Document:

Exhibit
        10.16

      

      EMPLOYMENT
        AGREEMENT

      

      

      This
        Employment Agreement (the “Agreement”) is made and entered into this
        1st
        day of
        January, 2006, by and between LEVEL 8 SYSTEMS, INC., a Delaware corporation
        (the
“Company”), and John P. Broderick, a resident of the State of New Jersey (the
“Employee”). 

      

      In
        consideration of the mutual covenants, promises and conditions set forth
        in this
        Agreement, and for other good and valuable consideration, the receipt and
        sufficiency of which are hereby acknowledged, the parties agree as
        follows:

      

      
        	
                1.

              	
                Employment. 
                  The Company hereby employs Employee and Employee hereby accepts
                  such
                  employment upon the terms and conditions set forth in this Agreement.
                  

              

      

      

      
        	
                2.

              	
                Duties
                  of Employee. 
                  Employee will be based in New Jersey or North Carolina at the discretion
                  of the Company. Employee’s title will be Chief Executive Officer, Chief
                  Financial Officer, Chief Operating Officer and Corporate Secretary
                  and
                  Employee will report directly to the Board of Directors of the
                  Company.
                  Employee agrees to perform and discharge such other duties as may
                  be
                  assigned to Employee from time to time by the Company to the reasonable
                  satisfaction of the Board of Directors , and such duties will be
                  consistent with those duties regularly and customarily assigned
                  by the
                  Company to the position of Chief Executive Officer, Chief Financial
                  Officer and Secretary. Employee agrees to comply with all of the
                  Company's
                  policies, standards and regulations and to follow the instructions
                  and
                  directives as promulgated by the Board of Directors of the Company.
                  Employee will devote Employee's full professional and business-related
                  time, skills and best efforts to such duties and will not, during
                  the term
                  of this Agreement, be engaged (whether or not during normal business
                  hours) in any other business or professional activity, whether
                  or not such
                  activity is pursued for gain, profit or other pecuniary advantage,
                  without
                  the prior written consent of the Board of Directors of the Company.
                  This
                  Section will not be construed to prevent Employee from (a) investing
                  personal assets in businesses which do not compete with the Company
                  in
                  such form or manner that will not require any services on the part
                  of
                  Employee in the operation or the affairs of the companies in which
                  such
                  investments are made and in which Employee's participation is solely
                  that
                  of an investor; (b) purchasing securities in any corporation whose
                  securities are listed on a national securities exchange or regularly
                  traded in the over-the-counter market, provided that Employee at
                  no time
                  owns, directly or indirectly, in excess of one percent (1%) of
                  the
                  outstanding stock of any class of any such corporation engaged
                  in a
                  business competitive with that of the Company; or (c) participating
                  in
                  conferences, preparing and publishing papers or books, teaching
                  or joining
                  or participating in any professional associations or trade group,
                  so long
                  as the Board of Directors of the Company approves such participation,
                  preparation and publication or teaching prior to Employee’s engaging
                  therein.

              

      

      

      
        	
                3.

              	
                Term. 
                  The term of this Agreement will be at-will, and can be terminated
                  by
                  either party at any time, with or without cause, subject to the
                  provisions
                  of Section 4 of this Agreement. 

              

      

      

      
        	
                4.

              	
                Termination.

              

      

       

      
        	 	
                (a)

              	
                Termination
                  by Company for Cause. 
                  The Company may terminate this Agreement and all of its obligations
                  hereunder immediately, including the obligation to pay Employee
                  

              

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      severance,
        vacation pay or any further accrued benefits or remuneration, if any of the
        following events occur:

      

      
        	 	
                (i)

              	
                Employee
                  materially breaches any of the terms or conditions set forth in
                  this
                  Agreement and fails to cure such breach within ten (10) days after
                  Employee's receipt from the Company of written notice of such breach
                  (notwithstanding the foregoing, no cure period shall be applicable
                  to
                  breaches by Employee of Sections 10 through 14 of this
                  Agreement);

              

      

      

      
        	 	
                (ii)

              	
                Employee
                  commits any other act materially detrimental to the business or
                  reputation
                  of the Company;

              

      

      

      
        	 	
                (iii)

              	
                Employee
                  engages in dishonest or illegal activities or commits or is convicted
                  of
                  any crime involving fraud, deceit or moral turpitude;
                  or

              

      

      

      
        	 	
                (iv)

              	
                Employee
                  dies or becomes mentally or physically incapacitated or disabled
                  so as to
                  be unable to perform Employee's duties under this Agreement even
                  with a
                  reasonable accommodation. Without limiting the generality of the
                  foregoing, Employee's inability adequately to perform services
                  under this
                  Agreement for a period of sixty (60) consecutive days will be conclusive
                  evidence of such mental or physical incapacity or disability, unless
                  such
                  inability is pursuant to a mental or physical incapacity or disability
                  covered by the Family Medical Leave Act, in which case such sixty
                  (60) day
                  period shall be extended to a one hundred and twenty (120) day
                  period.

              

      

      

      
        	 	
                (b)

              	
                Termination
                  by Company Without Cause. 
                  The Company may terminate Employee's employment pursuant to this
                  Agreement
                  for reasons other than those stated in Section 4(a) upon at least
                  thirty
                  (30) days' prior written notice to Employee. In the event Employee's
                  employment with the Company is terminated by the Company without
                  cause,
                  the Company shall be obligated to pay Employee a lump sum severance
                  payment equal to twelve (12) months of Employee’s then base salary payable
                  within thirty (30) days after the date of termination. In addition,
                  Employee will be entitled to payment of all unused vacation days
                  at his
                  current daily rate and any accrued but unpaid salary or earned
                  bonuses.
                  Any option grants or restricted stock awards made to employee will
                  immediately vest. The payment to Employee for all deferred salaries
                  and
                  earned bonuses will be paid within 30 days by the Company. Other
                  than the
                  severance payments set forth in this Section 4(b), Employee will
                  be
                  entitled to receive no further remuneration and will not be entitled
                  to
                  participate in any Company benefit programs following his termination
                  by
                  the Company, whether such termination is with or without
                  cause.

              

      

      

      
        	 	
                (c)

              	
                Termination
                  by Employee for Cause. 
                  In the event there occurs a substantial change in the Employee’s job
                  duties related to his position as CFO, but not CEO or COO, or there
                  is a
                  decrease in or a failure to provide the compensation or vested
                  benefits
                  under this Agreement initiated by either the Company or as a result
                  of a
                  Change in Control (as defined below) of the Company, Employee shall
                  have
                  the right to resign his employment and will be entitled to a lump
                  sum
                  severance payment equal to twelve (12) months of Employee’s then base
                  salary payable within thirty (30) days after the date of termination
                  In
                  addition, Employee will be entitled to payment of all unused vacation
                  days
                  at his current daily rate and a lump sum equal to all deferred
                  salaries
                  and earned bonuses. In addition, all Employee’s then outstanding but
                  unvested stock options shall vest one

              

      

      
        
          
          

        

        
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      hundred
        percent (100%). Employee shall have 12 months from the date written notice
        is
        given to Employee about the announcement and closing of a transaction resulting
        in a Change in Control of the Company that would result in a substantial
        change
        in the Employee’s job duties or decrease his compensation or vested benefits
        under this Agreement to resign or this Section 4(c) shall not apply. In the
        event Employee resigns from the Company for any other reason, Employee will
        not
        be entitled to receive or accrue any further Company benefits or other
        remuneration under this Agreement and Employee specifically agrees that he
        will
        not be entitled to receive any severance pay.

      

      For
        purposes of this Section 4, a Change in Control shall be deemed to have occurred
        if any of the following occur:

      

      
        	 	
                (i)

              	
                the
                  merger of consolidation of the Company with or into another unaffiliated
                  entity, or the merger of another unaffiliated entity into the Company
                  or
                  another subsidiary thereof with the effect that immediately after
                  such
                  transaction the stockholders of the Company immediately prior to
                  such
                  transaction hold less than fifty percent (50%) of the total voting
                  power
                  of all securities generally entitled to vote in the election of
                  directors,
                  managers or trustees of the entity surviving such merger or consolidation.
                  This provision will not apply to any reorganization and reverse
                  merger
                  between the Company and Cicero, Inc. (or any other similar entity
                  established for a similar purpose)
                  ;

              

      

      

      
        	 	
                (ii)

              	
                the
                  sale or transfer of more than fifty-one percent (51%) of the Company’s
                  then outstanding voting stock (other than a restructuring event
                  which
                  results in the continuation of the Company’s business by an affiliated
                  entity) to unaffiliated person or group (as such term is used in
                  Section
                  13(d)(3) of the Securities Exchange Act of 1934, as amended);
                  or

              

      

      

      
        	 	
                (iii)

              	
                the
                  adoption by the stockholders of the Company of a plan relating
                  to the
                  liquidation or dissolution of the
                  Company.

              

      

      

      
        	
                5.

              	
                Compensation
                  and Benefits.
                  

              

      

      

      
        	 	
                (a)

              	
                Annual
                  Salary. 
                  During the term of this Agreement and for all services rendered
                  by
                  Employee under this Agreement, the Company will pay Employee a
                  base salary
                  of One Hundred Fifty Thousand Dollars ($150,000.00) per annum in
                  equal
                  bi-monthly installments. Such annual salary will be subject to
                  adjustments
                  by any increases given in the normal course of
                  business.

              

      

      

      
        	 	
                (b)

              	
                Incentive
                  Compensation. 
                  Employee shall be eligible to receive incentive compensation in
                  the form
                  of cash bonuses, in the amount set forth in Exhibit C. The initial
                  cash bonus of $50,000 will be earned and payable within ninety
                  90 days
                  after the close of the trailing three months wherein the Company
                  achieved
                  an operating cash flow under generally accepted accounting principles
                  (after accounting for all bonuses) of no less than $150,000 as
                  defined in
                  Exhibit C. In
                  addition, Employee is eligible for an additional annual bonus upon
                  the
                  Company reaching certain operating cash flow levels (after accounting
                  for
                  all bonuses) as set forth in Exhibit C. Said bonus will be payable
                  after
                  the annual accounts have been presented to the Compensation Committee.
                  Exhibit C attached hereto provides the benchmarks associated with
                  achieving the Incentive
                  Compensation.

              

      

      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      

      
        	 	
                (c)

              	
                Equity
                  Awards. 
                  Upon the successful completion of either the recapitalization merger
                  of
                  Level 8 Systems, into Cicero, Inc., or the successful amendment
                  of Level
                  8’s charter to increase the authorized shares necessary to effect
                  the
                  recapitalization of the Company and the associated conversion of
                  debt and
                  equity, (the Conversion Event) Employee is hereby awarded a Stock
                  Option
                  Grant equal
                  to
                  1.35% of the fully diluted shares of either Cicero, Inc. or Level
                  8
                  Systems, Inc., whichever entity shall be the surviving entity,
                  at the
                  prevailing market price on the day of grant. These options shall
                  vest 1/3
                  immediately and 1/3 on each of the next two anniversaries of the
                  date of
                  grant. Where possible under existing tax laws, these option grants
                  will be
                  Incentive Stock Option Grants otherwise these options will be Non
                  Qualified Options. In addition, Employee will be granted a restricted
                  stock award equal to 1.35% of the fully diluted shares of either
                  Cicero,
                  Inc. or Level 8 Systems common stock, which ever entity shall be
                  the
                  surviving entity. The restricted stock award will vest upon the
                  resignation or termination of employee or upon a change in control
                  as
                  defined in Section 4 (c) above. The Company will utilize its best
                  efforts
                  to register the restricted stock award within 60 days of
                  grant.

              

      

      

      
        	
                6.

              	
                Vacation. 
                  Employee shall be eligible for four (4) weeks of paid vacation
                  annually,
                  provided that such vacation is scheduled at such times that do
                  not
                  interfere with the Company’s legitimate business needs.
                  

              

      

      

      
        	
                7.

              	
                Other
                  Benefits. 
                  Employee will be entitled to such fringe benefits as may be provided
                  from
                  time-to-time by the Company to its employees, including, but not
                  limited
                  to, group health insurance, life and disability insurance, and
                  any other
                  fringe benefits now or hereafter provided by the Company to its
                  employees,
                  if and when Employee meets the eligibility requirements for any
                  such
                  benefit. The Company reserves the right to change or discontinue
                  any
                  employee benefit plans or programs now being offered to its employees;
                  provided, however, that all benefits provided for employees of
                  the same
                  position and status as Employee will be provided to Employee on
                  an equal
                  basis.

              

      

      

      
        	
                8.

              	
                Business
                  Expenses. 
                  Employee will be reimbursed for all reasonable expenses incurred
                  in the
                  discharge of Employee's duties under this Agreement pursuant to
                  the
                  Company's standard reimbursement
                  policies.

              

      

       

      
        	
                9.

              	
                Withholding. 
                  The Company will deduct and withhold from the payments made to
                  Employee
                  under this Agreement, state and federal income taxes, FICA and
                  other
                  amounts normally withheld from compensation due
                  employees.

              

      

      

      
        	
                10.

              	
                Non-Disclosure
                  of Proprietary Information. 
                  Employee recognizes and acknowledges that the Trade Secrets (as
                  defined
                  below) and Confidential Information (as defined below) of the Company
                  and
                  its affiliates and all physical embodiments thereof (as they may
                  exist
                  from time-to-time, collectively, the “Proprietary Information”) are
                  valuable, special and unique assets of the Company's and its affiliates'
                  businesses. Employee further acknowledges that access to such Proprietary
                  Information is essential to the performance of Employee's duties
                  under
                  this Agreement. Therefore, in order to obtain access to such
                  

              

      

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      

      Proprietary
        Information, Employee agrees that, except with respect to those duties assigned
        to him by the Company, Employee will hold in confidence all Proprietary
        Information and will not reproduce, use, distribute, disclose, publish or
        otherwise disseminate any Proprietary Information, in whole or in part, and
        will
        take no action causing, or fail to take any action necessary to prevent causing,
        any Proprietary Information to lose its character as Proprietary Information,
        nor will Employee make use of any such information for Employee's own purposes
        or for the benefit of any person, firm, corporation, association or other
        entity
        (except the Company) under any circumstances. 

      

      For
        purposes of this Agreement, the term “Trade Secrets” means information,
        including, but not limited to, any technical or nontechnical data, formula,
        pattern, compilation, program, device, method, technique, drawing, process,
        financial data, financial plan, product plan, list of actual or potential
        customers or suppliers, or other information similar to any of the foregoing,
        which derives economic value, actual or potential, from not being generally
        known to, and not being readily ascertainable by proper means by, other persons
        who can derive economic value from its disclosure or use. For purposes of
        this
        Agreement, the term “Trade Secrets” does not include information that Employee
        can show by competent proof (i) was known to Employee and reduced to writing
        prior to disclosure by the Company (but only if Employee promptly notifies
        the
        Company of Employee’s prior knowledge); (ii) was generally known to the public
        at the time the Company disclosed the information to Employee; (iii) became
        generally known to the public after disclosure by the Company through no
        act or
        omission of Employee; or (iv) was disclosed to Employee by a third party
        having
        a bona fide right both to possess the information and to disclose the
        information to Employee. The term “Confidential Information” means any data or
        information of the Company, other than trade secrets, which is valuable to
        the
        Company and not generally known to competitors of the Company. The provisions
        of
        this Section 6 will apply to Trade Secrets for so long as such information
        remains a trade secret and to Confidential Information during Employee’s
        employment with the Company and for a period of two (2) years following any
        termination of Employee’s employment with the Company for whatever
        reason.

      

      
        	
                11.

              	
                Non-Solicitation
                  Covenants. 
                  Employee agrees that during Employee's employment by the Company
                  and for a
                  period of two (2) year following the termination of Employee's
                  employment
                  for whatever reason, Employee will not, directly or indirectly,
                  on
                  Employee's own behalf or in the service of or on behalf of any
                  other
                  individual or entity, divert, solicit or attempt to divert or solicit
                  any
                  individual or entity (i) who is a client of the Company at any
                  time during
                  the six (6)-month period prior to Employee's termination of employment
                  with the Company (“Client”), or was actively sought by the Company as a
                  prospective client, and (ii) with whom Employee had material contact
                  while
                  employed by the Company to provide similar services or products
                  as such
                  provided by Employee for the Company to such Clients or prospects.
                  Employee further agrees and represents that during Employee's employment
                  by the Company and for a period of two (2) year following any termination
                  of Employee's employment for whatever reason, Employee will not,
                  directly
                  or indirectly, on Employee's own behalf or in the service of, or
                  on behalf
                  of any other individual or entity, divert, solicit or hire away,
                  or
                  attempt to divert, solicit or 

              

      

      
        
          
          

        

        
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      hire
        away, to or for any individual or entity which is engaged in providing similar
        services or products to that provided by the Company, any person employed
        by the
        Company for whom Employee had supervisory responsibility or with whom Employee
        had material contact while employed by the Company, whether or not such employee
        is a full-time employee or temporary employee of the Company, whether or
        not
        such employee is employed pursuant to written agreement and whether or not
        such
        employee is employed for a determined period or at-will. For purposes of
        this
        Agreement, “material contact” exists between Employee and a Client or potential
        Client when (1) Employee established and/or nurtured the Client or potential
        Client; (2) the Client or potential Client and Employee interacted to further
        a
        business relationship or contract with the Company; (3) Employee had access
        to
        confidential information and/or marketing strategies or programs regarding
        the
        Client or potential Client; and/or (4) Employee learned of the Client or
        potential Client through the efforts of the Company providing Employee with
        confidential Client information, including but not limited to the Client’s
        identify, for purposes of furthering a business relationship. 

      

      
        	
                12.

              	
                Existing
                  Restrictive Covenants. 
                  Except as provided in Exhibit B, Employee has not entered into
                  any
                  agreement with any employer or former employer: (a) to keep in
                  confidence
                  any confidential information, or (b) to not compete with any former
                  employer. Employee represents and warrants that Employee's employment
                  with
                  the Company does not and will not breach any agreement which Employee
                  has
                  with any former employer to keep in confidence confidential information
                  or
                  not to compete with any such former employer. Employee will not
                  disclose
                  to the Company or use on its behalf any confidential information
                  of any
                  other party required to be kept confidential by
                  Employee.

              

      

      

      
        	
                13.

              	
                Return
                  of Proprietary Information. 
                  Employee acknowledges that as a result of Employee's employment
                  with the
                  Company, Employee may come into the possession and control of Proprietary
                  Information, such as proprietary documents, drawings, specifications,
                  manuals, notes, computer programs, or other proprietary material.
                  Employee
                  acknowledges, warrants and agrees that Employee will return to
                  the Company
                  all such items and any copies or excerpts thereof, and any other
                  properties, files or documents obtained as a result of Employee's
                  employment with the Company, immediately upon the termination of
                  Employee's employment with the
                  Company.

              

      

      

      
        	
                14.

              	
                Proprietary
                  Rights. 
                  During the course of Employee's employment with the Company, Employee
                  may
                  make, develop or conceive of useful processes, machines, compositions
                  of
                  matter, computer software, algorithms, works of authorship expressing
                  such
                  algorithm, or any other discovery, idea, concept, document or improvement
                  which relates to or is useful to the Company's Business (the
                  “Inventions”), whether or not subject to copyright or patent protection,
                  and which may or may not be considered Proprietary Information.
                  Employee
                  acknowledges that all such Inventions will be “works made for hire” under
                  United States copyright law and will remain the sole and exclusive
                  property of the Company. Employee also hereby assigns and agrees
                  to assign
                  to the Company, in perpetuity, all right, title and interest Employee
                  may
                  have in and to such Inventions, including without limitation, all
                  copyrights, and the right to apply for any form of patent,
                  

              

      

      
        
          
          

        

        
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      utility
        model, industrial design or similar proprietary right recognized by any state,
        country or jurisdiction. Employee further agrees, at the Company's request
        and
        expense, to do all things and sign all documents or instruments necessary,
        in
        the opinion of the Company, to eliminate any ambiguity as to the ownership
        of,
        and rights of the Company to, such Inventions, including filing copyright
        and
        patent registrations and defending and enforcing in litigation or otherwise
        all
        such rights. 

      

      Employee
        will not be obligated to assign to the Company any Invention made by Employee
        while in the Company's employ which does not relate to any business or activity
        in which the Company is or may reasonably be expected to become engaged,
        except
        that Employee is so obligated if the same relates to or is based on Proprietary
        Information to which Employee will have had access during and by virtue of
        Employee's employment or which arises out of work assigned to Employee by
        the
        Company. Employee will not be obligated to assign any Invention which may
        be
        wholly conceived by Employee after Employee leaves the employ of the Company,
        except that Employee is so obligated if such Invention involves the utilization
        of Proprietary Information obtained while in the employ of the Company. Employee
        is not obligated to assign any Invention that relates to or would be useful
        in
        any business or activities in which the Company is engaged if such Invention
        was
        conceived and reduced to practice by Employee prior to Employee's employment
        with the Company. Employee agrees that any such Invention is set forth on
        Exhibit “A” to this Agreement.

      

      
        	
                15.

              	
                Remedies. 
                  Employee agrees and acknowledges that the violation of any of the
                  covenants or agreements contained in Sections 10 through 14 of
                  this
                  Agreement would cause irreparable injury to the Company, that the
                  remedy
                  at law for any such violation or threatened violation thereof would
                  be
                  inadequate, and that the Company will be entitled, in addition
                  to any
                  other remedy, to temporary and permanent injunctive or other equitable
                  relief without the necessity of proving actual damages or posting
                  a
                  bond.

              

      

      

      
        	
                16.

              	
                Severability. 
                  In case one or more of the provisions contained in this Agreement
                  is for
                  any reason held to be invalid, illegal or unenforceable in any
                  respect,
                  the parties agree that it is their intent that the same will not
                  affect
                  any other provision in this Agreement, and this Agreement will
                  be
                  construed as if such invalid or illegal or unenforceable provision
                  had
                  never been contained herein. It is the intent of the parties that
                  this
                  Agreement be enforced to the maximum extent permitted by
                  law.

              

      

      

      
        	
                17.

              	
                Entire
                  Agreement. 
                  This Agreement embodies the entire agreement of the parties relating
                  to
                  the subject matter of this Agreement and supersedes all prior agreements,
                  oral or written, regarding the subject matter hereof. No amendment
                  or
                  modification of this Agreement will be valid or binding upon the
                  parties
                  unless made in writing and signed by the
                  parties.

              

      

      

      
        	
                18.

              	
                Governing
                  Law. 
                  This Agreement is entered into and will be interpreted and enforced
                  pursuant to the laws of the State of New Jersey. The parties hereto
                  hereby
                  agree that the appropriate forum and venue for any disputes between
                  any of
                  the parties hereto arising 

              

      

      
        
          
          

        

        
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      out
        of
        this Agreement shall be any federal court in the state where the Employee
        has
        his principal place of residence and each of the parties hereto hereby submits
        to the personal jurisdiction of any such court. The foregoing shall not limit
        the rights of any party to obtain execution of judgment in any other
        jurisdiction. The parties further agree, to the extent permitted by law,
        that a
        final and unappealable judgment against either of them in any action or
        proceeding contemplated above shall be conclusive and may be enforced in
        any
        other jurisdiction within or outside the United States by suit on the judgment,
        a certified exemplified copy of which shall be conclusive evidence of the
        fact
        and amount of such judgment.

      

      
        	
                19.

              	
                Surviving
                  Terms. 
                  Sections 4, 10, 11, 14, 15 and 18 of this Agreement shall survive
                  termination of this Agreement.

              

      

      

      IN
        WITNESS WHEREOF, the parties have executed this Agreement as of the day and
        year
        first above written.

      

      
        	COMPANY:	 	
                EMPLOYEE:

              
	 	 	 	 
	LEVEL
                8 SYSTEMS, INC.	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	
                By:
                  

              	 	 	 
	
                Name:

              	 	 	
                John
                  P. Broderick

              
	
                Title:
                  

              	 	 	 

      

      
        
          
          

        

        
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      EXHIBIT
        A

      

      INVENTIONS

      

      

      

      

      Employee
        represents that there are no Inventions.

      

      

      
        	 	 
	 	
                Employee
                  Initials

              

      

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

      EXHIBIT
        B

      

      EXISTING
        RESTRICTIVE COVENANTS

      

        
          
            
            

          

          
            10

            
              

            

          

          
            
            

          

        

      

       

      EXHIBIT
        C

      

      VARIABLE
        COMPENSATION

      

       

      Initial
        Cash Bonus:

      

      Employee
        is entitled to an initial cash bonus of $50,000 payable within ninety 90
        days
        after the close of the trailing three months wherein the Company achieved
        an
        operating cash flow under generally accepted accounting principles (after
        accounting for all bonuses) of no less than $150,000. Cash flow from operations
        is defined as net income plus depreciation and amortization plus or minus
        the
        changes in working capital. 

      

      Annual
        Cash Bonus:

      

      Employee
        is entitled to an annual cash bonus payable after the Company has reported
        its
        results for the year. This annual cash bonus is tied to cash flow from
        operations (defined as above) as per the chart below:

      

      

      
        	 	
                Operating
                  Cash Flow
                  Range

              	 	 	 	 
	 	 	 	 	 	 	 
	 	
                From

              	
                To

              	 	
                Variable
                  Compensation

              
	 	 	 	 	 	 	 
	
                Tier
                  1

              	
                $
                  500,000 

              	
                $
                  1,000,000 

              	 	 	
                $
                  100,000 

              	 
	
                Tier
                  2

              	
                $
                  1,000,001 

              	
                $
                  2,000,000 

              	 	 	
                $
                  200,000 

              	 
	
                Tier
                  3

              	
                $
                  greater than 2,000,001 

              	 	 	 	
                $
                  300,000 

              	 

      

      

      
        	 	
                Performance
                  significantly in excess of Tier 3 may result in an additional reward
                  at
                  the discretion of the Compensation
                  Committee

              

      

       

    

     

    11SECURITIES
      PURCHASE AGREEMENT

     

    This
      Securities Purchase Agreement (this “Agreement”)
      is
      dated as of July __, 2007, between Zagg Incorporated, a Nevada corporation
      (the
“Company”),
      and
      each purchaser identified on the signature pages hereto (each, including its
      successors and assigns, a “Purchaser”
and
      collectively the “Purchasers”).

     

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

     

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

     

    ARTICLE
      I.

    DEFINITIONS

     

    1.1 Definitions

     

    .
      In
      addition to the terms defined elsewhere in this Agreement, for all purposes
      of
      this Agreement, the following terms have the meanings set forth in this Section
      1.1:

     

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

     

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

     

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

     

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

     

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

     

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

     

    “Commission”
means
      the Securities and Exchange Commission.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

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

     

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

     

    “Company
      Counsel”
means
      ____________, with offices located at _____________. 

     

    “Disclosure
      Schedules”
means
      the Disclosure Schedules of the Company delivered concurrently herewith.

     

    “Effective
      Date”
means
      the date that the initial Registration Statement filed by the Company pursuant
      to the Registration Rights Agreement is first declared effective by the
      Commission.

     

    “Escrow
      Agent”
shall
      mean Signature Bank, a New York State chartered bank and having an office at
      261
      Madison Avenue, New York, New York 10016.

     

    “Escrow
      Agreement”
shall
      mean the escrow agreement entered into prior to the date hereof, by and among
      the Company, Empire Financial Group and the Escrow Agent pursuant to which
      the
      Purchasers shall deposit Subscription Amounts with the Escrow Agent to be
      applied to the transactions contemplated hereunder.

     

    “Evaluation
      Date”
shall
      have the meaning ascribed to such term in Section 3.1(r). 

     

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

    

    “Exempt
      Issuance”
means
      the issuance of (a) shares of Common Stock or options to employees, officers
      or
      directors of the Company pursuant to any stock or option plan duly adopted
      for
      such purpose, by a majority of the non-employee members of the Board of
      Directors or a majority of the members of a committee of non-employee directors
      established for such purpose, (b) securities upon the exercise or exchange
      of or
      conversion of any Securities issued hereunder and/or other securities
      exercisable or exchangeable for or convertible into shares of Common Stock
      issued and outstanding on the date of this Agreement, provided that such
      securities have not been amended since the date of this Agreement to increase
      the number of such securities or to decrease the exercise, exchange or
      conversion price of such securities, and (c) securities issued pursuant to
      acquisitions or strategic transactions approved by a majority of the
      disinterested directors of the Company, provided that any such issuance shall
      only be to a Person which is, itself or through its subsidiaries, an operating
      company in a business synergistic with the business of the Company and in which
      the Company receives benefits in addition to the investment of funds, but shall
      not include a transaction in which the Company is issuing securities primarily
      for the purpose of raising capital or to an entity whose primary business is
      investing in securities and (d) with the prior written consent of Empire
      Financial Group, up to an amount of Common Stock and warrants equal to $2
      million in the aggregate, on substantially the same or more favorable terms
      and
      conditions and prices to the Company as hereunder, with investors executing
      definitive agreements for the purchase of such securities and such transactions
      having closed on or before the earlier of (i) the Filing Date (as defined in
      the
      Registration Rights Agreement) or (ii) the date that the Initial Registration
      Statement (as defined in the Registration Rights Agreement) is actually filed
      with the Commission. 

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    “FWS”
means
      Feldman Weinstein & Smith LLP with offices located at 420 Lexington Avenue,
      Suite 2620, New York, New York 10170-0002.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    “Per
      Share Purchase Price”
equals
      $1.00, subject to adjustment for reverse and forward stock splits, stock
      dividends, stock combinations and other similar transactions of the Common
      Stock
      that occur after the date of this Agreement.

     

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

     

    “Pre-Notice”
shall
      have the meaning ascribed to such term in Section 4.12. 

     

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

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    “Purchaser
      Party”
shall
      have the meaning ascribed to such term in Section 4.8.

     

    “Registration
      Rights Agreement”
means
      the Registration Rights Agreement, dated the date hereof, among the Company
      and
      the Purchasers, in the form of Exhibit
      A
      attached
      hereto.

     

    “Registration
      Statement”
means
      a
      registration statement meeting the requirements set forth in the Registration
      Rights Agreement and covering the resale by the Purchasers of the Shares and
      the
      Warrant Shares. 

     

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

     

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

     

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

     

    “Securities”
means
      the Shares, the Warrants and the Warrant Shares.

     

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

     

    “Shares”
means
      the shares of Common Stock issued or issuable to each Purchaser pursuant to
      this
      Agreement.

     

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

     

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

     

    “Subsequent
      Financing”
shall
      have the meaning ascribed to such term in Section 4.12.

     

    “Subsequent
      Financing Notice”
shall
      have the meaning ascribed to such term in Section 4.12. 

     

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

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    “Trading
      Day”
means
      a
      day on which the New York Stock Exchange is open for trading.

     

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

     

    “Transaction
      Documents”
means
      this Agreement, the Warrants, the Registration Rights Agreement, the Escrow
      Agreement and any other documents or agreements executed in connection with
      the
      transactions contemplated hereunder.

     

    “Transfer
      Agent”
means
      Empire Stock Transfer, Inc., the current transfer agent of the Company, with
      a
      mailing address of 2470 St. Rose Pkwy., Suite 304, Henderson, NV 89074 and
      a
      facsimile number of (702) 974-1444, and any successor transfer agent of the
      Company.

     

    “VWAP”
means,
      for any date, the price determined by the first of the following clauses that
      applies: (a) if the Common Stock is then listed or quoted on a Trading Market
      other than the Pink Sheets, LLC, the daily volume weighted average price of
      the
      Common Stock for such date (or the nearest preceding date) on the Trading Market
      on which the Common Stock is then listed or quoted for trading as reported
      by
      Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time)
      to
      4:02 p.m. (New York City time); (b)  if prices for the Common Stock are
      then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a similar
      organization or agency succeeding to its functions of reporting prices), the
      most recent bid price per share of the Common Stock so reported; or (c) in
      all other cases, the fair market value of a share of Common Stock as determined
      by an independent appraiser selected in good faith by the Purchasers of a
      majority in interest of the Shares then outstanding and reasonably acceptable
      to
      the Company, the fees and expenses of which shall be paid by the Company.

     

    “Warrants”
means,
      collectively, the Common Stock purchase warrants delivered to the Purchasers
      at
      the Closing in accordance with Section 2.2(a) hereof, which Warrants shall
      be
      exercisable immediately and have a term of exercise equal to 5 years, in the
      form of Exhibit
      C
      attached
      hereto.

     

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

     

    ARTICLE
      II.

    PURCHASE
      AND SALE

     

    2.1 Closing.
      On the Closing Date, upon the terms and subject to the conditions set forth
      herein, substantially concurrent with the execution and delivery of this
      Agreement by the parties hereto, the Company agrees to sell, and the Purchasers,
      severally and not jointly, agree to purchase, up to an aggregate of $3,000,000
      of Shares and Warrants. Each Purchaser shall deliver to the Escrow Agent, via
      wire transfer or a certified check, immediately available funds equal to its
      Subscription Amount and the Company shall deliver to each Purchaser its
      respective Shares and a Warrant as determined pursuant to Section 2.2(a), and
      the Company and each Purchaser shall deliver the other items set forth in
      Section 2.2 deliverable at the Closing. Upon satisfaction of the covenants
      and
      conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the
      offices of FWS or such other location as the parties shall mutually
      agree.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    2.2 Deliveries.

     

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

     

    (i) this
      Agreement duly executed by the Company;

     

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

     

    (iii) a
      certificate evidencing a number of Shares equal to such Purchaser’s Subscription
      Amount divided by the Per Share Purchase Price, registered in the name of such
      Purchaser;

     

    (iv) a
      Warrant
      registered in the name of such Purchaser to purchase up to a number of shares
      of
      Common Stock equal to 50% of such Purchaser’s Shares with an exercise price
      equal to $1.30, subject to adjustment therein; and

     

    (v) the
      Registration Rights Agreement duly executed by the Company.

     

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

     

    (i) this
      Agreement duly executed by such Purchaser;

     

    (ii) such
      Purchaser’s Subscription Amount by wire transfer to the Escrow Account;
      and

     

    (iii) the
      Registration Rights Agreement duly executed by such Purchaser.

     

    2.3 Closing
      Conditions. 

     

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

     

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

     

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

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

     

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

     

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

     

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

     

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

     

    ARTICLE
      III.

    REPRESENTATIONS
      AND WARRANTIES

     

    3.1 Representations
      and Warranties of the Company. Except
      as
      set forth in the Disclosure Schedules, which Disclosure Schedules shall be
      deemed a part hereof and shall qualify any representation or otherwise made
      herein to the extent of the disclosure contained in the corresponding section
      of
      the Disclosure Schedules, the Company hereby makes the following representations
      and warranties to each Purchaser:

     

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

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    (e) Filings,
      Consents and Approvals.
      The
      Company is not required to obtain any consent, waiver, authorization or order
      of, give any notice to, or make any filing or registration with, any court
      or
      other federal, state, local or other governmental authority or other Person
      in
      connection with the execution, delivery and performance by the Company of the
      Transaction Documents, other than (i) filings required pursuant to Section
      4.4
      of this Agreement, (ii) the filing with the Commission of the Registration
      Statement, (iii) application(s) to each applicable Trading Market for the
      listing of the Securities for trading thereon in the time and manner required
      thereby and (iv) the filing of Form D with the Commission and such filings
      as
      are required to be made under applicable state securities laws (collectively,
      the “Required
      Approvals”).

     

    (f) Issuance
      of the Securities.
      The
      Securities are duly authorized and, when issued and paid for in accordance
      with
      the applicable Transaction Documents, will be duly and validly issued, fully
      paid and nonassessable, free and clear of all Liens imposed by the Company
      other
      than restrictions on transfer provided for in the Transaction Documents. The
      Warrant Shares, when issued in accordance with the terms of the Transaction
      Documents, will be validly issued, fully paid and nonassessable, free and clear
      of all Liens imposed by the Company other than restrictions on transfer provided
      for in the Transaction Documents. The Company has reserved from its duly
      authorized capital stock the maximum number of shares of Common Stock issuable
      pursuant to this Agreement and the Warrants.

     

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

     

    
      
        
        

      

      
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    (h) SEC
      Reports; Financial Statements.
      The
      Company has filed all reports, schedules, forms, statements and other documents
      required to be filed by the Company under the Securities Act and the Exchange
      Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years
      preceding the date hereof (or such shorter period as the Company was required
      by
      law or regulation to file such material) (the foregoing materials, including
      the
      exhibits thereto and documents incorporated by reference therein, being
      collectively referred to herein as the “SEC
      Reports”)
      on a
      timely basis or has received a valid extension of such time of filing and has
      filed any such SEC Reports prior to the expiration of any such extension. As
      of
      their respective dates, the SEC Reports complied in all material respects with
      the requirements of the Securities Act and the Exchange Act, as applicable,
      and
      none of the SEC Reports, when filed, 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. The financial
      statements of the Company included in the SEC Reports comply in all material
      respects with applicable accounting requirements and the rules and regulations
      of the Commission with respect thereto as in effect at the time of filing.
      Such
      financial statements have been prepared in accordance with United States
      generally accepted accounting principles applied on a consistent basis during
      the periods involved (“GAAP”),
      except as may be otherwise specified in such financial statements or the notes
      thereto and except that unaudited financial statements may not contain all
      footnotes required by GAAP, and fairly present in all material respects the
      financial position of the Company and its consolidated subsidiaries as of and
      for the dates thereof and the results of operations and cash flows for the
      periods then ended, subject, in the case of unaudited statements, to normal,
      immaterial, year-end audit adjustments.

     

    
      
        
        

      

      
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    (i) Material
      Changes; Undisclosed Events, Liabilities or Developments.
      Since
      the date of the latest audited financial statements included within the SEC
      Reports, except as specifically disclosed in a subsequent SEC Report filed
      prior
      to the date hereof, (i) there has been no event, occurrence or development
      that
      has had or that could reasonably be expected to result in a Material Adverse
      Effect, (ii) the Company has not incurred any liabilities (contingent or
      otherwise) other than (A) trade payables and accrued expenses incurred in the
      ordinary course of business consistent with past practice and (B) liabilities
      not required to be reflected in the Company’s financial statements pursuant to
      GAAP or disclosed in filings made with the Commission, (iii) the Company has
      not
      altered its method of accounting, (iv) the Company has not declared or made
      any
      dividend or distribution of cash or other property to its stockholders or
      purchased, redeemed or made any agreements to purchase or redeem any shares
      of
      its capital stock and (v) the Company has not issued any equity securities
      to
      any officer, director or Affiliate, except pursuant to existing Company stock
      option plans. The Company does not have pending before the Commission any
      request for confidential treatment of information. Except for the issuance
      of
      the Securities contemplated by this Agreement or as set forth on Schedule
      3.1(i),
      no
      event, liability or development has occurred or exists with respect to the
      Company or its Subsidiaries or their respective business, properties, operations
      or financial condition, that would be required to be disclosed by the Company
      under applicable securities laws at the time this representation is made or
      deemed made that has not been publicly disclosed at least 1 Trading Day prior
      to
      the date that this representation is made.

     

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

     

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

     

    
      
        
        

      

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

     

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

     

    (n) Title
      to Assets.
      The
      Company and the Subsidiaries have good and marketable title in fee simple to
      all
      real property owned by them and good and marketable title in all personal
      property owned by them that is material to the business of the Company and
      the
      Subsidiaries, in each case free and clear of all Liens, except for Liens as
      do
      not materially affect the value of such property and do not materially interfere
      with the use made and proposed to be made of such property by the Company and
      the Subsidiaries and Liens for the payment of federal, state or other taxes,
      the
      payment of which is neither delinquent nor subject to penalties. Any real
      property and facilities held under lease by the Company and the Subsidiaries
      are
      held by them under valid, subsisting and enforceable leases with which the
      Company and the Subsidiaries are in compliance.

     

    
      
        
        

      

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

     

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

     

    (q) Transactions
      With Affiliates and Employees.
      Except
      as set forth in the SEC Reports, none of the officers or directors of the
      Company and, to the knowledge of the Company, none of the employees of the
      Company is presently a party to any transaction with the Company or any
      Subsidiary (other than for services as employees, officers and directors),
      including any contract, agreement or other arrangement providing for the
      furnishing of services to or by, providing for rental of real or personal
      property to or from, or otherwise requiring payments to or from any officer,
      director or such employee or, to the knowledge of the Company, any entity in
      which any officer, director, or any such employee has a substantial interest
      or
      is an officer, director, trustee or partner, in each case in excess of $60,000
      other than for (i) payment of salary or consulting fees for services rendered,
      (ii) reimbursement for expenses incurred on behalf of the Company and (iii)
      other employee benefits, including stock option agreements under any stock
      option plan of the Company.

     

    (r) Sarbanes-Oxley;
      Internal Accounting Controls.
      The
      Company is in material compliance with all provisions of the Sarbanes-Oxley
      Act
      of 2002 which are applicable to it as of the Closing Date. The
      Company and the 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 GAAP and to maintain asset accountability, (iii)
      access to assets is permitted only in accordance with management’s general or
      specific authorization, and (iv) the recorded accountability for assets is
      compared with the existing assets at reasonable intervals and appropriate action
      is taken with respect to any differences. The Company has established disclosure
      controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
      15d-15(e)) for the Company and designed such disclosure controls and procedures
      to ensure that information required to be disclosed by the Company in the
      reports it files or submits under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the Commission’s
      rules and forms. The Company’s certifying officers have evaluated the
      effectiveness of the Company’s disclosure controls and procedures as of the end
      of the period covered by the Company’s most recently filed periodic report under
      the Exchange Act (such date, the “Evaluation
      Date”).
      The
      Company presented in its most recently filed periodic report under the Exchange
      Act the conclusions of the certifying officers about the effectiveness of the
      disclosure controls and procedures based on their evaluations as of the
      Evaluation Date. Since the Evaluation Date, there have been no changes in the
      Company’s internal control over financial reporting (as such term is defined in
      the Exchange Act) that has materially affected, or is reasonably likely to
      materially affect, the Company’s internal control over financial
      reporting.

     

    
      
        
        

      

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

     

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

     

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

     

    (v) Registration
      Rights.
      Except
      as set forth in Schedule 3.1(v) attached hereto, other than each of the
      Purchasers, no Person has any right to cause the Company to effect the
      registration under the Securities Act of any securities of the
      Company.

     

    (w) Listing
      and Maintenance Requirements.
      The
      Company’s Common Stock is registered pursuant to Section 12(b) or 12(g) of the
      Exchange Act, and the Company has taken no action designed to, or which to
      its
      knowledge is likely to have the effect of, terminating the registration of
      the
      Common Stock under the Exchange Act nor has the Company received any
      notification that the Commission is contemplating terminating such registration.
      The Company has not, in the 12 months preceding the date hereof, received notice
      from any Trading Market on which the Common Stock is or has been listed or
      quoted to the effect that the Company is not in compliance with the listing
      or
      maintenance requirements of such Trading Market. The Company is, and has no
      reason to believe that it will not in the foreseeable future continue to be, in
      compliance with all such listing and maintenance requirements.

     

    
      
        
        

      

      
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    (x) Application
      of Takeover Protections.
      The
      Company and the 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 Company’s certificate of
      incorporation (or similar charter documents) or the laws of its state of
      incorporation that is or could become applicable to the Purchasers as a result
      of the Purchasers and the Company fulfilling their obligations or exercising
      their rights under the Transaction Documents, including without limitation
      as a
      result of the Company’s issuance of the Securities and the Purchasers’ ownership
      of the Securities.

     

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

     

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

     

    
      
        
        

      

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

     

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

     

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

     

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

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    (ee)  Accountants.
      The
      Company’s accounting firm is set forth on Schedule
      3.1(ee)
      of the
      Disclosure Schedule. To the knowledge and belief of the Company, such accounting
      firm (i) is a registered public accounting firm as required by the Exchange
      Act
      and (ii) shall express its opinion with respect to the financial statements
      to
      be included in the Company’s Annual Report on Form 10-KSB for the year ending
      December 31, 2007.

     

    (ee) No
      Disagreements with Accountants and Lawyers. There
      are
      no disagreements of any kind presently existing, or reasonably anticipated
      by
      the Company to arise, between the Company and the accountants and lawyers
      formerly or presently employed by the Company which could affect the Company’s
      ability to perform any of its obligations under any of the Transaction
      Documents, and the Company is current with respect to any fees owed to its
      accountants and lawyers.  

     

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

     

    (gg) Acknowledgement
      Regarding Purchaser’s Trading Activity.
      Anything
      in this Agreement or elsewhere herein to the contrary notwithstanding (except
      for Sections 3.2(f) and 4.14 hereof), it is understood and acknowledged by
      the
      Company (i) that none of the Purchasers have been asked by the Company to agree,
      nor has any Purchaser agreed, to desist from purchasing or selling, long and/or
      short, securities of the Company, or “derivative” securities based on securities
      issued by the Company or to hold the Securities for any specified term; (ii)
      that past or future open market or other transactions by any Purchaser,
      specifically including, without limitation, Short Sales or “derivative”
transactions, before or after the closing of this or future private placement
      transactions, may negatively impact the market price of the Company’s
      publicly-traded securities; (iii) that any Purchaser, and counter-parties in
      “derivative” transactions to which any such Purchaser is a party, directly or
      indirectly, presently may have a “short” position in the Common Stock, and (iv)
      that each Purchaser shall not be deemed to have any affiliation with or control
      over any arm’s length counter-party in any “derivative” transaction.
The
      Company further understands and acknowledges that (a) one or more Purchasers
      may
      engage in hedging activities at various times during the period that the
      Securities are outstanding, including, without limitation, during the periods
      that the value of the Warrant Shares deliverable with respect to Securities
      are
      being determined and (b) such hedging activities (if any) could reduce the
      value
      of the existing stockholders' equity interests in the Company at and after
      the
      time that the hedging activities are being conducted.  The Company
      acknowledges that such aforementioned hedging activities do not constitute
      a
      breach of any of the Transaction Documents.

     

    
      
        
        

      

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

    

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

     

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

     

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

     

    
      
        
        

      

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

     

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

     

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

     

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

     

    
      
        
        

      

      
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    ARTICLE
      IV.

    OTHER
      AGREEMENTS OF THE PARTIES

     

    4.1 Transfer
      Restrictions. 

     

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

     

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

     

    THIS
      SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
      OR
      THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
      REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
      ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
      EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
      AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
      REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
      SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
      TO
      SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
      COMPANY. THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
      ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL
      INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE
      SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.

     

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

     

    
      
        
        

      

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

    

    (d) In
      addition to such Purchaser’s other available remedies, the Company shall pay to
      a Purchaser, in cash, as partial liquidated damages and not as a penalty, for
      each $2,000 of Shares or Warrant Shares (based on the VWAP of the Common Stock
      on the date such Securities are submitted to the Transfer Agent) delivered
      for
      removal of the restrictive legend and subject to Section 4.1(c), $10 per Trading
      Day (increasing to $20 per Trading Day five (5) Trading Days after such damages
      have begun to accrue) for each Trading Day after the second Trading Day
      following the Legend Removal Date until such certificate is delivered without
      a
      legend. Nothing herein shall limit such Purchaser’s right to pursue actual
      damages for the Company’s failure to deliver certificates representing any
      Securities as required by the Transaction Documents, and such Purchaser shall
      have the right to pursue all remedies available to it at law or in equity
      including, without limitation, a decree of specific performance and/or
      injunctive relief.

     

    
      
        
        

      

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

     

    4.2 Furnishing
      of Information.
      Until
      the earliest of the time that (i) no Purchaser owns Securities or (ii) the
      Warrants have expired, the Company covenants to timely file (or obtain
      extensions in respect thereof and file within the applicable grace period)
      all
      reports required to be filed by the Company after the date hereof pursuant
      to
      the Exchange Act even if the Company is not then subject to the reporting
      requirements of the Exchange Act. As long as any Purchaser owns Securities,
      if
      the Company is not required to file reports pursuant to the Exchange Act, it
      will prepare and furnish to the Purchasers and make publicly available in
      accordance with Rule 144(c) such information as is required for the Purchasers
      to sell the Securities under Rule 144. The Company further covenants that it
      will take such further action as any holder of Securities may reasonably
      request, to the extent required from time to time to enable such Person to
      sell
      such Securities without registration under the Securities Act within the
      requirements of the exemption provided by Rule 144.

     

    4.3 Integration.
      The
      Company shall not sell, offer for sale or solicit offers to buy or otherwise
      negotiate in respect of any security (as defined in Section 2 of the Securities
      Act) that would be integrated with the offer or sale of the Securities in a
      manner that would require the registration under the Securities Act of the
      sale
      of the Securities to the Purchasers or that would be integrated with the offer
      or sale of the Securities to the Purchasers for purposes of the rules and
      regulations of any Trading Market such that it would require shareholder
      approval prior to the closing of such other transaction unless shareholder
      approval is obtained before the closing of such subsequent
      transaction.

     

    4.4 Securities
      Laws Disclosure; Publicity. The Company shall, by 8:30 a.m. (New York City
      time) on the 3rd
      Trading
      Day immediately following the date hereof, issue a Current Report on Form 8-K,
      disclosing the material terms of the transactions contemplated hereby, and
      filing the Transaction Documents as exhibits thereto. The Company and each
      Purchaser shall consult with each other in issuing any other press releases
      with
      respect to the transactions contemplated hereby, and neither the Company nor
      any
      Purchaser shall issue any such press release or otherwise make any such public
      statement without the prior consent of the Company, with respect to any press
      release of any Purchaser, or without the prior consent of each Purchaser, with
      respect to any press release of the Company, which consent shall not
      unreasonably be withheld or delayed, except if such disclosure is required
      by
      law, in which case the disclosing party shall promptly provide the other party
      with prior notice of such public statement or communication. Notwithstanding
      the
      foregoing, the Company shall not publicly disclose the name of any Purchaser,
      or
      include the name of any Purchaser in any filing with the Commission or any
      regulatory agency or Trading Market, without the prior written consent of such
      Purchaser, except (i) as required by federal securities law in connection with
      (A) any registration statement contemplated by the Registration Rights Agreement
      and (B) the filing of final Transaction Documents (including signature pages
      thereto) with the Commission and (ii) to the extent such disclosure is required
      by law or Trading Market regulations, in which case the Company shall provide
      the Purchasers with prior notice of such disclosure permitted under this clause
      (ii).

     

    
      
        
        

      

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

     

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

     

    4.7 Use
      of
      Proceeds. Except as set forth on Schedule 4.7 attached hereto, the Company
      shall use the net proceeds from the sale of the Securities hereunder for working
      capital purposes and shall not use such proceeds for (a) the satisfaction of
      any
      portion of the Company’s debt (other than payment of trade payables in the
      ordinary course of the Company’s business and prior practices), (b) the
      redemption of any Common Stock or Common Stock Equivalents or (c) the settlement
      of any outstanding litigation.

     

    4.8 Indemnification
      of Purchasers. Subject to the provisions of this Section 4.8, the Company
      will indemnify and hold each Purchaser and its directors, officers,
      shareholders, members, partners, employees and agents (and any other Persons
      with a functionally equivalent role of a Person holding such titles
      notwithstanding a lack of such title or any other title), each Person who
      controls such Purchaser (within the meaning of Section 15 of the Securities
      Act
      and Section 20 of the Exchange Act), and the directors, officers, shareholders,
      agents, members, partners or employees (and any other Persons with a
      functionally equivalent role of a Person holding such titles notwithstanding
      a
      lack of such title or any other title) of such controlling persons (each, a
      “Purchaser Party”) harmless from any and all losses, liabilities,
      obligations, claims, contingencies, damages, costs and expenses, including
      all
      judgments, amounts paid in settlements, court costs and reasonable attorneys’
fees and costs of investigation that any such Purchaser Party may suffer or
      incur as a result of or relating to (a) any breach of any of the
      representations, warranties, covenants or agreements made by the Company in
      this
      Agreement or in the other Transaction Documents or (b) any action instituted
      against a Purchaser in any capacity, or any of them or their respective
      Affiliates, by any stockholder of the Company who is not an Affiliate of such
      Purchaser, with respect to any of the transactions contemplated by the
      Transaction Documents (unless such action is based upon a breach of such
      Purchaser’s representations, warranties or covenants under the Transaction
      Documents or any agreements or understandings such Purchaser may have with
      any
      such stockholder or any violations by the Purchaser of state or federal
      securities laws or any conduct by such Purchaser which constitutes fraud, gross
      negligence, willful misconduct or malfeasance). If any action shall be brought
      against any Purchaser Party in respect of which indemnity may be sought pursuant
      to this Agreement, such Purchaser Party shall promptly notify the Company in
      writing, and the Company shall have the right to assume the defense thereof
      with
      counsel of its own choosing reasonably acceptable to the Purchaser Party. Any
      Purchaser Party shall have the right to employ separate counsel in any such
      action and participate in the defense thereof, but the fees and expenses of
      such
      counsel shall be at the expense of such Purchaser Party except to the extent
      that (i) the employment thereof has been specifically authorized by the Company
      in writing, (ii) the Company has failed after a reasonable period of time to
      assume such defense and to employ counsel or (iii) in such action there is,
      in
      the reasonable opinion of such separate counsel, a material conflict on any
      material issue between the position of the Company and the position of such
      Purchaser Party, in which case the Company shall be responsible for the
      reasonable fees and expenses of no more than one such separate counsel. The
      Company will not be liable to any Purchaser Party under this Agreement (i)
      for
      any settlement by a Purchaser Party effected without the Company’s prior written
      consent, which shall not be unreasonably withheld or delayed; or (ii) to the
      extent, but only to the extent that a loss, claim, damage or liability is
      attributable to any Purchaser Party’s breach of any of the representations,
      warranties, covenants or agreements made by such Purchaser Party in this
      Agreement or in the other Transaction Documents.

     

    
      
        
        

      

      
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    4.9 Reservation
      of Common Stock.
      As of
      the date hereof, the Company has reserved and the Company shall continue to
      reserve and keep available at all times, free of preemptive rights, a sufficient
      number of shares of Common Stock for the purpose of enabling the Company to
      issue Shares pursuant to this Agreement and Warrant Shares pursuant to any
      exercise of the Warrants. 

     

    4.10 Listing
      of Common Stock. The
      Company hereby agrees to use best efforts to maintain the listing of the Common
      Stock on a Trading Market, and as soon as reasonably practicable following
      the
      Closing (but not later than the earlier of the Effective Date and the first
      anniversary of the Closing Date) to list all of the Shares and Warrant Shares
      on
      such Trading Market. The Company further agrees, if the Company applies to
      have
      the Common Stock traded on any other Trading Market, it will include in such
      application all of the Shares and Warrant Shares, and will take such other
      action as is necessary to cause all of the Shares and Warrant Shares to be
      listed on such other Trading Market as promptly as possible. The Company will
      take all action reasonably necessary to continue the listing and trading of
      its
      Common Stock on a Trading Market and will comply in all respects with the
      Company’s reporting, filing and other obligations under the bylaws or rules of
      the Trading Market.

     

    4.11 Equal
      Treatment of Purchasers. No consideration shall be offered or paid to any
      Person to amend or consent to a waiver or modification of any provision of
      any
      of the Transaction Documents unless the same consideration is also offered
      to
      all of the parties to the Transaction Documents. For clarification purposes,
      this provision constitutes a separate right granted to each Purchaser by the
      Company and negotiated separately by each Purchaser, and is intended for the
      Company to treat the Purchasers as a class and shall not in any way be construed
      as the Purchasers acting in concert or as a group with respect to the purchase,
      disposition or voting of Securities or otherwise.

     

    
      
        
        

      

      
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    4.12 Participation
      in Future Financing. 

     

    (a) From
      the
      date hereof until the date that is the 12 month anniversary of the Effective
      Date, upon any issuance by the Company or any of its Subsidiaries of Common
      Stock or Common Stock Equivalents for cash consideration (a “Subsequent
      Financing”),
      each
      Purchaser shall have the right to participate in the Subsequent Financing up
      to
      an amount equal to 100% of the Subsequent Financing (the “Participation
      Maximum”)
      on the
      same terms, conditions and price provided for in the Subsequent
      Financing. 

     

    (b) At
      least
      5 Trading Days prior to the closing of the Subsequent Financing, the Company
      shall deliver to each Purchaser a written notice of its intention to effect
      a
      Subsequent Financing (“Pre-Notice”),
      which
      Pre-Notice shall ask such Purchaser if it wants to review the details of such
      financing (such additional notice, a “Subsequent
      Financing Notice”). 
      Upon the request of a Purchaser, and only upon a request by such Purchaser,
      for
      a Subsequent Financing Notice, the Company shall promptly, but no later than
      1
      Trading Day after such request, deliver a Subsequent Financing Notice to such
      Purchaser.  The Subsequent Financing Notice shall describe in reasonable
      detail the proposed terms of such Subsequent Financing, the amount of proceeds
      intended to be raised thereunder and the Person or Persons through or with
      whom
      such Subsequent Financing is proposed to be effected and shall include a term
      sheet or similar document relating thereto as an
      attachment.   

     

    (c) Any
      Purchaser desiring to participate in such Subsequent Financing must provide
      written notice to the Company by not later than 5:30 p.m. (New York City time)
      on the 5th
      Trading
      Day after all of the Purchasers have received the Pre-Notice that the Purchaser
      is willing to participate in the Subsequent Financing, the amount of the
      Purchaser’s participation, and that the Purchaser has such funds ready, willing,
      and available for investment on the terms set forth in the Subsequent Financing
      Notice. If the Company receives no notice from a Purchaser as of such
      5th
      Trading
      Day, such Purchaser shall be deemed to have notified the Company that it does
      not elect to participate.  

     

    (d) If
      by
      5:30 p.m. (New York City time) on the 5th
      Trading
      Day after all of the Purchasers have received the Pre-Notice, notifications
      by
      the Purchasers of their willingness to participate in the Subsequent Financing
      (or to cause their designees to participate) is, in the aggregate, less than
      the
      total amount of the Subsequent Financing, then the Company may effect the
      remaining portion of such Subsequent Financing on the terms and with the Persons
      set forth in the Subsequent Financing Notice.  

     

    (e) If
      by
      5:30 p.m. (New York City time) on the 5th
      Trading
      Day after all of the Purchasers have received the Pre-Notice, the Company
      receives responses to a Subsequent Financing Notice from Purchasers seeking
      to
      purchase more than the aggregate amount of the Participation Maximum, each
      such
      Purchaser shall have the right to purchase its Pro Rata Portion (as defined
      below) of the Participation Maximum.  “Pro
      Rata Portion”
means
      the ratio of (x) the Subscription Amount of Securities purchased on the Closing
      Date by a Purchaser participating under this Section 4.12 and (y) the sum of
      the
      aggregate Subscription Amounts of Securities purchased on the Closing Date
      by
      all Purchasers participating under this Section 4.12 plus the aggregate
      subscription amounts of investors party to securities purchase agreement(s)
      contemplated by clause (d) in the definition of Exempt Issuance that are
      participating in such Subsequent Financing pursuant to participation rights
      granted to such investors under such agreements that are substantially similar
      to this Section 4.12.

     

    
      
        
        

      

      
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    (f) The
      Company must provide the Purchasers with a second Subsequent Financing Notice,
      and the Purchasers will again have the right of participation set forth above
      in
      this Section 4.12, if the Subsequent Financing subject to the initial Subsequent
      Financing Notice is not consummated for any reason on the terms set forth in
      such Subsequent Financing Notice within 60 Trading Days after the date of the
      initial Subsequent Financing Notice.

     

    (g) Notwithstanding
      the foregoing, this Section 4.12 shall not apply in respect of (i)
      an
      Exempt
      Issuance
      or (ii)
      an underwritten public offering of Common Stock.

     

    4.13 Subsequent
      Equity Sales.

     

    (a) From
      the
      date hereof until 90 days after the Effective Date, neither the Company nor
      any
      Subsidiary shall issue shares of Common Stock or Common Stock Equivalents;
      provided,
      however,
      the 90
      day period set forth in this Section 4.13 shall be extended for the number
      of
      Trading Days during such period in which (i) trading in the Common Stock is
      suspended by any Trading Market, or (ii) following the Effective Date, the
      Registration Statement is not effective or the prospectus included in the
      Registration Statement may not be used by the Purchasers for the resale of
      the
      Shares and Warrant Shares.

     

    (b) From
      the
      date hereof until such time as no Purchaser holds any of the Securities, the
      Company shall be prohibited from effecting or entering into an agreement to
      effect any Subsequent Financing involving a Variable Rate Transaction.
“Variable
      Rate Transaction”
means
      a
      transaction in which the Company issues or sells (i) any debt or equity
      securities that are convertible into, exchangeable or exercisable for, or
      include the right to receive additional shares of Common Stock either (A) at
      a
      conversion, exercise or exchange rate or other price that is based upon and/or
      varies with the trading prices of or quotations for the shares of Common Stock
      at any time after the initial issuance of such debt or equity securities, or
      (B)
      with a conversion, exercise or exchange price that is subject to being reset
      at
      some future date after the initial issuance of such debt or equity security
      or
      upon the occurrence of specified or contingent events directly or indirectly
      related to the business of the Company or the market for the Common Stock or
      (ii) enters into any agreement, including, but not limited to, an equity line
      of
      credit, whereby the Company may sell securities at a future determined price.
      Any Purchaser shall be entitled to obtain injunctive relief against the Company
      to preclude any such issuance, which remedy shall be in addition to any right
      to
      collect damages.

     

    
      
        
        

      

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

     

    4.14 Short
      Sales and Confidentiality After The Date Hereof. Each Purchaser, severally
      and not jointly with the other Purchasers, covenants that neither it nor any
      Affiliate acting on its behalf or pursuant to any understanding with it will
      execute any Short Sales during the period commencing at the Discussion Time
      and
      ending at the time that the transactions contemplated by this Agreement are
      first publicly announced as described in Section 4.4. 
      Each
      Purchaser, severally and not jointly with the other Purchasers, covenants that
      until such time as the transactions contemplated by this Agreement are publicly
      disclosed by the Company as described in Section 4.4, such Purchaser will
      maintain the confidentiality of the existence and terms of this transaction
      and
      the information included in the Disclosure Schedules.  Each Purchaser
      severally and not jointly with any other Purchaser, understands and
      acknowledges, and agrees, to act in a manner that will not violate the positions
      of the Commission as set forth in Item 65, Section A, of the Manual of Publicly
      Available Telephone Interpretations, dated July 1997, compiled by the Office
      of
      Chief Counsel, Division of Corporation Finance. Notwithstanding
      the foregoing, no Purchaser makes any representation, warranty or covenant
      hereby that it will not engage in Short Sales in the securities of the Company
      after the time that the transactions contemplated by this Agreement are first
      publicly announced as described in Section 4.4.  Notwithstanding
      the foregoing, in the case of a Purchaser that is a multi-managed investment
      vehicle whereby separate portfolio managers manage separate portions of such
      Purchaser’s assets and the portfolio managers have no direct knowledge of the
      investment decisions made by the portfolio managers managing other portions
      of
      such Purchaser’s assets, the covenant set forth above shall only apply with
      respect to the portion of assets managed by the portfolio manager that made
      the
      investment decision to purchase the Securities covered by this
      Agreement.

     

    4.15 Delivery
      of Securities After Closing. The Company shall deliver, or cause to be
      delivered, the respective Securities purchased by each Purchaser to such
      Purchaser within 3 Trading Days of the Closing Date.

     

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

     

    4.17 Capital
      Changes. Until the one year anniversary of the Effective Date, the Company
      shall not undertake a reverse or forward stock split or reclassification of
      the
      Common Stock without the prior written consent of the Purchasers holding a
      majority in interest of the Shares.

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

     

    4.18 Directors
      and Officers Insurance. The Company shall have obtained directors and
      officers insurance coverage at least equal to $2 million from a reputable
      insurance company on or before July 15, 2007.

     

    4.19 Per
      Share Purchase Price Protection.

     

    (a) As
      to
      each Purchaser that then holds at least 20% of the Shares initially purchased
      hereunder by such Purchaser on the Closing Date, after the date hereof and
      until
      the 2 year anniversary of the Effective Date, if the Company or any Subsidiary
      thereof shall issue any Common Stock or Common Stock Equivalents entitling
      any
      person or entity to acquire shares of Common Stock at an effective price per
      share less than the Per Share Purchase Price (the “Discounted
      Purchase Price”,
      as
      further defined below), within 3 Trading Days of the date thereof the Company
      shall issue to such Purchaser that number of additional shares of Common Stock
      equal to the difference between (a) the quotient obtained by dividing (i) the
      product of (A) the Shares then held by such Purchaser immediately prior to
      such
      issuance multiplied by (B) the Per Share Purchase Price (or if Shares were
      previously issued pursuant to this Section 4.18, the lowest Discounted Purchase
      Price used hereunder prior to such issuance) divided by (ii) the Discounted
      Purchase Price, less (b) the Shares then held by such Purchaser immediately
      prior to such issuance. The term “Discounted
      Purchase Price”
shall
      mean the amount actually paid by third parties for a share of Common Stock.
      The
      sale of Common Stock Equivalents shall be deemed to have occurred at the time
      of
      the issuance of the Common Stock Equivalents and the Discounted Purchase Price
      covered thereby shall also include the actual exercise or conversion price
      thereof at the time of the conversion or exercise (in addition to the
      consideration per share of Common Stock underlying the Common Stock Equivalents
      received by the Company upon such sale or issuance of the Common Stock
      Equivalents). If shares are issued for a consideration other than cash, the
      per
      share selling price shall be the fair value of such consideration as determined
      in good faith by the Board of Directors of the Company. The Company may not
      refuse to issue a Purchaser additional Shares hereunder based on any claim
      that
      such Purchaser or any one associated or affiliated with such Purchaser has
      been
      engaged in any violation of law, agreement or for any other reason, unless,
      an
      injunction from a court, on notice, restraining and or enjoining an issuance
      hereunder shall have been sought and obtained. Nothing herein shall limit a
      Purchaser’s right to pursue actual damages for the Company's failure to deliver
      Shares hereunder and such Purchaser shall have the right to pursue all remedies
      available to it at law or in equity including, without limitation, a decree
      of
      specific performance and/or injunctive relief. On the date of closing of any
      transaction pursuant to which securities are issued for a Discounted Purchase
      Price, the Company shall give the Purchasers written notice thereof.

     

    (b) Notwithstanding
      anything to the contrary herein, this Section 4.18 shall not apply to an Exempt
      Issuance.

     

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      V.

    MISCELLANEOUS

     

    5.1 Termination. 
      This Agreement may be terminated by any Purchaser, as to such Purchaser’s
      obligations hereunder only and without any effect whatsoever on the obligations
      between the Company and the other Purchasers, by written notice to the other
      parties, if the Closing has not been consummated on or before June __, 2007;
      provided, however, that no such termination will affect the right of any party
      to sue for any breach by the other party (or parties).

     

    5.2 Fees
      and Expenses. Except as expressly set forth in the Transaction Documents to
      the contrary, each party shall pay the fees and expenses of its advisers,
      counsel, accountants and other experts, if any, and all other expenses incurred
      by such party incident to the negotiation, preparation, execution, delivery
      and
      performance of this Agreement. The Company shall pay all Transfer Agent fees,
      stamp taxes and other taxes and duties levied in connection with the delivery
      of
      any Securities to the Purchasers.

     

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

     

    5.4 Notices.
      Any and all notices or other communications or deliveries required or permitted
      to be provided hereunder shall be in writing and shall be deemed given and
      effective on the earliest of (a) the date of transmission, if such notice or
      communication is delivered via facsimile at the facsimile number set forth
      on
      the signature pages attached hereto prior to 5:30 p.m. (New York City time)
      on a
      Trading Day, (b) the next Trading Day after the date of transmission, if such
      notice or communication is delivered via facsimile at the facsimile number
      set
      forth on the signature pages attached hereto on a day that is not a Trading
      Day
      or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the
      2nd
      Trading
      Day following the date of mailing, if sent by U.S. nationally recognized
      overnight courier service, or (d) upon actual receipt by the party to whom
      such
      notice is required to be given. The address for such notices and communications
      shall be as set forth on the signature pages attached hereto.

     

    5.5 Amendments;
      Waivers. No provision of this Agreement may be waived or amended except in a
      written instrument signed, in the case of an amendment, by the Company and
      the
      Purchasers of at least 67% of the Shares still held by the Purchasers or, in
      the
      case of a waiver, by the party against whom enforcement of any such waived
      provision is sought. No waiver of any default with respect to any provision,
      condition or requirement of this Agreement shall be deemed to be a continuing
      waiver in the future or a waiver of any subsequent default or a waiver of any
      other provision, condition or requirement hereof, nor shall any delay or
      omission of any party to exercise any right hereunder in any manner impair
      the
      exercise of any such right.

     

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

     

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

     

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

     

    5.8 No
      Third-Party Beneficiaries. This Agreement is intended for the benefit of the
      parties hereto and their respective successors and permitted assigns and is
      not
      for the benefit of, nor may any provision hereof be enforced by, any other
      Person, except as otherwise set forth in Section 4.8.

     

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

     

    5.10 Survival.
      The representations and warranties contained herein shall survive the Closing
      and the delivery of the Shares and Warrant Shares.

     

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

     

    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    

     

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

     

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

     

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

     

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

     

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

     

    
      
        
        

      

      
        32

        
          

        

      

      
        
        

      

    

     

    (Signature
      Pages Follow)

     

    
      
        
        

      

      
        33

        
          

        

      

      
        
        

      

    

    

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

     

    

    
      	
              ZAGG
                INCORPORATED

            	 	
              Address
                for Notice:

            
	 	 	 
	
              By: 

              
                

              

              Name:

              Title:

            	 	
              Fax:

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

            	 	 

    

     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK

    SIGNATURE
      PAGE FOR PURCHASER FOLLOWS]

     

    
      
        
        

      

      
        34

        
          

        

      

      
        
        

      

    

    

    [PURCHASER
      SIGNATURE PAGES TO ZAGG SECURITIES PURCHASE AGREEMENT]

    

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

     

    Name
      of
      Purchaser: ________________________________________________________

     

    Signature
      of Authorized Signatory of Purchaser:
      __________________________________

     

    Name
      of
      Authorized Signatory:
      ____________________________________________________

     

    Title
      of
      Authorized Signatory:
      _____________________________________________________

     

    Email
      Address of
      Purchaser:________________________________________________

     

    Fax
      Number of Purchaser:
      ________________________________________________

     

    Address
      for Notice of Purchaser:

     

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

     

    Subscription
      Amount: $_________________

    

    Shares:
      _________________

    

    Warrant
      Shares: __________________

    

    EIN
      Number: [PROVIDE
      THIS UNDER SEPARATE COVER]

     

    [SIGNATURE
      PAGES CONTINUE]

     

    
      
        
        

      

      
        35

        
          

        

      

      
        
        

      

    

     

    Schedule
      3.1(a)

    

    None

     

    
      
        
        

      

      
        36

        
          

        

      

      
        
        

      

    

    

    Schedule
      3.1(g)

     

    Capitalization
      Table

     

    
      	
              ZAGG
                Incorporated

            	 	 	 	 	 
	
              Capitalization
                Table

            	 	 	 	 	 
	 	 	 	 	 	 
	
              CURRENT
                CAPITALIZATION

            	 	 	 	 	 
	 	 	 	 	 	 
	
              Robert
                G. Pedersen II / SunCreek

            	 	 	
              6,500,000
                

            	 	 	
              42.85

            	
              %

            
	
              Shell
                company shareholders

            	 	 	
              3,346,000
                

            	 	 	
              22.06

            	
              %

            
	
              Shares
                sold by Phillip Chipping in secondary transaction to
                non-affiliates

            	 	 	
              2,761,765
                

            	 	 	
              18.21

            	
              %

            
	
              Interim
                capital shares 

            	 	 	
              1,500,142
                

            	 	 	
              9.89

            	
              %

            
	
              Phillip
                Chipping

            	 	 	
              738,235
                

            	 	 	
              4.87

            	
              %

            
	
              Brandon
                T. O'Brien 

            	 	 	
              147,853
                

            	 	 	
              0.97

            	
              %

            
	
              Alan
                Farr

            	 	 	
              100,000
                

            	 	 	
              0.66

            	
              %

            
	
              Dexis
                Development

            	 	 	
              75,000
                

            	 	 	
              0.49

            	
              %

            
	
              Fully
                diluted shares

            	 	 	
              15,168,995
                

            	 	 	
              100.00

            	
              %

            
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 
	
              CAPITALIZATION
                ASSUMING $5.0M IN UNITS IS COMPLETED

            	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 
	
              Robert
                G. Pedersen II / SunCreek

            	 	 	
              6,500,000
                

            	 	 	
              31.00

            	
              %

            
	
              UNITS
                investors ($5.0M at $1.00 per share)

            	 	 	
              5,000,000
                

            	 	 	
              23.84

            	
              %

            
	
              Shell
                company shareholders

            	 	 	
              3,346,000
                

            	 	 	
              15.96

            	
              %

            
	
              Shares
                sold by Phillip Chipping in secondary transaction to
                non-affiliates

            	 	 	
              2,761,765
                

            	 	 	
              13.17

            	
              %

            
	
              Interim
                capital shares

            	 	 	
              1,500,142
                

            	 	 	
              7.15

            	
              %

            
	
              Employees
                & Affiliates- stock and options

            	 	 	
              800,000
                

            	 	 	
              3.82

            	
              %

            
	
              Phillip
                Chipping

            	 	 	
              738,235
                

            	 	 	
              3.52

            	
              %

            
	
              Brandon
                T. O'Brien 

            	 	 	
              147,853
                

            	 	 	
              0.71

            	
              %

            
	
              Alan
                Farr

            	 	 	
              100,000
                

            	 	 	
              0.48

            	
              %

            
	
              Dexis
                Development

            	 	 	
              75,000
                

            	 	 	
              0.36

            	
              %

            
	
              Fully
                diluted shares

            	 	 	
              20,968,995
                

            	 	 	
              100.00

            	
              %

            

    

     

    
      
        
        

      

      
        37

        
          

        

      

      
        
        

      

    

     

    Schedule
      3.1(g) cont.

    

    Table
      of Beneficial Ownership

    The
      following table sets forth information, as of June 7, 2007, the beneficial
      ownership of the outstanding shares of Company’s capital stock by (i) each
      person known by Company who beneficially owns five percent (5%) or more of
      the
      outstanding shares; (ii) each officer of the Company; (iii) each director of
      the
      Company, and (iv) all the aforementioned officers and directors as a
      group. 

     

    
      	
              Title
                of

              Class

            	 	
              Name
                and Address

              Of

              Beneficial
                Owners (1)

            	 	
              Amount
                and Nature

              Of
                Beneficial Ownership

            	
            	
              Percent

              Of

              Class
                (2)

            
	
              Common
                Stock

            	
               

            	
              Robert
                G. Pedersen II, President and Chief Executive Officer (3)

            	
               

            	
              6,500,000

            	
               

            	
              42.85%

            
	
              Common
                Stock

            	 	
              Brandon
                T. O’Brien

              Chief
                Financial Officer

            	 	
              147,853

            	 	
              0.97%

            
	
              Common
                Stock

            	
               

            	
              Andrew
                C. Park

              201
                Post Street, 11th Floor

              San
                Francisco, CA 94108

            	
               

            	
              1,058,235

            	
               

            	
              6.98%

            
	
              Common
                Stock

            	
               

            	
              SunCreek,
                LLC 

              2873
                Tolcate Lane

              Holladay,
                Utah 84121

            	
               

            	
              5,000,000

            	
               

            	
              32.96%

            
	
              Common
                Stock

            	 	
              Joseph
                W. and Patricia G. Abrams Family Trust (4)

            	 	
              820,042

            	 	
              5.41%

            
	
               

            	
               

            	
              All
                officers and directors a group (2)

            	
               

            	
              6,647,853

            	
               

            	
              43.83%

            

    

     

    
      	
              (1)

            	
              Unless
                otherwise noted, the address for each of the named beneficial owners
                is:
                3855 South 500 West, Suite J, Salt Lake City, Utah, 84115. Unless
                otherwise indicated, beneficial ownership is determined in accordance
                with
                Rule 13d-3 promulgated under the Exchange Act and generally includes
                voting and/or investment power with respect to securities. Shares
                of
                common stock subject to options or warrants that are currently exercisable
                or exercisable within sixty days of June 7, 2007, are deemed to be
                beneficially owned by the person holding such options or warrants
                for the
                purpose of computing the percentage of ownership set forth in the
                above
                table, unless otherwise indicated.

            

    

    

    
      	
              (2)

            	
              The
                calculations of percentage of beneficial ownership are based on 15,168,995
                shares of common stock outstanding as of June 7,
                2007.

            

    

    

    
      	
              (3)

            	
              Includes
                1,500,000 shares of Common Stock held directly by Mr. Pedersen and
                5,000,000 shares of Common Stock held by SunCreek, LLC, an entity
                wholly
                owned by Mr. Pedersen. Mr. Pedersen exercises sole voting and investment
                control over the shares held by SunCreek,
                LLC.

            

    

    

    
      	
              (4)

            	
              The
                820,042 shares are held by the Joseph W. & Patricia G. Abrams Family
                Trust, a revocable living trust. Joseph W. Abrams and, his wife,
                Patricia
                G. Abrams are the sole trustees, trustors and beneficiaries of the
                Joseph
                W. & Patricia G. Abrams Family Trust, each with unilateral power to
                revoke the trust. As trustees, each of Joseph and Patricia Abrams
                is
                deemed to have shared voting power with respect to the shares held
                by the
                Joseph W. & Patricia G. Abrams Family
                Trust.

            

    

     

    
      
        
        

      

      
        38

        
          

        

      

      
        
        

      

    

    

    Schedule
      3.1(g) cont.

    

    PiggyBack
      Registration Rights

     

    On
      September 27, 2006, the Company entered into an Exclusive Finder’s Agreement
      with Empire Financial Group, Inc. (“Empire Financial”) in connection with a
      private offering transaction of up to $6 million. The Company agreed to pay
      Empire Financial cash compensation equal to 9% in of the gross proceeds of
      the
      offering, and to issue warrants to purchase 100,000 shares of Company common
      stock for every $1 million raised in the offering. The warrant shares have
      piggyback registration rights.

    

    On
      February 8, 2007, the Company issued and sold 785,856 shares of Common Stock
      to
      accredited investors. The shares were sold at a price per share of $0.35. These
      shares have piggy back registration rights. The shares were issued pursuant
      to
      an exemption form registration provided by Rule 506 of Regulation D, as they
      were issued without any form of general solicitation or general advertising
      and
      the purchases qualified as accredited investors and accepted the shares for
      their personal accounts and not with a view towards distribution.

    

    During
      the quarter ended March 31, 2007, the Company repaid $50,000 of the principal
      balance of a $100,000 note issued in November 2006 to an affiliate of the
      Company’s Chief Executive Officer, and the remaining $50,000 of principal plus
      accrued interest of $1,749 was converted into 147,853 shares of Common Stock.
      These shares have piggy back registration rights. The shares were issued
      pursuant to an exemption form registration provided by Rule 506 of Regulation
      D,
      as they were issued without any form of general solicitation or general
      advertising and the purchases qualified as accredited investors and accepted
      the
      shares for their personal accounts and not with a view towards
      distribution.

    

    Warrant
      Schedule

     

    
      	
              Warrant
                Holder

            	 	
              Number
                of Warrants

            	 	
              Exercise
                Price

            	 	
              Expiration
                Date

            	 
	 	 	 	 	 	 	 	 
	
              Empire
                Financial Group

            	 	 	
              12,601

            	 	
              $

            	
              0.35

            	 	 	
              3/18/2012

            	 
	
              Michael
                R. Jacks

            	 	 	
              9,450

            	 	
              $

            	
              0.35

            	 	 	
              3/18/2012

            	 
	
              William
                Corbett

            	 	 	
              9,450

            	 	
              $

            	
              0.35

            	 	 	
              3/18/2012

            	 
	
              Lee
                Osman

            	 	 	
              7,875

            	 	
              $

            	
              0.35

            	 	 	
              3/18/2012

            	 
	
              Paul
                Marr

            	 	 	
              6,562

            	 	
              $

            	
              0.35

            	 	 	
              3/18/2012

            	 
	
              Jake
                Jordaan

            	 	 	
              6,562

            	 	
              $

            	
              0.35

            	 	 	
              3/18/2012

            	 
	
              Remington
                Partners

            	 	 	
              100,000

            	 	
              $

            	
              0.50

            	 	 	
              5/30/2012

            	 

    

    

    
      
        
        

      

      
        39

        
          

        

      

      
        
        

      

    

     

    Schedule
      3.1(i)

    

    Organization
      in the Last Five Years

     

    The
      Company was incorporated on March 24, 2005. The Company was formed under the
      original name “Protective Solutions, Inc.” and subsequently changed its name to
“ShieldZone Corporation.” The Company maintains its corporate offices and
      operational facility at 3855 South 500 West, Suites B and J, Salt Lake City,
      Utah, 84115. The telephone number of the Company is 801-263-0699. The Company’s
      website addresses are www.ShieldZone.com, www.InvisibleShield.com and
      www.zagg.com. The Company changed its name to Zagg Incorporated in connection
      with the Merger (described below).

    

    On
      February 8, 2007, Amerasia Khan Enterprises Ltd. a Nevada corporation (“AKE”)
      (nka Zagg Incorporated), a publicly held entity, executed an Agreement and
      Plan
      of Merger (the “Merger Agreement”) by and between AKE and its wholly owned
      subsidiary, SZC Acquisition Corp., a Nevada corporation (“Subsidiary”) on the
      one hand and ShieldZone Corporation (now Zagg Incorporated), a Utah corporation
      on the other hand. Pursuant to the Merger Agreement ShieldZone merged with
      the
      Subsidiary, with ShieldZone Corporation surviving the merger (the “Merger”). In
      consideration, the shareholders of ShieldZone received 10,175,000 shares of
      the
      common stock of AKE.

    

    Following
      the Merger, ShieldZone was reincorporated in Nevada as a subsidiary of AKE.
      On
      March 7, 2007, ShieldZone was merged up and into AKE. At that time AKE changed
      its name to Zagg Incorporated. The operations of the surviving entity (Zagg
      Incorporated) are solely that of ShieldZone. As a result of these transactions,
      the historical financial statements of Zagg Incorporated are the historical
      financial statements of ShieldZone. The fiscal year end of Company is December
      31.

    

    Directors
      and Executive Officers

     

    The
      following tables summarize the Company's current executive officers and
      directors and the proposed executive officers and directors of the
      Company:

     

    
      	
              Name

            	
               

            	
              Age

            	
               

            	
              Position

            
	
              Robert
                G. Pedersen II

            	
               

            	
              40

            	
               

            	
              Chief
                Executive Officer, Director

            
	
              Brandon
                T. O’Brien

            	
               

            	
              36

            	
               

            	
              Chief
                Financial Officer

            

    

    

    Robert
      G. Pedersen II. Mr.
      Pedersen provides the overall vision and leadership of Zagg Incorporated. Mr.
      Pedersen has more than 20 years' experience in executive management, sales
      and
      marketing, communications, as well as owning and managing several start-up
      businesses and enterprises. Since 1998, Mr. Pedersen was a co-owner and
      executive manager for Del Sol, LC, a Utah-based international specialty retailer
      of apparel and accessories, where he implemented the in-line retail store
      model.  Del Sol now has more than 80 stores world-wide. Additionally, Mr.
      Pedersen created and was the director of DelSol.com, Del Sol LC’s Internet
      presence. In 2002 Mr. Pedersen founded PayTeck, Inc., a Utah provider of
      Internet-based payment processing services, which was later sold to Zion's
      Bank,
      a public company, in 2005. Mr. Pedersen joined Zagg in October 2005 as a
      consultant and then in January 2006 joined the company as a full partner in
      a
      full time capacity and has served as its Chief Executive Officer and Chairman
      since that time.  Mr. Pedersen is also the Company’s largest
      shareholder.  Mr. Pedersen earned a degree in business administration
      (BSBA) from the University of Phoenix and a Masters Degree (MBA) from Brigham
      Young University in Business Administration with an emphasis in marketing,
      finance and organizational communications. Mr. Pedersen and his wife and six
      children reside in Holladay, Utah. 

     

    
      
        
        

      

      
        40

        
          

        

      

      
        
        

      

    

     

    
      

      Brandon
        T. O’Brien.
        Mr.
        O’Brien became our Chief Financial Officer on February 12, 2007. Prior to
        assuming his position as the Chief Financial Officer for the Company, Mr.
        O’Brien, served as the Vice President of Finance at Fonix Corporation, a speech
        recognition software company, from January 2003 to January 2007, and as an
        independent financial consultant from September 2001 to January 2003. Mr.
        O’Brien has extensive experience in mergers and acquisitions, accounting for
        financial transactions with foreign subsidiaries and the application of
        financial accounting standards and principles. Mr. O’Brien has broad experience
        with both small micro-cap public companies and with large multinational public
        companies. Mr. O’Brien is a licensed Certified Public Accountant and has
        attained the Certified Management Accountant and Certified Financial Manager
        designations. Mr. O’Brien earned a Bachelor of Science degree in Accounting from
        Utah State University in 1995 and a Masters of Business Administration from
        the
        University of Utah in 1996. Mr. O’Brien resides with his wife and five children
        in Farmington, Utah.

      

      Executive
        Compensation

       

      The
        table
        below summarizes all compensation awarded to, earned by, or paid to our former
        or current executive officers for the fiscal years ended 2006, 2005 and
        2004.

      

      Summary
        Compensation Table

       

      
        	
                 

                Name
                  and principal

                Position

              	 	
                Year

              	 	
                Salary

                ($)

              	 	
                Bonus

                ($)

              	 	
                 

                Stock

                Awards

                ($)

              	 	
                Option

                Awards

                ($)

              	 	
                Non-Equity

                Incentive
                  Plan

                Compensation

                ($)

              	 	
                Nonqualified

                Deferred

                Compensation

                Earnings
                  ($)

              	 	
                All
                  Other

                Compensation

                ($)

              	 	
                Total

                ($)

              	 
	
                Robert
                  G. Pedersen II

                CEO
                  & President

              	 	 	
                2004

                2005

                2006

              	 	 	
                -

                -

                40,000

              	 	 	
                -

                -

                10,000

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                85,000
                  

                -

              	(3)	 	
                -

                85,000

                50,000

              	 
	
                 

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 
	
                Phillip
                  Chipping (1)

              	 	 	
                2004

                2005

                2006

              	 	 	
                -

                54,614

                98,500

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                54,614

                98,500

              	 
	
                 

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 	 	
                
                

              	 
	
                David
                  Ho

                Former
                  CFO (4)

              	 	 	
                2004

                2005

                2006

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                9,600
                  

                -

              	(2)	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                -

                -

              	 	 	
                -

                9,600

                -

              	 

      

      

      
        	(1)	
                  Effective
                  December 15, 2006, Mr. Chipping resigned his position as an officer
                  and
                  director of the Company. 

              

      

      

      
        	(2)	
                We
                  issued 400,000 shares of common stock to Mr. David Ho at $0.001
                  per share
                  on June 10, 2005 in settlement of $400 of debt. The conversion
                  rate of
                  $0.001 for these issuances was the price determined by considering
                  both
                  the stock price at the time and the great deal of time and effort
                  our
                  officers and directors expended in developing our business plan
                  and
                  establishing the contacts necessary to progress the company thus
                  far. We
                  recorded a non cash charge of $9,600 to Mr. Ho for management compensation
                  to reflect the fair value of the common stock issued to Mr. Ho.
                  These
                  issuances were made by Amerasia Khan Enterprises Ltd. prior to
                  the merger
                  transaction with the Company.

              

      

       

      
        
          
          

        

        
          41

          
            

          

        

        
          
          

        

      

      
 

      
        	
                (3)

              	
                Represents
                  a consulting fee paid to a company owned by Mr. Pedersen for services
                  rendered through July 2006, but paid in fiscal 2005. In January
                  2006, Mr.
                  Pedersen purchased a 50% interest in the equity of the Company
                  through an
                  affiliated entity and was appointed Chief Executive Officer and
                  Director
                  of the Company. 

              

      

      

      
        	
                (4) 

              	
                Mr.
                  Ho resigned has an officer and director of the Company prior to
                  the date
                  of this Report. Mr. Ho, a former officer and director, did not
                  receive
                  compensation for his position as an officer of the Company.
                  

              

      

      

       Long-Term
        Incentive Plans

       

      We
        do not
        currently have any long term incentive plans.

      

      Compensation
        to Directors

      

      Directors
        do not generally receive cash compensation for their services as directors,
        but
        may be reimbursed for expenses incurred in attending board meetings. During
        the
        year ended December 31, 2006, and for the quarter ended March 31, 2007, the
        directors of the Company did not receive any compensation for services as
        directors. 

      

      We
        intend
        to adopt a director compensation policy for directors which will include
        compensation on a per meeting basis or upon appointment which will likely
        be a
        combination of cash compensation and stock options.

      

      Stock
        Option Grants

      

      No
        stock
        options were granted to any of the Company’s directors and officers during the
        Company’s most recent fiscal year ended December 31, 2006. No stock options were
        granted to any of the Company’s directors and officers during the quarter ended
        March 31, 2007.

      

      Exercise
        of Stock Options and Year-End Option Values

       

      No
        share
        purchase options were exercised by the Company’s officers, directors and
        employees during the fiscal year ended December 31, 2006. No share purchase
        options were exercised by the Company’s officers, directors and employees during
        the quarter ended March 31, 2007.

      

      Outstanding
        Stock Options

      

      The
        Company currently does not have any outstanding stock options, a stock option
        plan or an incentive plan; however, the Board of Directors has reserved 800,000
        shares of common stock for use in such a plan to be established at a later
        date.

       

      Certain
        Relationships and Related Transactions

       

      Except
        as
        disclosed below, none of our directors or executive officers, nor any person
        who
        beneficially owns, directly or indirectly, shares carrying more than 5% of
        the
        voting rights attached to all of our outstanding shares, nor any members
        of the
        immediate family (including spouse, parents, children, siblings, and in-laws)
        of
        any of the foregoing persons has any material interest, direct or indirect,
        in
        any transaction since our incorporation or in any presently proposed transaction
        which, in either case, has or will materially affect us.

       

      
        
          
          

        

        
          42

          
            

          

        

        
          
          

        

      

      

      In
        October 2005, the Company executed a nine month consulting agreement with
        SunCreek, LLC, an entity wholly owned by Robert G. Pedersen II who subsequently
        became the Company’s Chief Executive Officer. Compensation in the amount of
        $85,000 was paid under the Agreement as of December 2005. No further
        compensation is due under the Agreement. The Agreement also provided for
        the
        sale by Phillip J. Chipping, the then sole owner of the Company, of 50% of
        the
        equity securities of the Company to SunCreek, LLC for the amount of $25,000.
        

      

      In
        November 2006, the Company issued a Convertible Note (the “Note”), with an
        affiliate of the Company’s Chief Executive Officer in the original principal
        amount of $100,000. The Note was convertible at the holder's option any time
        up
        to maturity at a conversion price equal to $0.35 per common share. The Note
        was
        due on May 15, 2007, bore interest at 20% per year and was unsecured. The
        common
        shares underlying the Note have piggy back registration rights. During the
        three
        months ended March 31, 2007, the Company repaid $50,000 of the principal
        balance
        of the note. In addition, the remaining $50,000 of principal plus accrued
        interest of $1,749 was converted into 147,853 shares of the Company’s common
        stock 

      

      Risk
        Factors

       

      RISKS
        RELATED TO THE COMPANY AND ITS BUSINESS

      

      If
        we are unable to raise capital, our business will fail. 

      

      For
        the
        foreseeable future, we intend to fund our operations and capital expenditures
        from operations and our cash on hand largely from the proceeds of this Offering.
        If our capital resources are insufficient, we may need additional funds to
        continue our operations, pursue business opportunities (such as expansion,
        acquisitions of complementary businesses or the development of new products
        or
        services), to react to unforeseen difficulties or to respond to competitive
        pressures. We cannot assure you that at such time as we need funds that
        alternative financing arrangements will be available in amounts or on terms
        acceptable to us, if at all. If additional financing is not available when
        required or is not available on acceptable terms, we may be unable to fund
        our
        expansion, successfully promote our current products, license new products
        or
        enhance our products and services, take advantage of business opportunities,
        or
        respond to competitive pressures, any of which could have a material adverse
        effect on our business and the value of our common stock. If we choose to
        raise
        additional funds through the issuance of equity securities, this may cause
        significant dilution of our common stock, and holders of the additional equity
        securities may have rights senior to those of the holders of our common stock.
        If we obtain additional financing by issuing debt securities, the terms of
        these
        securities could restrict or prevent us from paying dividends and could limit
        our flexibility in making business decisions.

       

      
        
          
          

        

        
          43

          
            

          

        

        
          
          

        

      

      

      Without
        sufficient financing, we would be forced to limit our operations and otherwise
        fail to pursue the full measure of our business plan. We are seeking a maximum
        of $5,000,000 in this Offering because that amount will be sufficient to
        allow
        us to proceed with our business plan for the next twelve months. If we receive
        than that amount, we would be forced to modify our business plan to curtail
        our
        expansion. We do not know how much money we will raise in this Offering.
        If it
        turns out that we have not raised enough money to complete our business plan
        for
        the next twelve months, we will try to raise additional funds from another
        private placement or from loans, if available. In the event that we are unable
        to raise more financing to pursue our business plan, we will lose opportunities
        for growth necessary for our survival and investors may lose their entire
        investment.

      

      Because
        we may be forced to incur debt in the future on less than favorable terms,
        the
        resulting strain on our cash flow may impair our business
        operations. 

      

      In
        order
        to fund operations, we may issue debt instruments which will have a senior
        claim
        on our assets in the event of a sale of assets. Future debt service may cause
        strain on cash flow and impair business operations.

      

      Because
        the markets for our products are subject to continuing change, they may impair
        our ability to successfully sell our products. 

      

      The
        markets for our products are volatile and subject to continuing change. Consumer
        tastes and demands can be unpredictable. We must continuously adjust our
        marketing strategy to address the changing state of the markets for our
        products, we may not be able to anticipate changes in the market and, as
        a
        result, our product strategies may be unsuccessful.

      

      Because
        we are dependent on a third party source to acquire sufficient quantities
        of raw
        materials to produce our products, any interruption in that relationship
        could
        harm our results of operations and our revenues. 

      

      We
        acquire substantially all of our raw materials that we use in our products
        from
        one distributor. While we believe our relationship with that distributor
        is
        excellent, and we foresee no interruption in our ability to obtain raw materials
        from such distributor, we might in the future need to find other sources
        or
        attempt to manufacture the raw materials, or a material substantially similar
        to
        them, ourselves. We believe we could obtain the raw materials from other
        sources, or obtain substantially similar raw materials, or even produce similar
        materials ourselves. We also keep an inventory of raw materials on hand which
        could support our operations even if our sources were interrupted. However
        any
        unexpected interruption in our acquisition of the raw materials and the
        production of our products could harm our results of operations and our
        revenues.

      

      Because
        we are dependent for our success on one key executive officer, our inability
        to
        retain this officer would impede our business plan and growth strategies,
        which
        would have a negative impact on our business and the value of your
        investment. 

      

      Our
        success depends on the skills, experience and performance of key members
        of our
        management team including Mr. Robert G. Pedersen II, our CEO, and Brandon
        O’Brien, our CFO. We do not have an employment agreement with Mr. Pedersen
        or
        Mr. O’Brien. We do not have employment agreements with any other members of our
        senior management team. Each of those individuals without long-term employment
        agreements may voluntarily terminate his employment with the Company at any
        time
        upon short notice. Were we to lose one or more of these key executive officers,
        we would be forced to expend significant time and money in the pursuit of
        a
        replacement, which would result in both a delay in the implementation of
        our
        business plan and the diversion of limited working capital. We can give you
        no
        assurance that we can find satisfactory replacements for these key executive
        officers at all, or on terms that are not unduly expensive or burdensome
        to our
        company. Although we intend to issue stock options or other equity-based
        compensation to attract and retain employees, such incentives may not be
        sufficient to attract and retain key personnel.

       

      
        
          
          

        

        
          44

          
            

          

        

        
          
          

        

      

      

      If
        we fail to attract, train and retain sufficient numbers of our qualified
        personnel, our prospects, business, financial condition and results of
        operations will be materially and adversely affected.

      

      Our
        success depends to a significant degree upon our ability to attract, retain
        and
        motivate skilled and qualified personnel. Failure to attract and retain
        necessary technical personnel, sales and marketing personnel and skilled
        management could adversely affect our business. If we fail to attract, train
        and
        retain sufficient numbers of these highly qualified people, our prospects,
        business, financial condition and results of operations will be materially
        and
        adversely affected.

      

      Because
        we experience seasonal and quarterly fluctuations in demand for our products,
        no
        one quarter is indicative of our results of operations for the entire fiscal
        year. 

      

      Our
        quarterly results may fluctuate quarter to quarter as a result of market
        acceptance of our products, the mix, pricing and presentation of the products
        offered and sold, the hiring and training of additional personnel, the timing
        of
        inventory write downs, the cost of materials, the incurrence of other operating
        costs and factors beyond our control, such as general economic conditions
        and
        actions of competitors. We are also affected by seasonal buying cycles of
        consumers, such as the holiday season, and the introduction of popular consumer
        electronics, such as a new generation of the iPod. Accordingly, the results
        of
        operations in any quarter will not necessarily be indicative of the results
        that
        may be achieved for a full fiscal year or any future quarter.

      

      Because
        we have limited protection on the intellectual property underlying our products,
        we may not be able to protect our products from the infringement of others
        and
        may be prevented from marketing our products.
        

      

      We
        do not
        own proprietary rights with respect to the film we use in our products. We
        have
        a patent pending with respect to the covering of electronic devices with
        thin
        films. In addition, we own and keep confidential the design configurations
        of
        the film and the process to cut the film which are our copyrights. We seek
        to
        protect our intellectual property rights through confidentiality agreements
        with
        our employees, consultants and partners. However, no assurance can be given
        that
        such measures will be sufficient to protect our intellectual property rights
        or
        that the intellectual property rights that we have are sufficient to protect
        other persons from creating and marketing substantially similar products.
        If we
        cannot protect our rights, we may lose our competitive advantage. Moreover,
        if
        it is determined that our products infringe on the intellectual property
        rights
        of third parties, we may be prevented from marketing our products.

       

      
        
          
          

        

        
          45

          
            

          

        

        
          
          

        

      

       

      Because
        the Company may, at some time in the future, issue additional securities,
        shareholders are subject to dilution of their ownership.

      

      Although
        the Company has no plans to raise additional capital aside from the present
        Offering, it may at some time in the future do so. Any such issuance would
        likely dilute shareholders’ ownership interest in the Company and may have an
        adverse impact on the price of the Company’s common stock. In addition, from
        time to time we may issue shares of common stock in connection with equity
        financing activities or as incentives to our officers and business partners.
        We
        may expand the number of shares available under stock incentive and option
        plans, or create new plans. All issuances of common stock would be dilutive
        to
        your holdings in the Company. If your holdings are diluted, the overall value
        of
        your shares may be diminished and your ability to influence shareholder voting
        will also be harmed.

      

      If
        we fail to maintain proper inventory levels, our business could be
        harmed. 

      

      We
        produce our products prior to the time we receive customers’ orders. We do this
        to minimize purchasing costs, the time necessary to fill customer orders
        and the
        risk of non-delivery. However, we may be unable to sell the products we have
        produced in advance. Inventory levels in excess of customer demand may result
        in
        inventory write-downs, and the sale of excess inventory at discounted prices
        could significantly impair our brand image and have a material adverse effect
        on
        our operating results and financial condition. Conversely, if we underestimate
        demand for our products or if we fail to produce the quality products that
        we
        require at the time we need them, we may experience inventory shortages.
        Inventory shortages might delay shipments to customers, negatively impact
        distributor relationships, and diminish brand loyalty. 

      

      Because
        we face intense competition, including competition from companies with
        significantly greater resources than ours, if we are unable to compete
        effectively with these companies, our market share may decline and our business
        could be harmed. 

      

      Our
        market is highly competitive with numerous competitors. Some of our competitors
        have greater financial, technological, manufacturing, marketing and distribution
        resources than we do. Their greater capabilities in these areas may enable
        them
        to compete more effectively on the basis of price and production and more
        quickly develop new products and technologies. They may also have more fully
        developed sales channels for consumer sales including large retail seller
        arrangements and international distribution capabilities. In addition, new
        companies may enter the markets in which we compete, further increasing
        competition in the laser industry. We may not be able to compete successfully
        in
        the future, and increased competition may result in price reductions, reduced
        profit margins, loss of market share and an inability to generate cash flows
        that are sufficient to maintain or expand our development and marketing of
        new
        products, which would adversely impact the trading price of our common
        shares.

       

      
        
          
          

        

        
          46

          
            

          

        

        
          
          

        

      

      

      If
        we are unable to effectively manage our growth, our operating results and
        financial condition will be adversely affected.

      

      We
        intend
        to grow our business by expanding our sales, administrative and marketing
        organizations. Any growth in or expansion of our business is likely to continue
        to place a strain on our management and administrative resources, infrastructure
        and systems. As with other growing businesses, we expect that we will need
        to
        refine and expand our business development capabilities, our systems and
        processes and our access to financing sources. We also will need to hire,
        train,
        supervise and manage new employees. These processes are time consuming and
        expensive, will increase management responsibilities and will divert management
        attention. We cannot assure you that we will be able to:

       

      
        	
                 · 

              	
                expand
                  our systems effectively or efficiently or in a timely
                  manner;

              
	 	 
	
                 · 

              	
                allocate
                  our human resources optimally;

              
	 	 
	
                 · 

              	
                meet
                  our capital needs;

              
	 	 
	
                 · 

              	
                identify
                  and hire qualified employees or retain valued employees;
                  or

              
	 	 
	
                 · 

              	
                incorporate
                  effectively the components of any business or product line that
                  we may
                  acquire in our effort to achieve
                  growth.

              

      

      

      Our
        inability or failure to manage our growth and expansion effectively could
        harm
        our business and materially and adversely affect our operating results and
        financial condition.

      

      If
        our competitors misappropriate our proprietary know-how and trade
        secrets, it
        could have a material adverse affect on our business. 

      

      We
        depend
        heavily on the expertise of our production team. If any of our competitors
        copies or otherwise gains access to similar products independently, we might
        not
        be able to compete as effectively. The measures we take to protect our designs
        may not be adequate to prevent their unauthorized use. Further, the laws
        of
        foreign countries may provide inadequate protection of such intellectual
        property rights. We may need to bring legal claims to enforce or protect
        such
        intellectual property rights. Any litigation, whether successful or
        unsuccessful, could result in substantial costs and diversions of resources.
        In
        addition, notwithstanding the rights we have secured in our intellectual
        property, other persons may bring claims against us that we have infringed
        on
        their intellectual property rights or claims that our intellectual property
        right interests are not valid. Any claims against us, with or without merit,
        could be time consuming and costly to defend or litigate and therefore could
        have an adverse affect on our business.

      

      If
        our facilities were to experience catastrophic loss, our operations would
        be
        seriously harmed. 

      

      Our
        facilities could be subject to a catastrophic loss from fire, flood, earthquake
        or terrorist activity. All of our activities, including manufacturing, our
        corporate headquarters and other critical business operations are in one
        location. Any catastrophic loss at this facility could disrupt our operations,
        delay production, and revenue and result in large expenses to repair or replace
        the facility. While we have obtained insurance to cover most potential losses,
        we cannot assure you that our existing insurance coverage will be adequate
        against all other possible losses.

       

      
        
          
          

        

        
          47

          
            

          

        

        
          
          

        

      

      

      New
        rules, including those contained in and issued under the Sarbanes-Oxley Act
        of
        2002, may make it difficult for us to retain or attract qualified officers
        and
        directors, which could adversely affect the management of our business and
        our
        ability to obtain or retain listing of our common stock. 

      

      We
        may be
        unable to attract and retain qualified officers, directors and members of
        board
        committees required to provide for our effective management as a result of
        the
        recent and currently proposed changes in the rules and regulations which
        govern
        publicly-held companies, including, but not limited to, certifications from
        executive officers and requirements for financial experts on the board of
        directors. The perceived increased personal risk associated with these recent
        changes may deter qualified individuals from accepting these roles. The
        enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance
        of a
        series of new rules and regulations and the strengthening of existing rules
        and
        regulations by the SEC. Further, certain of these recent and proposed changes
        heighten the requirements for board or committee membership, particularly
        with
        respect to an individual’s independence from the corporation and level of
        experience in finance and accounting matters. We may have difficulty attracting
        and retaining directors with the requisite qualifications. If we are unable
        to
        attract and retain qualified officers and directors, the management of our
        business could be adversely affected.

      

      Our
        internal controls over financial reporting may not be effective, and our
        independent registered public accounting firm may not be able to certify
        as to
        their effectiveness, which could have a significant and adverse effect on
        our
        business. 

      

      We
        are
        subject to various regulatory requirements, including the Sarbanes-Oxley
        Act of
        2002. We, like all other public companies, must incur additional expenses
        and,
        to a lesser extent, diversion of our management’s time in our efforts to comply
        with Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal
        controls over financial reporting. We have not evaluated our internal controls
        over financial reporting in order to allow management to report on, and our
        registered independent public accounting firm to attest to, our internal
        controls over financial reporting, as required by Section 404 of the
        Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, which
        we
        collectively refer to as Section 404. We have never performed the system
        and process evaluation and testing required in an effort to comply with the
        management assessment and auditor certification requirements of
        Section 404, which may initially apply to us as of December 31, 2007
        and December 31, 2008, respectively. Our lack of familiarity with Section
        404
        may unduly divert management’s time and resources in executing the business
        plan. If, in the future, management identifies one or more material weaknesses,
        or our external auditors are unable to attest that our management’s report is
        fairly stated or to express an opinion on the effectiveness of our internal
        controls, this could result in a loss of investor confidence in our financial
        reports, have an adverse effect on our stock price and/or subject us to
        sanctions or investigation by regulatory authorities.

      

      Economic,
        political, military or other events in the United States could interfere
        with
        our success or operations and harm our business. 

      

      We
        market
        and sell our products and services in the United States and abroad. The
        September 11, 2001 terrorist attacks disrupted commerce throughout the United
        States and other parts of the world. The continued threat of similar attacks
        throughout the world and the military action, or possible military action,
        taken
        by the United States and other nations, in Iraq or other countries may cause
        significant disruption to commerce throughout the world. To the extent that
        such
        disruptions further slow the global economy or, more particularly, result
        in
        delays or cancellations of purchase orders for our products or extends the
        sales
        cycles with potential customers, our business and results of operations could
        be
        materially adversely affected. We are unable to predict whether the threat
        of
        new attacks or the responses thereto will result in any long-term commercial
        disruptions or if such activities or responses will have a long-term material
        adverse effect on our business, results of operations or financial
        condition.

       

      
        
          
          

        

        
          48

          
            

          

        

        
          
          

        

      

       

      RISKS
        RELATED TO THE COMPANY’S COMMON STOCK AND THE
        OFFERING

       

      Because
        our projections of future revenues and earnings are highly subjective and
        may
        not reflect future results, investors may experience volatility in the price
        of
        our common stock. 

       

      Customers
        of our products are varied and it is difficult to predict with any degree
        of
        certainty what the Company’s revenues will be for any given period. Our
        experience indicates that customers can change their purchasing patterns
        quickly
        in response to market demands and therefore our forecasts may not be relied
        upon
        to accurately forecast sales. We may have provided projections of our future
        sales and earnings. Since we do not have long-term purchase commitments from
        major customers and instead rely on a broader public to purchase our products,
        it is difficult for us to accurately predict the amount of our sales and
        related
        earnings in any given period. Our projections are based on management’s best
        estimate of sales using historical sales data, information from customers
        and
        other information deemed relevant. These projections are highly subjective
        since
        sales to our customers can fluctuate substantially. Our period to period
        revenues have varied in the past and may continue to vary in the future.
        Any
        significant change in purchases by our customers can significantly affect
        our
        sales and profitability. 

       

      If
        demand
        for our products fluctuates, our revenues, profitability and financial condition
        could be adversely affected. Important factors that could cause demand for
        our
        products to fluctuate include: 

      

      
        	 	
                 · 

              	
                changes
                  in customer product needs; 

              

      

      
        	 	 	 

        	 	
                 · 

              	
                changes
                  in the level of inventory; 

              

      

      
        	 	 	 

        	 	
                 · 

              	
                changes
                  in business and economic conditions, including a downturn in our
                  industry;
                  and 

              

      

      
        	 	 	 

        	 	
                 · 

              	
                market
                  acceptance of our products. 

              

      

      

      If
        our
        actual sales or earnings are less than the projected amounts, the price of
        our
        common stock may be adversely affected and accordingly our shareholders should
        not place undue reliance on these projections. 

       

      
        
          
          

        

        
          49

          
            

          

        

        
          
          

        

      

       

      In
        addition, the price of our common stock may be adversely affected due to
        other
        factors, such as changes in analysts’ estimates regarding earnings, or may be
        due to factors relating to the markets in general. Shareholders should be
        willing to incur the risk of such fluctuations.

      

      If
        a market for our common stock does not develop, shareholders may be unable
        to
        sell their shares.

      

      A
        market
        for our common stock may never develop. Although we applied for quotation
        of our
        common stock on the NASD over-the-counter bulletin board through a market
        maker,
        our shares may never be traded on the bulletin board, or, if traded, a public
        market may not materialize. If our common stock is not traded on the bulletin
        board or if a public market for our common stock does not develop, investors
        may
        not be able to re-sell the shares of our common stock that they have purchased
        and may lose all of their investment.

      

      Because
        we will be subject to the “Penny Stock” rules if our shares are quoted on the
        over-the-counter bulletin board, the level of trading activity in our stock
        may
        be reduced. 

      

      Broker-dealer
        practices in connection with transactions in "penny stocks" are regulated
        by
        penny stock rules adopted by the Securities and Exchange Commission. Penny
        stocks generally are equity securities with a price of less than $5.00 (other
        than securities registered on some national securities exchanges or quoted
        on
        Nasdaq). The penny stock rules require a broker-dealer, prior to a transaction
        in a penny stock not otherwise exempt from the rules, to deliver a standardized
        risk disclosure document that provides information about penny stocks and
        the
        nature and level of risks in the penny stock market. The broker-dealer also
        must
        provide the customer with current bid and offer quotations for the penny
        stock,
        the compensation of the broker-dealer and its salesperson in the transaction,
        and, if the broker-dealer is the sole market maker, the broker-dealer must
        disclose this fact and the broker-dealer's presumed control over the market,
        and
        monthly account statements showing the market value of each penny stock held
        in
        the customer's account. In addition, broker-dealers who sell these securities
        to
        persons other than established customers and "accredited investors" must
        make a
        special written determination that the penny stock is a suitable investment
        for
        the purchaser and receive the purchaser's written agreement to the transaction.
        Consequently, these requirements may have the effect of reducing the level
        of
        trading activity, if any, in the secondary market for a security subject
        to the
        penny stock rules, and investors in our common stock may find it difficult
        to
        sell their shares. 

      

      If
        our shares are quoted on the over-the-counter bulletin board, we will be
        required to remain current in our filings with the SEC and our securities
        will
        not be eligible for quotation if we are not current in our filings with the
        SEC.

      

      In
        the
        event that our shares are quoted on the over-the-counter bulletin board,
        we will
        be required order to remain current in our filings with the SEC in order
        for
        shares of our common stock to be eligible for quotation on the over-the-counter
        bulletin board. In the event that we become delinquent in our required filings
        with the SEC, quotation of our common stock will be terminated following
        a 30 or
        60 day grace period if we do not make our required filing during that time.
        If
        our shares are not eligible for quotation on the over-the-counter bulletin
        board, investors in our common stock may find it difficult to sell their
        shares.

       

      
        
          
          

        

        
          50

          
            

          

        

        
          
          

        

      

    

    

    Because
      of our status as a relatively unknown company with a small and thinly traded
      public float and lack of history as a public company which could lead to wide
      fluctuations in our share price, the market price for our common stock may
      be
      particularly volatile. 

    

    The
      market for our common stock may be characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price could
      continue to be more volatile than a seasoned issuer for the indefinite future.
      The potential volatility in our share price is attributable to a number of
      factors. First, as noted above, our shares of common stock may be sporadically
      and thinly traded. As a consequence of this lack of liquidity, the trading
      of
      relatively small quantities of shares by our stockholders may disproportionately
      influence the price of those shares in either direction. The price for our
      shares could, for example, decline precipitously in the event that a large
      number of our shares of common stock are sold on the market without commensurate
      demand, as compared to a seasoned issuer which could better absorb those sales
      without adverse impact on its share price. Many of these factors will be beyond
      our control and may decrease the market price of our common shares, regardless
      of our operating performance. We cannot make any predictions or projections
      as
      to what the prevailing market price for our common stock will be at any
      time.

     

    In
      addition, the market price of our common stock could be subject to wide
      fluctuations in response to:

     

    
      	
              -

            	 	
              quarterly
                variations in our revenues and operating expenses;

            
	 	 	 
	
              -

            	 	
              announcements
                of new products or services by us;

            
	 	 	 
	
              -

            	 	
              fluctuations
                in interest rates;

            
	 	 	 
	
              -

            	 	
              significant
                sales of our common stock, including “short” sales;

            
	 	 	 
	
              -

            	 	
              the
                operating and stock price performance of other companies that investors
                may deem comparable to us; and

            
	 	 	 
	
              - 

            	 	
              news
                reports relating to trends in our markets or general economic
                conditions.

            

    

     

    The
      stock
      market, in general, and the market prices for penny stock companies in
      particular, have experienced volatility that often has been unrelated to the
      operating performance of such companies. These broad market and industry
      fluctuations may adversely affect the price of our stock, regardless of our
      operating performance.

     

    Stockholders
      should be aware that, according to SEC Release No. 34-29093, the market for
      penny stocks has suffered in recent years from patterns of fraud and abuse.
      Such
      patterns include (1) control of the market for the security by one or a few
      broker-dealers that are often related to the promoter or issuer; (2)
      manipulation of prices through prearranged matching of purchases and sales
      and
      false and misleading press releases; (3) boiler room practices involving
      high-pressure sales tactics and unrealistic price projections by inexperienced
      sales persons; (4) excessive and undisclosed bid-ask differential and markups
      by
      selling broker-dealers; and (5) the wholesale dumping of the same securities
      by
      promoters and broker-dealers after prices have been manipulated to a desired
      level, along with the resulting inevitable collapse of those prices and with
      consequent investor losses. Our management is aware of the abuses that have
      occurred historically in the penny stock market. Although we do not expect
      to be
      in a position to dictate the behavior of the market or of broker-dealers who
      participate in the market, management will strive within the confines of
      practical limitations to prevent the described patterns from being established
      with respect to our securities. The occurrence of these patterns or practices
      could increase the volatility of our share price.

     

    
      
        
        

      

      
        51

        
          

        

      

      
        
        

      

    

     

    Limitations
      on director and officer liability and indemnification of our officers and
      directors by us may discourage stockholders from bringing suit against a
      director. 

    

    Our
      articles of incorporation and bylaws provide, with certain exceptions as
      permitted by governing state law, that a director or officer shall not be
      personally liable to us or our stockholders for breach of fiduciary duty as
      a
      director, except for acts or omissions which involve intentional misconduct,
      fraud or knowing violation of law, or unlawful payments of dividends. These
      provisions may discourage stockholders from bringing suit against a director
      for
      breach of fiduciary duty and may reduce the likelihood of derivative litigation
      brought by stockholders on our behalf against a director. In addition, our
      articles of incorporation and bylaws may provide for mandatory indemnification
      of directors and officers to the fullest extent permitted by governing state
      law.

     

    Because
      we do not expect to pay dividends for the foreseeable future, investors seeking
      cash dividends should not purchase our common stock. 

    

    We
      currently intend to retain any future earnings to support the development and
      expansion of our business and do not anticipate paying cash dividends in the
      foreseeable future. Our payment of any future dividends will be at the
      discretion of our board of directors after taking into account various factors,
      including but not limited to our financial condition, operating results, cash
      needs, growth plans and the terms of any credit agreements that we may be a
      party to at the time. In addition, our ability to pay dividends on our common
      stock may be limited by state law. Accordingly, investors must rely on sales
      of
      their Common Stock after price appreciation, which may never occur, as the
      only
      way to realize their investment.

     

    Our
      Chief Executive Officer and Chief Financial Officer own or control at least
      43%
      of our outstanding common stock, which may limit your ability and the ability
      of
      our other stockholders, whether acting alone or together, to propose or direct
      the management or overall direction of our Company. Additionally, this
      concentration of ownership could discourage or prevent a potential takeover
      of
      our Company that might otherwise result in shareholders receiving a premium
      over
      the market price for our shares. 

    

    We
      estimate that approximately 43% of our outstanding shares of common stock is
      owned and controlled by our Chief Executive Officer and our Chief Financial
      Officer. Such concentrated control of the Company may adversely affect the
      price
      of our common stock. Our principal stockholders may be able to control matters
      requiring approval by our stockholders, including the election of directors,
      mergers or other business combinations. Such concentrated control may also
      make
      it difficult for our stockholders to receive a premium for their shares of
      our
      common stock in the event we merge with a third party or enter into different
      transactions which require stockholder approval. These provisions could also
      limit the price that investors might be willing to pay in the future for shares
      of our common stock. Accordingly, the existing principal stockholders together
      with our directors and executive officers will have the power to control the
      election of our directors and the approval of actions for which the approval
      of
      our stockholders is required. If you acquire shares, you may have no effective
      voice in the management of the Company.

     

    
      
        
        

      

      
        52

        
          

        

      

      
        
        

      

    

     

    Because
      future sales of substantial amounts of our equity securities in the public
      market, or the perception that such sales could occur, could put downward
      selling pressure on our securities, the market for our common stock may be
      adversely affected.

    

    Our
      common stock is presently not traded on any market or securities exchange,
      but
      should a market develop, shares sold at a price below the current market price
      at which the common stock is trading will cause that market price to decline.
      Moreover, the offer or sale of a large number of shares at any price may cause
      the market price to fall. There is a risk that this downward pressure may make
      it impossible for an investor to sell his securities at any reasonable price,
      if
      at all.

    

    Because
      the securities to be issued in the Offering will be illiquid restricted
      securities, investors may not be able to sell their securities when they want
      to.

     

    The
      Units, shares of Common Stock and Warrants issued in the Offering have not
      been
      registered under the Securities Act, or registered or qualified under any state
      securities laws. The Units, Common Stock and Warrants are being sold pursuant
      to
      exemptions contained in and under those laws. Accordingly, these securities
      will
      be considered "restricted securities" as defined in Rule 144 under the
      Securities Act and therefore may not be resold, and must be held indefinitely
      unless registered under applicable federal and state securities laws, or an
      exemption from the registration requirements of those laws is available. Both
      the certificates representing the shares of Common Stock and the Warrants sold
      in the Offering will contain a legend reflecting their restricted status.
      Therefore, a purchaser may not be able to sell their securities when they want
      to.

    

    Because
      we may be unable to register all of the common stock included within the Units
      for resale, investors may need to rely on an exemption from the registration
      requirements in order to sell such common stock.

    

    Under
      the
      Registration Rights Agreement, we are obligated to file a "resale" registration
      statement with the SEC that covers all of the Common Stock included within
      the
      Units sold in the Offering (along with the Empire Financial warrants and 862,139
      shares of common stock that have piggyback registration rights) and to use
      our
      best efforts to have such "resale" registration statement declared effective
      by
      the SEC at such time and in the manner set forth therein. It is possible that
      the SEC (or NASD) may impose conditions that do not permit us or interfere
      with
      our ability to register all of such shares of Common Stock for resale. In
      certain circumstances, the SEC may take the view that the private placement
      requires us to register the issuance of the securities as a primary offering.
      Without sufficient disclosure of this risk, rescission of the private placement
      could be sought by investors or an offer of rescission may be mandated by the
      SEC, which would result in a material adverse affect to us. To date, the SEC
      has
      not made any formal statements or proposed or adopted any new rules or
      regulations regarding interpretations of Rule 415 promulgated under the
      Securities Act, as such rule applies to resale registration statements. However,
      investors should be aware of the risks that interpretive positions taken with
      respect to Rule 415, or similar rules or regulations adopted subsequent to
      the
      date hereof, could have on the manner in which the Common Stock may be
      registered or our ability to register the Common Stock for resale at all. If
      we
      are unable to register some or all of the Common Stock, such shares would only
      be able to be sold pursuant to an exemption from registration under the
      Securities Act, such as Rule 144, that permits the resale of securities
      following twelve months after the issuance of such securities, subject to
      certain volume limitations. 

     

    
      
        
        

      

      
        53

        
          

        

      

      
        
        

      

    

     

    Because
      investors in this Offering may be considered underwriters, they may be subject
      to unfavorable laws that may apply to their detriment.

    

    Investors
      purchasing Units in the Offering with a view to selling or otherwise
      distributing those securities may be considered to be underwriters, subjecting
      such investors to potential liability tinder Section 11 of the Securities Act.
      Further, if deemed an underwriter, an investor could not rely on Rule 144 of
      the
      Securities Act to sell or otherwise distribute the securities purchased in
      the
      Offering. 

    

    If
      the SEC does not declare a registration statement effective, investors may
      not
      be able to sell shares in the amounts or at the times they might otherwise
      wish
      to do so.

    

    The
      Company and the investors will enter into a Registration Rights Agreement at
      the
      commencement of the Offering. The Company has already agreed to register certain
      warrants in favor of Empire Financial. Under the applicable agreements, we
      will
      be obligated to file a registration statement providing for the resale of all
      of
      the shares of Common Stock (i) included in the Units, (ii) underlying the
      Warrants that are included in the Units and (iii) underlying the warrants issued
      to Empire Financial, within 30 days after commencement of this Offering. If
      the
      registration statement is not timely filed or fails to be declared effective
      by
      the SEC, then we must pay liquidated damages in the amount of 2% of the
      aggregate purchase price with respect to investors, and no liquidated damages
      associated with warrants in favor of Empire Financial. Although we believe
      that
      we will be able to take all steps necessary to permit the SEC to declare our
      registration statement effective, it is possible that the SEC may, by
      application of policies or procedures, which may change over time, delay the
      effectiveness of the registration statement or make it impractical for us to
      respond to the SEC in a manner which permits the SEC to declare the registration
      statement effective. If we are not able to cause the registration statement
      to
      be declared effective, then investors will need to rely on exemptions from
      the
      registration requirements of the Securities Act, such as Rule 144. Such
      exemptions typically limit the amount of shares that an investor can sell,
      require that the shares be sold in certain types of transactions, require that
      the investor have held the shares to be sold for a minimum period of time and
      limit the number of times that an investor may sell its shares.

    

    Because
      management will have substantial discretion over the use of the proceeds of
      the
      Offering, investors will have no control over where the money will
      go.

    

    Our
      management will have significant flexibility in applying the net proceeds of
      the
      Offering and may apply the proceeds in ways with which you do not agree. The
      failure of our management to apply these fends effectively could materially
      harm
      our business. The proposed allocation of the net proceeds of the Offering
      represents our management's best estimate of the expected use of funds to
      finance our activities in accordance with our management's current views and
      objectives.

     

    
      
        
        

      

      
        54

        
          

        

      

      
        
        

      

    

     

    Because
      we have not retained independent professionals for investors, they should not
      rely on our professionals in connection with this
      Offering.

    

    We
      have
      not retained any independent professionals to review or comment on the Offering
      or otherwise protect your interests. Although we and Empire Financial have
      each
      retained our own counsel, none of such firms nor any other firm has made any
      independent examination of any factual matters represented by management herein,
      and investors may not rely on such firms or their participation in preparation
      of these disclosures or other matters related to the Offering, including with
      respect to any matters herein described.

     

    
      
        
        

      

      
        55

        
          

        

      

      
        
        

      

    

     

    Schedule
      3.1(v)

    

    PiggyBack
      Registration Rights

     

    On
      September 27, 2006, the Company entered into an Exclusive Finder’s Agreement
      with Empire Financial Group, Inc. (“Empire Financial”) in connection with a
      private offering transaction of up to $6 million. The Company agreed to pay
      Empire Financial cash compensation equal to 9% in of the gross proceeds of
      the
      offering, and to issue warrants to purchase 100,000 shares of Company common
      stock for every $1 million raised in the offering. The warrant shares have
      piggyback registration rights.

    

    On
      February 8, 2007, the Company issued and sold 785,856 shares of Common Stock
      to
      accredited investors. The shares were sold at a price per share of $0.35. These
      shares have piggy back registration rights. The shares were issued pursuant
      to
      an exemption form registration provided by Rule 506 of Regulation D, as they
      were issued without any form of general solicitation or general advertising
      and
      the purchases qualified as accredited investors and accepted the shares for
      their personal accounts and not with a view towards distribution.

    

    During
      the quarter ended March 31, 2007, the Company repaid $50,000 of the principal
      balance of a $100,000 note issued in November 2006 to an affiliate of the
      Company’s Chief Executive Officer, and the remaining $50,000 of principal plus
      accrued interest of $1,749 was converted into 147,853 shares of Common Stock.
      These shares have piggy back registration rights. The shares were issued
      pursuant to an exemption from registration provided by Rule 506 of Regulation
      D,
      as they were issued without any form of general solicitation or general
      advertising and the purchases qualified as accredited investors and accepted
      the
      shares for their personal accounts and not with a view towards
      distribution.

     

    
      
        
        

      

      
        56

        
          

        

      

      
        
        

      

    

     

    Schedule
      3.1(aa)

    

    The
      Company has an unsecured note in the amount of $200,000, bearing interest at
      18%
      per annum, due and payable on August 15, 2007. 

     

    
      
        
        

      

      
        57

        
          

        

      

      
        
        

      

    

     

    Schedule
      3.1(ee)

    

    Hansen,
      Barnett & Maxwell, PC.

    Salt
      Lake
      City, Utah

     

    
      
        
        

      

      
        58

        
          

        

      

      
        
        

      

    

     

    Schedule
      4.7

    

    The
      following table summarizes the anticipated application of the proceeds the
      Company will receive from this Offering if the maximum number of Units is
      sold:

    

    
      	
               

            	 	
              Amount
                Assuming Maximum Offering

            	 	
              Percent

            	 
	
              GROSS
                OFFERING

            	 	
              $

            	
              5,000,000

            	 	 	
              100.0

            	
              %

            
	
              Commission
                1

            	 	
              $

            	
              450,000

            	 	 	
              9.0

            	
              %

            
	
              Net
                Proceeds

            	 	
              $

            	
              4,550,000

            	 	 	
              91.0

            	
              %

            
	
              USE
                OF NET PROCEEDS

            	 	 	 	 	 	 	 
	
              Acquisitions2

            	 	
              $

            	
              1,300,000

            	 	 	
              29

            	
              %

            
	
              TV
                Infomercial3

            	 	
              $

            	
              1,080,000

            	 	 	
              24

            	
              %

            
	
              Retail
                Distribution4

            	 	
              $

            	
              210,000

            	 	 	
              5

            	
              %

            
	
              Mall
                Kiosk Program5

            	 	
              $

            	
              720,000

            	 	 	
              16

            	
              %

            
	
              International
                Expansion6

            	 	
              $

            	
              210,000

            	 	 	
              5

            	
              %

            
	
              Inventory
                Buildup7

            	 	
              $

            	
              370,000

            	 	 	
              8

            	
              %

            
	
              Working
                Capital 8

            	 	
              $

            	
              660,000

            	 	 	
              15

            	
              %

            
	
              TOTAL
                APPLICATION OF PROCEEDS

            	 	
              $

            	
              4,550,000

            	 	 	
              100.0

            	
              %

            

    

    

    1 Commissions:
      The
      Company has engaged Empire Financial Group, Inc. (“Empire Financial”), a
      licensed broker-dealer, to serve as the Company’s placement agent in the
      Offering. The Units will be offered and sold by the Company and/or Empire
      Financial on a “best-efforts minimum/maximum” basis. Pursuant to the terms of
      the Company’s engagement with Empire Financial, the Company shall pay to Empire
      Financial (i) a cash fee equal to 9% of the aggregate purchase price paid by
      each purchaser of Units in the Offering, (ii) warrants to purchase 100,000
      shares of common stock for every $1,000,000 raised in the Offering, exercisable
      upon the same terms as Warrants sold to investors in the Offering, and (iii)
      reimbursements for costs incurred not to exceed $10,000. The Company’s officers
      and directors may also be involved in the sale of the Units, but will not
      receive any sales commission or other remuneration for such efforts.

    

    2 Acquisitions:
      acquire
      2-3 complimentary companies and product lines by the end of 2008. This will
      include the cash component of acquisition capital for the purchase of revenue
      producing, complimentary companies. The Company will use a combination of cash
      and equity to facilitate future acquisitions.

    

    3 TV
      Infomercial:
      roll-out
      a full national television direct response ad campaign during 2007. 
      These
      expenses include commercial production and management costs and costs associated
      with the purchase of television media time. 

    

    4 Retail
      Distribution:
      establish the Company’s products in approximately 150 national big box retail
      stores by the end of 2008. This cost will include retail support with additional
      personnel, point-of-purchase materials, displays, etc.

    

    5 Mall
      Kiosk Program:
      open 18
      new corporate owned carts/kiosks in key malls by the end of 2008. This cost
      includes displays, product, equipment, leases, personnel on an average of $40k
      per location.

    

    6 International
      Expansion:
      set up
      Zagg Europe by August 2007. These costs are to set up the Company’s European
      operations for distribution and marketing in Europe.

     

    
      
        
        

      

      
        59

        
          

        

      

      
        
        

      

    

     

    7 Inventory
      Buildup:
      Buildup
      up inventory to support growth initiatives for 2007. These costs include new
      growth initiatives including infomercial, big box distribution, new products,
      and corporate retail locations. 

    

    8 Working
      Capital:
      Develop
      organization to support the Company’s continued rapid growth. Systems
      implementation and growth, additional staff required to support growth, research
      and development for new products and expansion of online sales programs, trade
      show participation, expansion of the Company’s campus program and other
      miscellaneous general and administrative expenses. 

    

    Provided
      the Maximum Offering is sold, we anticipate that the net proceeds from the
      Offering will be sufficient to meet our financial requirements for approximately
      one year. In the event that less than the Maximum Offering is sold, we may
      then
      require substantial additional capital to fund our current business. The
      foregoing represents our current estimate of its allocation of the net proceeds
      of the Offering. This estimate is based on certain assumptions and the amounts
      actually expended for each purpose may vary significantly if any of our
      assumptions prove inaccurate. We reserve the right to change the use of proceeds
      as events may cause us to redirect our priorities and reallocate the proceeds
      accordingly.

    

    Growth
      by Acquisition

    

    In
      February 2007, the Company changed its name from ShieldZone Corporation to
      ZAGG
      Incorporated to better position itself to become a large and encompassing
      company in the electronics’ accessories industry through organic growth and
      through making targeted acquisitions. The ShieldZone name was very specific
      to
      the invisibleSHIELD product line and although the invisibleSHIELD is and will
      continue to be the Company’s core product, the name change will enable us the
      opportunity to easily add new products to the Company’s product offering. ZAGG
      is a lifestyle company with the slogan, “When others’ Zig, we ZAGG!” ZAGG will
      continue to search out other complimentary proven products and companies that
      fit the ZAGG lifestyle and strategy for fast growth.

    

    The
      Company has identified a potential acquisition target in a marketing and
      distribution company that will enable the Company to continue to develop its
      strategy of new product development and marketing. The Company may use a portion
      of the funds raised in this Offering as a portion of the acquisition funds
      for
      this target. In addition, the Company has identified several other potential
      acquisition targets that the Company anticipates would add additional revenues
      and profits through complementary product offerings.

    

    Organic
      Growth through Continued Aggressive Marketing

    

    The
      Company’s invisibleSHIELD product line is still a relatively new product
      offering, but it has proven to be well accepted by the consumer market. In
      two
      years, over 200,000 invisibleSHIELDs have been sold to customers worldwide.
      The
      majority of these sells have been over the internet, primarily to “early
      adopters.” The Company feels that mass market provides significant growth
      opportunity that has not yet been realized. The Company plans to reach the
      end
      consumer through a targeted, brand-focused, approach with the invisibleSHIELD.
      With adequate funding, the Company intents to implement its new aggressive
      marketing initiatives that will focus on three key areas for growth: television
      infomercial, retail sales and international sales.

     

    
      
        
        

      

      
        60

        
          

        

      

      
        
        

      

    

     

    Television
      Infomercial

    

    The
      invisibleSHIELD is a product that demonstrates well. Once a consumer sees the
      invisibleSHIELD product and how it functions, there is a strong correlation
      to
      purchases. Since the Company’s inception, the sales growth of the
      invisibleSHIELD has primarily been through word-of-mouth advertising. The
      Company believes that an effective short-form television infomercial, with
      a
      direct response component, will both increase the invisibleSHIELD brand
      awareness and enable an effective demonstration of the product. The Company
      has
      contracted with an industry leader in the direct response industry to produce
      an
      effective ad campaign that will be utilized on national television beginning
      in
      the summer of 2007. As of the date hereof, the production of the infomercial
      is
      in the final stages of production and anticipated to begin airing on national
      television stations shortly, pending the successful outcome of a testing period.
      The Company anticipates that the direct response campaign coupled with the
      infomercial should successfully reach the general public, spread brand awareness
      and create a gateway for an in-line big box store retail program.

    

    Retail
      Distribution into Big Box stores

    

    With
      the
      successful implementation of the infomercial, the Company anticipates that
      the
      invisibleSHIELD brand will create a customer driven establishment of the
      invisibleSHIELD product line in Big Box retail stores. The Company has completed
      extensive research and determined that the invisibleSHIELD product line may
      enjoy a successful direct response campaign and retail implementation. The
      Company has already received positive feedback from major product distributors
      to begin distribution of the invisibleSHIELD product line once new retail
      packaging is completed and our television campaign is initiated. The Company
      anticipates that this wholesale distribution will create wide-spread awareness
      and market penetration.

    

    Carts/Kiosks
      Retail Locations

    

    An
      additional retail approach that has already been tested and proven to be
      successful for the invisibleSHIELD product is that of carts and kiosks in malls.
      Malls have heavy foot traffic and create an opportunity for potential customers
      to see a live demonstration of the invisibleSHIELD. As of the date hereof,
      the
      Company has 11 licensed retail mall carts established averaging approximately
      $15,000 per month in retail sales. These carts and kiosks also offer our
      customers the added benefit of performing the installation of the
      invisibleSHIELD for an added fee. Although relatively easy to install,
      approximately 80% of kiosk customers utilize the kiosk installation option.
      To
      take advantage of the full margins offered by the invisibleSHIELD, the Company
      plans to open approximately 18 corporate carts through the end of 2008. The
      Company anticipates that these corporate carts will contribute approximately
      $15,000 each in revenue. Corporate owned kiosk locations will also allow the
      Company to easily add additional product offerings at each location allowing
      the
      Company to realize full retail margins on these products.

     

    
      
        
        

      

      
        61

        
          

        

      

      
        
        

      

    

     

    International
      Expansion

    

    The
      Company’s internet presence www.ShieldZone.com and www.invisibleSHIELD.com have
      consistently produced an average of over $170,000 a month in revenue for the
      past several months. Approximately 10% of the Company’s online revenue is
      already derived from European customers. With no current marketing or retail
      presence in Europe, the Company sees great opportunity for growth in the
      European marketplace. The Company anticipates that by duplicating current and
      implementing future marketing initiatives and operations used in our current
      operations should also be effective in the European markets, if executed
      correctly. The Company is preparing to begin operations and fulfillment from
      a
      centralized location in Europe during the third quarter of 2007. Pending the
      successful European expansion of the Company’s operations, future offices are
      planned for Canada, Asia, Australia, the Middle East and Central and South
      America.

     

    
      
        
        

      

      
        62

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