time duration of each of the covenants set forth in Section
15(a) are reasonable in nature and are no broader than are necessary to
maintain the confidentiality and the goodwill of the Company’s proprietary and
Confidential Information, plans and services and to protect the other
legitimate business interests of the Company, including without limitation the
goodwill developed by Executive with Company’s customers, suppliers, licensees
and business relations.

(d)           If,
during any portion of the Restricted Period, Executive is not in compliance
with the terms of Section 15(a), the Company shall be entitled to, among
other remedies, compliance by Executive with the terms of Section 15(a)
for an additional period of time (i.e., in addition to the Restricted Period)
that shall equal the period(s) over which such noncompliance occurred.

(e)           The
parties hereto intend that the covenants contained in Section 15(a) be
construed as a series of separate covenants, one for each defined province in
each geographic area in which Executive on behalf of the Company conducts
business.  Except for geographic
coverage, each such separate covenant shall be deemed identical in terms to the
applicable covenant contained in Section 15(a).  Furthermore, each of the covenants in Section
14(a) shall be deemed a separate and independent covenant, each being
enforceable irrespective of the enforceability (with or without reformation) of
the other covenants contained in Section 15(a).

16.           Survival
of Covenants.

Sections
14 and 15 shall survive the expiration or termination
of this Agreement for any reason, except that the restrictions of Section 15
shall not apply in the event Executive’s employment is terminated as a result
of (i) the winding up, dissolution, or liquidation of the Company, (ii) the
merger, consolidation or sale of substantially all of the assets of the
Company, or (iii) the sale, transfer or other disposition of all of the equity
securities of the Company, other than, in the case of clauses (ii) and (iii),
in connection with a Permitted Transfer (as such term is defined in the LLC
Agreement).  Executive further agrees to
notify all future persons, funds or businesses, with which he becomes
affiliated with or employed by during the Restricted Period, of the restrictions
set forth in Sections 14 and 15, prior to the commencement of any
such affiliation or employment.

17.           Notices.

All
notices and other communications required or permitted to be given hereunder
shall be in writing and shall be deemed to have been duly given if delivered
personally, mailed by certified mail (return receipt requested) or sent by
overnight delivery service to the parties at the following addresses or at such
other addresses as shall be specified by the parties by like notice, in order of
preference of the recipient:

	
  

  	
  To VNR:

  	
  To the Executive:

  
	
   

  	
   

  	
   

  
	
   

  	
  7700 San Felipe, Suite 485

  	
   

  
	
   

  	
  Houston, Texas 77063

  	
  Houston, TX

  
	
   

  	
  Facsimile: (832) 327-2260

  	
  Facsimile:

  

 

 11
 

Notice so
given shall, in the case of mail, be deemed to be given and received on the
fifth calendar day after posting, and in the case overnight delivery service,
on the date of actual delivery.

18.           Severability and
Reformation.

If
any one or more of the terms, provisions, covenants or restrictions of this
Agreement shall be determined by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions shall remain in full force and effect, and the
invalid, void or unenforceable provisions shall be deemed severable.  Moreover, if any one or more of the
provisions contained in this Agreement shall for any reason be held to be
excessively broad as to duration, geographical scope, activity or subject, it
shall be reformed by limiting and reducing it to the minimum extent necessary,
so as to be enforceable to the extent compatible with the applicable law as it
shall then appear.

19.           Assignment.

This Agreement
shall be binding upon and inure to the benefit of the heirs and legal
representatives of Executive and the permitted assigns and successors of the
Company, but neither this Agreement nor any rights or obligations hereunder
shall be assignable or otherwise subject to hypothecation by Executive (except
by will or by operation of the laws of intestate succession) or by the Company,
except that the Company may assign this Agreement to any successor (whether by
merger, purchase or otherwise) to all or substantially all of the stock assets
or businesses of the Company, if such successor expressly agrees to assume the
obligations of the Company hereunder.

20.           Amendment.

This
Agreement may be amended only by writing signed by Executive and by a duly
authorized representative of VNR (other than Executive).

21.           Assistance
in Litigation.

Executive
shall reasonably cooperate with the Company in the defense or prosecution of
any claims or actions now in existence or that may be brought in the future
against or on behalf of the Company that relate to events or occurrences that
transpired while Executive was employed by the Company.  Executive’s cooperation in connection with
such claims or actions shall include, but not be limited to, being available to
meet with counsel to prepare for discovery or trial and to act as a witness on
behalf of the Company at mutually convenient times.  Executive also shall cooperate fully with the
Company in connection with any investigation or review by any federal, state,
or local regulatory authority as any such investigation or review relates, to
events or occurrences that transpired while Executive was employed by the
Company.  The Company will pay Executive
an agreed upon reasonably hourly rate for Executive’s cooperation pursuant to
this Section 22.

 12
 

 

22.           Beneficiaries;
References.

Executive
shall be entitled to select (and change, to the extent permitted under any
applicable law) a beneficiary or beneficiaries to receive any compensation or
benefit payable hereunder following Executive’s death, and may change such
election, in either case by giving the Company written notice thereof.  In the event of Executive’s death or a
judicial determination of his incompetence, reference in this Agreement to
Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative. 
Any reference to the masculine gender in this Agreement shall include,
where appropriate, the feminine.

23.           Use of Name, Likeness and
Biography.

The
Company shall have the right (but not the obligation) to use, publish and
broadcast, and to authorize others to do so, the name, approved likeness and
approved biographical material of Executive to advertise, publicize and promote
the business of the Company and its affiliates, but not for the purposes of
direct endorsement without Executive’s consent. 
This right shall terminate upon the termination of this Agreement.  An “approved likeness” and “approved
biographical material” shall be, respectively, any photograph or other
depiction of Executive, or any biographical information or life story
concerning the professional career of Executive.

24.           Governing
Law.

THIS
AGREEMENT SHALL BE CONSTRUED, INTERPRETED AND GOVERNED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS WITHOUT REFERENCE TO RULES RELATING TO CONFLICTS OF
LAW.

25.           Entire
Agreement.

This
Agreement and the LLC Agreement contain the entire understanding between the
parties hereto with respect to the subject matter hereof and supersede in all
respects any prior or other agreement or understanding, written or oral,
between the Company or any affiliate of the Company and Executive with respect
to such subject matter.

26.           Withholding.

The
Company shall be entitled to withhold from payment to the Executive of any
amount of withholding required by law.

27.           Counterparts.

This
Agreement may be executed in two or more counterparts, each of which will be
deemed an original.

28.           Remedies.

The
parties recognize and affirm that in the event of a breach of Sections 14
or 15 of this Agreement, money damages would be inadequate and the
Company would not have an adequate remedy at law.  Accordingly, the parties agree that in the
event of a breach or a threatened breach 

 13
 

of Sections 14
or 15, the Company may, in addition and supplementary to other rights
and remedies existing in its favor, apply to any court of law or equity of
competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce or prevent any violations of the provisions hereof
(without posting a bond or other security). 
In addition, Executive agrees that in the event a court of competent jurisdiction
or an arbitrator finds that Executive violated Section 14 or 15,
the time periods set forth in those Sections shall be tolled until such breach
or violation has been cured.  Executive
further agrees that the Company shall have the right to offset the amount of
any damages resulting from a breach by Executive of Section 14 or 15
against any payments due Executive under this Agreement.  The parties agree that if one of the parties
is found to have breached this Agreement by a court of competent jurisdiction
or arbitrator, the breaching party will be required to pay the non-breaching
party’s attorneys’ fees reasonably incurred in prosecuting the non-breaching
party’s claim of breach.

29.           Non-Waiver.

The
failure by either party to insist upon the performance of any one or more
terms, covenants or conditions of this Agreement shall not be construed as a
waiver or relinquishment of any right granted hereunder or of any future
performance of any such term, covenant or condition, and the obligation of either
party with respect hereto shall continue in full force and effect, unless such
waiver shall be in writing signed by VNR (other than Executive) and Executive.

30.           Announcement.

The
Company shall have the right to make public announcements concerning the execution
of this Agreement and the terms contained herein, at the Company’s discretion.

31.           Construction.

The
headings and captions of this Agreement are provided for convenience only and
are intended to have no effect in construing or interpreting this Agreement.  The language in all parts of this Agreement
shall be in all cases construed in accordance to its fair meaning and not
strictly for or against the Company or Executive.

32.           Right
to Insure.

The
Company shall have the right to secure, in its own name or otherwise, and at
its own expense, life, health, accident or other insurance covering Executive,
and Executive shall have no right, title or interest in and to such
insurance.  Executive shall assist the
Company in procuring such insurance by submitting to examinations and by
signing such applications and other instruments as may be required by the
insurance carriers to which application is made for any such insurance.

33.           No
Inconsistent Obligations.

Executive
represents and warrants that to his knowledge he has no obligations, legal, in
contract, or otherwise, inconsistent with the terms of this Agreement or with
his undertaking employment with the Company to perform the duties described
herein.  Executive will not 

 14
 

disclose to the
Company, or use, or induce the Company to use, any confidential, proprietary,
or trade secret information of others. Executive represents and warrants that
to his knowledge he has returned all property and confidential information
belonging to all prior employers, if he is obligated to do so.

34.           Binding Agreement.

This Agreement
shall inure to the benefit of and be binding upon Executive, his heirs and
personal representatives, and the Company, its successors and assigns.

35.           Voluntary Agreement.

Each party to this Agreement has read and fully
understands the terms and provisions hereof, has had an opportunity to review
this Agreement with legal counsel, has executed this Agreement based upon such
party’s own judgment and advice of counsel (if any), and knowingly, voluntarily,
and without duress, agrees to all of the terms set forth in this
Agreement.  The parties have participated
jointly in the negotiation and drafting of this Agreement.  If an ambiguity or question of intent or
interpretation arises, this Agreement will be construed as if drafted jointly
by the parties and no presumption or burden of proof will arise favoring or
disfavoring any party because of authorship of any provision of this
Agreement.  Except as expressly set forth
in this Agreement, neither the parties nor their affiliates, advisors and/or
their attorneys have made any representation or warranty, express or implied,
at law or in equity with respect of the subject matter contained herein.  Without limiting the generality of the
previous sentence, the Companies, their affiliates, advisors, and/or attorneys
have made no representation or warranty to Executive concerning the state or
federal tax consequences to Executive regarding the transactions contemplated
by this Agreement.

IN
WITNESS WHEREOF, the parties hereto have executed this Employment Agreement
between VNR and  Britt Pence  as of the day and year first above written.

	
  

  	
   

  	
  “EXECUTIVE”

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Britt Pence

  
	
   

  	
   

  	
  Britt Pence

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  VNR HOLDINGS, LLC

  
	
   

  	
   

  	
  “COMPANY”

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Scott W. Smith

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  VANGUARD NATURAL RESOURCES, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Scott W. Smith

  

 

 15United States Securities and Exchange Commission EDGAR Filing

EXHIBIT 4.5

Dated:   August __, 2006

NEITHER THIS BRIDGE NOTE NOR THE SECURITIES INTO WHICH THIS BRIDGE NOTE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.

No. CD-__

$_______

THE QUANTUM GROUP, INC.

8% Subordinated Secured Convertible Bridge Note

Due March 31, 2007

This Subordinated Secured Bridge Note (the “Bridge Note”) is issued by THE QUANTUM GROUP, INC., a Nevada corporation (the “Obligor”), to ______________ (the “Holder”).

FOR VALUE RECEIVED, the Obligor hereby promises to pay to the Holder or its successors and assigns the principal sum of ________________ Dollars ($_______), together with accrued but unpaid interest on or before the “Maturity Date” as herewithin defined in accordance with the following terms:

Interest.  Interest shall accrue on the outstanding principal balance hereof at an annual rate equal to 8%.  Interest shall be calculated on the basis of a 360-day year and the actual number of days elapsed, to the extent permitted by applicable law.  Interest hereunder will be paid to the Holder or its assignee in whose name this Bridge Note is registered on the records of the Obligor regarding registration and transfers of Bridge Notes (the “Bridge Note Register”) on the Maturity Date.  In the event the principal of the Bridge Note shall not be paid at the Maturity Date, interest shall be accrued at the rate of 1.5% per month until principal and all accrued interest have been paid.

Maturity Date.  This Bridge Note together with all accrued interest shall be due and payable at the earlier of (a) the closing of a secondary public offering of the Obligor’s securities in an aggregate amount of approximately $8,000,000 with Newbridge Securities Corporation (“Newbridge”) as managing underwriter (the “Secondary Public Offering”) or (b) on March 31, 2007, provided however that such date may be extended for up to 60-days upon prior written notice from Newbridge to the Obligor and the Holder. 

This Bridge Note is subject to the following additional provisions:

Section 1.

Dissolution Event.  In the event the Obligor has a dissolution event, which shall consist of a change in control, a financing of at least $4,000,000 (excluding the SPO), a 

			
	 
	 
	 

merger whereby the Obligor is not the surviving entity or sale of all or substantially all of the assets of the Obligor, then the Bridge Note holders shall have the option to demand payment of the principal and any accrued interest and such payment shall be made within 20 days of such event, otherwise the Bridge Note holders may convert as per the Conversion Price defined herein.

Section 2.

Conversion and Adjustment.

(a)

Upon written request until such time the Bridge Notes are repaid (including any accrued interest), the Bridge Note holders (at their sole discretion) shall have the right to convert (from time to time, in whole or part) the Bridge Notes into shares of common stock of the Obligor, as described at the Conversion Price described below.

(b)

The Conversion Price (“Conversion Price”) shall be equal to 70% of the offering price of any of the Obligor’s subsequent securities offerings, including the SPO.  An offering shall not include the issuance of (i) shares of common stock or options to consultants, employees, officers and directors of the Obligor, (ii) securities upon the exercise or exchange of or conversion of any securities issued hereunder and/or other securities exercisable or exchangeable for or convertible into shares of Obligor’s common stock issued and outstanding on the closing of the Financing Agreement for Sale of Bridge Securities dated August __, 2006 (the “Financing Agreement”), and (iii) securities issued pursuant to acquisitions or strategic transactions.  

(c)

The Holder shall effect conversions by delivering to the Obligor a completed notice in the form attached hereto as Exhibit A (a “Conversion Notice”).  The date on which a Conversion Notice is delivered is the “Conversion Date.”  Unless the Holder is converting the entire principal amount outstanding under this Bridge Note, the Holder is not required to physically surrender this Bridge Note to the Obligor in order to effect conversions.  Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Bridge Note plus all accrued and unpaid interest thereon in an amount equal to the applicable conversion.  The Holder and the Obligor shall maintain records showing the principal amount converted and the date of such conversions.  In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error.

(d)

If the Obligor, at any time while this Bridge Note is outstanding, shall (i) pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock into a larger number of shares, (iii) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by reclassification of shares of the Common Stock any shares of capital stock of the Obligor, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event.  Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re­classification.

(e)

Upon a conversion hereunder the Obligor shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Closing 

			
	 
	2

	 

Bid Price of the Obligor’s Common Stock on the Conversion Date.  If the Obligor elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

(f)

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

Section 3.

Registration Rights and Reservation of Shares.  As provided under the Subscription Agreement executed by the Holder and accepted by the Obligor, the Bridge Note Holder shall have registration rights to register the common shares issuable upon the conversion of the Bridge Note.  The Obligor shall at all times reserve for such number of shares of its common stock as shall be required for issuance and delivery upon conversion of the Bridge Notes.

Section 4.

Notice.  Any notices, consents, waivers or other communications required or permitted to be given under the terms hereof 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) trading day after deposit with a nationally recognized overnight delivery service, 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 Obligor, to:

The Quantum Group, Inc.

3420 Fairlane Farms Road, Suite C

Wellington, Florida 33414

Attention: Noel Guillama

Telephone: (561) 798-9800

Facsimile: (561) 396-3456

or at 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 three (3) business days prior to the effectiveness of such change.  Written confirmation of receipt (i) given by the recipient of such notice, consent, waiver or other communication, (ii) 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 (iii) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.

Section 5.

This Bridge Note shall not entitle the Holder to any of the rights of a stockholder of the Obligor, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any 

			
	 
	3

	 

other proceedings of the Obligor, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof.

Section 6.

Repayment of this Bridge Note shall be secured by a lien on all tangible and intangible assets of the Obligor as described in that certain Security Agreement executed contemporaneously herewith.

Section 7.

In the event of an occurrence of any event of default specified below, the principal of, and all accrued and unpaid interest on, this Bridge Note shall be come due and payable as specified below.  In the event of an event of default under this Bridge Note, a default may only be called by holders of at least fifty percent (50%) of the aggregate principal amount of the Bridge Notes then outstanding, including High Capital Funding, LLC.  

The following shall constitute an event of default:

(a)

Obligor fails to make any payment hereunder when due, which failure has not been cured within 10 days following such due date.

(b)

The Obligor breaches any material covenant or other term or condition of this Bridge Note, the Financing Agreement or the Security Agreement executed in connection with this Bridge Note in any material respect and such breach, if subject to cure, continues for a period of ten (10) days after written notice to the Obligor.

(c)

Obligor files a petition to take advantage of any insolvency act; makes an assignment for the benefit of its creditors; commences a proceeding for the appointment of a receiver, trustee, liquidator or conservator of itself of a whole or any substantial part of its property; files a petition or answer seeking reorganization or arrangement or similar relief under the federal bankruptcy laws or any other applicable law or statute of the United States of America or any state.

(d)

A court of competent jurisdiction enters an order, judgment or decree appointing a custodian, receiver, trustee, liquidator or conservator of Obligor or of the whole or any substantial part of its properties, or approves a petition filed against Obligor seeking reorganization or arrangement or similar relief under the federal bankruptcy laws or any other applicable law or statue of the United States of America or any state; or if, under the provisions of any other law for the relief or aid of debtors, a court of competent jurisdiction assumes custody or control of Obligor or of the whole or any substantial part of its properties; or there is commenced against Obligor any proceeding for any of the foregoing relief and such proceeding or petition remains undismissed for a period of 30-days; or if Obligor by any act indicates its consent to or approval of any such proceeding or petition.

(e)

If (i) any judgment remaining unpaid, unstayed or undismissed for a period of 60-days is rendered against Obligor, which by itself or together with all other such judgments rendered against Obligor remaining unpaid, unstayed or undismissed for a period of 60-days, is in excess of $100,000, or (ii) there is any attachment or execution against Obligor’s properties remaining unstayed or undismissed for a period of 60-days, which by itself or together with all other attachments and executions against Obligor’s properties remaining unstayed or undismissed for a period of 60-days is for an amount in excess of $100,000.

Section 8.

If this Bridge Note is mutilated, lost, stolen or destroyed, the Obligor shall execute and deliver, in exchange and substitution for and upon cancellation of the mutilated 

			
	 
	4

	 

Bridge Note, or in lieu of or in substitution for a lost, stolen or destroyed Bridge Note, a new Bridge Note for the principal amount of this Bridge Note so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Bridge Note, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Obligor.

Section 9.

This Bridge Note shall be governed by and construed in accordance with the laws of the State of Nevada.  Each of the parties consents to the jurisdiction of the applicable State or Federal Court located in Las Vegas, Nevada in connection with any dispute arising under this Bridge Note and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum conveniens to the bringing of any such proceeding in such jurisdictions.

Section 10.

If the Obligor fails to materially comply with the terms of this Bridge Note, then the Obligor shall reimburse the Holder promptly for all fees, costs and expenses, including, without limitation, attorneys’ fees and expenses incurred by the Holder in any action in connection with this Bridge Note, including, without limitation, those incurred: (i) during any workout, attempted workout, and/or in connection with the rendering of legal advice as to the Holder’s rights, remedies and obligations, (ii) collecting any sums which become due to the Holder, (iii) defending or prosecuting any proceeding or any counterclaim to any proceeding or appeal; or (iv) the protection, preservation or enforcement of any rights or remedies of the Holder.

Section 11.

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

Section 12.

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

Section 13.

Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, which for the purposes of hereof means any day except Saturday, Sunday and any day which shall be a Federal legal holiday in the United States or day on which banking institutions are authorized or required by law or other government action to close, such payment shall be made on the next succeeding Business Day.

			
	 
	5

	 

Section 14.

If there are any inconsistencies between this Bridge Note and the Financing Agreement between the Bridge Note Purchasers and the Company dated August __, 2006, the Financing Agreement shall govern.

Section 15.

THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY.  THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES’ ACCEPTANCE OF THIS AGREEMENT.

IN WITNESS WHEREOF, the Obligor has caused this Bridge Note to be duly executed by a duly authorized officer as of the date set forth above.

THE QUANTUM GROUP, INC.

By:____________________________

Name:

Title:

			
	 
	6

	 

EXHIBIT “1”

EXHIBIT “A”

NOTICE OF CONVERSION

(To be executed by the Holder in order to convert the Bridge Note)

TO:

_______________________

The undersigned hereby irrevocably elects to convert _________ of the principal amount of the above Bridge Note into Shares of Common Stock (or other securities) of The Quantum Group, Inc., according to the conditions stated therein, as of the Conversion Date written below.

Conversion Date:

Applicable Conversion Price:

Signature:

Name:

Social Security # or Tax ID #

Address:

Amount to be converted:

Amount of Bridge Note unconverted:

Conversion Price per share:

Number of shares of Common

Stock to be issued:

Please issue the shares of

Common Stock in the following

name and to the following address:

Issue to:

Authorized Signature:

Name:

Title:

Phone Number:

Broker DTC Participant Code:

Account Number:

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