Document:

EXHIBIT
      10.1

    

    SECURITIES
      PURCHASE AGREEMENT

    

    SECURITIES
      PURCHASE AGREEMENT
      (this
“Agreement”),
      dated
      as of May 29, 2008, by and among Kentucky USA Energy, Inc., a Delaware
      corporation, (the “Company”),
      and
      the investors listed on the Schedule of Note Buyers attached hereto
      (individually, a “Buyer”
and
      collectively, the “Buyers”).

    

    WHEREAS:

    

    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) and/or
      Rule 506 of Regulation D (“Regulation D”)
      as
      promulgated by the U.S. Securities and Exchange Commission (the “SEC”)
      under
      the Securities Act of 1933, as amended (the “1933
      Act”).

    

    B.
      The
      Company has authorized a new series of senior convertible notes of the Company
      which notes shall be convertible into the Company’s common stock, par value
      $0.0001 per share (“Common
      Stock”),
      in
      accordance with the terms of the Notes (as defined below) (as converted,
      collectively, the “Conversion
      Shares”).

    

    C.
      The
      Company intends to conduct a private placement offering of the Notes in an
      aggregate principal amount of at least $2,500,000 (the “Minimum
      PPO Amount”).

    

    D.
      Each
      Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
      conditions stated in this Agreement, (i) that aggregate principal amount of
      the
      Notes, in substantially the form attached hereto as Exhibit
      A
      (the
“Notes”),
      set
      forth on the Buyer Omnibus Signature Page attached hereto (which aggregate
      principal amount for all Buyers shall be a maximum of $5,000,000), and (ii)
      warrants, in substantially the form attached hereto as Exhibit
      B
      (the
“Warrants”),
      to
      acquire that number of shares of Common Stock (as exercised, collectively,
      the
“Warrant
      Shares”)
      set
      forth opposite such Buyer’s name in column (3) on the Schedule of Note
      Buyers.

    

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

    

    F. The
      Notes, the Conversion Shares, the Warrants and the Warrant Shares collectively
      are referred to herein as the “Securities”.

    

    G. The
      Notes
      will rank senior to all indebtedness of the Company, subject to Permitted
      Indebtedness (as defined in the Notes), and will be secured by a perfected
      security interest in all of the assets of the Company, subordinate to any
      security interest granted in connection with Permitted Indebtedness, as
      evidenced by the security agreement attached hereto as Exhibit
      D
      (the
“Security
      Agreement”)
      and
      together with any ancillary documents related thereto, collectively the
“Security
      Documents”).

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    NOW,
      THEREFORE,
      the
      Company and each Buyer hereby agree as follows:

    

    1. PURCHASE
      AND SALE OF NOTES AND WARRANTS.

    

    (a) Purchase
      of 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, will purchase from the Company on the Closing Date, (i) an
      aggregate principal amount of Notes as set forth on the Buyer Omnibus Signature
      Page attached hereto and (ii) Warrants to acquire an aggregate number of Warrant
      Shares as set forth opposite such Buyer’s name in column (3) on the Schedule of
      Note Buyers (the “Closing”).
      The
      Minimum PPO Amount need to be subscribed to for the Company to complete and
      close the offering of the Notes.

    

    (i) Closing.
       The date and time of the Closing (the “Closing
      Date”)
      shall
      be 10:00 a.m., New York City Time, on or before June 6, 2008 (or such later
      date
      as is mutually agreed to by the Company and the Required Holders (as defined
      in
      the Note) after notification of satisfaction (or waiver) of the conditions
      to
      the Closing set forth in Sections 6 and 7 below) at the offices of Gottbetter
      & Partners, LLP, 488 Madison Avenue, New York, NY 10022.

    

    (ii) Notes
      and Warrants Purchase Price.
      Each
      Buyer shall pay $1.00 for each $1.00 of principal amount of Notes to be
      purchased by such Buyer. For each $1.00 in principal amount of Notes purchased
      by the Buyer, such Buyer shall receive a Warrant to purchase one (1) share
      of
      Common Stock.

    

    (c) On
      the
      Closing Date, (i) each Buyer shall pay to the Company the total purchase price
      for the Notes and the Warrants to be purchased by such Buyer (the “Purchase
      Price”)
      by
      wire transfer of immediately available funds in accordance with the Company’s
      written wire instructions and (ii) the Company shall deliver to each Buyer
      (A) the Notes (in the principal amounts as such Buyer shall have requested
      prior
      to such date) in the aggregate principal amount equal to the amount paid by
      such
      Buyer to the Company and (B) the Warrants (in the amounts as such Buyer shall
      have requested prior to such date) in which such Buyer is purchasing on such
      date, in each case 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 represents and warrants with respect to only itself that:

    

    (a) No
      Public Sale or Distribution.
       Such Buyer is (i) acquiring the Notes and the Warrants and (ii) upon
      conversion of the Notes and exercise of the Warrants will acquire the Conversion
      Shares issuable upon conversion of the Notes and the Warrant Shares issuable
      upon exercise of the Warrants, 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. 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.

    
      
        
        

      

      
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    (b) Accredited
      Investor Status.
       Such Buyer is an “accredited investor” as that term is defined in Rule
      501(a) under the 1933 Act.  Such Buyer is not a registered broker-dealer
      under Section 15 of the Securities Exchange Act of 1934, as amended (the
“1934
      Act”).

    

    (c) 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
      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.

    

    (d) 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.  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.

    

    (e) No
      Governmental Review.
       Such Buyer understands that no 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.

    

    (f) Transfer
      or Resale.
       Such Buyer understands that except as provided in the Registration Rights
      Agreement: (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 an opinion of counsel, 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 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.  The Notes or Warrants may be pledged in connection
      with a bona fide margin account or other loan or financing arrangement secured
      by the Notes or Warrants and such pledge of Securities shall not be deemed
      to be
      a transfer, sale or assignment of the Notes or Warrants hereunder, and no Buyer
      effecting a pledge of Notes or Warrants 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 (as defined in Section
      3(b)), including, without limitation, this Section 2(f).

    
      
        
        

      

      
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    (g) Legends.
       Such 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 have been registered under the
      1933
      Act as contemplated by the Registration Rights Agreement, the stock certificates
      representing the Conversion Shares and the Warrant Shares, 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, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY,
      THAT
      REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS 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.

    

    The
      legend set forth above shall be removed and the Company shall issue a
      certificate without such legend to the holder of the Securities upon which
      it is
      stamped, if, unless otherwise required by state securities laws, (i) such
      Securities are registered for resale under the 1933 Act, (ii) in connection
      with
      a sale, assignment or other transfer, such holder provides the Company with
      an
      opinion of counsel, in a form reasonably acceptable to the Company, 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
      (iii)
      such holder provides the Company with reasonable assurance that the Securities
      can be sold, assigned or transferred pursuant to Rule 144 or Rule
      144A.

    
      
        
        

      

      
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    (h) Validity;
      Enforcement.
       This Agreement, the Registration Rights Agreement and the Security
      Documents to which such Buyer is a party have been duly and validly authorized,
      executed and delivered on behalf of such Buyer and shall constitute 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,
      the Registration Rights Agreement and the Security Documents to which such
      Buyer
      is a party and the consummation by such Buyer of the transactions contemplated
      hereby and thereby 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.

    

    (j) Residency.
       Such Buyer is a resident of that jurisdiction specified below its address
      on the Buyer Omnibus Signature Page attached hereto.

    

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

    

    (l) Certain
      Trading Activities.
       Such Buyer’s trading activities with respect to the securities of the
      Company shall be in compliance with all applicable federal and state securities
      laws, rules and regulations and the rules and regulations of the principal
      market on which such securities are listed or traded. Neither such Buyer nor
      its
      affiliates, nor any Person acting on behalf of or pursuant to any understanding
      with such Buyer, has an open short position in the securities of the Company
      and, except as set forth below, such Buyer shall not, and shall not cause any
      of
      its affiliates or any Person acting on behalf of or pursuant to any
      understanding with such Buyer, to engage in any short sale as defined in any
      applicable SEC or National Association of Securities Dealers rules on any
      hedging transactions with respect to the securities of the Company until the
      earlier to occur of (i) the third anniversary of the Closing Date and (ii)
      such
      Buyer no longer own a principal balance of the Notes. Without limiting the
      foregoing, such Buyer agrees not to engage in any naked short transactions
      in
      excess of the amount of shares owned (or an offsetting long position) by such
      Buyer.

    
      
        
        

      

      
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    (m) Limited
      Ownership.
       The purchase by such Buyer of the Securities issuable to it at any Closing
      will not result in such Buyer or in the aggregate with other Buyers
      (individually or together with other Persons with whom such Buyer has
      identified, or will have identified, itself as part of a “group” in a public
      filing made with the SEC involving the Company’s securities) acquiring, or
      obtaining the right to acquire, in excess of 4.99% of the outstanding shares
      of
      Common Stock or the voting power of the Company on a post transaction basis
      that
      assumes that the Closing shall have occurred. Such Buyer does not presently
      intend to, alone or together with others, make a public filing with the SEC
      to
      disclose that it has (or that it together with such other Persons have)
      acquired, or obtained the right to acquire, as a result of the Closing (when
      added to any other securities of the Company that it or they then
      own
      or have the right to acquire), in excess of 4.99% of the outstanding shares
      of
      Common Stock or the voting power of the Company on a post transaction basis
      that
      assumes that the Closing shall have occurred.

    

    (n) 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.

    

    (o) Organization.
       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 corporate or partnership power and authority to enter into and to
      consummate the transactions contemplated by the applicable Transaction Documents
      and otherwise to carry out its obligations thereunder.

    

    3. REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY.

    

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

    

    (a) Organization
      and Qualification.
       The Company and its “Subsidiaries”
(which
      for purposes of this Agreement means any joint venture or any entity in which
      the Company, directly or indirectly, holds an equity interest representing
      50%
      or more of the equity securities thereof) are entities duly organized and
      validly existing in good standing under the laws of the jurisdiction in which
      they are formed, and have the requisite power and authority to own their
      properties and to carry on their business as now being conducted.  Each of
      the Company and its 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 reasonably be expected to have a Material Adverse
      Effect.  As used in this Agreement, “Material
      Adverse Effect”
means
      any material adverse effect on the business, properties, assets, operations,
      results of operations, condition (financial or otherwise) or prospects of the
      Company and its Subsidiaries, taken as a whole, or on the transactions
      contemplated hereby and the other Transaction Documents or by the agreements
      and
      instruments to be entered into in connection herewith or therewith, or on the
      authority or ability of the Company to perform its obligations under the
      Transaction Documents (as defined below).  The Company has no Subsidiaries
      except as set forth on Schedule
      3(a).
      The
      Company owns, directly or indirectly, all of the equity interests of each
      Subsidiary free and clear of any liens.

    
      
        
        

      

      
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    (b) Authorization;
      Enforcement; Validity.
       The Company has the requisite power and authority to enter into and
      perform its obligations under this Agreement, the Notes, the Warrants, the
      Registration Rights Agreement, the Security Documents, and each of the other
      agreements entered into by the Company hereto in connection with the
      transactions contemplated by this Agreement (collectively, the “Transaction
      Documents”)
      and to
      issue the Securities in accordance with the terms hereof and thereof.  The
      execution and delivery of this Agreement and the other Transaction Documents
      by
      the
      Company
      and the consummation by the Company of the transactions contemplated hereby
      and
      thereby, including, without limitation, the issuance of the Notes and the
      Warrants, the reservation for issuance and the issuance of the Conversion Shares
      issuable upon conversion of the Notes, the reservation for issuance and issuance
      of Warrant Shares issuable upon exercise of the Warrants, and the granting
      of a
      security interest in the Collateral (as defined in the Security Documents)
      have
      been duly authorized by the Company’s Board of Directors and (other than (i) the
      filing of appropriate UCC financing statements with the appropriate states
      and
      other authorities pursuant to the Security Agreement, (ii) the filing of a
      Form
      D under Regulation D of the 1933 Act, and (iii) the filing with the SEC of
      one or more registration statements in accordance with the requirements of
      the
      Registration Rights Agreement) no further filing, consent or authorization
      is
      required by the Company, its Board of Directors or its stockholders.  This
      Agreement and the other Transaction Documents of even date herewith have been
      duly executed and delivered by the Company, and constitute 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.

    

    (c) Issuance
      of Securities.
       The issuance of the Notes and the Warrants are duly authorized and are
      free from all taxes, liens and charges with respect to the issue thereof. As
      of
      the Closing, a number of shares of Common Stock shall have been duly authorized
      and reserved for issuance which equals the maximum number of shares Common
      Stock
      issuable upon conversion of the Notes and upon exercise of the Warrants.
 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, will be validly issued, fully paid and nonassessable
      and
      free from all preemptive or similar rights, taxes, liens and charges with
      respect to the issue thereof, with the holders being entitled to all rights
      accorded to a holder of Common Stock.  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 this Agreement and the other
      Transaction Documents by the Company and the consummation by the Company of
      the
      transactions contemplated hereby and thereby (including, without limitation,
      the
      issuance of the Notes and the Warrants, the granting of a security interest
      in
      the Collateral and reservation for issuance and issuance of the Conversion
      Shares and the Warrant Shares) will not (i) result in a violation of the
      Certificate of Incorporation (as defined in Section 3(r)) or Bylaws (as defined
      in Section 3(r)) of the Company 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 material agreement, indenture or instrument to which the
      Company or any of its Subsidiaries is a party, or (iii) result in a violation
      of
      any law, rule, regulation, order, judgment or decree (including federal and
      state securities laws and regulations and the rules and regulations of the
      NASD
      Over-the-Counter Bulletin Board (the “Principal
      Market”)
      applicable to the Company or any of its Subsidiaries or by which any property
      or
      asset of the Company or any of its Subsidiaries is bound or affected, except
      to
      the extent that any such violation would not reasonably be expected to have
      a
      Material Adverse Effect.

    
      
        
        

      

      
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    (e) Consents.
       Other than as set forth on Schedule
      3(e),
      the
      Company is not 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 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 is required to obtain pursuant to the preceding sentence
      have
      been obtained or effected on or prior to the Closing Date, and the Company
      and
      its Subsidiaries are unaware of any facts or circumstances which might prevent
      the Company from obtaining or effecting any of the registration, application
      or
      filings pursuant to the preceding sentence.  The Company is not in
      violation of the applicable listing requirements of the Principal Market and
      has
      no knowledge of any facts which would reasonably lead to delisting or suspension
      of the Common Stock in the foreseeable future. The issuance by the Company
      of
      the Securities shall not have the effect of delisting or suspending the Common
      Stock from the Principal Market.

    

    (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, (ii) to the knowledge of the
      Company, an “affiliate” of the Company (as defined in Rule 144) or (iii) to the
      knowledge of the Company, a “beneficial owner” of more than 10% of the shares of
      Common Stock (as defined for purposes of Rule 13d-3 of the 1934 Act.  The
      Company further acknowledges that no Buyer is acting as a financial advisor
      or
      fiduciary of the Company (or in any similar capacity) with respect to this
      Agreement and the other 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 this Agreement and the other
      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. 

    

    (g) No
      General Solicitation.
       Neither the Company, nor any of its Subsidiaries or affiliates, nor, to
      the Company’s knowledge, 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.

    
      
        
        

      

      
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    (h) No
      Integrated Offering.
       None of the Company, its Subsidiaries, any of their affiliates, or any
      Person acting on its or their behalf has, directly or indirectly, made any
      offers or sales of any security or solicited any offers to buy any security,
      under circumstances that would require registration of any of the Securities
      under the 1933 Act or cause this offering of the Securities to be integrated
      with prior offerings by the Company for purposes of the 1933 Act or 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, its Subsidiaries, their affiliates or any
      Person acting on its or their behalf will take any action or steps referred
      to
      in the preceding sentence that would require registration of any of the
      Securities under the 1933 Act or cause the offering of the Securities to be
      integrated with other offerings.

    

    (i) Dilutive
      Effect.
       The Company understands and acknowledges that the number of Conversion
      Shares issuable upon conversion of the Notes and the Warrant Shares issuable
      upon exercise of the Warrants will increase in certain circumstances.  The
      Company further acknowledges that its obligation to issue Conversion Shares
      upon
      conversion of the Notes in accordance with this Agreement and the Notes and
      its
      obligation to issue the Warrant Shares upon exercise of the Warrants in
      accordance with this Agreement and the Warrants is, in each case, 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 Certificate of Incorporation
      or the laws of the jurisdiction of its formation 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 has
      not adopted a stockholder rights plan or similar arrangement relating to
      accumulations of beneficial ownership of Common Stock or a change in control
      of
      the Company.

    

    (k) SEC
      Documents; Financial Statements.
       Except as disclosed in Schedule
      3(k),
      during
      the two (2) years prior to the date hereof or such shorter period of time during
      which it has been so obligated, the Company has 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 the SEC Documents not
      available on the EDGAR system if such SEC Documents have been requested in
      writing by Buyers.  As of their respective filing 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 filing 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.  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). No
      other
      information provided by or on behalf of the Company to
      the
      Buyers in connection with the transactions contemplated hereby which is
      not
      included in the SEC Documents, including, without limitation,
      information
      referred
      to in Section 2(d) of this Agreement or in any disclosure schedules,
      contains
      any untrue statement of a material fact or omits to state any
      material fact
      necessary in order to make the statements therein, in the light of
      the
      circumstance under which they are or were made, not
      misleading.

    
      
        
        

      

      
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    (l) Absence
      of Certain Changes.
      Except
      as disclosed in Schedule 3(l),
      since
      the date of the Company’s most recent audited financial statements contained in
      a Form 10-K, there has been no material adverse change and no material adverse
      development in the business, assets, properties, operations, condition
      (financial or otherwise), results of operations or prospects of the Company.
      Except as disclosed in Schedule 3(l),
      since
      the date of the Company’s most recent audited financial statements contained in
      a Form 10-K, neither the Company nor any of its Subsidiaries has
      (i) declared or paid any dividends, (ii) sold any assets, individually
      or in the aggregate, in excess of $100,000 outside of the ordinary course of
      business or (iii) except as set forth in Schedule 3(l),
      had
      capital expenditures, individually or in the aggregate, in excess of $100,000.
      Neither Company nor any of its Subsidiaries has taken any steps to seek
      protection pursuant to any bankruptcy law nor does the Company have any
      knowledge or reason to believe that its creditors intend to initiate involuntary
      bankruptcy proceedings or any actual knowledge of any fact which would
      reasonably lead a creditor to do so.

    

    (m) No
      Undisclosed Events, Liabilities, Developments or Circumstances.
       No event, liability, development or circumstance has occurred or exists,
      or is contemplated to occur with respect to the Company, its Subsidiaries or
      their respective business, properties, prospects, operations or financial
      condition, that would be required to be disclosed by the Company under
      applicable securities laws on a registration statement on Form 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.

    

    (n) Conduct
      of Business; Regulatory Permits.
       Neither the Company nor any of its Subsidiaries is in violation of any
      term of or in default under its Certificate of Incorporation or Bylaws or their
      organizational charter or certificate of incorporation or bylaws, respectively.
      Neither the Company nor any of its Subsidiaries is in violation of any judgment,
      decree or order or any law, statute, ordinance, rule or regulation applicable
      to
      the Company or its Subsidiaries, and neither the Company nor any of its
      Subsidiaries will conduct its business in violation of any of the foregoing,
      except for possible violations which would not, individually or in the
      aggregate, reasonably be expected to have a Material Adverse Effect.
 Without limiting the generality of the foregoing, the Company is not in
      violation of any of the rules, regulations or requirements of the Principal
      Market and has no knowledge of any facts or circumstances which would reasonably
      lead to delisting or suspension of the Common Stock by the Principal Market
      in
      the foreseeable future. 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 its
      Subsidiaries possess all certificates, authorizations and permits issued by
      the
      appropriate regulatory authorities necessary to conduct their respective
      businesses, except where the failure to possess such certificates,
      authorizations or permits would not reasonably be expected to 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.

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    (o) Foreign
      Corrupt Practices.
       Neither the Company, nor any of its Subsidiaries, nor any director,
      officer, agent, employee or other Person acting on behalf of the Company or
      any
      of its Subsidiaries has, in the course of its actions for, or on behalf of,
      the
      Company or any of its 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.

    

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

    

    (q)  Transactions
      with Affiliates.
       Except as set forth in the SEC Documents filed at least ten days prior to
      the date hereof and other than the grant of stock options disclosed
      on
      Schedule 3(q),
      none of
      the officers, directors or employees of the Company or any of its Subsidiaries
      is presently a party to any transaction with the Company or any of its
      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
      its
      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.

    
      
        
        

      

      
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    (r) Equity
      Capitalization.
       As of the date hereof, the authorized capital stock of the Company
      consists of (i) 300,000,000 shares of Common Stock, of which as of the date
      hereof, 35,000,000 shares are issued and outstanding, no shares are reserved
      for
      issuance pursuant to the Company’s stock option and purchase plans and no shares
      are reserved for issuance pursuant to securities (other than the Notes and
      the
      Warrants) exercisable or exchangeable for, or convertible into, shares of Common
      Stock and (ii) 20,000,000 shares of preferred stock, par value $0.0001 per
      share, of which as of the date hereof, none are issued
      and outstanding.  All of such outstanding shares have been, or upon
      issuance will be, validly issued and are fully paid and nonassessable.
 Except as disclosed in Schedule
      3(r):
      (i)
      none of the Company’s capital stock is subject to preemptive rights or any other
      similar rights or any liens or encumbrances suffered or permitted by the
      Company; (ii) 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 its Subsidiaries, or contracts,
      commitments, understandings or arrangements by which the Company or any of
      its
      Subsidiaries is or may become bound to issue additional capital stock of the
      Company or any of its 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 its Subsidiaries; (iii) there are no
      outstanding debt securities, notes, credit or loan agreements, credit facilities
      or other agreements, documents or instruments evidencing Indebtedness (as
      defined below) of the Company or any of its Subsidiaries or by which the Company
      or any of its Subsidiaries is or may become bound; (iv) there are no financing
      statements securing obligations in any material amounts, either singly or in
      the
      aggregate, filed in connection with the Company or any of its Subsidiaries;
      (v)
      there are no agreements or arrangements under which the Company or any of its
      Subsidiaries is obligated to register the sale of any of their securities under
      the 1933 Act (except pursuant to the Registration Rights Agreement); (vi) there
      are no outstanding securities or instruments of the Company or any of its
      Subsidiaries which contain any redemption or similar provisions, and there
      are
      no contracts, commitments, understandings or arrangements by which the Company
      or any of its Subsidiaries is or may become bound to purchase, repurchase,
      retire or redeem a security of the Company or any of its 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)
      the
      Company does not have any stock appreciation rights or “phantom stock” plans or
      agreements or any similar plan or agreement; and (ix) the Company and its
      Subsidiaries have no liabilities or obligations required to be disclosed in
      the
      SEC Documents but not so disclosed in the SEC Documents, other than those
      incurred in the ordinary course of the Company’s or its Subsidiaries’ respective
      businesses and which, individually or in the aggregate, do not or would not
      reasonably be expected to have a Material Adverse Effect.  The Company has
      furnished to the Buyer true, correct and complete copies of the Company’s
      Certificate of Incorporation, as amended and as in effect on the date hereof
      (the “Certificate
      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.

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    (s) Indebtedness
      and Other Contracts.
       Except as disclosed in Schedule
      3(s),
      neither
      the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness
      (as
      defined below) or, (ii) 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 reasonably be expected to result,
      individually or in the aggregate, in a Material Adverse Effect. Schedule
      3(s)
      provides
      a detailed description of the material terms of any such outstanding
      Indebtedness.  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 and a government or any
      department or agency thereof.

    

    (t) Absence
      of Litigation.
       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 its Subsidiaries,
      the Common Stock or any of the Company’s Subsidiaries or any of the Company’s or
      its Subsidiaries’ officers or directors, except as set forth in Schedule
      3(t).

    

    (u) Insurance.
       The Company and each of its 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 its 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 not be able to renew its existing insurance
      coverage as and when such coverage expires or to obtain similar coverage from
      similar insurers as may be necessary to continue its business at a cost that
      would not reasonably be expected to have a Material Adverse
      Effect.

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    (v) Employee
      Relations.

    

    (i)
       Neither the Company nor any of its Subsidiaries is a party to any
      collective bargaining agreement or employs any member of a union.  The
      Company and its Subsidiaries believe that their relations with their employees
      are good.  No executive officer of the Company or any of its Subsidiaries
      (as defined in Rule 501(f) of the 1933 Act) 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 of the Company or any of its
      Subsidiaries, to the knowledge of the Company or any such Subsidiary, is, or
      is
      now expected to be, 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 does
      not
      subject the Company or any of its Subsidiaries to any liability with respect
      to
      any of the foregoing matters.

    

    (ii)
      The
      Company and its 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 its Subsidiaries have good and marketable title in fee
      simple to all real property and good and marketable title to all personal
      property owned by them which is material to the business of the Company and
      its
      Subsidiaries, in each case free and clear of all liens, encumbrances and defects
      except such as 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 its Subsidiaries.  Any real property and facilities held
      under lease by the Company and any of its 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 facilities by the Company and its Subsidiaries.

    

    (x) Intellectual
      Property Rights.
       The Company and its 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, inventions,
      licenses, approvals, governmental authorizations, trade secrets and other
      intellectual property rights (“Intellectual
      Property Rights”)
      necessary to conduct their respective businesses as now conducted.  Except
      as set forth in Schedule
      3(x),
      none of
      the Company’s Intellectual Property Rights have expired or terminated, or are
      expected to expire or terminate, within three years from the date of this
      Agreement.  The Company does not have any knowledge of any infringement by
      the Company or its 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, being threatened, against the Company or any of its
      Subsidiaries regarding its Intellectual Property Rights.  The Company is
      unaware of any facts or circumstances which might give rise to any of the
      foregoing infringements or claims, actions or proceedings. The Company and
      its
      Subsidiaries have taken reasonable security measures to protect the secrecy,
      confidentiality and value of all of their Intellectual Property
      Rights.

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    (y) Environmental
      Laws.
       The Company and its Subsidiaries (i) are in compliance with any and all
      Environmental Laws (as hereinafter defined), (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.
       Except as set forth in Schedule
      3(z),
      the
      Company or one of its 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 its Subsidiaries as owned by the
      Company or such Subsidiary.

    

    (aa) Investment
      Company.
       The Company is not, and is not an affiliate of, an “investment company”
within the meaning of the Investment Company Act of 1940, as
      amended.

    

    (bb) Tax
      Status.
       The Company and each of its Subsidiaries (i) has 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
      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.
       There are no unpaid taxes in any material amount claimed to be due by the
      taxing authority of any jurisdiction, and the officers of the Company know
      of no
      basis for any such claim. No
      liens
      have been filed and no claims are being asserted by or against the Company
      or
      any of its Subsidiaries with respect to any taxes (other than liens for taxes
      not yet due and payable). Neither the Company nor it Subsidiaries has received
      notice of assessment or proposed assessment of any taxes claimed to be owed
      by
      it or any other Person on its behalf. Except as disclosed on Schedule 3(bb),
      neither the Company nor any Subsidiary is a party to any tax sharing or tax
      indemnity agreement or any other agreement of a similar nature that remains
      in
      effect. Each of the Company and its Subsidiaries has complied in all material
      respects with all applicable legal requirements relating to the payment and
      withholding of taxes and, within the time and in the manner prescribed by law,
      has withheld from wages, fees and other payments and paid over to the proper
      governmental or regulatory authorities all amounts required.

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    (cc) Internal
      Accounting and Disclosure Controls.
       The Company and each of its Subsidiaries maintain 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 “Internal
      Accounting Controls”).
       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.

    

    (dd) Off
      Balance Sheet Arrangements.
       There is no transaction, arrangement or other relationship between the
      Company or any of its 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 would be reasonably likely
      to
      have a Material Adverse Effect.

    

    (ee) Ranking
      of Notes.
       Except as set forth on Schedule
      (ee),
      no
      Indebtedness of the Company is senior to or ranks
      pari
      passu
      with the
      Notes in right of payment, whether with respect of payment of redemptions,
      interest, damages or upon liquidation or dissolution or otherwise.

    

    (ff) Form
      S-1 Eligibility.
       The Company is eligible to register the Conversion Shares and the Warrant
      Shares for resale by the Buyers using Form S-1 promulgated under the 1933
      Act.

    

    (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 material laws
      imposing such taxes will be or will have been complied with.

    

    (hh) 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 other than the existence of the transactions
      contemplated by this Agreement or the other Transaction Documents.  The
      Company understands and confirms that each of the Buyers will rely on the
      foregoing representations in effecting transactions in the Securities.  All
      disclosure provided to the Buyers regarding the Company, its business and the
      transactions contemplated by this Agreement and the other Transaction Documents,
      including the Schedules and Exhibits hereto and thereto, furnished by or on
      behalf of the Company is true and correct and does not contain any untrue
      statement of a material fact or omit to state any material fact necessary in
      order to make the statements made herein or herein, in the light of the
      circumstances under which they were made, not misleading. No material event
      or
      circumstance has occurred or information exists with respect to the Company
      or
      any of its Subsidiaries or its or their business, assets, liabilities,
      properties, prospects, operations or financial conditions (financial or
      otherwise), which, under applicable law, rule or regulation, requires public
      disclosure or announcement by the Company but which has not been so publicly
      announced or disclosed. 

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    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.  

    

    (c) Reporting
      Status.
       Until the date on which the Investors (as defined in the Registration
      Rights Agreement) shall have sold all the Conversion Shares and Warrant Shares
      and none of the Notes or Warrants is outstanding (the “Reporting
      Period”),
      the
      Company shall 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 otherwise permit such termination.

    

    (d) Use
      of
      Proceeds.
       The Company will use the proceeds from the sale of the Securities for
      general corporate and for working capital purposes, provided,
      that
      the Company may not use the proceeds from the sale of the Securities for (i)
      the
      repayment of any other outstanding Indebtedness of the Company or any of its
      Subsidiaries, other than Indebtedness set forth on Schedule
      4(d)
      or (ii)
      the redemption or repurchase of any of its or its Subsidiaries’ equity
      securities.

    

    (e) Financial
      Information.
       The Company agrees to send the following to each Investor (as defined in
      the Registration Rights Agreement) 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, 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 and (ii) copies of any notices
      and other information made available or given to the stockholders of the Company
      generally, contemporaneously with the making available or giving thereof to
      the
      stockholders. As used herein “Business Day” means any other day other than a
      Saturday, Sunday or other day on which commercial banks in The City of New
      York
      are authorized or required by law to remain closed.

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    (f) Listing.
       The Company shall promptly secure the listing of all of the Registrable
      Securities (as defined in the Registration Rights Agreement) upon each national
      securities exchange and automated quotation system, if any, upon which the
      Common Stock is 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.  The Company shall maintain
      the Common Stock’s authorization for
      quotation on the Principal Market.  Neither the Company nor any of its
      Subsidiaries shall take any action which would be reasonably expected to result
      in the delisting or suspension of the Common Stock on the Principal 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 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) relating to or arising out of the transactions
      contemplated by the Transaction Documents. The Company shall pay, and hold
      each
      Buyer harmless against, any liability, loss or expense (including, without
      limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in
      connection with any claim against a Buyer 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.
       The Company acknowledges and agrees that the Notes or Warrants may be
      pledged by an Investor (as defined in the Registration Rights Agreement) in
      connection with a bona fide margin agreement or other loan or financing
      arrangement that is secured by the Notes or Warrants.  The pledge of Notes
      or Warrants shall not be deemed to be a transfer, sale or assignment of the
      Notes or Warrants hereunder, and no Investor effecting a pledge of Notes or
      Warrants shall be required to provide the Company with any notice thereof or
      otherwise make any delivery to the Company pursuant to this Agreement or any
      other Transaction Document, including, without limitation, Section 2(f) hereof;
      provided that an Investor and its pledgee shall be required to comply with
      the
      provisions of Section 2(f) hereof in order to effect a sale, transfer or
      assignment of Notes or Warrants to such pledgee.  The Company hereby agrees
      to execute and deliver such documentation as a pledgee of the Notes or Warrants
      may reasonably request in connection with a pledge of the Notes or Warrants
      to
      such pledgee by an Investor.

    

    (i) Disclosure
      of Transactions and Other Material Information.
       On or before 5:00 p.m., New York Time, on the fourth Business Day
      following the date of this Agreement, the Company shall file a Current Report
      on
      Form 8-K describing the terms of the transactions contemplated by the
      Transaction Documents in the form required by the 1934 Act and attaching the
      material Transaction Documents (including, without limitation, this Agreement
      (and all schedules to this Agreement), the form of each of the Notes, the form
      of Warrants, the Registration Rights Agreement and the Security Documents)
      as
      exhibits to such filing (including all attachments, the “8-K
      Filing”).
       From and after the filing of the 8-K Filing with the SEC, no Buyer shall
      be in possession of any material,
      nonpublic information received from the Company, any of its Subsidiaries or
      any
      of their respective officers, directors, employees, stockholders,
      representatives or agents, that is not disclosed in the 8-K Filing.  The
      Company shall not, and shall cause each of its Subsidiaries and its and each
      of
      their respective officers, directors, employees and agents not to, provide
      any
      Buyer with any material, nonpublic information regarding the Company or any
      of
      its Subsidiaries from and after the filing of the 8-K Filing with the SEC
      without the express written consent of such Buyer. In
      the
      event of a breach of the foregoing covenant by the Company, any of their
      Subsidiaries, or any of their respective officers, directors, employees and
      agents, in addition to any other remedy provided herein or in the Transaction
      Documents, a Buyer shall have the right to make a public disclosure, in the
      form
      of a press release, public advertisement or otherwise, of such
      material, nonpublic information without
      the prior approval by the Company, their Subsidiaries, or any of their
      respective officers, directors, employees or agents.
      No Buyer
      shall have any liability to the Company, its Subsidiaries, or any of its or
      their respective officers, directors, employees, stockholders or agents for
      any
      such disclosure.

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

    (j) Restriction
      on Redemption and Cash Dividends.
       So long as any Note is 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).

    

    (k) Additional
      Notes and Other Issuances.
       So long as any Buyer beneficially owns any Securities, the Company will
      not issue any Notes (other than to the Buyers as contemplated hereby) and the
      Company shall not issue any other securities that would cause a breach or
      default under the Notes.  For long as any Notes or Warrants remain
      outstanding, the Company shall not, in any manner, issue or sell any rights,
      warrants or options to subscribe for or purchase Common Stock or directly or
      indirectly convertible into or exchangeable or exercisable for Common Stock
      if
      the effect of such issuance is to cause the Company to be required to issue
      upon
      conversion of any Note or exercise of any Warrant any shares of Common Stock
      in
      excess of that number of shares of Common Stock which the Company has authorized
      and reserved for purposes of such conversions or exercises or which the Company
      may issue upon conversion of the Notes and exercise of the Warrants without
      breaching the Company’s obligations under the rules or regulations of the
      Principal Market.

    

    (l) Corporate
      Existence.
       So long as any Buyer beneficially owns any Securities, the Company shall
      not be party to any Fundamental Transaction (as defined in the Notes) unless
      the
      Company is in compliance with the applicable provisions governing Fundamental
      Transactions set forth in the Notes and the Warrants.

    

    (m) Reservation
      of Shares.
       So long as any Buyer owns any Securities, the Company shall take all
      action necessary to at all times have authorized, and reserved for the purpose
      of issuance, no less than the number of shares of Common Stock issuable upon
      conversion of all of the Notes and issuable upon exercise of the Warrants then
      outstanding (without taking into account any limitations on the conversion
      of
      the Notes or exercise of the Warrants set forth in the Notes and Warrants,
      respectively).

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

    (n) Conduct
      of Business.
       The business of the Company and its Subsidiaries shall not be conducted in
      violation of any law, ordinance or regulation of any government, or any
      department or agency thereof or governmental entity, except where such
      violations would not reasonably be expected to result, either individually
      or in
      the aggregate, in a Material Adverse Effect.

    

    (o) Additional
      Registration Statements.
       Until the Effective Date (as defined in the Registration Rights
      Agreement), the Company will not file a registration statement under the 1933
      Act relating to securities that are not the Securities.  

    

    (p) No
      Short Position.
      Each of
      the Buyers and its Affiliates do not have an open short position in the Common
      Stock. 

    

    (q) Transactions
      with Affiliates.
      So long
      as any Note or Warrant is outstanding, the Company shall not, and shall cause
      each of its Subsidiaries not to, enter into, amend, modify or supplement, or
      permit any Subsidiary to enter into, amend, modify or supplement any agreement,
      transaction, commitment, or arrangement with any of its or any Subsidiary’s
      officers, directors, person who were officers or directors at any time during
      the previous two (2) years, stockholders who beneficially own five percent
      (5%)
      or more of the Common Stock, or Affiliates (as defined below) or with any
      individual related by blood, marriage or adoption to any such individual or
      with
      any entity in which any such entity or individual owns a five percent (5%)
      or
      more beneficial interest (each a “Related
      Party”),
      except for (a) customary employment arrangements and benefit programs on
      reasonable terms, (b) any investment in an Affiliate of the Company, (c) any
      agreement, transaction, commitment or arrangement on an arms-length basis on
      terms no less favorable than terms which would have been obtainable from a
      person other than such Related Party, (d) any agreement transaction, commitment
      or arrangement which is approved by a majority of the disinterested directors
      of
      the Company, for purposes hereof, any director who is also an officer of the
      Company or any subsidiary of the Company shall not be a disinterested director
      with respect to any such agreement, transaction, commitment, or arrangement.
      “Affiliate”
for
      purposes hereof means, with respect to any person or entity, another person
      or
      entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
      interest in that person or entity, (ii) has ten percent (10%) or more common
      ownership with that person or entity, (iii) controls that person or entity,
      or
      (iv) shares common control with that person or entity. “Control”
or
      “controls”
for
      purposes hereof means that a person or entity has the power, direct or indirect,
      to conduct or govern the policies of another person or entity. 

     

    5. [Intentionally
      Omitted]

    

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

    

    (a) Closing
      Date.
       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 its sole discretion by providing
      each Buyer with prior written notice thereof:

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

    (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 and each other Buyer shall have delivered to the Company the Purchase
      Price to be paid by such Buyers on the Closing Date in accordance with Section
      1(b) hereof for the Notes and the related Warrants being purchased by such
      Buyer on the Closing Date by wire transfer of immediately available funds
      pursuant to the wire instructions provided by the Company.

    

    (iii) 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
      made at that time (except for representations and warranties that speak as
      of a
      specific 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.

    

    (a) Closing
      Date.
       The obligation of each Buyer hereunder to purchase the Notes and the
      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:

    

    (i) The
      Company shall have executed and delivered to such Buyer (A) each of the
      Transaction Documents, (B) the Notes (in such principal amounts as such Buyer
      shall request) being purchased by such Buyer at the Closing pursuant to this
      Agreement and (C) the Warrants (in such amounts as such Buyer shall
      request) being purchased by such Buyer at the Closing pursuant to this
      Agreement.

    

    (ii) Such
      Buyer shall have received the opinion of Gottbetter & Partners, LLP, the
      Company’s outside counsel, dated as of the Closing Date, in substantially the
      form of Exhibit E
      attached
      hereto.

    

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

    

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

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

    (v) The
      Company shall have delivered to such Buyer a certificate, executed by the Chief
      Executive Officer 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 Certificate
      of
      Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
      form attached hereto as Exhibit F.

    

    (vi) The
      representations and warranties of the Company shall be true and correct in
      all
      material respects (other than representations and warranties that are already
      qualified by materiality or Material Adverse Effect which shall be true and
      correct in all 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) and the Company shall have performed, satisfied and
      complied in all respects with the covenants, agreements and conditions required
      by the Transaction Documents 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 G.

    

    (vii) 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 as of a date
      within five days of the Closing Date.

    

    (viii) 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

    

    (ix) The
      Company shall have obtained all governmental, regulatory or third party consents
      and approvals, if any, necessary for the sale of the Securities.

    

    (xi) The
      Company 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. 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.

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

    (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; provided that a facsimile signature shall be considered due
      execution and shall be binding upon the signatory thereto with the same force
      and effect as if the signature were an original, not a facsimile
      signature.

    

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

    

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

    

    (e) Entire
      Agreement; Amendments.
       This Agreement and the other Transaction Documents supersede all other
      prior oral or written agreements between the Buyers, the Company, their
      Affiliates and Persons acting on their behalf with respect to the matters
      discussed herein, and this Agreement, the other Transaction Documents 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 other than by an
      instrument in writing signed by the Company and the Required Holders, and any
      amendment to this Agreement made in conformity with the provisions of this
      Section 8(e) shall be binding on all Buyers and holders of Securities, as
      applicable.  No provision hereof may be waived other than by an instrument
      in writing signed by the party against whom enforcement is sought.  No such
      amendment shall be effective to the extent that it applies to less than all
      of
      the holders of the applicable Securities then outstanding.

    

    (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 Business Day after deposit with an overnight courier service,
      in
      each case properly addressed to the party to receive the same.  The
      addresses and facsimile numbers for such communications shall
      be:

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

    If
      to the
      Company:

    

    Kentucky
      USA Energy, Inc.

    321
      Somerset Road

    London,
      KY 40741

    Telephone:             
      (606)
      878-5987

    Facsimile: 

    Attention:              
      Steven
      D.
      Eversole, CEO

    

    Copy
      to
      (for informational purposes only):

    

    Gottbetter
      & Partners, LLP

    488
      Madison Avenue

    New
      York,
      NY 10022

    Telephone:             
      (212)
      400-6900

    Facsimile:                
      (212)
      400-6901

    Attention:              
      Adam
      S.
      Gottbetter, Esq.

    

    If
      to a
      Buyer, to its address and facsimile number set forth on the Buyer Omnibus
      Signature Page attached hereto, with copies to such Buyer’s representatives as
      set forth on the Schedule of Note Buyers 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.  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
      the Notes or the Warrants.  The Company shall not assign this Agreement or
      any rights or obligations hereunder without the prior written consent of the
      Required Holders (unless the Company is in compliance with the applicable
      provisions governing Fundamental Transactions set forth in the Notes and the
      Warrants).  A Buyer may assign some or all of its rights hereunder 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; provided that such
      assignee agrees in writing to be bound by all of the provisions contained
      herein.

    

    (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.

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

    (i) Survival.
       The representations and warranties of the Company and the Buyers contained
      in Sections 2 and 3 and the agreements and covenants set forth in Sections
      4 and
      8 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 of its stockholders,
      partners, members, officers, directors and employees (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,
      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 in the Transaction Documents
      or any other certificate, instrument or document contemplated hereby or thereby
      or (b) any breach of any covenant, agreement or obligation of the Company
      contained in the Transaction Documents or any other certificate, instrument
      or
      document contemplated hereby or thereby. 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) Independent
      Nature of Buyers’ Obligations and Rights.
       The obligations of each Buyer under any Transaction Document are several
      and not joint with the obligations of any other Buyer, and no Buyer shall be
      responsible in any way for the performance of the obligations of any other
      Buyer
      under any Transaction Document.  Nothing contained herein or in any other
      Transaction Document, and no action taken by any Buyer pursuant hereto or
      thereto, shall be deemed to constitute the Buyers as a partnership, an
      association, a joint venture or any other kind of entity, or create a
      presumption that the Buyers are in any way acting in concert or as a group
      with
      respect to such obligations or the transactions contemplated by the Transaction
      Documents and the Company acknowledges that to its knowledge the Buyers are
      not
      acting in concert or as a group, and the Company will not assert any such claim,
      with respect to such obligations or the transactions contemplated by the
      Transaction Documents.  Each Buyer confirms that it has independently
      participated 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.

    

    [Remainder
      of Page Intentionally Left Blank]

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

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

    

    
      	
              KENTUCKY
                USA ENERGY, INC.

            
	 
	
              By:

            	     

	 	
              Name: Steven
                D. Eversole

            
	 	
              Title:  
                Chief
                Executive Officer

            

    

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

    Securities
      Purchase Agreement

    Buyer
      Omnibus Signature Page

    

    The
      undersigned, desiring to: (A) enter into (i) Securities Purchase Agreement
      (the
“Agreement”),
      (ii)
      Registration Rights Agreement, (iii) Security Agreement and (iv) Subsidiary
      Guaranty, each dated as of May __, 2008 between the undersigned and the other
      parties thereto, in or substantially in the forms furnished to the undersigned
      and (ii) purchase the Notes of the Company as set forth below, hereby agrees
      to
      purchase such Notes from the Company and further agrees to join the Agreement,
      the Registration Rights Agreement, the Security Agreement and the Subsidiary
      Guaranty as a party thereto, with all the rights and privileges appertaining
      thereto, and to be bound in all respects by the terms and conditions thereof.
      The undersigned specifically acknowledges having read the representations
      section in the Agreement entitled “Buyer’s Representations and Warranties,” and
      hereby represent that the statements contained therein are complete and accurate
      with respect to the undersigned as a Buyer.

    

    The
      Buyer
      hereby elects to purchase Notes in the principal amount of $_______________
      [to
      be completed by the Buyer] under the Agreement.

    

    
      	
              Name
                of Buyer:

            
	 
	
              If
                an entity: 

            
	 
	
              Print
                Name of Entity: 

            
	 
	   

	 
	
              By:
                

            	   

	 	
              Name:

            
	 	
              Title:

            

    

     

    
      	
              If an individual:

            
	 	 
	
              Print Name: 

            	    
	 	 
	
              Signature: 

            	    
	 	 
	
              All Buyers: 

            
	 	 
	
              Address: 

            	   

	 	 
	   

	 
	
              Jurisdiction:

            	   

	 	 
	
              Telephone No.: 

            	   
	 	 
	
              Facsimile No.:

            	    
	 	 
	
              Email Address:

            	    

    

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

    

    SCHEDULE
      OF NOTE BUYERS

    

    
      	
              (1)

            	 	
              (2)

            	 	
              (3)

            	 	
              (4)

            	 	
              (5)

            	 
	
              Buyer

            	 	
              Aggregate

              Principal

              of Note

            	 	
              Aggregate

              Number of

              Warrant

              Shares

            	 	
              Purchase

              Price

            	 	
              Legal Representative’s

              Address and

              Facsimile Number

            	 
	 	 	
              $

            	
              2,500,000

            	 	 	
              2,500,000

            	 	
              $

            	
              2,500,000

            	 	 	
            	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 
 
 
 	 	 	 
  
 	 	 	 
   
 	 	 	 
 
 	 
	
              Total:

            	 	
              $

            	
              2,500,000

            	 	 	
              2,500,000

            	 	
              $

            	
              2,500,000EXHIBIT
      10.2

    

    NEITHER
      THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR
      THE
      SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE 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, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION
      IS
      NOT REQUIRED UNDER SAID ACT OR (II) UNLESS 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. ANY TRANSFEREE OF THIS NOTE SHOULD
      CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 18(a)
      HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY,
      THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS
      SET
      FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS
      NOTE.

    

    KENTUCKY
      USA ENERGY, INC.

    8%
      SENIOR CONVERTIBLE NOTE

    

      
        	
                Issuance
                  Date:  May 29, 2008

              	
                Original
                  Principal Amount: U.S.
                  $2,500,000

              

      

    

    

    FOR
      VALUE
      RECEIVED, Kentucky USA Energy, Inc., a Delaware corporation (the “Company”),
      hereby promises to pay to the order of _______________ or registered assigns
      (the “Holder”)
      the
      amount set out above as the Original Principal Amount (as reduced pursuant
      to
      the terms hereof pursuant to payment, redemption, conversion or otherwise,
      the
“Principal”)
      when
      due, whether upon the Maturity Date (as defined below) or any Installment Date
      (as defined below) with respect to the Installment Amount (as defined below)
      due
      on such Installment Date or upon acceleration, redemption or otherwise (in
      each
      case in accordance with the terms hereof) and to pay interest (“Interest”)
      on any
      outstanding Principal at a rate per annum equal to the Interest Rate (as defined
      below), from the date set out above as the Issuance Date (the “Issuance
      Date”)
      until
      the same becomes due and payable, whether upon the Maturity Date, an Interest
      Date (as defined below) or any Installment Date or upon acceleration, redemption
      or otherwise (in each case in accordance with the terms hereof).  This 8%
      Senior Convertible Note (including all 8% Senior Convertible Notes issued in
      exchange, transfer or replacement hereof, this “Note”)
      is one
      of a series of 8% Senior Convertible Notes issued pursuant to the Securities
      Purchase Agreement on the Closing Date (collectively, the “Notes”
and
      such other 8% Senior Convertible Notes, the “Other Notes”).
      Unless otherwise defined herein, certain capitalized terms in this Note are
      defined in Section 28.

    

    1. PAYMENTS
      OF PRINCIPAL; MATURITY.
       On each Installment Date commencing May 29, 2009 (the “Initial
      Installment Date”),
      the
      Company shall pay to the Holder an amount equal to the Installment Amount due
      on
      such Installment Date. At the option of the Company, an Installment Amount
      may
      be paid either (i) in cash by wire transfer of immediately available funds
      or
      (ii) in shares of Common Stock based upon eighty-five percent (85%) of the
      five-day volume weighted average prices of the Common Stock immediately prior
      to
      the applicable Installment Date as reported by Bloomberg.  Any payment of
      principal of the Note made by the Company shall reduce on a dollar for dollar
      basis the fact amount of the Note.

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    The
      “Maturity
      Date”
shall
      be May 28, 2011, as may be extended at the option of the Holder in the event
      that, and for so long as, an Event of Default (as defined in Section 4(a))
      shall
      have occurred and be continuing or any event shall have occurred and be
      continuing which with the passage of time and the failure to cure would result
      in an Event of Default.

    

    2. INTEREST;
      INTEREST RATE.
      Interest on this Note shall commence accruing on the Issuance Date at the
      Interest Rate and shall be computed on the basis of a 360-day year and actual
      days elapsed and shall be payable in arrears on the first Business Day of each
      calendar quarter following the Issuance Date and ending on, and including,
      the
      Maturity Date (each, an “Interest
      Date”)
      with
      the first Interest Date being August 29, 2008. Interest shall be payable to
      the
      record holder of this Note on the applicable Interest Date, in cash. Any
      Interest not paid on the Interest Date shall be added to the Principal of the
      Note

    

    3. CONVERSION
      OF NOTES.
       This Note shall be convertible into shares of common stock of the Company,
      par value $0.0001 per share (“Common
      Stock”),
      on
      the terms and conditions set forth in this Section 3.

    

    (a) Conversion
      Right.
       Subject to the provisions of Section 3(d), at any time or times on or
      after the Issuance Date, the Holder shall be entitled to convert any portion
      of
      the outstanding and unpaid Conversion Amount (as defined below) into fully
      paid
      and nonassessable shares of Common Stock in accordance with Section 3(c), at
      the
      Conversion Rate (as defined below).  Any conversion pursuant to this
      Section 3(a) shall be deemed to be a pre-payment of principal plus accrued
      and
      unpaid interest thereon, without any penalty, and shall be credited against
      any
      future payment of the Installment Amount in reverse chronological order starting
      with the last Installment Date. The Company shall not issue any fraction of
      a
      share of Common Stock upon any conversion.  If the issuance would result in
      the issuance of a fraction of a share of Common Stock, the Company shall round
      such fraction of a share of Common Stock up to the nearest whole
      share.

    

    (b) Conversion
      Rate.
       The number of shares of Common Stock issuable upon conversion of any
      Conversion Amount pursuant to Section 3(a) shall be determined by dividing
      (x)
      such Conversion Amount by (y) the Conversion Price (the “Conversion
      Rate”).

    

    (i) “Conversion
      Amount”
means
      the portion of the Principal plus any accrued and unpaid interest thereon at
      the
      Interest Rate to be converted, redeemed or otherwise with respect to which
      this
      determination is being made.

    

    (ii) “Conversion
      Price”
means
      $1.50, subject to any adjustment as provided herein.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    (c) Mechanics
      of Conversion.

    

    (i) Optional
      Conversion.
       To convert any Conversion Amount into shares of Common Stock on any date
      on or after the Issuance Date (a “Conversion
      Date”),
      the
      Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
      on or
      prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice
      of conversion in the form attached hereto as Exhibit
      A
      (the
“Conversion
      Notice”)
      to the
      Company and (B) if required by Section 3(c)(iii), surrender this Note to a
      nationally recognized overnight delivery service for delivery to the Company
      (or
      an indemnification undertaking with respect to this Note in the case of its
      loss, theft or destruction).  On or before the second (2nd)
      Trading
      Day following the date of receipt of a Conversion Notice (the “Share
      Delivery Date”),
      the
      Company shall (1) provided that the Transfer Agent is participating in the
      Fast
      Automated Securities Transfer Program of DTC credit such aggregate number of
      shares of Common Stock to which the Holder shall be entitled to the Holder’s or
      its designee’s balance account with DTC through its Deposit Withdrawal Agent
      Commission system or (2) if the Transfer Agent is not participating in the
      DTC
      Fast Automated Securities Transfer Program, issue and deliver to the address
      as
      specified in the Conversion Notice, a certificate, registered in the name of
      the
      Holder or its designee, for the number of shares of Common Stock to which the
      Holder shall be entitled.  If this Note is physically surrendered for
      conversion as required by Section 3(c)(iii) and the outstanding Principal of
      this Note is greater than the Principal portion of the Conversion Amount being
      converted, then the Company shall as soon as practicable and in no event later
      than three Business Days after receipt of this Note and at its own expense,
      issue and deliver to the holder a new Note (in accordance with Section 18(d))
      representing the outstanding Principal not converted.  The Person or
      Persons entitled to receive the shares of Common
      Stock
      issuable upon a conversion of this Note shall be treated for all purposes as
      the
      record holder or holders of such shares of Common Stock on the Conversion Date.
       In the event of a partial conversion of this Note pursuant hereto, the
      principal amount converted shall be deducted from the Installment Amounts
      relating to the Installment Dates as set forth in the Conversion
      Notice.

    

    (ii) Company’s
      Failure to Timely Convert.
       If within three (3) Trading Days after the Company’s receipt of the
      facsimile copy of a Conversion Notice, the Company shall fail to issue and
      deliver a certificate to the Holder or credit the Holder’s balance account with
      DTC for the number of shares of Common Stock to which the Holder is entitled
      upon such holder’s conversion of any Conversion Amount, and if on or after such
      Trading Day the Holder purchases (in an open market transaction or otherwise)
      Common Stock to deliver in satisfaction of a sale by the Holder of Common Stock
      issuable upon such conversion that the Holder anticipated receiving from the
      Company, then the Company shall, within three (3) Business Days after the
      Holder’s request and provision of trade confirmations and in the Holder’s
      discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s
      total purchase price (including brokerage commissions and other out-of-pocket
      expenses, 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 (and to issue
      such Common Stock) shall terminate, or (ii) promptly honor its obligation to
      deliver to the Holder a certificate or certificates representing such Common
      Stock and pay cash to the Holder in an amount equal to the excess (if any)
      of
      the Buy-In Price over the product of (A) such number of shares of Common Stock
      times (B) the Closing Bid Price on the Conversion Date.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    (iii) Registration;
      Book-Entry.
      The
      Company shall maintain a register (the “Register”)
      for
      the recordation of the names and addresses of the holders of each Note and
      the
      principal amount of the Notes held by such holders (the “Registered
      Notes”).
      The
      entries in the Register shall be conclusive and binding for all purposes absent
      manifest error. The Company and the holders of the Notes shall treat each Person
      whose name is recorded in the Register as the owner of a Note for all purposes,
      including, without limitation, the right to receive payments of principal and
      interest hereunder, notwithstanding notice to the contrary. A Registered Note
      may be assigned or sold in whole or in part only by registration of such
      assignment or sale on the Register. Upon its receipt of a request to assign
      or
      sell all or part of any Registered Note by a Holder, to the extent permitted
      by
      applicable securities laws, the Company shall record the information contained
      therein in the Register and issue one or more new Registered Notes in the same
      aggregate principal amount as the principal amount of the surrendered Registered
      Note to the designated assignee or transferee pursuant to Section 17.
      Notwithstanding anything to the contrary set forth herein, upon conversion
      of
      any portion of this Note in accordance with the terms hereof, the Holder shall
      not be required to physically surrender this Note to the Company unless (A)
      the
      full Conversion Amount represented by this Note is being converted or (B) the
      Holder has provided the Company with prior written notice (which notice may
      be
      included in a Conversion Notice) requesting physical surrender and reissue
      of
      this Note.  The Holder and the Company shall maintain records showing the
      Principal and Interest converted and the dates of such conversions or shall
      use
      such other method, reasonably satisfactory to the Holder and the Company, so
      as
      not to require physical surrender of this Note upon conversion.

    

    (iv) Disputes.
       In
      the event of a dispute as to the number of shares of Common Stock issuable
      to
      the Holder in connection with a conversion of this Note, the Company shall
      issue
      to the Holder the number of shares of Common Stock not in dispute and resolve
      such dispute in accordance with Section 23.

    

    (d) Limitations
      on Conversions. 

    

    (i) Beneficial
      Ownership.
       The Company shall not effect any conversion of this Note, and the Holder
      of this Note (including any successor, transferee or assignee) shall not have
      the right to convert any portion of this Note pursuant to Section 3(a), to
      the
      extent that after giving effect to such conversion, the Holder (together with
      the Holder’s affiliates) would beneficially own in excess of 4.99% of the number
      of shares of Common Stock outstanding immediately after giving effect to such
      conversion; provided,
      however,
      the
      percentage limitation may be increase to 9.99% at the Holder’s written request
      to the Company.  For purposes of the foregoing sentence, the number of
      shares of Common Stock beneficially owned by the Holder and its affiliates
      shall
      include the number of shares of Common Stock issuable upon conversion of this
      Note with respect to which the determination of such sentence is being made,
      but
      shall exclude the shares of Common Stock which would be issuable upon (A)
      conversion of the remaining, nonconverted portion of this Note beneficially
      owned by the Holder or any of its affiliates and (B) exercise or conversion
      of
      the unexercised or nonconverted portion of any other securities of the Company
      (including, without limitation, any Other Notes or warrants) subject to a
      limitation on conversion or exercise analogous to the limitation contained
      herein beneficially owned by the Holder or any of its affiliates.  Except
      as set forth in the preceding sentence, for purposes of this Section 3(d)(i),
      beneficial ownership shall be calculated in accordance with Section 13(d) of
      the
      Securities Exchange Act of 1934, as amended.  For purposes of this Section
      3(d)(i), in determining the number of outstanding shares of Common Stock, the
      Holder may rely on the number of outstanding shares of Common Stock as reflected
      in (x) the Company’s most recent Form 10-K, Form 10-Q, Form 8-K or any other
      public filing with the Securities and Exchange Commission, as the case may
      be,
      (y) a more recent public announcement by the Company or (z) any other notice
      by
      the Company or the Transfer Agent setting forth the number of shares of Common
      Stock outstanding.  For any reason at any time, upon the written request of
      the Holder, the Company shall within two Business Days confirm in writing to
      the
      Holder the number of shares of Common Stock then outstanding.  In any case,
      the number of outstanding shares of Common Stock shall be determined after
      giving effect to the conversion or exercise of securities of the Company,
      including this Note, by the Holder or its affiliates since the date as of which
      such number of outstanding shares of Common Stock was reported.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    (ii) Principal
      Market Regulation.
       The Company shall not be obligated to issue any shares of Common Stock
      upon conversion of this Note, and the Holder of this Note shall not have the
      right to receive upon conversion of this Note any shares of Common Stock, if
      the
      issuance of such shares of Common Stock would exceed the aggregate number of
      shares of Common Stock which the Company may issue upon conversion or exercise,
      as applicable, of the Notes and Warrants or otherwise without breaching the
      Company’s obligations under the rules or regulations of the Principal Market
      (the “Exchange
      Cap”),
      except that such limitation shall not apply in the event that the Company (A)
      obtains the approval of its stockholders as required by the applicable rules
      of
      the Principal Market for issuances of shares of Common Stock in excess of such
      amount or (B) obtains a written opinion from outside counsel to the Company
      that
      such approval is not required, which opinion shall be reasonably satisfactory
      to
      the Required Holders.  Until such approval or written opinion is obtained,
      no purchaser of the Notes pursuant to the Securities Purchase Agreement (the
      “Purchasers”)
      shall
      be issued in the aggregate, upon conversion or exercise, as applicable, of
      Notes
      or Warrants, shares of Common Stock in an amount greater than the product of
      the
      Exchange Cap multiplied by a fraction, the numerator of which is the principal
      amount of Notes issued to such Purchaser pursuant to the Securities Purchase
      Agreement on the Closing Date and the denominator of which is the aggregate
      principal amount of all Notes issued to the Purchasers pursuant to the
      Securities Purchase Agreement on the Closing Date (with respect to each
      Purchaser, the “Exchange
      Cap Allocation”).
       In the event that any Purchaser shall sell or otherwise transfer any of
      such Purchaser’s Notes, the transferee shall be allocated a pro rata portion of
      such Purchaser’s Exchange Cap Allocation, and the restrictions of the prior
      sentence shall apply to such transferee with respect to the portion of the
      Exchange Cap Allocation allocated to such transferee.  In the event that
      any holder of Notes shall convert all of such holder’s Notes into a number of
      shares of Common Stock which, in the aggregate, is less than such holder’s
      Exchange Cap Allocation, then the difference between such holder’s Exchange Cap
      Allocation and the number of shares of Common Stock actually issued to such
      holder shall be allocated to the respective Exchange Cap Allocations of the
      remaining holders of Notes on a pro rata basis in proportion to the aggregate
      principal amount of the Notes then held by each such holder. To the extent
      required by the Principal Market, the provisions of the Exchange Cap shall
      be
      modified to comply with the applicable rules and regulations of the Principal
      Market, provided that any such changes shall not, in the Holder’s reasonable
      discretion, materially change the terms of the transaction contemplated
      hereby.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    4. RIGHTS
      UPON EVENT OF DEFAULT.

    

    (a) Event
      of Default.
       Each of the following events shall constitute an “Event of Default
“:

    

    (i) the
      Company’s failure to pay to the Holder any amount of Principal (including,
      without limitation, any redemption or make-whole payments), Interest or other
      amounts when and as due under this Note or any other Transaction Document (as
      defined in the Securities Purchase Agreement) or any other agreement, document,
      certificate or other instrument delivered in connection with the transactions
      contemplated hereby and thereby to which the Holder is a party, except, in
      the
      case of a failure to pay Interest when and as due, in which case only if such
      failure continues for a period of at least five (5) Business Days;

    

    (ii) any
      default under, redemption of or acceleration prior to maturity of any
      Indebtedness in excess of $100,000, in the aggregate, of the Company or any
      of
      its Subsidiaries (as defined in the Securities Purchase Agreement);

    

    (iii) the
      Company or any of its Subsidiaries, pursuant to or within the meaning of Title
      11, U.S. Code, or any similar federal, foreign or state law for the relief
      of
      debtors (collectively, “Bankruptcy
      Law”),
      (A)
      commences a voluntary case, (B) consents to the entry of an order for relief
      against it in an involuntary case, (C) consents to the appointment of a
      receiver, trustee, assignee, liquidator or similar official
      (a
“Custodian”),
      (D)
      makes a general assignment for the benefit of its creditors or (E) admits in
      writing that it is generally unable to pay its debts as they become due;

    

    (iv) a
      court
      of competent jurisdiction enters an order or decree under any Bankruptcy Law
      that (A) is for relief against the Company or any of its Subsidiaries in an
      involuntary case, (B) appoints a Custodian of the Company or any of its
      Subsidiaries or (C) orders the liquidation of the Company or any of its
      Subsidiaries; 

    

    (v) a
      final
      judgment or judgments for the payment of money aggregating in excess of $250,000
      are rendered against the Company or any of its Subsidiaries and which judgments
      are not, within sixty (60) days after the entry thereof, bonded, discharged
      or
      stayed pending appeal, or are not discharged within sixty (60) days after the
      expiration of such stay; provided,
      however,
      that
      any judgment which is covered by insurance or an indemnity from a credit worthy
      party shall not be included in calculating the $250,000 amount set forth above
      so long as the Company provides the Holder a written statement from such insurer
      or indemnity provider (which written statement shall be reasonably satisfactory
      to the Holder) to the effect that such judgment is covered by insurance or
      an
      indemnity and the Company will receive the proceeds of such insurance or
      indemnity within thirty (30) days of the issuance of such judgment;

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    (vi) the
      Company breaches any material representation, warranty, covenant or other term
      or condition of any Transaction Document, except, in the case of a breach of
      a
      covenant which is curable, only if such breach continues for a period of at
      least ten (10) consecutive Business Days; 

    

    (vii) any
      breach or failure in any respect to comply with Section 15 of this Note;
      and

    

    (viii) any
      Event
      of Default (as defined in the Other Notes) occurs with respect to any Other
      Notes. 

    

    5. RIGHTS
      UPON FUNDAMENTAL TRANSACTION AND OTHER CORPORATE EVENTS.

    

    (a) Assumption.
       The Company shall not enter into or be party to a Fundamental Transaction
      unless (i) the Successor Entity assumes in writing all of the obligations of
      the
      Company under this Note and the other Transaction Documents in accordance with
      the provisions of this Section 5(a) pursuant to written agreements in form
      and
      substance satisfactory to the Required Holders and approved by the Required
      Holders prior to such Fundamental Transaction, including agreements to deliver
      to each holder of Notes in exchange for such Notes a security of the Successor
      Entity evidenced by a written instrument substantially similar in form and
      substance to the Notes, including, without limitation, having a principal amount
      and interest rate equal to the principal amounts and the interest rates of
      the
      Notes held by such holder, having similar conversion rights as the Notes and
      having similar ranking to the Notes, and satisfactory to the Required Holders
      and (ii) the Successor Entity (including its Parent Entity) is a publicly
      traded corporation whose common stock is quoted on or listed for trading on
      an
      Eligible Market. Upon the occurrence of any Fundamental Transaction, the
      Successor Entity shall succeed to, and be substituted for (so that from and
      after the date of such Fundamental Transaction, the provisions of this Note
      referring to the “Company” shall refer instead to the Successor Entity), and may
      exercise every right and power of the Company and shall assume all of the
      obligations of the Company under this Note with the same effect as if such
      Successor Entity had been named as the Company herein.  Upon consummation
      of the Fundamental Transaction, the Successor Entity shall deliver to the Holder
      confirmation that there shall be issued upon conversion or redemption of this
      Note at any time after the consummation of the Fundamental Transaction, in
      lieu
      of the shares of Common Stock (or other securities, cash, assets or other
      property) issuable upon the conversion of the Notes prior to such Fundamental
      Transaction, such shares of publicly traded common stock (or its equivalent)
      of
      the Successor Entity (including its Parent Entity) which the Holder would have
      been entitled to receive upon the happening of such Fundamental Transaction
      had
      this Note been converted immediately prior to such Fundamental Transaction,
      as
      adjusted in accordance with the provisions of this Note.  The provisions of
      this Section shall apply similarly and equally to successive Fundamental
      Transactions and shall be applied without regard to any limitations on the
      conversion of this Note.

     

    
      
        
        

      

      
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    (b) Other
      Corporate Events.
       In addition to and not in substitution for any other rights hereunder,
      prior to the consummation of any Fundamental Transaction pursuant to which
      holders of shares of Common Stock are entitled to receive securities or other
      assets with respect
      to or in exchange for shares of Common Stock (a “Corporate
      Event”),
      the
      Company shall make appropriate provision to insure that the Holder will
      thereafter have the right to receive, at the Holder’s option, upon a conversion
      of this Note (i) in addition to the shares of Common Stock receivable upon
      such
      conversion, such securities or other assets to which the Holder would have
      been
      entitled with respect to such shares of Common Stock had such shares of Common
      Stock been held by the Holder upon the consummation of such Corporate Event
      (without taking into account any limitations or restrictions on the
      convertibility of this Note) or (ii) in lieu of the shares of Common Stock
      otherwise receivable upon such conversion, such securities or other assets
      received by the holders of shares of Common Stock in connection with the
      consummation of such Corporate Event in such amounts as the Holder would have
      been entitled to receive had this Note initially been issued with conversion
      rights for the form of such consideration (as opposed to shares of Common Stock)
      at a conversion rate for such consideration commensurate with the Conversion
      Rate.  Provision made pursuant to the preceding sentence shall be in a form
      and substance satisfactory to the Required Holders.  The provisions of this
      Section shall apply similarly and equally to successive Corporate Events and
      shall be applied without regard to any limitations on the conversion or
      redemption of this Note.

    

    6. ADJUSTMENT
      OF CONVERSION PRICE.

    

    (a) Adjustment
      of Conversion Price upon Issuance of Common Stock.
       If at any time after the Subscription Date and prior to repayment in full
      or conversion in full of this Note, the Company issues or sells, or in
      accordance with this Section 6(a) is deemed to have issued or sold, any shares
      of Common Stock (excluding shares of Common Stock deemed to have been issued
      or
      sold by the Company in connection with any Excluded Securities) for a
      consideration per share (the “New
      Issuance Price”)
      less
      than a price (the “Applicable
      Price”)
      equal
      to the Conversion Price in effect immediately prior to such issue or sale (the
      foregoing a “Dilutive
      Issuance”),
      then
      immediately after such Dilutive Issuance, the Conversion Price then in effect
      shall be reduced to the New Issuance Price.  For purposes of determining
      the adjusted Conversion Price under this Section 6(a), the following shall
      be
      applicable:

    

    (i) Issuance
      of Options.
       If the Company in any manner grants or sells any options and the lowest
      price per share for which one share of Common Stock is issuable upon the
      exercise of any such option or upon conversion or exchange or exercise of any
      convertible securities issuable upon exercise of such option is less than the
      Applicable Price, then such share of Common Stock shall be deemed to be
      outstanding and to have been issued and sold by the Company at the time of
      the
      granting or sale of such option for such price per share.  For purposes of
      this Section 6(a)(i), the “lowest price per share for which one share of Common
      Stock is issuable upon the exercise of any such option or upon conversion or
      exchange or exercise of any convertible securities issuable upon exercise of
      such option” shall be equal to the sum of the lowest amounts of consideration
      (if any) received or receivable by the Company with respect to any one share
      of
      Common Stock upon granting or sale of the option, upon exercise of the option
      and upon conversion or exchange or exercise of any convertible security issuable
      upon exercise of such option.  No further adjustment of the Conversion
      Price shall be made upon the actual issuance of such share of Common Stock
      or of
      such convertible securities upon the exercise of such options or upon the
      actual
      issuance
      of such Common Stock upon conversion or exchange or exercise of such convertible
      securities.

     

    
      
        
        

      

      
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    (ii) Issuance
      of Convertible Securities.
       If the Company in any manner issues or sells any convertible securities
      and the lowest price per share for which one share of Common Stock is issuable
      upon such conversion or exchange or exercise thereof is less than the Applicable
      Price, then such share of Common Stock shall be deemed to be outstanding and
      to
      have been issued and sold by the Company at the time of the issuance or sale
      of
      such convertible securities for such price per share.  For the purposes of
      this Section 6(a)(ii), the “lowest price per share for which one share of Common
      Stock is issuable upon such conversion or exchange or exercise” shall be equal
      to the sum of the lowest amounts of consideration (if any) received or
      receivable by the Company with respect to any one share of Common Stock upon
      the
      issuance or sale of the convertible security and upon the conversion or exchange
      or exercise of such convertible security. No further adjustment of the
      Conversion Price shall be made upon the actual issuance of such share of Common
      Stock upon conversion or exchange or exercise of such convertible securities,
      and if any such issue or sale of such convertible securities is made upon
      exercise of any options for which adjustment of the Conversion Price had been
      or
      are to be made pursuant to other provisions of this Section 6(a), no further
      adjustment of the Conversion Price shall be made by reason of such issue or
      sale.

    

    (iii) Change
      in Option Price or Rate of Conversion.
       If the purchase price provided for in any options, the additional
      consideration, if any, payable upon the issue, conversion,  exchange or
      exercise of any convertible securities, or the rate at which any convertible
      securities are convertible into or exchangeable or exercisable for Common Stock
      changes at any time, the Conversion Price in effect at the time of such change
      shall be adjusted to the Conversion Price which would have been in effect at
      such time had such options or convertible securities provided for such changed
      purchase price, additional consideration or changed conversion rate, as the
      case
      may be, at the time initially granted, issued or sold.  For purposes of
      this Section 6(a)(iii), if the terms of any option or convertible security
      that
      was outstanding as of the Subscription Date are changed in the manner described
      in the immediately preceding sentence, then such option or convertible security
      and the Common Stock deemed issuable upon exercise, conversion or exchange
      thereof shall be deemed to have been issued as of the date of such change.
       No adjustment shall be made if such adjustment would result in an increase
      of the Conversion Price.

     

    
      
        
        

      

      
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    (iv) Calculation
      of Consideration Received.
       In case any option is issued in connection with the issue or sale of other
      securities of the Company, together comprising one integrated transaction in
      which no specific consideration is allocated to such options by the parties
      thereto, the options will be deemed to have been issued for such consideration
      as determined in good faith by the Board of Directors of the Company.  If
      any Common Stock, options or convertible securities are issued or sold or deemed
      to have been issued or sold for cash, the consideration received therefor will
      be deemed to be the net amount received by the Company therefor.  If any
      Common Stock, options or convertible securities are issued or sold for a
      consideration other than cash, the amount of the consideration other than cash
      received by the Company will be the fair
      value of
      such consideration as determined in good faith by the Board of Directors of
      the
      Company, except where such consideration consists of securities, in which case
      the amount of consideration received by the Company will be the Closing Sale
      Price of such securities on the date of receipt.  If any Common Stock,
      options or convertible securities are issued to the owners of the non-surviving
      entity in connection with any merger in which the Company is the surviving
      entity, the amount of consideration therefor will be deemed to be the fair
      value
      of such portion of the net assets and business of the non-surviving entity
      as is
      attributable to such Common Stock, options or convertible securities, as the
      case may be.  Except as otherwise provided in this Section 6(a)(iv), the
      fair value of any consideration other than cash or securities will be determined
      jointly by the Company and the Required Holders.  If such parties are
      unable to reach agreement within ten (10) days after the occurrence of an event
      requiring valuation (the “Valuation
      Event”),
      the
      fair value of such consideration will be determined by an independent, reputable
      appraiser jointly selected by the Company and the Required Holders within five
      (5) Business Days after the tenth day following the Valuation Event.  The
      determination of such appraiser shall be deemed binding upon all parties absent
      manifest error and the fees and expenses of such appraiser shall be borne by
      the
      Company.

    

    (v) Record
      Date.
       If the Company takes a record of the holders of Common Stock for the
      purpose of entitling them (A) to receive a dividend or other distribution
      payable in Common Stock, options or in convertible securities or (B) to
      subscribe for or purchase Common Stock, options or convertible securities,
      then
      such record date will be deemed to be the date of the issue or sale of the
      Notes
      deemed to have been issued or sold upon the declaration of such dividend or
      the
      making of such other distribution or the date of the granting of such right
      of
      subscription or purchase, as the case may be.

    

    (b) Adjustment
      of Conversion Price upon Subdivision or Combination of Common
      Stock.If
      the
      Company at any time on or after the Subscription Date subdivides (by any stock
      split, stock dividend, recapitalization or otherwise) one or more classes of
      its
      outstanding shares of Common Stock into a greater number of shares, the
      Conversion Price in effect immediately prior to such subdivision will be
      proportionately reduced.  If the Company at any time on or after the
      Subscription Date combines (by combination, reverse stock split or otherwise)
      one or more classes of its outstanding shares of Common Stock into a smaller
      number of shares, the Conversion Price in effect immediately prior to such
      combination will be proportionately increased.

     

    
      
        
        

      

      
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    7. COMPANY
      RIGHT OF REDEMPTION.

    

    (a) General.
      The
      Company at its option shall have the right to redeem, with three (3) Business
      Days advance written notice (the “Company
      Redemption Notice”),
      a
      portion or all the outstanding principal of the Note. The redemption price
      shall
      be the greater of (i) One Hundred and Twenty percent (120%) of the principal
      amount to be redeemed or (ii) the product of (x) the principal amount of the
      Note to be redeemed divided by the Conversion Price and (y) the Closing Sale
      Price of the Common Stock on the day immediately before date of such Company
      Redemption Notice (the “Company Redemption
      Price”),
      plus,
      in each case, any accrued interest an unpaid interest.

    

    (b) Mechanics
      of Company Redemption.
       If the Company elects to redeem the Note in accordance with Section 7(a),
      then the Company Redemption Price, if any, which is to be paid to the Holder,
      shall be paid, by wire transfer of immediately available funds, an amount in
      cash equal to 100% of the Company Redemption Price.

    

    8. CHANGE
      OF CONTROL.
      In the
      event the Company consummates a stock purchase agreement or other business
      combination with another Person whereby such other Person acquires more than
      the
      50% of either the outstanding shares of Voting Stock (not including any shares
      of Voting Stock held by the other Person or other Persons making or party to,
      or
      associated or affiliated with the other Persons making or party to, such stock
      purchase agreement or other business combination), the Holder at its option
      shall have the right to cause the Company to repurchase a portion or all the
      outstanding principal of the Note. The repurchase price shall be the greater
      of
      (i) One Hundred percent (100%) of the principal amount to be repurchased or
      (ii)
      One Hundred Fifty percent (150%) of the product of (x) the principal amount
      of
      the Note to be repurchased divided by the Conversion Price and (y) the Closing
      Sale Price of the Common Stock on the day immediately before date of such
      repurchase, plus, in each case, any accrued interest an unpaid
      interest.

    

    9. SECURITY.
       This Note and the Other Notes are secured to the extent and in the manner
      set forth in the Security Documents (as defined in the Securities Purchase
      Agreement).

    

    10. NONCIRCUMVENTION.
       The Company hereby covenants and agrees that the Company will not, by
      amendment of its Certificate of Incorporation, Bylaws or through any
      reorganization, transfer of assets, consolidation, merger, scheme of
      arrangement, dissolution, issue or sale of securities, or any other voluntary
      action, avoid or seek to avoid the observance or performance of any of the
      terms
      of this Note, and will at all times in good faith carry out all of the
      provisions of this Note and take all reasonable action as may be required to
      protect the rights of the Holder of this Note.

    

    11. RESERVATION
      OF AUTHORIZED SHARES.

    

    (a) Reservation.
       The Company initially shall reserve out of its authorized and unissued
      Common Stock a number of shares of Common Stock for each of the Notes equal
      to
      the Conversion Rate with respect to the Conversion Amount of each such Note
      as
      of the Issuance Date.  So long as any of the Notes are outstanding, the
      Company shall take all action necessary to reserve and keep available out of
      its
      authorized and unissued Common Stock, solely for the purpose of effecting the
      conversion of the Notes, the number of shares of Common Stock as shall from
      time
      to time be necessary to effect the conversion of all of the Notes then
      outstanding; provided that at no time shall the number of shares of Common
      Stock
      so reserved be less than the number of shares required to be reserved of the
      previous sentence (without regard to any limitations on conversions) (the
“Required
      Reserve Amount”).
      The
      initial number of shares of Common Stock reserved for conversions of the Notes
      and each increase in the number of shares so reserved shall be allocated pro
      rata among the holders of the Notes based on the principal amount of the Notes
      held by each holder at the Closing (as defined in the Securities Purchase
      Agreement) or increase in the number of reserved shares, as the case may be
      (the
“Authorized
      Share Allocation”).
      In
      the event that a holder shall sell or otherwise transfer any of such holder’s
      Notes, each transferee shall be allocated a pro rata portion of such holder’s
      Authorized Share Allocation. Any shares of Common Stock reserved and allocated
      to any Person which ceases to hold any Notes shall be allocated to the remaining
      holders of Notes, pro rata based on the principal amount of the Notes then
      held
      by such holders.

     

    
      
        
        

      

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

    

    12. [Intentionally
      Omitted]

    

    13. RESTRICTION
      ON REDEMPTION AND CASH DIVIDENDS.
       Until all of the Notes have been converted, redeemed or otherwise
      satisfied in accordance with their terms, the Company shall not, directly or
      indirectly, redeem, repurchase or declare or pay any cash dividend or
      distribution on its capital stock without the prior express written consent
      of
      the Required Holders.

    

    14. VOTING
      RIGHTS.
       The Holder shall have no voting rights as the holder of this Note, except
      as required by law, including but not limited to Chapter 78 of the Delaware
      Revised Statutes, and as expressly provided in this Note.

     

    
      
        
        

      

      
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    15. COVENANTS.
       

    

    (a) Rank.
      All
      payments due under this Note shall rank pari passu with all Other Notes and
      no
      other Indebtedness of the Company and its Subsidiaries shall be senior to the
      Indebtedness of the Company and its Subsidiary evidenced by the Note and the
      Other Notes, other than Permitted Indebtedness.

    

    (b) Incurrence
      of Indebtedness.
       So long as this Note is outstanding, the Company shall not, and the
      Company shall not permit any of its Subsidiaries to, directly or indirectly,
      incur or guarantee, assume or suffer to exist any Indebtedness, other than
      (i)
      Indebtedness evidenced by this Note and (ii) Permitted
      Indebtedness.

    

    (c) Existence
      of Liens.
       So long as this Note is outstanding, the Company shall not, and the
      Company shall not permit any of its Subsidiaries to, directly or indirectly,
      allow or suffer to exist any mortgage, lien, pledge, charge, security interest
      or other encumbrance upon or in any property or assets (including accounts
      and
      contract rights) owned by the Company or any of its Subsidiaries (collectively,
      “Liens”),
      other
      than Permitted Liens.

    

    (d) Restricted
      Payments.
       The Company shall not, and the Company shall not permit any of its
      Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay
      or
      make any payments in respect of, by the payment of cash or cash equivalents
      (in
      whole or in part, whether by way of open market purchases, tender offers,
      private transactions or otherwise), all or any portion of any Permitted
      Indebtedness, whether by way of payment in respect of principal of (or premium,
      if any) or interest on such Indebtedness, if at the time such payment is due
      or
      is otherwise made or, after giving effect to such payment, an event
      constituting, or that with the passage of time and without being cured would
      constitute, an Event of Default has occurred and is continuing.

    

    (e) Subsidiary
      Internal Accounting Controls.
       So long as this Note is outstanding, the Company and each of its
      Subsidiaries shall maintain, in all material respects, a system
      of
      internal accounting controls consistent with the Internal Accounting Controls
      (as defined in the Securities Purchase Agreement).

    

    16. VOTE
      TO ISSUE, OR CHANGE THE TERMS OF, NOTES.
       The affirmative vote at a meeting duly called for such purpose or the
      written consent without a meeting of the Required Holders shall be required
      for
      any change or amendment to this Note or the Other Notes.

    

    17. TRANSFER.
       The Holder acknowledges and agrees that this Note may be offered, sold,
      assigned or transferred by the Holder without the consent of the Company,
      provided that the provisions of Section 2(f) of the Securities Purchase
      Agreement are complied with in all respects.

    

    18. REISSUANCE
      OF THIS NOTE.

    

    (a) Transfer.
       If this Note is to be transferred, the Holder shall surrender this Note to
      the Company, whereupon the Company will issue, promptly following the
      satisfaction of the provisions of Section 2(f) of the Securities Purchase
      Agreement, and deliver upon the order of the Holder a new Note (in accordance
      with Section 18(d)), in the name of the validly registered assigns or
      transferee, representing the outstanding Principal being transferred by the
      Holder and, if less than the entire outstanding Principal is being transferred,
      a new Note (in accordance with Section 18(d)) to the Holder representing the
      outstanding Principal not being transferred.  The Holder and any assignee,
      by acceptance of this Note, acknowledge and agree that, by reason of the
      provisions of Section 3(c)(iii) and this Section 18(a), following conversion
      or
      redemption of any portion of this Note, the outstanding Principal represented
      by
      this Note may be less than the Principal stated on the face of this
      Note.

     

    
      
        
        

      

      
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    (b) Lost,
      Stolen or Mutilated Note.
       Upon receipt by the Company of evidence reasonably satisfactory to the
      Company of the loss, theft, destruction or mutilation of this Note, and, in
      the
      case of loss, theft or destruction, of any indemnification undertaking by the
      Holder to the Company in customary form and, in the case of mutilation, upon
      surrender and cancellation of this Note, the Company shall execute and deliver
      to the Holder a new Note (in accordance with Section 18(d)) representing the
      outstanding Principal.

    

    (c) Note
      Exchangeable for Different Denominations.
       This Note is exchangeable, upon the surrender hereof by the Holder at the
      principal office of the Company, for a new Note or Notes (in accordance with
      Section 18(d) and in principal amounts of at least $100,000) representing in
      the
      aggregate the outstanding Principal of this Note, and each such new Note will
      represent such portion of such outstanding Principal as is designated by the
      Holder at the time of such surrender.

    

    (d) Issuance
      of New Notes.
       Whenever the Company is required to issue a new Note pursuant to the terms
      of this Note, such new Note (i) shall be of like tenor with this Note, (ii)
      shall represent, as indicated on the face of such new Note, the Principal
      remaining outstanding (or in the case of a new Note being issued pursuant to
      Section 18(a) or Section 18(c), the Principal designated by the Holder which,
      when added to the principal represented by the other new Notes issued in
      connection with such issuance, does not exceed the Principal remaining
      outstanding under this Note immediately prior to such issuance of new Notes),
      (iii) shall have an issuance date, as indicated on the face of such new Note,
      which is the same as the Issuance Date of this Note, (iv) shall have the same
      rights and conditions as this Note, and (v) shall represent accrued Interest
      on
      the Principal and Interest of this Note, from the Issuance
      Date.

    

    19. REMEDIES,
      CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
      RELIEF.
       The remedies provided in this Note shall be cumulative and in addition to
      all other remedies available under this Note and any of the other Transaction
      Documents at law or in equity (including a decree of specific performance and/or
      other injunctive relief), and nothing herein shall limit the Holder’s right to
      pursue actual and consequential damages for any failure by the Company to comply
      with the terms of this Note.  Amounts set forth or provided for herein with
      respect to payments, conversion and the like (and the computation thereof)
      shall
      be the amounts to be received by the Holder and shall not, except as expressly
      provided herein, be subject to any other obligation of the Company (or the
      performance thereof).  The Company acknowledges that a breach by it of its
      obligations hereunder will cause irreparable harm to the Holder and that the
      remedy at law for any such breach may be inadequate.  The Company therefore
      agrees that, in the event of any such breach or threatened breach, the Holder
      shall be entitled, in addition to all other available remedies, to an injunction
      restraining any breach, without the necessity of showing economic loss and
      without any bond or other security being required.

    

    
      
        
        

      

      
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    20. PAYMENT
      OF COLLECTION, ENFORCEMENT AND OTHER COSTS.
       If (a) this Note is placed in the hands of an attorney for collection or
      enforcement or is collected or enforced through any legal proceeding or the
      Holder otherwise takes action to collect amounts due under this Note or to
      enforce the provisions of this Note or (b) there occurs any bankruptcy,
      reorganization, receivership of the Company or other proceedings affecting
      Company creditors’ rights and involving a claim under this Note, then the
      Company shall pay the costs incurred by the Holder for such collection,
      enforcement or action or in connection with such bankruptcy, reorganization,
      receivership or other proceeding, including, but not limited to, reasonable
      attorneys’ fees and disbursements.

    

    21. CONSTRUCTION;
      HEADINGS.
       This Note shall be deemed to be jointly drafted by the Company and all the
      Purchasers and shall not be construed against any person as the drafter hereof.
       The headings of this Note are for convenience of reference and shall not
      form part of, or affect the interpretation of, this Note.

    

    22. FAILURE
      OR INDULGENCE NOT WAIVER.
       No failure or delay on the part of the Holder in the exercise of any
      power, right or privilege hereunder shall operate as a waiver thereof, nor
      shall
      any single or partial exercise of any such power, right or privilege preclude
      other or further exercise thereof or of any other right, power or
      privilege.

    

    23. DISPUTE
      RESOLUTION.
       In the case of a dispute as to the determination of the Closing Bid Price
      or the arithmetic calculation of the Conversion Rate or the Company Redemption
      Price, the Company shall submit the disputed determinations or arithmetic
      calculations via facsimile within one (1) Business Day of receipt of the
      Conversion Notice or the Company Redemption Notice or other event giving rise
      to
      such dispute, as the case may be, to the Holder. If the Holder and the Company
      are unable to agree upon such determination or calculation within one (1)
      Business Day of such disputed determination or arithmetic calculation being
      submitted to the Holder, then the Company shall, within one (1) Business Day
      submit via facsimile (a) the disputed determination of the Closing Bid Price
      to
      an independent, reputable investment bank selected by the Company and approved
      by the Holder  (such approval not to be unreasonably withheld or delayed)
      or (b) the disputed arithmetic calculation of the Conversion Rate or the Company
      Redemption Price to the Company’s independent, outside accountant.  The
      Company, at the Company’s expense, shall cause the investment bank or the
      accountant, as the case may be, to perform the determinations or calculations
      and notify the Company and the Holder of the results no later than five (5)
      Business Days from the time it receives the disputed determinations or
      calculations.  Such investment bank’s or accountant’s determination or
      calculation, as the case may be, shall be binding upon all parties absent
      demonstrable error.

    

    
      
        
        

      

      
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    24. NOTICES;
      PAYMENTS.

    

    (a) Notices.
       Whenever notice is required to be given under this Note, unless otherwise
      provided herein, such notice shall be given in accordance with Section 8(f)
      of
      the Securities Purchase Agreement.  The Company shall provide the Holder
      with prompt written notice of all actions taken pursuant to this Note, including
      in reasonable detail a description of such action and the reason therefore.
       Without limiting the generality of the foregoing, the Company will give
      written notice to the Holder (i) immediately upon any adjustment of the
      Conversion Price, setting forth in reasonable detail, and certifying, the
      calculation of such adjustment and (ii) at least twenty  days prior to the
      date on which the Company closes its books or takes a record (A) with respect
      to
      any dividend or distribution upon the Common Stock, (B) with respect to any
      pro
      rata subscription offer to holders of Common Stock or (C) for determining rights
      to vote with respect to any Fundamental Transaction, dissolution or liquidation,
      provided in each case that such information shall be made known to the public
      prior to or in conjunction with such notice being provided to the
      Holder.

    

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

    

    25. CANCELLATION.
       After all Principal, accrued Interest and other amounts at any time owed
      on this Note has been paid in full, this Note shall automatically be deemed
      canceled, shall be surrendered to the Company for cancellation and shall not
      be
      reissued.

    

    26 WAIVER
      OF NOTICE.
       To the extent permitted by law, the Company hereby waives demand, notice,
      protest and all other demands and notices in connection with the delivery,
      acceptance, performance, default or enforcement of this Note and the Securities
      Purchase Agreement.

    

    27. GOVERNING
      LAW; JURISDICTION; JURY TRIAL.
       This Note shall be construed and enforced in accordance with, and all
      questions concerning the construction, validity, interpretation and performance
      of this Note 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.  The Company 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.  The Company 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 it set forth
      on the signature page hereto 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.  In the event that any provision of this Note is invalid
      or unenforceable under any applicable statute or rule of law, then such
      provision shall be deemed inoperative to the extent that it may conflict
      therewith and shall be deemed modified to conform with such statute or rule
      of
      law.  Any such provision which may prove invalid or unenforceable under any
      law shall not affect the validity or enforceability of any other provision
      of
      this Note.  Nothing contained herein shall be deemed or operate to preclude
      the Holder from bringing suit or taking other legal action against the Company
      in any other jurisdiction to collect on the Company’s obligations to the Holder,
      to realize on any collateral or any other security for such obligations, or
      to
      enforce a judgment or other court ruling in favor of the Holder.   THE
      COMPANY 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 NOTE OR ANY TRANSACTION CONTEMPLATED
      HEREBY.

    

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    28. CERTAIN
      DEFINITIONS.
       For purposes of this Note, the following terms shall have the following
      meanings:

    

    (a) "Approved
      Stock Plan"
      means
      any employee benefit plan which has been approved by the Board of Directors
      of
      the Company, pursuant to which the Company's securities may be issued to any
      employee, consultant, officer or director for services provided to the
      Company.

    

    (b) “Bloomberg”
means
      Bloomberg Financial Markets.

    

    (c) “Business
      Day”
means
      any day other than Saturday, Sunday or other day on which commercial banks
      in
      The City of New York are authorized or required by law to remain
      closed.

    

    (d) “Closing
      Bid Price”
and
      “Closing
      Sale Price”
means,
      for any security as of any date, the last closing bid price and last closing
      trade price, respectively, for such security on the Principal Market, as
      reported by Bloomberg, or, if the Principal Market begins to operate on an
      extended hours basis and does not designate the closing bid price or the closing
      trade price, as the case may be, then the last bid price or last trade price,
      respectively, of such security prior to 4:00 p.m., New York Time, as reported
      by
      Bloomberg, or, if the Principal Market is not the principal securities exchange
      or trading market for such security, the last closing bid price or last trade
      price, respectively, of such security on the principal securities exchange
      or
      trading market where such security is listed or traded as reported by Bloomberg,
      or if the foregoing do not apply, the last closing bid price or last trade
      price, respectively, of such security in the over-the-counter market on the
      electronic bulletin board for such security as reported by Bloomberg, or, if
      no
      closing bid price or last trade price, respectively, is reported for such
      security by Bloomberg, the average of the bid prices, or the ask prices,
      respectively, of any market makers for such security as reported in the “pink
      sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).
 If the Closing Bid Price or the Closing Sale Price cannot be calculated
      for a security on a particular date on any of the foregoing bases, the Closing
      Bid Price or the Closing Sale Price, as the case may be, of such security on
      such date shall be the fair market value as mutually determined by the Company
      and the Holder.  If the Company and the Holder are unable to agree upon the
      fair market value of such security, then such dispute shall be resolved pursuant
      to Section 23.  All such determinations to be appropriately adjusted for
      any stock dividend, stock split, stock combination or other similar transaction
      during the applicable calculation period.

    

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    (e) “Closing
      Date”
shall
      have the meaning set forth in the Securities Purchase Agreement, which date
      is
      the date the Company initially issued Notes pursuant to the terms of the
      Securities Purchase Agreement.

    

    (f) “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.

    

    (g) “Eligible
      Market”
means,
      the Principal Market, The New York Stock Exchange, Inc., the Nasdaq National
      Market, the Nasdaq National Market or the American Stock
      Exchange.

    

    (h) “Excluded
      Securities”
means
      any options or other securities issued in connection with any Approved Stock
      Plan and any Common Stock issued or issuable: (i) in connection with any
      Approved Stock Plan; (ii) upon conversion of, or in exchange for, the Notes
      or
      the exercise of the Warrants; (iii) in connection with any acquisition by the
      Company, whether through an acquisition of stock or a merger of any business,
      assets or technologies the primary purpose of which is not to raise equity
      capital; (iv) securities issued in connection with corporate partnering
      transactions on terms approved by the Board of Directors of the Company and
      the
      primary purpose of which is not to raise equity capital; and (v) upon conversion
      of any options or convertible securities which are outstanding on the day
      immediately preceding the Subscription Date, provided that the terms of such
      options or convertible securities are not amended, modified or changed on or
      after the Subscription Date.

    

    (i) “Fundamental
      Transaction”
means
      that the Company shall, directly or indirectly, in one or more related
      transactions, (i) consolidate or merge with or into (whether or not the Company
      is the surviving corporation) another Person, or (ii) sell, assign, transfer,
      convey or otherwise dispose of all or substantially all of the properties or
      assets of the Company to another Person, or (iii) allow another Person to make
      a
      purchase, tender or exchange offer that is accepted by the holders of more
      than
      the 50% of the outstanding shares of Voting Stock (not including any shares
      of
      Voting Stock held by the Person or Persons making or party to, or associated
      or
      affiliated with the Person or Persons making or party to, such purchase, tender
      or exchange offer), or (iv) consummate a stock purchase agreement or other
      business combination (including, without limitation, a reorganization,
      recapitalization, spin-off or scheme of arrangement) with another Person whereby
      such other Person acquires more than the 50% of either the outstanding shares
      of
      Voting Stock (not including any shares of Voting Stock held by the other Person
      or other Persons making or party to, or associated or affiliated with the other
      Persons making or party to, such stock purchase agreement or other business
      combination).

    

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    (j) “GAAP”
means
      United States generally accepted accounting principles, consistently
      applied.

    

    (k) “Indebtedness”
of
      any
      Person means, without duplication (i) all indebtedness for borrowed money,
      (ii)
      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), (iii) all
      reimbursement or payment obligations with respect to letters of credit, surety
      bonds and other similar instruments, (iv) 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,
      (v) 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), (vi)
      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, (vii) all
      indebtedness referred to in clauses (i) through (vi) 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, (viii) all obligations issued, undertaken or assumed as
      part
      of any financing facility with respect to accounts receivables of the Company
      and its Subsidiaries, including, without limitation, any factoring arrangement
      of such accounts receivables and (ix) all Contingent Obligations in respect
      of
      indebtedness or obligations of others of the kinds referred to in clauses (i)
      through (viii) above.

    

    (l) “Initial
      Issuance Date”
means
      May 29, 2008.

    

    (m) “Installment
      Amount”
means
      with respect to any Installment Date, the original principal amount of the
      Note
      divided by 24. In the event the Holder shall sell or otherwise transfer any
      portion of this Note, the transferee shall be allocated a pro rata portion
      of
      the each unpaid Installment Amount hereunder.

    

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    (n) “Installment
      Date”
means
      the Initial Installment Date and the first Business Day of each subsequent
      full
      calendar month.

    

    (o) “Interest
      Rate”
means
      eight percent (8%) per annum.

    

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

    

    (q) “Permitted
      Indebtedness”
means
      (A) Indebtedness to banks and other senior debt lenders existing as of the
      Subscription Date, including, without limitation, any Indebtedness to NSES
      12,
      LLC (the “Senior
      Debt Lender”)
      whether existing as of the Subscription Date or thereafter, (B) Indebtedness
      incurred by the Company that is made expressly subordinate in right of payment
      to the Indebtedness evidenced by this Note, (C) Indebtedness secured by
      Permitted Liens, (D) Indebtedness to trade creditors incurred in the ordinary
      course of
      business, and (E) extensions, refinancings and renewals of any items of
      Permitted Indebtedness, provided that the principal amount is not increased
      or
      the terms modified to impose more burdensome terms upon the Company or its
      Subsidiary, as the case may be.

    

    (r) “Permitted
      Liens”
means
      (i) any Lien granted in connection with any Permitted Indebtedness, including,
      without limitation, Lien granted to the Senior Debt Lender, (ii) any Lien for
      taxes not yet due or delinquent or being contested in good faith by appropriate
      proceedings for which adequate reserves have been established in accordance
      with
      GAAP, (iii) any statutory Lien arising in the ordinary course of business by
      operation of law with respect to a liability that is not yet due or delinquent,
      (iv) any Lien created by operation of law, such as materialmen’s liens,
      mechanics’ liens and other similar liens, arising in the ordinary course of
      business with respect to a liability that is not yet due or delinquent or that
      are being contested in good faith by appropriate proceedings, (v) Liens securing
      the Company’s obligations under the Notes, (vi) Liens (A) upon or in any
      equipment (as defined in the Security Agreement) acquired or held by the Company
      or any of its Subsidiaries to secure the purchase price of such equipment or
      indebtedness incurred solely for the purpose of financing the acquisition or
      lease of such equipment, or (B) existing on such equipment at the time of its
      acquisition, provided that the Lien is confined solely to the property so
      acquired and improvements thereon, and the proceeds of such equipment, (vii)
      Liens incurred in connection with the extension, renewal or refinancing of
      the
      indebtedness secured by Liens of the type described in clauses (i) and (vi)
      above, provided that any extension, renewal or replacement Lien shall be limited
      to the property encumbered by the existing Lien and the principal amount of
      the
      Indebtedness being extended, renewed or refinanced does not increase, (viii)
      leases or subleases and licenses and sublicenses granted to others in the
      ordinary course of the Company’s business, not interfering in any material
      respect with the business of the Company and its Subsidiaries taken as a whole,
      (ix) Liens in favor of customs and revenue authorities arising as a matter
      of
      law to secure payments of custom duties in connection with the importation
      of
      goods; (x) Liens arising from judgments, decrees or attachments in circumstances
      not constituting an Event of Default under Section 4(a)(v) and (vi) Liens with
      respect to Indebtedness not individually in excess of $25,000 or in the
      aggregate in excess of $100,000, which individually and in aggregate are not
      material to the Company.

    

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    (s) “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) “Principal
      Market”
means
      the NASD Over-the-Counter Bulletin Board.

    

    (u) “Registration
      Rights Agreement”
means
      that certain registration rights agreement between the Company and the initial
      holders of the Notes relating to, among other things, the registration of the
      resale of the Common Stock issuable upon conversion of the Notes and exercise
      of
      the Warrants.

    

    (v) “Required
      Holders”
means
      the holders of Notes representing at least a majority of the aggregate principal
      amount of the Notes then outstanding.

     

    (w) “Securities
      Purchase Agreement”
means
      that certain securities purchase agreement dated the Subscription Date by and
      among the Company and the initial holders of the Notes pursuant to which the
      Company issued the Notes.

    

    (x) “Subscription
      Date”
means
      May 29, 2008.

    

    (y) “Successor
      Entity”
means
      the Person, which may be the Company, formed by, resulting from or surviving
      any
      Fundamental Transaction or the Person with which such Fundamental Transaction
      shall have been made, provided that if such Person is not a publicly traded
      entity whose common stock or equivalent equity security is quoted or listed
      for
      trading on an Eligible Market, Successor Entity shall mean such Person’s Parent
      Entity.

    

    (z) “Trading
      Day”
means
      any day on which the Common Stock are 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 are then traded; provided that “Trading Day” shall not include any day on
      which the Common Stock are scheduled to trade on such exchange or market for
      less than 4.5 hours or any day that the Common Stock are 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 p.m., New York
      Time).

    

    (aa) “Voting
      Stock”
of
      a
      Person means capital stock of such Person of the class or classes pursuant
      to
      which the holders thereof have the general voting power to elect, or the general
      power to appoint, at least a majority of the board of directors, managers or
      trustees of such Person (irrespective of whether or not at the time capital
      stock of any other class or classes shall have or might have voting power by
      reason of the happening of any contingency).

    

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    (bb) “Warrants”
has
      the
      meaning ascribed to such term in the Securities Purchase Agreement, and shall
      include all warrants issued in exchange therefor or replacement
      thereof.

    

    29. DISCLOSURE.
      Upon
      receipt or delivery by the Company of any notice in accordance with the terms
      of
      this Note, unless the Company has in good faith determined that the matters
      relating to such notice do not constitute material, nonpublic information
      relating to the Company or its Subsidiaries, the Company shall within one (1)
      Business Day after any such receipt or delivery publicly disclose such material,
      nonpublic information on a Current Report on Form 8-K or otherwise. In the
      event
      that the Company believes that a notice contains material, nonpublic
      information, relating to the Company or its Subsidiaries, the Company shall
      indicate to the Holder contemporaneously with delivery of such notice, and
      in
      the absence of any such indication, the Holder shall be allowed to presume
      that
      all matters relating to such notice do not constitute material, nonpublic
      information relating to the Company or its Subsidiaries.

    

    [Signature
      Page Follows]

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the Company has caused this Senior Convertible Note to be
      duly
      executed as of the Issuance Date set out above.

    

      
        	
                KENTUCKY
                  USA ENERGY, INC.

              
	 
	
                By:

              	 
	
                Name: Steven
                  D. Eversole

              
	
                Title: Chief
                  Executive Officer

              

      

    

    

    
      
        
        

      

      
        23

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