8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported):December 5, 2006

ZAP

(Exact name of Registrant as specified in its charter)

California	001-32534		94-3210624
(State or other jurisdiction of incorporation or organization)	Commission File Number		IRS Employer Identification Number
501 Fourth Street Santa Rosa, CA		95401
(Address of principal executive offices)		(Zip Code)

(707) 525-8658

(Registrant’s telephone number, including area code)

not applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Section 1.  Registrant’s Business and Operations

Item 1.01  Entry into a Material Definitive Agreement

On December 5, 2006, ZAP (the “Company”) entered in to a Securities Purchase Agreement as part of the transaction described in further detail below under Item 2.03. To the extent required by Item 1.01 of Form 8-K, the information contained in or incorporated by reference into Item 2.03 of this Current Report is hereby incorporated by reference into this Item 1.01. The Securities Purchase Agreement is attached to this filing as Exhibit 99.1.

Section 2. Financial Information

Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant

On December 5, 2006, the Company held the first closing under a Securities Purchase Agreement (the “Agreement”), pursuant to which it agreed to sell $1.5 million aggregate principal amount of convertible notes due November 2008, with an interest rate of 8.0% per annum, payable quarterly (the “Notes”) to certain institutional accredited investors in a private placement. The notes will be convertible into shares of the Company’s common stock at an original conversion price of $1.00 per share.

The institutional accredited investors will also receive warrants, which will entitle each investor to purchase a number of shares of common stock equal to thirty percent of the number of shares of common stock that would be issuable upon conversion of the Note purchased by such Investor at the Closing. The warrants will have an original strike price of $1.10.

The conversion price and warrant strike price are subject to adjustments should the Company sell more shares of common stock for capital raising activities in the period beginning on the execution date and ending on the later of (1) the earlier of (x) the two year anniversary and (y) the effectiveness of the registration statement and (2) the six month anniversary of the execution date.

The Company may pay down both interest and principal with common stock, if certain equity conditions are met, which include, among other things, the effectiveness of the registration statement. If the Company chooses to pay interest with common stock, a 5% discount to market will apply. If the Company chooses to pay principal with common stock, it will be based on the lower of a 10% discount to the lowest daily Volume Weighted Average Price for any trading day among the immediately preceding ten consecutive trading days and the conversion price in effect on such Principal Payment Date.

The Company will be required to make monthly principal payments, beginning on June 1, 2007, in twelve equal installments; however, the Company will not be obligated

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to issue its stock in payment of such principal at a price below the lower of $0.75 or the adjusted conversion price in effect. The investors may, however, choose to receive the Company’s stock at (but not below) the lower of $0.75 or the adjusted conversion price in effect.

The foregoing description of the private placement does not purport to be complete and is qualified in its entirety by reference to the form of Securities Purchase Agreement, Convertible Note, Warrant and Registration Rights Agreement, which are all filed as exhibits to this report and are incorporated herein by reference.

The Notes and warrants were not registered under the Securities Act of 1933, as amended, in reliance upon the exemption set forth in Section 4(2) of the Securities Act relating to transactions by an issuer not involving a public offering and the exemption provided by Rule 506 of Regulation D thereunder.

Section 3  Securities and Trading Markets

Item 3.02.  Unregistered Sales of Equity Securities

To the extent required by Item 3.02 of Form 8-K, the information contained in or incorporated by reference into Item 2.03 of this Current Report is hereby incorporated by reference into this Item 3.02. The Form of Convertible Note and Form of Warrant are attached to this filing as Exhibit 99.2 and Exhibit 99.3.

This Current Report on Form 8-K is neither an offer to sell nor a solicitation of an offer to buy any of the Company's securities.  This report is being filed pursuant to and in accordance with Rule 135c under the Securities Act.

Section 9  Financial Statements and Exhibits

Item 9.01.  Financial Statements and Exhibits

(d)   Exhibits
Exhibit Number	Exhibit Title or Description
99.1	Securities Purchase Agreement
99.2	Form of Convertible Note
99.3	Form of Warrant
99.4	Registration Rights Agreement

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	ZAP
Date: December 11, 2006	By:  /s/ Steven M. Schneider
	Steven M. Schneider
	Chief Executive Officer

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ZAP

EXHIBIT INDEX

(d)   Exhibits
Exhibit Number	Exhibit Title or Description
99.1	Securities Purchase Agreement
99.2	Form of Convertible Note
99.3	Form of Warrant
99.4	Registration Rights Agreement

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EX-99.1

Exhibit 99.1

Execution Copy

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of December 5, 2006, by and between ZAP, a California corporation (the “Company”), and each of the entities whose names appear on the signature pages hereof. Such entities are each referred to herein as an “Investor” and, collectively, as the “Investors”.

A.The Company wishes to sell to each Investor, and each Investor wishes to purchase, upon the terms and subject to the conditions set forth in this Agreement, (i) a 8% Senior Convertible Note in the form attached hereto as Exhibit A (a “Note” and, collectively with the other Notes issued hereunder, the “Notes”) and (ii) a warrant in the form of Exhibit B hereto (a “Warrant” and, collectively with the other warrants issued hereunder, the “Warrants”). The Notes will be convertible under certain conditions into shares of the Company’s common stock, no par value (the “Common Stock”). The shares of Common Stock into which the Notes are convertible are referred to herein as the “Conversion Shares” and the shares of Common Stock into which the Warrants are exercisable are referred to herein as the “Warrant Shares”. The Notes, the Conversion Shares, the Warrants and the Warrant Shares are collectively referred to herein as the “Securities”.

B.Each Warrant will (i) entitle an Investor to purchase a number of Warrant Shares equal to thirty percent (30%) of the number of Conversion Shares that would be issuable upon conversion of the Note purchased by such Investor at the Closing (as defined below), at the Conversion Price (as defined below) in effect on the date of such Closing and without regard to any restrictions on such conversion, (ii) have an exercise price equal to one dollar and ten cents ($1.10), subject to adjustment as provided therein, and (iii) expire on the fifth (5th) anniversary of the Closing Date.

C.The Company has agreed to effect the registration of the Conversion Shares and the Warrant Shares for resale by the holders thereof under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to a Registration Rights Agreement in the form attached hereto as Exhibit C (the “Registration Rights Agreement”).

D.The sale of the Notes and the Warrants by the Company to the Investors will be effected in reliance upon the exemption from securities registration afforded by the provisions of Regulation D (“Regulation D”), as promulgated by the Commission (as defined below) under the Securities Act.

In consideration of the mutual promises made herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and each Investor hereby agree as follows:

1.PURCHASE AND SALE OF NOTES AND WARRANTS.

1.1Closing. Upon the terms and subject to the satisfaction or waiver of the conditions set forth herein, the Company agrees to sell and each Investor agrees to purchase (i) a Note (a “Note”) with a principal amount equal to the amount set forth below such Investor’s name on the signature pages hereof and (ii) a Warrant exercisable into the number of shares of Common Stock set forth below such Investor’s name on the signature pages hereof. The date on which the closing of such purchase and sale occurs (the “Closing”) is hereinafter referred to as the “Closing Date”. The Closing will be deemed to occur at the offices of Mazzeo Song LLP, 708 Third Avenue, 19^th Floor, New York, New York 10017 when (A) this Agreement and the other Transaction Documents (as defined below) have been executed and delivered by the Company and each Investor, (B) each of the conditions to the Closing described in this Agreement has been satisfied or waived as specified therein and (C) payment of each Investor’s Purchase Price (as defined below) payable with respect to the Note and Warrant being purchased by such Investor at the Closing has been made by wire transfer of immediately available funds (provided, that the aggregate amount of the Purchase Price paid by all of the Investors is not less than $1,500,000 and the total number of Investors is not greater than six (6)). At the Closing, the Company shall deliver to each Investor duly executed instruments representing the Note and Warrant purchased by such Investor at the Closing.

1.2 Certain Definitions. When used herein, the following terms shall have the respective meanings indicated:

“Affiliate” means, as to any Person (the “subject Person”), any other Person (a) that directly or indirectly through one or more intermediaries controls or is controlled by, or is under direct or indirect common control with, the subject Person, (b) that directly or indirectly beneficially owns or holds ten percent (10%) or more of any class of voting equity of the subject Person, or (c) ten percent (10%) or more of the voting equity of which is directly or indirectly beneficially owned or held by the subject Person. For the purposes of this definition, “control” when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, through representation on such Person’s board of directors or other management committee or group, by contract or otherwise.

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

“Business Day” means any day other than a Saturday, a Sunday or a day on which the Principal Market is closed or on which banks in the City of New York are required or authorized by law to be closed.

“Closing” and “Closing Date” have the respective meanings specified in Section 1.1 of this Agreement.

“Commission” means the Securities and Exchange Commission, and any successor regulatory agency.

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“Common Stock” has the meaning specified in the recitals to this Agreement.

“Conversion Shares” has the meaning specified in the recitals of this Agreement.

“Debt” means, as to any Person at any time: (a) all indebtedness, liabilities and obligations of such Person for borrowed money; (b) all indebtedness, liabilities and obligations of such Person to pay the deferred purchase price of Property or services, except trade accounts payable of such Person arising in the ordinary course of business that are not past due by more than 90 days; (c) all capital lease obligations of such Person; (d) all Debt of others guaranteed by such Person; (e) all indebtedness, liabilities and obligations secured by a Lien (other than a Permitted Lien) existing on Property owned by such Person, whether or not the indebtedness, liabilities or obligations secured thereby have been assumed by such Person or are non-recourse to such Person; (f) all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers’ acceptances, surety or other bonds and similar instruments; and (g) all liabilities and obligations of such Person to redeem or retire shares of capital stock of such Person (other than the Company’s obligation to redeem the Securities under the circumstances specified therein).

“Disclosure Documents” means all SEC Documents filed with the Commission at least five (5) Business Days prior to the Execution Date.

“DTC” means The Depositary Trust Company (and any successor entity).

“Effective Date” has the meaning specified in the Registration Rights Agreement.

“Environmental Law” means any federal, state, provincial, local or foreign law, statute, code or ordinance, principle of common law, rule or regulation, as well as any Permit, order, decree, judgment or injunction issued, promulgated, approved or entered thereunder, relating to pollution or the protection, cleanup or restoration of the environment or natural resources, or to the public health or safety, or otherwise governing the generation, use, handling, collection, treatment, storage, transportation, recovery, recycling, discharge or disposal of hazardous materials.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder.

“Event of Default” has the meaning specified in the Notes.

"Exchange" has the meaning specified in Section 4.16 of this Agreement.

“Exchange Act” means the Securities Exchange Act of 1934, as amended (or any successor act), and the rules and regulations thereunder (or respective successors thereto).

"Exchange Closing Date," "Exchange Documents," "Exchange Election Notice," "Exchange Notice," and "Exchange Securities" have the respective meanings specified in Section 4.16 of this Agreement.

“Execution Date” means the date of this Agreement.

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“GAAP” means generally accepted accounting principles, applied on a consistent basis, as set forth in (i) opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) statements of the Financial Accounting Standards Board and (iii) interpretations of the Commission and the staff of the Commission. Accounting principles are applied on a “consistent basis” when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period.

“Governmental Authority” means any nation or government, any state, provincial or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, any stock exchange, securities market or self-regulatory organization.

“Governmental Requirement” means any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, license or other directive or requirement of any federal, state, county, municipal, parish, provincial or other Governmental Authority or any department, commission, board, court, agency or any other instrumentality of any of them.

“Intellectual Property” means any U.S. or foreign patents, patent rights, patent applications, trademarks, trade names, service marks, brand names, logos and other trade designations (including unregistered names and marks), trademark and service mark registrations and applications, copyrights and copyright registrations and applications, inventions, invention disclosures, protected formulae, formulations, processes, methods, trade secrets, computer software, computer programs and source codes, manufacturing research and similar technical information, engineering know-how, customer and supplier information, assembly and test data drawings or royalty rights.

“Investment Company Act” has the meaning specified in Section 3.25 of this Agreement.

“Investor Party” has the meaning specified in Section 4.10 of this Agreement.

“Key Employee” has the meaning specified in Section 3.16 of this Agreement.

“Lien” means, with respect to any Property, any mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest, tax lien, financing statement, pledge, charge, or other lien, charge, easement, encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing).

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“Material Adverse Effect” means an effect that is material and adverse to (i) the consolidated business, properties, assets, operations, results of operations, financial condition, credit worthiness or prospects of the Company and the Company Subsidiaries taken as a whole, (ii) the ability of the Company to perform its obligations under this Agreement or the other Transaction Documents or (iii) the rights and benefits to which an Investor is entitled under this Agreement, the Notes and the other Transaction Documents.

“Material Contracts” means, as to the Company and the Company Subsidiaries, any agreement required pursuant to Item 601 of Regulation S-B or Item 601 of Regulation S-K, as applicable, promulgated under the Securities Act to be filed as an exhibit to any report, schedule, registration statement or definitive proxy statement filed or required to be filed by the Company with the Commission under the Exchange Act or any rule or regulation promulgated thereunder, and any and all amendments, modifications, supplements, renewals or restatements thereof.

“NASD” means the National Association of Securities Dealers, Inc.

“Obligations” means any and all indebtedness, liabilities and obligations of the Company to the Investor evidenced by and/or arising pursuant to this Agreement to pay amounts due on the Notes or to make other cash payments, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several or joint and several, including, without limitation, the obligations of the Company to repay principal of the Notes, to pay interest on the Notes (including, without limitation, interest accruing after any bankruptcy, insolvency, reorganization or other similar filing) and to pay all fees, indemnities, costs and expenses (including attorneys’ fees) provided for in this Agreement or the Notes.

“Pension Plan” means an employee benefit plan (as defined in ERISA) maintained by the Company for employees of the Company or any of its Affiliates.

“Permitted Debt” means the following:

(a)the Notes;

(b)Debt outstanding on the Execution Date and disclosed on Schedule 3.5 hereto;

(c)Subordinated Debt;

(d)Debt consisting of capitalized lease obligations and purchase money indebtedness incurred in connection with acquisition of capital assets and obligations under sale-leaseback or similar arrangements provided in each case that such obligations are not secured by Liens on any assets of the Company or its Subsidiaries other than the assets so leased; and

(e)Debt obtained from banking or other financial institutions engaged primarily in the business of lending transactions, provided that (i) such Debt shall not be

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convertible into any capital stock or other equity securities of the Company or its Subsidiaries, and (ii) no warrants or other equity securities of the Company or any of its Subsidiaries shall be issued in connection with obtaining such Debt.

“Permitted Liens” means each of the following:

(a)Liens in existence on the Execution Date and disclosed on Schedule 3.5 hereto;

(b)Liens on (and limited solely to) assets acquired through purchase money indebtedness to secure such purchase money indebtedness (and no other Debt);

(c)Liens to secure any Debt described in clause (e) of the definition of “Permitted Debt”;

(d)encumbrances consisting of easements, rights-of-way, zoning restrictions or other restrictions on the use of real Property or imperfections to title that do not (individually or in the aggregate) materially impair the ability of the Company or any of its Subsidiaries to use such Property in its businesses, and none of which is violated in any material respect by existing or proposed structures or land use;

(e)Liens for taxes, assessments or other governmental charges (including without limitation in connection with workers’ compensation and unemployment insurance) that are not delinquent or which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, and for which adequate reserves (as determined in accordance with GAAP) have been established;

(f)Liens of mechanics, materialmen, warehousemen, carriers, landlords or other similar statutory Liens securing obligations that are not yet due and are incurred in the ordinary course of business or which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the Property subject to such Liens, for which adequate reserves (as determined in accordance with GAAP) have been established; and

(g)mortgages on real Property in existence on the Execution Date and disclosed on Schedule 3.22 hereto, and any replacements thereof, securing amounts not greater than the amounts secured thereby on the Execution Date.

“Person” means any individual, corporation, trust, association, company, partnership, joint venture, limited liability company, joint stock company, Governmental Authority or other entity.

“Principal Market” means the principal exchange, market or quotation system on which the Common Stock is listed, traded or quoted.

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“Property” means property and/or assets of all kinds, whether real, personal or mixed, tangible or intangible (including, without limitation, all rights relating thereto).

“Pro Rata Share” means, with respect to an Investor, the ratio determined by dividing (i) the principal amount of the Note or Notes purchased hereunder by such Investor at the Closing by (ii) the aggregate principal amount of the Notes purchased hereunder by all of the Investors at the Closing.

“Purchase Price” means, with respect to Securities purchased at the Closing, the original principal amount of the Note purchased at the Closing.

“Registration Rights Agreement” has the meaning specified in the recitals to this Agreement.

“Registration Statement” has the meaning specified in the Registration Rights Agreement.

“Registrable Securities” has the meaning specified in the Registration Rights Agreement.

“Regulation D” has the meaning specified in the recitals to this Agreement.

“Reserved Amount” has the meaning specified in Section 4.3 of this Agreement.

“Restricted Payment” means (a) any dividend or other distribution (whether in cash, Property or obligations), direct or indirect, on account of (or the setting apart of money for a sinking or other analogous fund for the benefit of) any shares of any class of capital stock of the Company or its Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to all of the holders of that class; (b) any redemption, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of capital stock of the Company or any of its Affiliates now or hereafter outstanding, except the Securities; (c) any prepayment of principal of, premium, if any, or interest on, or any redemption, conversion, exchange, purchase, retirement, sinking fund or defeasance of, any Debt (whether upon acceleration of such Debt or otherwise) other than the Securities; and (d) any loan, advance or payment to any officer, director or stockholder of the Company or any of its Affiliates, exclusive of reasonable compensation and reimbursements paid to officers or directors in the ordinary course of business.

“Rule 144” means Rule 144 under the Securities Act or any successor provision.

“SEC Documents” means all reports, schedules, registration statements and definitive proxy statements filed by the Company with the Commission.

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

“Securities Act” has the meaning specified in the recitals of this Agreement.

“Subordinated Debt” means Debt of the Company which meets each of the following requirements: (a) such Debt is wholly unsecured; (b) such Debt is contractually subordinated, as to payment and liquidation, to the payment in full of the Notes on such terms and pursuant to written agreements in such form and substance as are reasonably acceptable to the holders of a majority in principal amount of the Notes, that restrict the Company from pre-paying any amounts in respect of the principal of such Debt (upon acceleration or otherwise) prior to the scheduled maturity thereof, and that restrict the subordinated creditor from commencing any judicial or other collection efforts or exercising any other remedies prior to the date that is ninety-one (91) days following the payment in full of the Notes; and (c) such Debt does not mature prior to the date that is ninety-one (91) days following the latest Maturity Date (as defined in the Notes) of the Notes then outstanding.

“Subsequent Placement” means any issuance, sale or exchange by the Company or any Subsidiary of the Company at any time after the Closing Date, or any agreement or obligation of the Company or any Subsidiary of the Company to issue, sell or exchange, at any time after the Closing Date, (i) any shares of common stock of the Company or any Subsidiary of the Company, (ii) any other equity security of the Company or any Subsidiary of the Company, including without limitation preferred stock, (iii) any other security of the Company or any Subsidiary of the Company which by its terms is convertible into or exchangeable or exercisable for any equity security of the Company or any Subsidiary of the Company, (iv) any option, warrant or other right to subscribe for, purchase or otherwise acquire any such security described in the foregoing clauses (i) through (iii), or (v) any debt instruments or securities, including promissory notes and convertible debt instruments; provided, however, that the term “Subsequent Placement” shall not be deemed to include any issuance, sale or exchange of Excluded Securities (as defined in the Notes).

“Subsidiary” means, with respect to any Person, any corporation or other entity of which at least a majority of the outstanding shares of stock or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors (or Persons performing similar functions) of such corporation or entity (regardless of whether or not at the time, in the case of a corporation, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries.

“Termination Date” means the first date on which there are no Notes outstanding.

“Trading Day” means any day on which shares of Common Stock are purchased and sold on the Principal Market.

“Transaction Documents” means (i) this Agreement, (ii) the Notes, (iii) the Warrants, (iv) the Registration Rights Agreement, and (v) all other agreements, documents and other instruments executed and delivered by or on behalf of the Company or any of its officers at the Closing.

“Transfer Agent” has the meaning specified in Section 2.5 of this Agreement.

“Variable Rate Security” means any security that is convertible into, exchangeable for or that requires the Company to issue shares of Common Stock at a conversion, exercise or exchange ratio or price that varies with the market price of the Common Stock.

“VWAP” on a Trading Day means the volume weighted average price of the Common Stock for such Trading Day on the Principal Market as reported by Bloomberg Financial Markets or, if Bloomberg Financial Markets is not then reporting such prices, by a comparable

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reporting service of national reputation selected by the Investors and reasonably satisfactory to the Company. If the VWAP cannot be calculated for the Common Stock on such Trading Day on any of the foregoing bases, then the Company shall submit such calculation to an independent investment banking firm of national reputation reasonably acceptable to each Investor, and shall cause such investment banking firm to perform such determination and notify the Company and each Investor of the results of determination no later than two (2) Business Days from the time such calculation was submitted to it by the Company. All such determinations shall be appropriately adjusted for any stock dividend, stock split or other similar transaction during such period.

1.3Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words “hereof”, “herein” and “hereunder” and words of similar import contained in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement.

2.REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR.

Each Investor (with respect to itself only) hereby represents and warrants to the Company and agrees with the Company that, as of the Execution Date:

2.1Authorization; Enforceability. Such Investor is duly and validly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization as set forth below such Investor’s name on the signature page hereof with the requisite corporate power and authority to purchase the Notes and Warrants to be purchased by it hereunder and to execute and deliver this Agreement and the other Transaction Documents to which it is a party. This Agreement constitutes, and upon execution and delivery thereof, each other Transaction Document to which such Investor is a party will constitute, such Investor’s valid and legally binding obligation, enforceable in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) general principles of equity.

2.2Accredited Investor. Such Investor (i) is an “accredited investor” as that term is defined in Rule 501 of Regulation D, (ii) was not formed or organized for the specific purpose of making an investment in the Company, and (iii) is acquiring the Securities solely for its own account and not with a present view to the public resale or distribution of all or any part thereof, except pursuant to sales that are registered under, or exempt from the registration requirements of, the Securities Act and/or sales registered under the Securities Act; provided, however, that in making such representation, such Investor does not agree to hold the Securities for any minimum or specific term and reserves the right to sell, transfer or otherwise dispose of the Securities at any time in accordance with the provisions of this Agreement and with Federal and state securities laws applicable to such sale, transfer or disposition. Such Investor can bear the economic risk of a total loss of its investment in the Securities and has such knowledge and experience in business and financial matters so as to enable it to understand the risks of and form an investment decision with respect to its investment in the Securities.

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2.3Information. The Company has, prior to the Execution Date, provided such Investor withinformation regarding the business, operations and financial condition of the Companyand has, prior to the Execution Date, granted to such Investor the opportunity to ask questions of and receive answers from representatives of the Company, its officers, directors, employees and agents concerning the Company in order for such Investor to make an informed decision with respect to its investment in the Securities. Neither such information nor any other investigation conducted by such Investor or any of its representatives shall modify, amend or otherwise affect such Investor’s right to rely on the Company’s representations and warranties contained in this Agreement.

2.4Limitations on Disposition. Such Investor acknowledges that, except as provided in the Registration Rights Agreement, the Securities have not been and are not being registered under the Securities Act and may not be transferred or resold without registration under the Securities Act or unless pursuant to an exemption therefrom.

2.5Legend. Such Investor understands that the certificates representing the Securities may bear at issuance a restrictive legend in substantially the following form:

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws, and may not be offered for sale or sold unless a registration statement under the Securities Act and applicable state securities laws shall have become effective with respect thereto, or an exemption from registration under the Securities Act and applicable state securities laws is available in connection with such offer or sale. These securities and the securities issuable upon conversion or exercise hereof (i) may be pledged or hypothecated in connection with a bona fide margin account or other financing secured by such securities or (ii) may be transferred or assigned to an affiliate of the holder hereof without the necessity of an opinion of counsel or the consent of the issuer hereof.”

Notwithstanding the foregoing, it is agreed that, as long as (A) the resale or transfer (including without limitation a pledge) of any of the Securities is registered pursuant to an effective registration statement, (B) such Securities have been sold pursuant to Rule 144, subject to receipt by the Company of customary documentation reasonably acceptable to the Company in connection therewith, or (C) such Securities are eligible for resale under Rule 144(k) or any successor provision, such Securities shall be issued without any legend or other restrictive language and, with respect to Securities upon which such legend is stamped, the Company shall issue new certificates without such legend to the holder upon request. The Company shall execute and deliver written instructions to the transfer agent for its Common Stock (the “Transfer Agent”) as may be necessary to satisfy any request by an Investor for removal of such legends no later than the close of business on the third (3^rd) Business Day following the receipt of the request from an Investor to the extent such legends may be removed in accordance with this Section 2.5.

2.6Reliance on Exemptions. Such Investor understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of U.S. federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations and warranties of such Investor set forth in this Section 2 in order

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to determine the availability of such exemptions and the eligibility of such Investor to acquire the Securities. Such Investor acknowledges that it did not purchase the Securities based upon any advertisement in any publication of general circulation. Such Investor is relying on the representations, acknowledgements and agreements made by the Company in Section 3 and elsewhere in this Agreement in making investing, trading and/or other decisions concerning the Company’s securities.

2.7Non-Affiliate Status; Common Stock Ownership. Such Investor is not an Affiliate of the Company or of any other Investor and is not acting in association or concert with any other Person in regard to its purchase of the Securities or otherwise in respect of the Company. Such Investor’s investment in the Securities is not for the purpose of acquiring, directly or indirectly, control of, and it has no intent to acquire or exercise control of, the Company or to influence the decisions or policies of the Board of Directors.

2.8 Fees. Such Investor has not agreed to pay any compensation or other fee, cost or related expenditure to any underwriter, broker, agent or other representative in connection with the transactions contemplated hereby.

2.9 No Conflicts. The execution and performance of this Agreement and the other Transaction Documents to which it is a party do not conflict in any material respect with any agreement to which such Investor is a party or is bound, any court order or judgment applicable to such Investor, or the constituent documents of such Investor.

2.10No Governmental Review. Such Investor understands that no U.S. federal or state agency or any other Governmental Authority has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of an investment in the Securities nor have such authorities passed upon the accuracy of any information provided to such Investor or made any findings or determinations as to the merits of the offering of the Securities.

3.REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Investor and agrees with each Investor that, as of the Execution Date:

3.1Organization, Good Standing and Qualification. Each of the Company and its Subsidiariesis duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite power and authority to carry on its business as now conducted. Each of the Company and its Subsidiaries is duly qualified to transact business and is in good standing in each jurisdiction in which it conducts business except where the failure so to qualify has not had or would not reasonably be expected to have a Material Adverse Effect.

3.2Authorization; Consents. The Company has the requisite corporate power and authority to enter into and perform its obligations under the Transaction Documents, to issue and sell the Notes and the Warrants to the Investors in accordance with the terms hereof and thereof, and to issue the Conversion Shares upon conversion of the Notes and the Warrant Shares upon exercise of the Warrants. All corporate action on the part of the Company by its officers, directors and shareholders necessary for the authorization, execution and delivery of, and the performance by the

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Company of its obligations under, the Transaction Documents has been taken, and no further consent or authorization of the Company, its Board of Directors, shareholders, any Governmental Authority or organization (other than such approval as may be required under the Securities Act and applicable state laws in respect of the Registration Rights Agreement, or any other person or entity) is required (pursuant to any rule of the Principal Market or otherwise). The Board of Directors has determined that the sale and issuance of the Securities, and the consummation of the transactions contemplated hereby and by the other Transaction Documents (including without limitation the issuance of the Notes and Warrants, the issuance of Conversion Shares in accordance with the terms of the Notes and the issuance of Warrant Shares in accordance with the terms of the Warrants), are in the best interests of the Company.

3.3Enforcement. This Agreement has been and, at or prior to the Closing, each other Transaction Document required to be delivered by the terms hereof at such Closing will be, duly executed and delivered by the Company. This Agreement constitutes and, upon the execution and delivery thereof by the Company, each other Transaction Document will constitute the valid and legally binding obligation of the Company, enforceable against the Company in accordance with their respective terms, subject to (i) applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization or other similar laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) general principles of equity.

3.4Disclosure Documents; Agreements; Financial Statements; Other Information. The Company is subject to the reporting requirements of the Exchange Act and, except as described on Schedule 3.4, the Company has, to the best of its knowledge, filed with the Commission all SEC Documents that the Company was required to file with the Commission on or after December 31, 2005. The Company is not aware of any event occurring or expected to occur on or prior to the Closing Date (other than the transactions effected hereby) that would require the filing of, or with respect to which the Company intends to file, a Form 8-K after the Closing. Each SEC Document filed on or after December 31, 2005, as of the date of the filing thereof with the Commission (or if amended or superseded by a filing prior to the Execution Date, then on the date of such amending or superseding filing), complied, to the best of the Company’s knowledge, in all material respects with the requirements of the Securities Act or Exchange Act, as applicable, and the rules and regulations promulgated thereunder and, as of the date of such filing (or if amended or superseded by a filing prior to the Execution Date, then on the date of such filing), such SEC Document (including all exhibits and schedules thereto and documents incorporated by reference therein) did not, to the best of the Company’s knowledge, contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. To the best of the Company’s knowledge, all documents required to be filed as exhibits to the SEC Documents filed on or after December 31, 2005 have been filed as required. Except as set forth in the Disclosure Documents, the Company has no liabilities, contingent or otherwise, other than liabilities incurred in the ordinary course of business which, under GAAP, are not required to be reflected in the financial statements included in the Disclosure Documents and which, individually or in the aggregate, are not material to the consolidated business or financial condition of the Company and its Subsidiaries taken as a whole. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto. To the

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best of the Company’s knowledge, such financial statements have been prepared in accordance with GAAP consistently applied at the times and during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end adjustments). The Company will prepare the financial statements to be included in any reports, schedules, registration statements and definitive proxy statements that the Company is required to file or files with the Commission after the date hereof in accordance with GAAP (except in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements).

3.5Capitalization; Debt Schedule. The capitalization of the Company, including its authorized capital stock, the number of shares issued and outstanding, the number of shares issuable and reserved for issuance pursuant to the Company’s stock option plans and agreements, the number of shares issuable and reserved for issuance pursuant to securities (other than the Notes and Warrants) exercisable for, or convertible into or exchangeable for any shares of Common Stock and the number of shares initially to be reserved for issuance upon conversion of the Notes and exercise of the Warrants, is set forth on Schedule 3.5 hereto. All outstanding shares of capital stock of the Company have been, or upon issuance will be, validly issued, fully paid and non-assessable. All Subsidiaries of the Company are disclosed on Schedule 3.5 hereto. Except as disclosed on Schedule 3.5 hereto, the Company or a wholly-owned Subsidiary of the Company owns all of the capital stock of each Subsidiary of the Company, which capital stock is validly issued, fully paid and non-assessable, and no shares of the capital stock of the Company or any of its Subsidiaries are subject to preemptive rights or any other similar rights of the shareholders of the Company or any such Subsidiary or any Liens created by or through the Company or any such Subsidiary. Except as disclosed on Schedule 3.5 or as contemplated herein, there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries (whether pursuant to anti-dilution, “reset” or other similar provisions). Schedule 3.5 identifies all Debt of the Company and/or its Subsidiaries currently outstanding in excess of $25,000 as of the date hereof.

3.6Due Authorization; Valid Issuance. The Notes are duly authorized and, when issued, sold and delivered in accordance with the terms of this Agreement, will be duly and validly issued, free and clear of any Liens imposed by or through the Company. The Warrants are duly authorized and, when issued, sold and delivered in accordance with the terms of this Agreement, will be duly and validly issued, free and clear of any Liens imposed by or through the Company. The Conversion Shares issuable under the Notes and the Warrant Shares issuable under the Warrants are duly authorized and reserved for issuance and, when issued and delivered in accordance with the terms of the Notes or the Warrants, as the case may be, will be duly and validly issued, fully paid and nonassessable, free and clear of any Liens imposed by or through the Company. Assuming the accuracy of each Investor’s representations contained herein, the issuance

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and sale of the Notes and Warrants under this Agreement will be effected in compliance with all applicable Federal and state securities laws.

3.7Form SB-2. The Company is eligible to register the Conversion Shares and Warrant Shares for resale in a secondary offering by each Investor on a registration statement on Form SB-2 under the Securities Act. To the Company’s knowledge, as of the date hereof and as of the Closing Date, there exist no facts or circumstances (including without limitation any required approvals or waivers of any circumstances that may delay or prevent the obtaining of accountant’s consents) that could reasonably be expected to prohibit or delay the preparation, filing or effectiveness of such registration statement on Form SB-2.

3.8No Conflict. Neither the Company nor any of its Subsidiaries is in violation of any provisions of its charter, Bylaws or any other governing document. Except as set forth on Schedule 3.8, neither the Company nor any of its Subsidiaries is in violation of or in default (and no event has occurred which, with notice or lapse of time or both, would constitute a default) under any provision of any instrument or contract to which it is a party or by which it or any of its Property is bound, or in violation of any provision of any Governmental Requirement applicable to the Company or any Subsidiary of the Company, except for any violation or default that has not had or would not reasonably be expected to have a Material Adverse Effect. The (i) execution, delivery and performance of this Agreement and the other Transaction Documents and (ii) consummation of the transactions contemplated hereby and thereby (including without limitation, the issuance of the Notes and the Warrants and the reservation for issuance and issuance of the Conversion Shares and the Warrant Shares) will not result in any violation of any provisions of the Company’s or any of its Subsidiary’s charter, Bylaws or any other governing document or in a default under any provision of any instrument or contract to which the Company or Subsidiary of the Company is a party or by which it or any of its Property is bound, or in violation of any provision of any Governmental Requirement applicable to the Company or Subsidiary of the Company or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument or contract or an event which results in the creation of any Lien upon any assets of the Company or of any of its Subsidiaries or the triggering of any preemptive or anti-dilution rights (including without limitation pursuant to any “reset” or similar provisions) or rights of first refusal or first offer, or any other rights that would allow or permit the holders of the Company’s securities or any other Person to purchase shares of Common Stock or other securities of the Company or Subsidiary of the Company (whether pursuant to a shareholder rights plan provision or otherwise).

3.9Financial Condition; Taxes; Litigation.

3.9.1 The financial condition of each of the Company and each Subsidiary of the Company is, in all material respects, as described in the Disclosure Documents, except for changes in the ordinary course of business and normal year-end adjustments that are not, in the aggregate, materially adverse to the consolidated business or financial condition of the Company and its Subsidiaries taken as a whole. There has been no (i) material adverse change to the business, operations, properties, financial condition, prospects or results of operations of the Company and its Subsidiaries taken as a whole since the date of the Company’s most recent financial statements

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contained in the Disclosure Documentsor (ii) change by the Company in its accounting principles, policies and methods except as required by changes in GAAP.

3.9.2 Each of the Company and its Subsidiaries has prepared in good faith and duly and timely filed all tax returns required to be filed by it and such returns are complete and accurate in all material respects and the Company and its Subsidiaries each has paid all taxes required to have been paid by it, except for taxes which it reasonably disputes in good faith or the failure of which to pay has not had or would not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any Subsidiary of the Company has any liability with respect to taxes that accrued on or before the date of the most recent balance sheet of the Company included in the Disclosure Documents in excess of the amounts accrued with respect thereto that are reflected on such balance sheet.

3.9.3 Except for sales tax audits undertaken by state taxing authorities in the ordinary course of business, neither the Company nor any of its Subsidiaries is the subject of any pending or, to the Company’s knowledge, threatened inquiry, investigation or administrative or legal proceeding by the Internal Revenue Service, the taxing authorities of any state or local jurisdiction, the Commission, the NASD, any state securities commission or other Governmental Authority.

3.9.4 Except as set forth on Schedule 3.9.4, there is no material claim, litigation or administrative proceeding pending, or, to the Company’s knowledge, threatened or contemplated, against the Company or any of its Subsidiaries, or against any officer, director or employee of the Company or any such Subsidiary in connection with such person’s employment therewith. Neither the Company nor any of its Subsidiaries is a party to or subject to the provisions of, any order, writ, injunction, judgment or decree of any court or Government Authority which has had or would reasonably be expected to have a Material Adverse Effect.

3.10 Acknowledgement of Dilution. The Company acknowledges that the issuance of Conversion Shares upon conversion of the Notes and issuance of the Warrant Shares upon exercise of the Warrants may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Notes in accordance with the terms of the Notes, and to issue Warrant Shares upon exercise of the Warrants in accordance with the terms of the Warrants, is unconditional (other than with respect to the conditions set forth in the Notes and the Warrants, respectively) regardless of the effect of any such dilution. The Company further acknowledges that, to the extent not otherwise prohibited by applicable law and the terms of this Agreement, each Investor may enter into hedging transactions with respect to the Common Stock.

3.11Intellectual Property. Except as set forth in Schedule 3.11:

(a)The Company and its Subsidiaries own, free and clear of claims or rights or any other Person, with full right to use, sell, license, sublicense, dispose of, and bring actions for infringement of, or, to the knowledge of the Company, has acquired licenses or other rights to use, all Intellectual Property necessary for the conduct of its business as presently conducted (other than with respect to software which is generally commercially available and not used or incorporated into the Company’s products and open source software which may be subject to one or more

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“general public” licenses). All works that are used or incorporated into the Company’s or any of its Subsidiaries’ services, products or services or products actively under development and which is proprietary to the Company or such Subsidiary was developed by or for the Company or its Subsidiaries by the current or former employees, consultants or independent contractors of the Company or its Subsidiaries or purchased or licensed by the Company or one or more of its Subsidiaries.

(b)The business of the Company and its Subsidiaries as presently conducted and the production, marketing, licensing, use and servicing of any products or services of the Company and its Subsidiaries do not, to the knowledge of the Company, infringe or conflict with any patent, trademark, copyright, or trade secret rights of any third parties or any other Intellectual Property of any third parties in any material respect. Neither the Company nor any of its Subsidiaries has received written notice from any third party asserting that any Intellectual Property owned or licensed by the Company or its Subsidiaries, or which the Company or any of its Subsidiaries otherwise has the right to use, is invalid or unenforceable by the Company or such Subsidiary and, to the Company’s knowledge, there is no valid basis for any such claim (whether or not pending or threatened).

(c)No claim is pending or, to the Company’s knowledge, threatened against the Company or any of its Subsidiaries nor has the Company or any of its Subsidiaries received any written notice or other written claim from any Person asserting that any of the Company’s or its Subsidiaries’ present or contemplated activities infringe or may infringe in any material respect any Intellectual Property of such Person, and the Company is not aware of any infringement by any other Person of any material rights of the Company or any of its Subsidiaries under any Intellectual Property Rights.

(d)All licenses or other agreements under which the Company or any of its Subsidiaries is granted Intellectual Property (excluding licenses to use software utilized in the Company’s or such Subsidiary’s internal operations and which is generally commercially available) are in full force and effect and, to the Company’s knowledge, there is no material default by any party thereto. The Company has no reason to believe that the licensors under such licenses and other agreements do not have and did not have all requisite power and authority to grant the rights to the Intellectual Property purported to be granted thereby.

(e)All licenses or other agreements under which the Company or any of its Subsidiaries has granted rights to Intellectual Property to others (including all end-user agreements) are in full force and effect, there has been no material default by the Company or any of its Subsidiaries thereunder and, to the Company’s knowledge, there is no material default of any provision thereof relating to Intellectual Property by any other party thereto.

(f)The Company and its Subsidiaries have taken all steps required in accordance with commercially reasonable business practice to establish and preserve their ownership in their owned Intellectual Property and to keep confidential all material technical information developed by or belonging to the Company or its Subsidiaries which has not been patented or copyrighted. To the Company’s knowledge, neither the Company nor any of its Subsidiaries is making any unlawful use of any Intellectual Property of any other Person, including,

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without limitation, any former employer of any past or present employees of the Company or any of its Subsidiaries. To the Company’s knowledge, neither the Company, any of its Subsidiaries nor any of their respective employees has any agreements or arrangements with former employers of such employees relating to any Intellectual Property of such employers, which materially interfere or conflict with the performance of such employee’s duties for the Company or its Subsidiaries or result in any former employers of such employees having any rights in, or claims on, the Company’s or any of its Subsidiaries’ Intellectual Property. Each current employee of the Company and of each of its Subsidiaries has executed agreements regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Company or its Subsidiaries, each independent contractor or consultant of the Company and of each of its Subsidiaries has executed agreements regarding confidentiality and proprietary information, and neither the Company nor any of its Subsidiaries has received written notice that any employee, consultant or independent contractor is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. Without limiting the foregoing: (i) the Company and each of its Subsidiaries has taken reasonable security measures to guard against unauthorized disclosure or use of any of its Intellectual Property that is confidential or proprietary; and (ii) the Company has no reason to believe that any Person (including, without limitation, any former employee or consultant of the Company or of any of its Subsidiaries) has unauthorized possession of any of its Intellectual Property, or any part thereof, or that any Person has obtained unauthorized access to any of its Intellectual Property. The Company and each of its Subsidiaries has complied in all material respects with its respective obligations pursuant to all agreements relating to Intellectual Property rights that are the subject of licenses granted by third parties, except for any non-compliance that has not had or would not reasonably be expected to have a Material Adverse Effect.

3.12Registration Rights; Rights of Participation Except with respect to the number of shares of Common Stock as is listed on Schedule 3.12, (A) the Company has not granted or agreed to grant to any person or entity any rights (including “piggy-back” registration rights) to have any securities of the Company registered with the Commission or any other governmental authority which has not been satisfied in full or waived on or prior to the date hereof and (B) no person or entity, including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties, has any right of first refusal, preemptive right, right of participation, anti-dilutive right or any similar right to participate in, or to receive securities or other assets of the Company solely as a result of the transactions contemplated by this Agreement or the other Transaction Documents.

3.13Solicitation; Other Issuances of Securities. Neither the Company nor any of its Subsidiaries or Affiliates, nor any Person acting on its or their behalf, (i) has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities, or (ii) has, directly or indirectly, made any offers or sales of any security or the right to purchase any security, or solicited any offers to buy any security or any such right, under circumstances that would require registration of the Securities under the Securities Act.

3.14Fees. Except as set forth on Schedule 3.14, the Company is not obligated to pay any brokers, finders or financial advisory fees or commissions to any underwriter, broker, agent or other representative in connection with the transactions contemplated hereby. The Company will

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indemnify and hold harmless such Investor from and against any claim by any person or entity alleging that such Investor is obligated to pay any such compensation, fee, cost or related expenditure in connection with the transactions contemplated hereby.

3.15Foreign Corrupt Practices. Neither the Company, any of its Subsidiaries nor, to the knowledge of the Company, any director, officer, agent, employee or other person acting on behalf of the Company or any of its Subsidiaries, has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity, (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee, or (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

3.16Key Employees. Each of the Company’s and each of its Subsidiarys’ executive officers (as defined in Rule 501(f) of the Securities Act) (each, a “Key Employee”) is currently serving in the capacity described in the Disclosure Documents. Except as set forth on Schedule 3.16, the Company has no knowledge of any fact or circumstance (including without limitation (i) the terms of any agreement to which such person is a party or any litigation in which such person is or may become involved and (ii) any illness or medical condition that could reasonably be expected to result in the disability or incapacity of such person) that would limit or prevent any such person from serving in such capacity on a full-time basis in the foreseeable future, or of any intention on the part of any such person to limit or terminate his or her employment with the Company or any of its Subsidiaries. To the knowledge of the Company, no Key Employee has borrowed money pursuant to a currently outstanding loan that is secured by Common Stock or any right or option to receive Common Stock.

3.17Employee Matters. There is no strike, labor dispute or union organization activities pending or, to the knowledge of the Company, threatened between it and its employees. No employees of the Company belong to any union or collective bargaining unit. The Company has complied in all material respects with all applicable federal and state equal opportunity and other laws related to employment.

3.18Environment. Except as disclosed in the Disclosure Documents, the Company and its Subsidiaries have no liabilities under any Environmental Law, nor, to the Company's knowledge, do any factors exist that are reasonably likely to give rise to any such liability, affecting any of the properties owned or leased by the Company or any of its Subsidiaries that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries has violated any Environmental Law applicable to it now or previously in effect, other than such violations or infringements that, individually or in the aggregate, have not had and would not reasonably be expected to have a Material Adverse Effect.

3.19ERISA. Except as described on Schedule 3.19, the Company does not maintain or contribute to, or have any obligation under, any Pension Plan. The Company is in compliance in all material respects with the presently applicable provisions of ERISA and the United States Internal Revenue Code of 1986, as amended, with respect to each Pension Plan except in any

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such case for any such matters that, individually or in the aggregate, have not had, and would not reasonably be expected to have, a Material Adverse Effect.

3.20Disclosure. The representations, warranties and written statements contained in this Agreement and the other Transaction Documents and in the certificates, exhibits and schedules delivered to such Investor by the Company pursuant to this Agreement and the other Transaction Documents and in connection with such Investor’s due diligence investigation of the Company, do not contain any untrue statement of a material fact, and do not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or statements not misleading in light of the circumstances under which they were made. Neither the Company nor any Person acting on its behalf or at its direction has provided such Investor with material non-public information other than the terms of the transactions contemplated hereby. Following the issuance of a press release in accordance with Section 4.1(c) of this Agreement, to the Company’s knowledge, such Investor will not possess any material non-public information concerning the Company that was provided to such Investor by the Company or its agents or representatives. The Company acknowledges that such Investor is relying on the representations, acknowledgments and agreements made by the Company in this Section 3.20 and elsewhere in this Agreement in making trading and other decisions concerning the Company’s securities.

3.21Insurance. The Company maintains insurance for itself and its Subsidiaries in such amounts and covering such losses and risks as are reasonably sufficient and customary in the businesses in which the Company and its Subsidiaries are engaged. As of the date hereof and as of the Closing Date, no notice of cancellation has been received for any of such policies and the Company is in compliance in all material respects with all of the terms and conditions thereof. The Company has no 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 to conduct its business as currently conducted without a significant increase in cost. Without limiting the generality of the foregoing, the Company maintains Director’s and Officer’s insurance in an amount not less than $5 million for each covered occurrence.

3.22 Property. The Company and its Subsidiaries have good and marketable title to all real and personal Property owned by them, in each case free and clear of all Liens, except for Permitted Liens. Any Property held under lease by the Company or its Subsidiaries is held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made or proposed to be made of such Property by the Company or any of its Subsidiaries. Schedule 3.22 sets forth all real property owned by the Company and all mortgages or other liens (other than Permitted Liens specified in paragraphs (b), (c) and (d) in the definition thereof) encumbering such Property.

3.23 Regulatory Permits. The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, except where the failure to have any such certificate, authorization or permit would not have a Material Adverse Effect, and neither the

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Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.

3.24[Intentionally Omitted.]

3.25Investment Company Status. The Company is not, and immediately after any Closing will not be, an “investment company” or an entity “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and shall conduct its business in a manner so that it will not become subject to the Investment Company Act.

3.26Transfer Taxes. No stock transfer or other taxes (other than income taxes) are required to be paid in connection with the issuance and sale of any of the Securities, other than such taxes for which the Company has established appropriate reserves and intends to pay in full on or before the Closing.

3.27Sarbanes-Oxley Act; Internal Controls and Procedures. The Company is in material compliance with any and all applicable requirements of the Sarbanes-Oxley Act of 2002, as amended, and any and all applicable rules and regulations promulgated by the SEC thereunder that are effective as of the date hereof. The Company maintains internal accounting controls, policies and procedures, and such books and records as are reasonably designed to provide reasonable assurance that (i) all transactions to which the Company or any Subsidiary of the Company is a party or by which its properties are bound are effected by a duly authorized employee or agent of the Company, supervised by and acting within the scope of the authority granted by the Company’s senior management; (ii) the recorded accounting of the Company’s consolidated assets is compared with existing assets at regular intervals; and (iii)all transactions to which the Company or any Subsidiary of the Company is a party, or by which its properties are bound, are recorded (and such records maintained) in accordance with all Government Requirements and as may be necessary or appropriate to ensure that the financial statements of the Company are prepared in accordance with GAAP.

3.28 Embargoed Person. None of the funds or other assets of the Company or its Subsidiaries shall constitute property of, or shall be beneficially owned, directly or indirectly, by any person subject to trade restrictions under United States law, including, but not limited to, the International Emergency Economic Powers Act, 50 U.S.C. § 1701 et seq., the Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Orders or regulations promulgated under any such United States laws (each, an “Embargoed Person”), with the result that the investments evidenced by the Securities are or would be in violation of law. No Embargoed Person shall have any interest of any nature whatsoever in the Company or any Subsidiary of the Company with the result that the investments evidenced by the Securities are or would be in violation of law. None of the funds or other assets of the Company or its Subsidiaries shall be derived from any unlawful activity with the result that the investments evidenced by the Securities are or would be in violation of law.

3.29Transactions with Interested Persons. Except as described on Schedule 3.29, no officer, director or employee of the Company or any of its Subsidiaries is or has made any arrangements with the Company or any of its Subsidiaries to become a party to any transaction with

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the Company or any Subsidiary of the Company (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.

3.30Customers and Suppliers. The relationships of the Company and its Subsidiaries with their respective customers and suppliers are maintained on commercially reasonable terms. Except as set forth on Schedule 3.30 hereto, to the Company’s knowledge, no customer or supplier of the Company or any of its Subsidiaries has any plan or intention to terminate its agreement with the Company or such Subsidiary, which termination would reasonably be expected to have a Material Adverse Effect.

3.31Accountants. The Company’s accountants,who the Company expects will render their opinion with respect to the financial statements to be included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006, are, to the Company’s knowledge, independent accountants as required by the Securities Act.

3.32No Other Agreements. The Company has not, directly or indirectly, entered into any agreement with or granted any right to any Investor relating to the terms or conditions of the transactions contemplated by the Transaction Documents, except as expressly set forth in the Transaction Documents.

3.33Solvency. (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 Debt; (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; and (iii) the expected cash flows of the Company for future periods, together with the proceeds the Company would receive upon liquidation of its assets and the proceeds from expected debt or equity offerings, after taking into account all anticipated uses of such amounts, would be sufficient to pay all Debt when such Debt is required to be paid. The Company has no knowledge of any facts or circumstances which led it to believe that it will be required to file for reorganization or liquidation under bankruptcy or reorganization laws of any jurisdiction, and has no present intention to so file.

4.COVENANTS OF THE COMPANY AND EACH INVESTOR.

4.1The Company agrees with each Investor that the Company will:

(a)file a Form D with respect to the Securities issued at the Closing as and when required under Regulation D and provide a copy thereof to such Investor promptly after such filing;

(b)at or prior to the Closing, take such action as the Company reasonably determines upon the advice of counsel is necessary to qualify the Securities for sale under applicable state or “blue-sky” laws or obtain an exemption therefrom, and shall promptly provide evidence of any such action to such Investor at such Investor’s request; and

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(c)(i) on or prior to 8:30 a.m. (eastern time) on the fourth Business Day following the Execution Date, issue a press release disclosing the material terms of this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby, and (ii) on or prior to 5:00 p.m. (eastern time) on the fourth Business Day following the Execution Date, file with the Commission a Current Report on Form 8-K disclosing the material terms of and including as exhibits this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby; provided, however, that each Investor shall have a reasonable opportunity to review and comment on any such press release or Form 8-K prior to the issuance or filing thereof; and provided, further, that if the Company fails to issue a press release disclosing the material terms of this Agreement and the other Transaction Documents within the time frames described herein, any Investor may issue a press release disclosing such information without any notice to or consent by the Company. Thereafter, the Company shall timely file any filings and notices required by the Commission or applicable law with respect to the transactions contemplated hereby.

4.2Existence and Compliance. The Company agrees that it will, and will cause each Subsidiary of the Company to, while any Investor holds any Securities:

(a)maintain its corporate existence in good standing;

(b)comply with all Governmental Requirements applicable to the operation of its business, except for instances of noncompliance that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

(c) comply with all agreements, documents and instruments binding on it or affecting its Properties or business, including, without limitation, all Material Contracts, except for instances of noncompliance that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

(d)provide each Investor with copies of all materials sent to its shareholders at the same time as such materials are delivered to such shareholders;

(e)timely file with the Commission all reports required to be filed pursuant to the Exchange Act and refrain from terminating its status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination;

(f)take commercially reasonable steps to limit sales of Common Stock by each of the Company’s Key Employees during the period beginning on the Execution Date and ending on the Effective Date to not more than 100,000 shares of Common Stock over any three-month period; provided that there shall be no limitation on a Key Employee’s right to sell shares issuable upon exercise of any warrant or option held by such Key Employee; and

(g)use commercially reasonable efforts to maintain adequate insurance coverage (including D&O insurance) for the Company and each Company Subsidiary.

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4.3Reservation of Common Stock. The Company shall, on the Closing Date, have authorized and reserved for issuance to the Investors free from any preemptive rights, and shall keep available at all times during which any Notes or Warrants are outstanding, a number of shares of Common Stock (the “Reserved Amount”) that, on such Closing Date, is not less than two hundred percent (200%) of (i) the number of Conversion Shares issuable upon conversion of all of the Notes to be issued at such Closing plus (ii) the number of Warrant Shares issuable upon exercise of all of the Warrants to be issued at the Closing, in each case without regard to any limitation or restriction on such conversion or exercise that may be set forth in the Notes or the Warrants. The Reserved Amount shall be allocated among the Investors in accordance with each Investor’s Pro Rata Share. In the event that an Investor shall sell or otherwise transfer any of such Investor’s Notes or Warrants, each transferee shall be allocated a pro rata portion of such transferor’s Reserved Amount. Any portion of the Reserved Amount allocated to any Investor or other Person which no longer holds any Notes or Warrants shall be reallocated to the remaining Investors pro rata based on the number of the Registrable Securities held by such Investors at such time. In the event that the Reserved Amount is insufficient at any time to cover one hundred twenty five percent (125%) of the Registrable Securities issuable upon the conversion of the Notes and exercise of the Warrants (without regard to any restriction on such conversion or exercise), the Company shall take such action (including without limitation holding a meeting of its shareholders) to increase the Reserved Amount to cover two hundred percent (200%) of such Registrable Securities, such increase to be effective not later than the thirtieth (30th) day (or sixtieth (60th) day, in the event shareholder approval is required for such increase) following the Company’s receipt of written notice of such deficiency. While any Notes or Warrants are outstanding, the Company shall not reduce the Reserved Amount without obtaining the prior written consent of each Investor then holding a Note or a Warrant.

4.4Use of Proceeds. The Company shall use the proceeds from the sale of the Notes and Warrants for working capital and general corporate purposes; provided, that the Company shall not use any of such proceeds (i) to pay any dividend or make any distribution on any of its securities, or (ii) to repay any loan made to or incurred by any Key Employee or any other officer or director or Affiliate of the Company.

4.5Transactions with Affiliates.The Company agrees that, during the period beginning on the Execution Date and ending on the Termination Date, any transaction or arrangement between it or any Subsidiary of the Company and any Affiliate or employee of the Company shall be effected on an arms’ length basis and shall be approved by the Company’s independent directors.

4.6Use of Investor Name. Except as may be required by applicable law and/or this Agreement, the Company shall not use, directly or indirectly, any Investor’s name or the name of any of its Affiliates in any advertisement, announcement, press release or other similar communication unless it has received the prior written consent of such Investor for the specific use contemplated or as otherwise required by applicable law or regulation.

4.7[Intentionally Omitted].

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4.8Limitations on Disposition. No Investor shall sell, transfer, assign or dispose of any Securities, unless:

(a)there is then in effect an effective registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or

(b)such Investor has notified the Company in writing of any such disposition, and furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such Securities under the Securities Act; provided, however, that no such opinion of counsel will be required (A) if the sale, transfer, assignment or disposition is made to an Affiliate of such Investor, (B) if the sale, transfer, assignment or disposition is made pursuant to Rule 144 and such Investor provides the Company with evidence reasonably satisfactory to the Company that the proposed transaction satisfies the requirements of Rule 144, (C) if such Securities are eligible for resale under Rule 144(k) or any successor provision or (D) if in connection with a bona fide pledge or hypothecation of any Securities under a margin arrangement with a broker-dealer or other financial institution or the sale of any such Securities by such broker-dealer or other financial institution following such Investor’s default under such margin arrangement.

4.9Disclosure of Non-Public Information. The Company agrees that it will not at any time following the Execution Date disclose material non-public information to any Investor without first obtaining such Investor’s written consent to such disclosure.

4.10Indemnification of Investors. The Company will indemnify and hold each Investor and its directors, managers, officers, shareholders, members, partners, employees and agents (each, an “Investor 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 Investor 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 an Investor, or any of them or their respective Affiliates, by any shareholder of the Company who is not an Affiliate of such Investor, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Investor’s representation, warranties or covenants under the Transaction Documents or any agreements or understandings such Investor may have with any such shareholder or any violations by such Investor of state or federal securities laws or any conduct by such Investor which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Investor Party in respect of which indemnity may be sought pursuant to this Agreement, such Investor 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. Any Investor 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 Investor 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 following such Investor Party’s written request that it do so, 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

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the position of the Company and the position of such Investor Party. The Company will not be liable to any Investor Party under this Agreement (i) for any settlement by an Investor 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 such Investor Party’s wrongful actions or omissions, or gross negligence or to such Investor Party’s breach of any of the representations, warranties, covenants or agreements made by such Investor in this Agreement or in the other Transaction Documents.

4.11Limitation on Debt and Liens. During the period beginning on the Execution Date and ending on the Termination Date, the Company shall refrain, and shall ensure that each Subsidiary of the Company refrains, from (A) incurring any Debt other than Permitted Debt, and (B) granting, establishing or maintaining any Lien on any of its Property other than Permitted Liens.

4.12Restricted Payments. During the period beginning on the Execution Date and ending on the Termination Date, the Company will not, and will not permit any Subsidiary of the Company to, make any Restricted Payments other than Restricted Payments made by such Subsidiaries to the Company.

4.13Disposition of Property. During the period beginning on the Execution Date and ending on the Termination Date, the Company will not, and will not permit any Subsidiary of the Company to, dispose, in a single transaction, or in a series of transactions all or any part of its Property unless (x) such disposition is (i) in the ordinary course of business, (ii) for fair market value, and (iii) for cash, and (y) such Property is not material to the Company’s or any of its Subsidiary’s business, operations or financial condition or performance.

4.14Modification of Organizational Documents. Except as described on Schedule 4.14, during the period beginning on the Execution Date and ending on the Termination Date, the Company will not, nor will it permit any of its Subsidiaries to, consent to or implement any termination, amendment, modification, supplement or waiver of the certificate or articles of incorporation, articles of organization, bylaws, regulations or other constituent documents of the Company or any such Subsidiary.

4.15Mergers and Consolidations. Except as described on Schedule 4.15, during the period beginning on the Execution Date and ending on the Termination Date, the Company will not, and will not permit any Subsidiary of the Company to, without the prior written consent of Investors holding at least a majority in principal amount of the Notes then outstanding (which consent will not be unreasonably withheld), merge with or consolidate into, any Person, except that (i) any of the Company’s wholly owned Subsidiaries may merge with, consolidate into the Company or another of the Company’s wholly owned Subsidiaries and (ii) the Company or any Subsidiary of the Company may effect a merger solely for the purpose of changing its jurisdiction of incorporation.

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4.16Exchange Right. If the Company intends to effect a Subsequent Placement at any time prior to the 30^th day following the Closing, the Company shall deliver to each Investor a written notice (an “Exchange Notice”) no later than two (2) Business Days (the “Exchange Notice Date”) prior to the closing date of such Subsequent Placement along with the proposed definitive investment documents for such Subsequent Placement (the “Exchange Documents”). Each Investor shall have the right (but not the obligation) to exchange all (but not less than all) of such Investor’s Note and Warrant (an “Exchange”) for the securities being offered in such Subsequent Placement (the “Exchange Securities”). If an Investor wishes to participate in an Exchange, such Investor shall deliver written notice thereof (an “Exchange Election Notice”) to the Company within ten (10) Business Days after receipt by such Investor of the Exchange Notice for such Exchange. If an Investor has timely delivered an Exchange Election Notice, the applicable Exchange shall be consummated on (i) the date that is the later of (x) the date on which the applicable Subsequent Placement is consummated in accordance with its terms and (y) the date that is one Business Day after the date on which such Exchange Election Notice was timely delivered by such Investor or (ii) such other date that is mutually agreed to in writing or by email by the Company and such Investor (such date, the “Exchange Closing Date”). Each Exchange shall be effected on a dollar-for-dollar basis so that each dollar of principal (and interest accrued through and including the applicable Exchange Closing Date) shall be deemed payment for the Exchange Securities which shall have the same terms and conditions, mutatis mutandis, granted to other Persons purchasing the Exchange Securities (whether as purchasers in such Subsequent Placement or through an Exchange pursuant to this Section 4.16). The Company and each Investor that elects to exercise its Exchange right hereunder shall on the applicable Exchange Closing Date execute, and deliver to the other party, the Exchange Documents to which it is a party, and the Company shall deliver the original certificates or other instruments evidencing the Exchange Securities to be issued to such Investor within two Business Days of such Exchange Closing Date. Upon the execution of the Exchange Documents by the Company and an Investor, the obligations of the Company under the Investor’s original Note and Warrant shall be extinguished. Each Investor that participates in an Exchange shall return its original Note and Warrant to the Company for cancellation no later than two Business Days after the receipt of the certificates evidencing its Exchange Securities; provided, that the Investor’s original Note and Warrant shall be deemed cancelled even should Investor fail to return the same to the Company for cancellation. Notwithstanding the delivery by an Investor of an Exchange Election Notice to the Company, nothing contained herein shall be deemed to limit in any way the right of such Investor to effectuate a conversion or exercise of such Investor’s Note or Warrant at any time prior to the applicable Exchange Closing Date, in which case, such Investor’s Exchange Election Notice shall be deemed to have been revoked and the Company’s obligation to effect such Exchange with such Investor shall be deemed to have been terminated.

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5.CONDITIONS TO CLOSING.

5.1Conditions to Investors’ Obligations at the Closing. Each Investor’s obligations to effect the Closing, including without limitation its obligation to purchase a Note and Warrant at the Closing, are conditioned upon the fulfillment (or waiver by such Investor in its sole and absolute discretion) of each of the following events as of the Closing Date, and the Company shall use commercially reasonable efforts to cause each of such conditions to be satisfied:

5.1.1 the representations and warranties of the Company set forth in this Agreement and in the other Transaction Documents shall be true and correct in all material respects as of such date as if made on such date (except that to the extent that any such representation or warranty relates to a particular date, such representation or warranty shall be true and correct in all material respects as of that particular date);

5.1.2 the Company shall have complied with or performed in all material respects all of the agreements, obligations and conditions set forth in this Agreement and in the other Transaction Documents that are required to be complied with or performed by the Company on or before the Closing;

5.1.3  the Company shall have delivered to such Investor a certificate, signed by the Chief Executive Officer and Chief Financial Officer of the Company, certifying that the conditions specified in this Section 5.1 have been fulfilled as of the Closing, it being understood that such Investor may rely on such certificate as though it were a representation and warranty of the Company made herein;

5.1.4 the Company shall have delivered to such Investor an opinion of counsel for the Company, dated as of the Closing Date, in the form attached hereto as Exhibit D hereto;

5.1.5 the Company shall have executed and delivered to such Investor the Note and the Warrant being purchased by such Investor at the Closing;

5.1.6 the Company shall have executed and delivered to such Investor the Registration Rights Agreement and each other Transaction Document;

5.1.7 the Company shall have delivered to such Investor a certificate, signed by the Secretary or an Assistant Secretary of the Company, attaching (i) the articles and by-laws of the Company and (ii) resolutions passed by its Board of Directors to authorize the transactions contemplated hereby and by the other Transaction Documents, and certifying that such documents are true and complete copies of the originals and have not been amended or superseded, it being understood that such Investor may rely on such certificate as a representation and warranty of the Company made herein;

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5.1.8 the Company shall have obtained the written agreement of each Key Employee to refrain from selling shares of Common Stock for the period specified in, and in accordance with, Section 4.2(f) of this Agreement;

5.1.9 there shall have occurred no material adverse change in the Company’s consolidated business or financial condition since the date of the Company’s most recent financial statements contained in the Disclosure Documents;

5.1.10 the Company shall have authorized and reserved for issuance upon conversion of the Notes and exercise of the Warrants two hundred percent (200%) of the aggregate number of shares of Common Stock issuable upon conversion of all of the Notes and exercise of all of the Warrants to be issued at the Closing (such number to be determined without regard to any restriction on such conversion or exercise);

5.1.11 there shall be no injunction, restraining order or decree of any nature of any court or Government Authority of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions contemplated hereby and by the other Transaction Documents; and

5.1.12  the Company shall have paid the expenses described in Section 6.10 of this Agreement.

5.2Conditions to Company’s Obligations at the Closing. The Company’s obligations to effect the Closing with an Investor are conditioned upon the fulfillment (or waiver by the Company in its sole and absolute discretion) of each of the following events as of the Closing Date:

5.2.1 the representations and warranties of such Investor set forth in this Agreement and in the other Transaction Documents to which it is a party shall be true and correct in all material respects as of such date as if made on such date (except that to the extent that any such representation or warranty relates to a particular date, such representation or warranty shall be true and correct in all material respects as of that date);

5.2.2 such Investor shall have complied with or performed all of the agreements, obligations and conditions set forth in this Agreement that are required to be complied with or performed by such Investor on or before the Closing;

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5.2.3 there shall be no injunction, restraining order or decree of any nature of any court or Government Authority of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions contemplated hereby and by the other Transaction Documents;

5.2.4  such Investor shall have executed each Transaction Document to which it is a party and shall have delivered the same to the Company; and

5.2.5 such Investor shall have tendered to the Company the Purchase Price for the Note and the Warrant being purchased by it at theClosing by wire transfer of immediately available funds.

6.MISCELLANEOUS.

6.1Survival; Severability. The representations, warranties, covenants and indemnities made by the parties herein and in the other Transaction Documents shall survive the Closing notwithstanding any due diligence investigation made by or on behalf of the party seeking to rely thereon. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that in such case the parties shall negotiate in good faith to replace such provision with a new provision which is not illegal, unenforceable or void, as long as such new provision does not materially change the economic benefits of this Agreement to the parties.

6.2Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. An Investor may assign its rights and obligations hereunder in connection with any private sale or transfer of the Securities in accordance with the terms hereof, as long as, as a condition precedent to such transfer, the transferee executes an acknowledgment agreeing to be bound by the applicable provisions of this Agreement, in which case the term “Investor” shall be deemed to refer to such transferee as though such transferee were an original signatory hereto. The Company may not assign its rights or obligations under this Agreement.

6.3No Reliance. Each party acknowledges that (i) it has such knowledge in business and financial matters as to be fully capable of evaluating this Agreement, the other Transaction Documents and the transactions contemplated hereby and thereby, (ii) it is not relying on any advice or representation of any other party in connection with entering into this Agreement, the other Transaction Documents or such transactions (other than the representations made in this Agreement or the other Transaction Documents), (iii) it has not received from any other party any assurance or guarantee as to the merits (whether legal, regulatory, tax, financial or otherwise) of entering into this Agreement or the other Transaction Documents or the performance of its obligations hereunder and thereunder, and (iv) it has consulted with its own legal, regulatory, tax,

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business, investment, financial and accounting advisors to the extent that it has deemed necessary, and has entered into this Agreement and the other Transaction Documents based on its own independent judgment and, if applicable, on the advice of such advisors, and not on any view (whether written or oral) expressed by any other party.

6.4 Independent Nature of Investors’ Obligations and Rights. The obligations of each Investor hereunder are several and not joint with the obligations of the other Investors hereunder, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor hereunder. The Company acknowledges and agrees that nothing contained herein or in any other Transaction Document, and no action taken by any Investor pursuant hereto or thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or a “group” as described in Section 13(d) of the Exchange Act, or create a presumption that the Investors are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Investor has been represented by its own separate counsel in connection with the transactions contemplated hereby, shall be entitled to protect and enforce its rights, including without limitation rights arising out of this Agreement or the other Transaction Documents, individually, and shall not be required to join any other Investor as an additional party in any proceeding for such purpose.

6.5Injunctive Relief. The Company acknowledges and agrees that a breach by it of its obligations hereunder will cause irreparable harm to each Investor and that the remedy or remedies at law for any such breach will be inadequate and agrees, in the event of any such breach, in addition to all other available remedies, such Investor shall be entitled to an injunction restraining any breach and requiring immediate and specific performance of such obligations without the necessity of showing economic loss or the posting of any bond.

6.6Governing Law; Jurisdiction; Waiver of Jury Trial. (a) This Agreement shall be governed by and construed under the laws of the State of California applicable to contracts made and to be performed entirely within the State of California. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City and County of San Diego for the adjudication of any dispute hereunder or any other Transaction Document or in connection herewith or therewith or with any transaction contemplated hereby or thereby, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address 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 manner permitted by law.

(b) EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES AND AGREES THAT ANY DISPUTE OR CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY

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HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE BREACH, TERMINATION OR VALIDITY OF THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 6.6(b).

6.7Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. This Agreement may be executed and delivered by facsimile transmission.

6.8Headings. The headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

6.9Notices. Any notice, demand or request required or permitted to be given by the Company or the Investor pursuant to the terms of this Agreement shall be in writing and shall be deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such delivery is made on a day that is not a Business Day, in which case such delivery will be deemed to be made on the next succeeding Business Day, (ii) on the next Business Day after timely delivery to an overnight courier and (iii) on the Business Day actually received if deposited in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed as follows:

If to the Company:

ZAP

501 Fourth Street

Santa Rosa, California 95401

Attn: Steven Kim

Tel:(707) 525-8658

Fax: (707) 525-8692

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

Donahue Gallagher Woods LLP

Suite 1900

300 Lakeside Drive

Oakland, CA 94612

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Attn:Michael J. Dalton

Tel:(510) 451-0544

Fax:(510) 832-1486

and if to any Investor, to such address for such Investor as shall appear on the signature page hereof executed by such Investor, or as shall be designated by such Investor in writing to the Company in accordance with this Section 6.9.

6.10Expenses. The Company and each Investor shall pay all costs and expenses that it incurs in connection with the negotiation, execution, delivery and performance of this Agreement or the other Transaction Documents, provided, however, that that the Company shall, at the Closing, pay to Gemini the amount of $25,000 in immediately available funds as reimbursement for its out-of-pocket expenses (including without limitation legal fees and expenses) incurred or to be incurred by it in connection with its due diligence investigation of the Company and the negotiation, preparation, execution, delivery and performance of this Agreement and the other Transaction Documents. At the Closing, the amount due for such fees and expenses may be netted out of the Purchase Price payable by any Investor managed by Gemini.

6.11Entire Agreement; Amendments. This Agreement and the other Transaction Documents constitute the entire agreement between the parties with regard to the subject matter hereof and thereof, superseding all prior agreements or understandings, whether written or oral, between or among the parties. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended except pursuant to a written instrument executed by the Company and the holders of at least two-thirds (2/3) of the Registrable Securities into which all of the Notes and Warrants then outstanding are convertible or exercisable (without regard to any limitation on such conversion or exercise), and no provision hereof may be waived other than by a written instrument signed by the party against whom enforcement of any such waiver is sought. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

[Signature Pages to Follow]

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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first-above written.

ZAP

By: _______________________________

Name:

Title:

GEMINI MASTER FUND, LTD.

By: Gemini Strategies, LLC

By:_______________________________

Name:

Title:

Principal Amount of Note Purchased at Closing:________________________

Number of Shares into which Warrant Exercisable:________________________

ADDRESS:

c/o Gemini Strategies, LLC

12220 El Camino Real, Suite 400

San Diego, CA 92130-2091

Attn:Steven Winters

Tel: (858) 480-2828

Fax: (858) 509-8808

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first-above written.

ZAP

By: _______________________________

Name:

Title:

GREY K OFFSHORE FUND, LTD.

By: RNK Capital LLC

By:_______________________________

Name:

Title:

Principal Amount of Note Purchased at Closing:________________________

Number of Shares into which Warrant Exercisable:________________________

ADDRESS:

c/o RNK Capital LLC

527 Madison Avenue

6^th Floor

New York, NY 10022

Attn:Andrew Farago

Tel: (212) 419-3967

Fax: (212) 419-3950

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first-above written.

ZAP

By: _______________________________

Name:

Title:

GREY K FUND, LP

By: RNK Capital LLC

By:_______________________________

Name:

Title:

Principal Amount of Note Purchased at Closing:________________________

Number of Shares into which Warrant Exercisable:________________________

ADDRESS:

c/o RNK Capital LLC

527 Madison Avenue

6^th Floor

New York, NY 10022

Attn:Andrew Farago

Tel: (212) 419-3967

Fax: (212) 419-3950

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first-above written.

ZAP

By: _______________________________

Name:

Title:

[____________________________]

By: [_______________________]

By:_______________________________

Name:

Title:

Principal Amount of Note Purchased at Closing:________________________

Number of Shares into which Warrant Exercisable:________________________

ADDRESS:

303 East Wacker Drive

Suite 311

Chicago, IL 60601

Attn:John Fife

Tel: (312) 297-7000

Fax: (312) 819-9701

EX-99.2

Exhibit 99.2

THIS SENIOR CONVERTIBLE NOTE (THIS “NOTE”)AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVENOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE OR SOLD UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER OR SALE. THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION HEREOF (I) MAY BE PLEDGED OR HYPOTHECATED IN CONNECTION WITH A BONA FIDE MARGIN LOAN OR OTHER FINANCING SECURED BY SUCH SECURITIES OR (II) MAY BE TRANSFERRED OR ASSIGNED TO AN AFFILIATE OF THE HOLDER HEREOF WITHOUT THE NECESSITY OF AN OPINION OF COUNSEL OR THE CONSENT OF THE ISSUER HEREOF.

THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER HEREOF IN ORDER TO EFFECT A PARTIAL PAYMENT, REDEMPTION OR CONVERSION HEREOF. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS THAN THE PRINCIPAL AMOUNT SHOWN BELOW.

ZAP

8% SENIOR CONVERTIBLE NOTE

$[___________]

Issue Date: December 5, 2006

FOR VALUE RECEIVED, ZAP,a California corporation(the “Company”), hereby promises to pay to the order of [GEMINI MASTER FUND, LTD.] or its permitted successors or assigns (the “Holder”) the sum of [__________________________] DOLLARS ($[_____________]) in same day funds, on or before the two (2) year anniversary of the Issue Date (the “Maturity Date”). The Holder may convert principal of and interest accrued on this Note into shares (“Conversion Shares”) of the Company’s common stock, no par value (the “Common Stock”), on the terms set forth herein.

Except as specifically provided by the terms of Section 6, and the Scheduled Principal Payments contemplated in Section 2(a), the Company shall not have the right to prepay any principal of this Note.

The Company has issued this Note pursuant to a Securities Purchase Agreement, dated as of December 5, 2006 (the “Securities Purchase Agreement”). The Notes issued by the Company

pursuant to the Securities Purchase Agreement, including this Note, are collectively referred to herein as the “Notes”.

The following terms shall apply to this Note:

1.DEFINITIONS.

“Business Day” means any day other than a Saturday, a Sunday or a day on which the Principal Market is closed or on which banks in the City of New York are required or authorized by law to be closed.

“Change of Control” means the existence or occurrence of any of the following: (a) the sale, conveyance or disposition of all or substantially all of the assets of the Company; (b) the effectuation of a transaction or series of transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of; (c) the consolidation, merger or other business combination of the Company with or into any other entity, immediately following which the prior stockholders of the Company fail to own, directly or indirectly, at least fifty percent (50%) of the surviving entity; (d) a transaction or series of transactions in which any Person or group acquires more than fifty percent (50%) of the voting equity of the Company; or (e) the Continuing Directors do not at any time constitute at least a majority of the Board of Directors of the Company.

“Continuing Director” means, at any date, a member of the Company’s Board of Directors (i) who was a member of such board on the date of the Securities Purchase Agreement or (ii) who was nominated or elected by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Company’s Board of Directors was recommended or endorsed by at least a majority of the directors who were Continuing Directors at the time of such nomination or election or such lesser number comprising a majority of a nominating committee if authority for such nominations or elections has been delegated to a nominating committee whose authority and composition have been approved by at least a majority of the directors who were Continuing Directors at the time such committee was formed.

“Conversion” has the meaning set forth in Section 3(a) of this Note.

“Conversion Date” has the meaning set forth in Section 3(b) of this Note.

“Conversion Default” has the meaning set forth in Section 3(e) of this Note.

“Conversion Notice” has the meaning set forth in Section 3(b) of this Note.

“Conversion Price” means, as of any date, one dollar ($1.00), subject to adjustment as provided herein.

“Convertible Securities”means any stock or securities (other than Options) of the Company convertible into or exercisable or exchangeable for Common Stock.

“Current Price” means, as of a particular date, the average of the daily VWAP for each of the five (5) consecutive Trading Days occurring immediately prior to (but not including) such date.

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“Default Interest Rate” means the lower of twelve (12%) and the maximum rate permitted by applicable law or by the applicable rules or regulations of any governmental agency or of any stock exchange or other self-regulatory organization having jurisdiction over the Company or the trading of its securities.

“Delivery Date” has the meaning set forth in Section 3(d) of this Note.

“Determination Date” has the meaning set forth in Section 4(c) of this Note.

“Dispute Procedure” has the meaning set forth in Section 3(b) of this Note.

“Distribution,” “Distribution Date” and “Distribution Notice” have the respective meanings set forth in Section 4(c) of this Note.

“Equity Conditions” means each of the following:

(i)the Registration Statement shall have been declared effective, not be the subject of any stop order, be available to the Holder, and cover the number of Registrable Securities required by the Registration Rights Agreement;

(ii)the Reserved Amount must be equal to or greater than the number of shares of Common Stock that the Company is required to reserve by the Securities Purchase Agreement;

(iii)trading in the Common Stock shall not have been suspended on the Principal Market;

(iv)the shares of Common Stock that the Holder would beneficially own, after giving effect to the contemplated issuance of Company securities for which these Equity Conditions must be satisfied, shall not exceed the limitation set forth in Section 3(f) (unless such limitation has been waived by the Holder in accordance with Section 3(f); and

(v)an Event of Default, or an event that with the passage of time or giving of notice, or both, would constitute an Event of Default, has not occurred and is not continuing.

“Event of Default” means the occurrence of any of the following events:

(i)a Liquidation Event occurs or is publicly announced;

(ii)the Company fails to make any payment of principal or interest on this Note in full as and when such payment is due, and such payment remains unpaid for five (5) Business Days following written notice thereof from the Holder;

(iii) other than a breach described in clause (ii) above, the Company breaches or provides notice of its intent to breach any material term or condition of this Note, the

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Securities Purchase Agreement, the Warrant or the Registration Rights Agreement (including, without limitation, the occurrence of a Conversion Default, an Exercise Default (as defined in the Warrants) or a Registration Default (as defined in the Registration Rights Agreement); and such breach continues for a period of five (5) Business Days following written notice thereof from the Holder;

(iv)any representation or warranty made by the Company in this Note, the Securities Purchase Agreement, the Warrant or the Registration Rights Agreement was inaccurate or misleading in any material respect as of the date such representation or warranty was made; or

(v)a default occurs or is declared, or any amounts are accelerated, under or with respect to any instrument that evidences Debt of the Company or any of its Subsidiaries in a principal amount exceeding $25,000.

“Excluded Securities” means (i) securities purchased under the Securities Purchase Agreement; (ii) securities issued upon conversion or exercise of the Notes, the Warrants, or any other options, warrants or convertible securities outstanding as of the Issue Date and disclosed on Schedule 3.5 of the Securities Purchase Agreement; (iii) shares of Common Stock issuable or issued to employees from time to time upon the exercise of options, in such case granted or to be granted in the discretion of the Board of Directors pursuant to one or more employee stock option plans or restricted stock plans in effect as of the Issue Date or adopted after the Issue Date by the independent members of the Board of Directors; (iv) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization of the Company; (v) shares of Common Stock issued in exchange for services, in leasing transactions, or for purchase of assets, in each case, negotiated on an arms’ length basis and charged at a reasonable market rates; and (vi) securities issued in connection with a merger or a consolidation involving the Company or a Subsidiary or the acquisition of the capital stock or the assets of any Person, provided in each case that the transaction is approved by the written consent of the Investors holding at least a majority of the principal amount of the Notes then outstanding, such consent not to be unreasonably withheld.

“Floor Price” means, as of any date, the lesser of (i) $0.75(as appropriately adjusted for any stock dividend, stock split, reverse stock split or other similar transaction) and (ii) the Conversion Price in effect as of such date.

“Forced Conversion” has the meaning set forth in Section 7(a) of this Note.

“Forced Conversion Date” has the meaning set forth in Section 7(b) of this Note.

“Forced Conversion Period” has the meaning set forth in Section 7(a) of this Note.

“Forced Conversion Price” means, as of any date, the lesser of (i) $2.00 (as appropriately adjusted for any stock dividend, stock split, reverse stock split or other similar transaction) and (ii) two hundred percent (200%) of the Conversion Price in effect as of such date.

“Governmental Authority” means any nation or government, any state, provincial or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including without limitation any stock exchange, securities market or self-regulatory organization.

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“Interest” and “Interest Payment Date” have the respective meanings set forth in Section 2(b)(i) of this Note.

“Interest Stock Option” has the meaning set forth in Section 2(b)(ii) of this Note.

“Interest Stock Option Delivery Date” has the meaning set forth in Section 2(b)(v) of this Note.

“Interest Stock Option Notice” has the meaning set forth in Section 2(b)(iv) of this Note.

“Issue Date” means the date on which this Note is issued pursuant to the Securities Purchase Agreement.

“Liquidation Event” means the (i) institution of any insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings in connection therewith, relative to the Company or any Subsidiary of the Company, or (ii) the dissolution or other winding up of the Company or any Subsidiary of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy proceedings, or (iii) any assignment for the benefit of creditors or any marshalling of the material assets or material liabilities of the Company or any Subsidiary of the Company.

“Major Transaction” means a merger, consolidation, business combination, tender offer, exchange of shares, recapitalization, reorganization, redemption or other similar event, as a result of which shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities or other assets of the Company or another entity or the Company shall sell all or substantially all of its assets.

“Mandatory Redemption,” “Mandatory Redemption Date” and “Mandatory Redemption Notice” have the respective meanings set forth in Section 5(a) of this Note.

“Mandatory Redemption Price” means one hundred and twenty percent (120%) of (A) the unpaid principal amount of this Note being redeemed plus (B) all accrued and unpaid Interest (including default interest).

“Optional Redemption”, “Optional Redemption Date” and “Optional Redemption Notice” have the respective meanings set forth in Section 6(a) of this Note.

“Optional Redemption Price” means one hundred and twenty percent (120%) of (A) the unpaid principal amount of this Note plus (B) all accrued and unpaid Interest (including default interest).

“Options” means any rights, warrants or options to subscribe for, purchase or receive Common Stock or Convertible Securities.

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“Person” means any individual, corporation, trust, association, company, partnership, joint venture, limited liability company, joint stock company, Governmental Authority or other entity.

“Principal Market” means the principal exchange, market or quotation system on which the Common Stock is listed, traded or quoted.

“Principal Payment” has the meaning set forth in Section 2(a)(i) of this Note.

“Principal Payment Response Notice” and “Principal Payment Suspension Notice” have the respective meanings set forth in Section 2(a)(vi) of this Note.

“Principal Payment Share Price” means, as of a Scheduled Principal Payment Date, the lesser of (i)ninety percent (90%) of the lowest daily VWAP for any Trading Day among the ten (10) consecutive Trading Days occurring immediately prior to (but not including) such Scheduled Principal Payment Date and (ii) the Conversion Price in effect as of such Scheduled Principal Payment Date.

“Principal Stock Option” has the meaning set forth in Section 2(a)(ii) of this Note

“Principal Stock Option Delivery Date” has the meaning set forth in Section 2(a)(v) of this Note

“Principal Stock Option Notice” has the meaning set forth in Section 2(a)(iv) of this Note

“Purchase Rights” means any options, warrants or other rights to purchase or subscribe for Common Stock or Convertible Securities.

“Record Date” has the meaning set forth in Section 4(c) of this Note.

“Registrable Securities” has the meaning set forth in the Registration Rights Agreement.

“Registration Rights Agreement” means the agreement between the Holder and the Company pursuant to which the Company has agreed to register the resale of the shares of Common Stock issuable under the Notes and the Warrants.

“Registration Statement” has the meaning set forth in the Registration Rights Agreement.

“Scheduled Interest Payment Date” means each April 1, July 1, October 1, and January 1 following the Issue Date, with the first Scheduled Interest Payment Date occurring on January 1, 2007, provided, that if any of such days in any year is not a Business Day, then the Scheduled Interest Payment Date shall be the Business Day immediately following such date.

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“Scheduled Principal Payment Date” means the first day of each calendar month, with the first Scheduled Principal Payment Date occurring on June 1, 2007, provided, that if any of such days in any year is not a Business Day, then the Scheduled Principal Payment Date shall be the Business Day immediately following such date.

“Trading Day” means a Business Day on which shares of Common Stock are purchased and sold on the Principal Market.

“Transaction Documents” means (i) the Securities Purchase Agreement, (ii) the Notes, (iii) the Warrants, (iv) the Registration Rights Agreement, and (v) all other agreements, documents and other instruments executed and delivered by or on behalf of the Company and any of its officers at the Closing.

“VWAP” on a Trading Day means the volume weighted average price of the Common Stock for such Trading Day on the Principal Market as reported by Bloomberg Financial Markets or, if Bloomberg Financial Markets is not then reporting such prices, by a comparable reporting service of national reputation selected by the Holders and reasonably satisfactory to the Company. If VWAP cannot be calculated for the Common Stock on such Trading Day on the foregoing bases, then the Company shall submit such calculation to an independent investment banking firm of national reputation reasonably acceptable to the Investors, and shall cause such investment banking firm to perform such determination and notify the Company and the Investors of the results of determination no later than two (2) Business Days from the time such calculation was submitted to it by the Company. All such determinations shall be appropriately adjusted for any stock dividend, stock split, reverse stock split or other similar transaction during such period.

“Warrants” means the warrants issued pursuant to the Securities Purchase Agreement.

All definitions contained in this Note are equally applicable to the singular and plural forms of the terms defined. The words “hereof”, “herein” and “hereunder” and words of similar import refer to this Note as a whole and not to any particular provision of this Note. Any capitalized term used but not defined herein has the meaning specified in the Securities Purchase Agreement.

2.PAYMENT OF PRINCIPAL AND INTEREST.

(a)Principal.

(i)Schedule and Amount of Payments. Subject to Section 2(a)(vi), the Company shall pay to the Holder, in cash, on each Scheduled Principal Payment Date, an amount of principal equal to the lesser of (x) 8.333% of the original principal amount of this Note and (y) the then total remaining unpaid principal of this Note (each, a “Principal Payment”).

(ii)Payment of Principal. The Company shall make each Principal Payment in cash by wire transfer of immediately available funds; provided, however, that, subject to the satisfaction of all of the Equity Conditions as specified in Section 2(a)(iii), the Company may elect to pay all or a portion of a Principal Payment due on a Scheduled Principal Payment Date in shares of Common Stock

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(the “Principal Stock Option”). A Principal Payment that is not paid as and when due in accordance with this Section 2(a) shall bear interest until paid at the Default Interest Rate.

(iii)Conditions to Principal Payment in Common Stock. The Company shall be entitled to exercise the Principal Stock Option with respect to a Scheduled Principal Payment Date only if, on the Principal Stock Option Delivery Date for such Scheduled Principal Payment Date and on each of the ten (10) Trading Days immediately preceding such date, all of the Equity Conditions are satisfied in full. In the event that any of the Equity Conditions are not satisfied as of the applicable Principal Stock Option Delivery Date and each such Trading Day (and regardless of whether the Company has delivered a Principal Stock Option Notice), the Company shall not be permitted to exercise the Principal Stock Option and must pay the entire Principal Payment due on such Scheduled Principal Payment Date in cash by wire transfer of immediately available funds on such Scheduled Principal Payment Date, and such amounts due but not paid on such Scheduled Principal Payment Date shall accrue interest at the Default Interest Rate until paid in full. Notwithstanding the foregoing, in no event shall the Company be permitted to exercise the Principal Stock Option to the extent that, upon receipt of the shares of Common Stock deliverable thereby, the Holder would beneficially own more than 4.99% of the number of shares of Common Stock then outstanding.

(iv)Principal Stock Option Notice. In order to exercise the Principal Stock Option with respect to a Scheduled Principal Payment Date, the Company must deliver, on or before the tenth (10^th) calendar day immediately prior to such date, written notice to the Holder stating that the Company wishes to exercise such option and the amount of the Principal Payment to be paid in shares of Common Stock (a “Principal Stock Option Notice”). A Principal Stock Option Notice, once delivered by the Company, shall be irrevocable (provided that if the Company is prohibited under Section 2(a)(iii) from exercising the Principal Stock Option contemplated in such Principal Stock Option Notice; such Principal Stock Option Notice shall be deemed cancelled). In the event that the Company does not deliver a Principal Stock Option Notice on or before such tenth day, the Company will be deemed to have elected to pay all of the Principal Payment then due in cash.

(v)Delivery of Shares. If the Company has validly exercised the Principal Stock Option with respect to a Scheduled Principal Payment Date, the Company must deliver to the Holder, on or before the fifth (5^th) Business Day following such Scheduled Principal Payment Date (the “Principal Stock Option Delivery Date”), a number of shares of Common Stock equal to (A) the amount of the Principal Payment for which the Company has elected to pay in Common Stock on such Scheduled Principal Payment Date divided by (B) the Principal Payment Share Price as of such Scheduled Principal Payment Date. The Company must deliver such shares of Common Stock to the Holder in accordance with the provisions of Section 3(d) of this Note, with the Principal Stock Option Delivery Date being deemed the Delivery Date for purposes hereof, and in the event of the Company’s failure to effect such delivery on the applicable Delivery Date therefor, the Holder shall have the remedies specified in Section 3(e) of this Note. If any fractional share would be issuable upon exercise of the Principal Stock Option, such fractional share shall be disregarded and the number of shares issuable shall, in the aggregate, be equal to the nearest whole number of shares.

(vi)Suspension of Principal Payment.

(1)Notwithstanding Section 2(a)(i), the obligation of the Company to

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make a Principal Payment on a Scheduled Principal Payment Date shall be suspended as and to the extent provided in Section 2(a)(vi)(3)if (a) the Company has timely delivered a Principal Stock Option Notice with respect to such Principal Payment, (b) the Principal Payment Share Price is less than the Floor Price as of such Scheduled Principal Payment Date, (c) the Company provides written notice thereof (the “Principal Payment Suspension Notice”)to the Holder prior to 5 p.m., New York City time on such Scheduled Principal Payment Date, and (d) the Holder fails to provide written notice (the “Principal Payment Response Notice”)to the Company within two Business Days of receiving such Principal Payment Suspension Notice stating that the Holder is willing to receive such Principal Payment in shares of Common Stock based on a per share price equal to such Floor Price (and not the Principal Payment Share Price). If the Company fails to timely deliver a Principal Payment Suspension Notice with respect to a Principal Payment, then the Company shall be obligated to make such Principal Payment in shares of Common Stock at the applicable Principal Payment Share Price, even if such price is below the Floor Price.

(2)If the Holder timely delivers a Principal Payment Response Notice in response to a Principal Payment Suspension Notice, then the Company shall, in full satisfaction of the Principal Payment to which such Principal Payment Response Notice relates, deliver to the Holder, on or before the Principal Stock Option Delivery Date for such Principal Payment, a number of shares of Common Stock equal to (A) the amount of such Principal Payment divided by (B) the Floor Price as of such Scheduled Principal Payment Date. Notwithstanding the foregoing, if any of the Equity Conditions are not satisfied (or waived by the Holder) as of such Principal Stock Option Delivery Date and on each of the ten (10) Trading Days immediately preceding such date, then the Company shall not be entitled or permitted to make such Principal Payment, and such Principal Payment shall be deemed suspended as and to the extent provided in Section 2(a)(vi)(3). The Company must deliver the shares of Common Stock required to be delivered by it under this Section 2(a)(vi)(2) to the Holder in accordance with the provisions of Section 3(d) of this Note, with the applicable Principal Stock Option Delivery Date being deemed the Delivery Date for purposes hereof, and in the event of the Company’s failure to effect such delivery on such Principal Stock Option Delivery Date, the Holder shall have the remedies specified in Section 3(e) of this Note. If any fractional share would be issuable upon the making of a Principal Payment hereunder, such fractional share shall be disregarded and the number of shares issuable shall, in the aggregate, be equal to the nearest whole number of shares.

(3)If the Holder does not timely deliver a Principal Payment Response Notice to a Principal Payment Suspension Notice (or, if upon timely delivery by the Holder of a Principal Payment Response Notice to a Principal Payment Suspension Notice, any of the Equity Conditions are not satisfied in accordance with Section 2(a)(vi)(2)), the Company’s obligation to make the Principal Payment to which such Principal Payment Suspension Notice relates shall be suspended until the next Scheduled Principal Payment Date; in which case, (i) all Principal Payments previously suspended and not paid plus (2) the Principal Payment regularly scheduled to be paid on such Scheduled Principal Payment Date, shall be due and payable in full as of such Scheduled Principal Payment Date in accordance with, and subject to the limitations of, this Section 2(a).

(b)Interest.

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(i)Interest Accrual. This Note shall bear interest on the unpaid principal amount hereof (“Interest”) at an annual rate equal to eight percent (8%), computed on the basis of a 360-day year and calculated using the actual number of days elapsed since the Issue Date or the date on which Interest was most recently paid, as the case may be, and if not timely paid as provided herein, compounded monthly. The Company shall pay accrued Interest (x) on each Scheduled Interest Payment Date, (y) on the Maturity Date and (z) on any date on which the entire principal amount of this Note is paid in full (whether through conversion or otherwise) (each of the foregoing clauses (x), (y) and (z) being referred to herein as an “Interest Payment Date”).

(ii)Interest Payments. The Company shall pay Interest in cash by wire transfer of immediately available funds; provided, however, that, subject to the satisfaction of all of the Equity Conditions as specified in Section 2(b)(iii), the Company may elect to pay all or a portion of the Interest due on a Scheduled Interest Payment Date in shares of Common Stock (the “Interest Stock Option”). Interest that is not paid as and when due in accordance with this Section 2(b) shall bear interest until paid at the Default Interest Rate.

(iii)Conditions to Interest Payment in Common Stock. The Company shall be entitled to exercise the Interest Stock Option with respect to a Scheduled Interest Payment Date only if, on the Interest Stock Option Delivery Date for such Scheduled Interest Payment Date and on each of the ten (10) Trading Days immediately preceding such date, all of the Equity Conditions are satisfied in full. In the event that any Equity Conditions is not satisfied as of the applicable Interest Stock Option Delivery Date and each such Trading Day (and regardless of whether the Company has delivered an Interest Stock Option Notice), the Company shall not be permitted to exercise the Interest Stock Option and must pay all amounts due on such Scheduled Interest Payment Date in cash by wire transfer of immediately available funds on such Scheduled Interest Payment Date, and such amounts due but not paid on such Scheduled Interest Payment Date shall accrue interest at the Default Interest Rate until paid in full. Notwithstanding the foregoing, in no event shall the Company be permitted to exercise the Interest Stock Option to the extent that, upon receipt of the shares of Common Stock deliverable thereby, the Holder would beneficially own more than 4.99% of the number of shares of Common Stock then outstanding.

(iv)Interest Stock Option Notice. In order to exercise the Interest Stock Option with respect to a Scheduled Interest Payment Date, the Company must deliver, on or before the tenth (10^th) calendar day immediately prior to such date, written notice to the Holder stating that the Company wishes to exercise such option and the amount of Interest to be paid in shares of Common Stock (an “Interest Stock Option Notice”). An Interest Stock Option Notice, once delivered by the Company, shall be irrevocable (provided that if the Company is prohibited under Section 2(b)(iii) from exercising the Interest Stock Option contemplated in such Interest Stock Option Notice, such Interest Stock Option Notice shall be deemed cancelled). In the event that the Company does not deliver an Interest Stock Option Notice on or before such tenth day, the Company will be deemed to have elected to pay all Interest then due in cash.

(v)Delivery of Shares. If the Company has validly exercised the Interest Stock Option with respect to a Scheduled Interest Payment Date, the Company must deliver to the Holder, on or before the fifth (5^th) Business Day following such Scheduled Interest Payment Date (the “Interest Stock Option Delivery

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Date”), a number of shares of Common Stock equal to (A) the amount of Interest accrued and payable with respect to this Note as of such Scheduled Interest Payment Date divided by (B) ninety-five percent (95%) of the Current Price in effect on such Scheduled Interest Payment Date. The Company must deliver such shares of Common Stock to the Holder in accordance with the provisions of Section 3(d) of this Note, with the Interest Stock Option Delivery Date being deemed the Delivery Date for purposes hereof, and in the event of the Company’s failure to effect such delivery on the applicable Delivery Date therefor, the Holder shall have the remedies specified in Section 3(e) of this Note. If any fractional share would be issuable upon exercise of the Interest Stock Option, such fractional share shall be disregarded and the number of shares issuable shall, in the aggregate, be equal to the nearest whole number of shares.

3.CONVERSION.

(a)Right to Convert. The Holder shall have the right, at any time and from time to time, to convert (i) all or any part of the outstanding and unpaid principal amount of this Note and (ii) at the Holder’s option, in its sole discretion, all or any part of unpaid Interest (and any other amounts) accrued hereon, into such number of fully paid and non-assessable Conversion Shares as is determined in accordance with the terms hereof (a “Conversion”). The Company may not refuse any conversion request by the Holder for any reason or no reason unless and until the Company obtains an injunction and posts bond with respect thereto.

(b) Conversion Notice. In order to convert principal of (and, if the Holder so elects, Interest accrued on) this Note, the Holder shall send by facsimile transmission (followed by a telephonic or email confirmation that such facsimile was sent), at any time prior to 5:00 p.m., New York City time, on the Business Day on which the Holder wishes to effect such Conversion (the “Conversion Date”), a properly completed notice of conversion to the Company, in the form set forth on Annex I hereto, stating the amount of principal (and accrued Interest and any other amounts, if applicable) to be converted and a calculation of the number of shares of Common Stock issuable upon such Conversion (a “Conversion Notice”). Subject to Section 8(d), the Conversion Notice shall also state the name or names (with address) in which the shares of Common Stock that are issuable on such Conversion shall be issued. The Holder shall not be required to physically surrender this Note to the Company in order to effect a Conversion. The Company shall maintain a record showing, at any given time, the unpaid principal amount of this Note and the date of each Conversion or other payment of principal hereof. In the case of a dispute as to the number of Conversion Shares issuable upon a Conversion (including without limitation as a result of adjustments to the Conversion Price made in accordance with Section 4 below), the Company shall promptly issue to the Holder the number of Conversion Shares that are not disputed, the Company and the Holder shall provide each other with their respective calculations, and the Company shall submit the disputed calculations to a certified public accounting firm of national recognition (other than the Company’s independent accountants) within two (2) Business Days following the later of the date on which the Holder delivers its calculations to the Company and the receipt of the Holder’s Conversion Notice. The Company shall use its best efforts to cause such accountants to calculate the Conversion Price as provided herein and to notify the Company and the Holder of the results in writing no later than two (2) Business Days following the day on which such accountant received the disputed calculations (the “Dispute Procedure”). Such accountant’s calculation shall be deemed conclusive absent manifest error. The fees of any such accountant shall be borne by the party whose calculations are most at variance with those of such accountant.

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(c)Number of Conversion Shares; Reduction of Principal and Interest. The number of Conversion Shares to be delivered by the Company pursuant to a Conversion shall be equal to the principal amount of (and, if the Holder so elects, Interest and any other amounts accrued on) this Note being converted divided by the Conversion Price in effect on the Conversion Date. Upon the valid delivery of the Conversion Shares by the Company, the amounts subject to such Conversion shall be credited towards the principal amount of (and, if the Holder so elected, Interest and any other amounts accrued on) this Note, provided that all amounts credited towards future payments of principal shall be credited in the order that such principal payments are to become due and payable.

(d)Delivery of Common Stock Upon Conversion. Upon receipt of a Conversion Notice, the Company shall, no later than the close of business on the sixth (6th) Business Day following the Conversion Date set forth in such Conversion Notice (the “Delivery Date”), issue and deliver or cause to be delivered to the Holder the number of Conversion Shares determined pursuant to Section 3(c) above, provided, however, that any Conversion Shares that are the subject of a Dispute Procedure shall be delivered no later than the close of business on the sixth (6th) Business Day following the determination made pursuant thereto. The Company shall effect delivery of Conversion Shares to the Holder, as long as the Company’s designated transfer agent or co-transfer agent in the United States for the Common Stock (the “Transfer Agent”) participates in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program (“FAST”), by crediting the account of the Holder or its nominee at DTC (as specified in the applicable Conversion Notice) with the number of Conversion Shares required to be delivered, no later than the close of business on such Delivery Date. In the event that the Transfer Agent is not a participant in FAST or if the Holder so specifies in a Conversion Notice or otherwise in writing on or before the Conversion Date, the Company shall effect delivery of Conversion Shares by delivering to the Holder or its nominee physical certificates representing such Conversion Shares, no later than the close of business on such Delivery Date. If any Conversion would create a fractional Conversion Share, such fractional Conversion Share shall be disregarded and the number of Conversion Shares issuable upon such Conversion, in the aggregate, shall be the nearest whole number of Conversion Shares. Conversion Shares delivered to the Holder shall not contain any restrictive legend unless such legend is required pursuant to the terms of the Securities Purchase Agreement.

(e)Failure to Deliver Conversion Shares.

(i)In the event that the Company fails for any reason to deliver to the Holder the number of Conversion Shares specified in a Conversion Notice (without any restrictive legend to the extent permitted by applicable law and the terms of the Securities Purchase Agreement) on or before the Delivery Date therefor, or fails to remove any restrictive legend from outstanding Conversion Shares at the request of the Holder in accordance with Section 2.5 of the Securities Purchase Agreement on or before the tenth (10th) Business Day following such request (a “Conversion Default”), the Holder shall have the right to receive from the Company an amount equal to (i) (N/365) multiplied by (ii) the principal amount of, and any Interest and any other amounts accrued on, this Note represented by the Conversion Shares which remain the subject of such Conversion Default multiplied by (iii) the Default Interest Rate, where “N” equals the number of days elapsed between the original Delivery Date of such Conversion Shares (or from such tenth Business Day in the event of a failure to remove a legend from outstanding Conversion Shares) and the date on which such Conversion Default has been cured. In the event that shares of Common Stock are purchased by or on behalf of the Holder in order to make delivery on a sale effected in anticipation of receiving

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Conversion Shares upon a Conversion, and there is a Conversion Default with respect to such Conversion, the Holder shall have the right to receive from the Company, in addition to the foregoing amounts, (i) the aggregate amount paid by or on behalf of the Holder for such shares of Common Stock minus (ii) the aggregate amount of net proceeds, if any, received by the Holder from the sale of the Conversion Shares issued by the Company pursuant to such Conversion. Amounts payable under this Section 3(e)(i)shall be paid to the Holder in immediately available funds on or before the second (2^nd) Business Day following written notice from the Holder to the Company specifying the amount owed to it by the Company pursuant to this Section 3(e)(i) and, if a Conversion Default continues to exist thereafer, at the end of each period of thirty (30) days following such second Business Day.

(ii)In addition to its rights under Section 3(e)(i) above, the Holder shall have the right to pursue all other remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief).

(f)Limitations on Right to Convert. In no event shall the Holder be permitted to convert principal of or Interest (or other amounts) on this Note if, upon such conversion, (x) the number of Conversion Shares to be issued pursuant to such Conversion plus (y) the number of shares of Common Stock beneficially owned by the Holder (other than Common Stock which may be deemed beneficially owned except for being subject to a limitation on conversion or exercise analogous to the limitation contained in this Section 3(f)) would exceed 4.99% of the number of shares of Common Stock then issued and outstanding, it being the intent of the Company and the Holder that the Holder not be deemed at any time to have the power to vote or dispose of greater than 4.99% of the number of shares of Common Stock issued and outstanding at any time. Nothing contained herein shall be deemed to restrict the right of the Holder to convert such excess principal amount at such time as such Conversion does not violate the provisions of this Section3(f). As used herein, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this Section 3(f) applies (and without limiting any rights the Company may otherwise have), the submission of a Conversion Notice by the Holder shall be deemed to be the Holder’s representation that this Note is convertible pursuant to the terms hereof, the Company may rely on the Holder’s representation that this Note is convertible pursuant to the terms hereof, and the Company shall have no obligation whatsoever to verify or confirm the accuracy of such representation. The Company shall have no liability to any person if the Holder’s determination of whether this Note is convertible pursuant to the terms hereof is incorrect. The holders of Common Stock are to be deemed third-party beneficiaries of the limitation imposed hereby and, accordingly, this Section 3(f) may not be amended without the consent of the holders of a majority of the shares of Common Stock then outstanding; provided, however, that the Holder shall have the right, upon sixty (60) days’ prior written notice to the Company, to waive the provisions of this Section 3(f) without obtaining such consent.

4.ADJUSTMENTS TO FIXED CONVERSION PRICE.

(a)Stock Splits, Stock Interests, Etc. If, at any time on or after the Issue Date, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, reclassification or other similar event, the Conversion Price shall be proportionately reduced, or if the number of outstanding shares of Common Stock is decreased by a reverse stock split, combination, reclassification or other similar event, the Conversion Price shall be proportionately

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increased. In such event, the Company shall notify the Company’s transfer agent of such change on or before the effective date thereof.

(b)Major Transactions. If, at any time after the Issue Date, any Major Transaction shall occur, then the Holder shall thereafter have the right to receive upon Conversion, in lieu of the shares of Common Stock otherwise issuable, such shares of stock, securities and/or other property as would have been issued or payable upon such Major Transaction with respect to or in exchange for the number of shares of Common Stock which would have been issuable upon Conversion had such Major Transaction not taken place (without giving effect to any limitations on such Conversion contained in this Note or the Securities Purchase Agreement). The Company shall not effect any Major Transaction unless (i) the Holder has received written notice of such transaction at least thirty (30) days prior thereto (which period shall be increased to sixty one (61) days if, at such time, without giving effect to the limitation on conversion contained in Section 3(f) hereof, the Holder would beneficially own more than 4.99% of the Common Stock then outstanding, and the Holder has notified the Company in writing of such circumstance) but in no event later than fifteen (15) days prior to the record date for the determination of stockholders entitled to vote with respect thereto; provided, however, that the Company shall publicly disclose the material terms of any such Major Transaction on or before the date on which it delivers notice of a Major Transaction to the Holder, and (ii) the resulting successor or acquiring entity (if not the Company) assumes by written instrument (in form and substance reasonable satisfactory to the Holder) the obligations of the Company under this Note (including, without limitation, the obligation to make payments of principal and Interest accrued but unpaid through the date of such consolidation, merger or sale and accruing thereafter). The above provisions shall apply regardless of whether or not there would have been a sufficient number of shares of Common Stock authorized and available for issuance upon conversion of this Note as of the date of such transaction, and shall similarly apply to successive Major Transactions. Notwithstanding the foregoing, if a Major Transaction constitutes a Change of Control, the Holder may, in lieu of exercising its rights under this Section 4(b), exercise its rights under Section 5 of this Note.

(c)Distributions. If, at any time after the Issue Date, the Company declares or makes any distribution of cash or any other assets (or rights to acquire such assets) to holders of Common Stock, including without limitation any dividend or distribution to the Company’s stockholders in shares (or rights to acquire shares) of capital stock of a subsidiary) (a “Distribution”), the Company shall deliver written notice of such Distribution (a “Distribution Notice”) to the Holder at least fifteen (15) days prior to the earlier to occur of (i) the record date for determining stockholders entitled to such Distribution (the “Record Date”) and (ii) the date on which such Distribution is made (the “Distribution Date”) (the earlier of such dates being referred to as the “Determination Date”). Upon receipt of the Distribution Notice, the Holder shall promptly (but in no event later than three (3) Business Days) notify the Company whether it has elected (A) to receive the same amount and type of assets (including, without limitation, cash) being distributed as though the Holder were, on the Determination Date, a holder of a number of shares of Common Stock into which this Note is convertible as of such Determination Date (such number of shares to be determined without giving effect to any limitations on such conversion) or (B) upon any exercise of this Note on or after the Distribution Date, to reduce the Conversion Price in effect on the Business Day immediately preceding the Record Date by an amount equal to the fair market value of the assets to be distributed divided by the number of shares of Common Stock as to which such Distribution is to be made, such fair market value to be reasonably determined in good faith by the

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independent members of the Company’s Board of Directors. Upon receipt of such election notice from the Holder, the Company shall timely effectuate the transaction or adjustment contemplated in the foregoing clause (A) or (B), as applicable. If the Holder does not notify the Company of its election pursuant to the preceding sentence on or prior to the Determination Date, the Holder shall be deemed to have elected clause (A) of the preceding sentence.

(d)Convertible Securities; Options. If, at any time after the Issue Date, the Company issues Convertible Securities or Options to the record holders of the Common Stock, whether or not such Convertible Securities or Options are immediately convertible, exercisable or exchangeable, then the Holders shall be entitled, upon any Conversion of this Note after the date of record for determining stockholders entitled to receive such Convertible Securities or Options (or if no such record is taken, the date on which such Convertible Securities or Options are issued), to receive the aggregate number of Convertible Securities or Options which the Holder would have received with respect to the shares of Common Stock issuable upon such conversion (without giving effect to any limitations on such Conversion contained in this Note or the Securities Purchase Agreement) had the Holder been the holder of such shares of Common Stock on the record date for the determination of stockholders entitled to receive such Convertible Securities or Options (or if no such record is taken, the date on which such Convertible Securities or Options were issued).

(e)Dilutive Issuances.

(i)Adjustment Upon Dilutive Issuance. If, at any time after the Issue Date and on or prior to the later of (1) the earlier of (x) the Effective Date and (y) the two year anniversary of the Issue Date, and (2) the six month anniversary of the Issue Date, the Company issues or sells, or in accordance with Section 4(e)(ii) of this Note is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share less than the Conversion Price on the date of such issuance or sale (or deemed issuance or sale) (a “Dilutive Issuance”), then effective immediately upon the Dilutive Issuance, the Conversion Price shall be adjusted so as to equal the consideration received or receivable by the Company (on a per share basis) for the additional shares of Common Stock so issued, sold or deemed issued or sold in such Dilutive Issuance (which, in the case of a deemed issuance or sale, shall be calculated in accordance with Section 4(e)(ii) of this Note). Notwithstanding the foregoing, no adjustment shall be made pursuant hereto if such adjustment would result in an increase in the Conversion Price.

(ii)Effect On Conversion Price Of Certain Events. For purposes of determining the adjusted Conversion Price under Section 4(e)(i) of this Note, the following will be applicable:

(A)Issuance Of Options. If the Company issues or sells any Options, whether or not immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options (and the price of any conversion of Convertible Securities, if applicable) is less than the Conversion Price in effect on the date of issuance or sale of such Options, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion, exercise or exchange of Convertible Securities, if applicable) shall, as of the date of the issuance or sale of such Options, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon the exercise of such Options” shall be determined by

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dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion, exercise or exchange thereof (determined in accordance with the calculation method set forth in Section 4(e)(ii)(B) below) at the time such Convertible Securities first become convertible, exercisable or exchangeable, by (y) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion, exercise or exchange of Convertible Securities, if applicable). No further adjustment to the Conversion Price shall be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion, exercise or exchange of Convertible Securities issuable upon exercise of such Options.To the extent that shares of Common Stock or Convertible Securities are not delivered pursuant to such Options, upon the expiration or termination of such Options, the Conversion Price shall be readjusted to the Conversion Price that would then be in effect had the adjustments made upon the issuance of such Options been made on the basis of delivery of only the number of shares of Common Stock actually delivered.

(B)Issuance Of Convertible Securities. If the Company issues or sells any Convertible Securities, whether or not immediately convertible, exercisable or exchangeable, and the price per share for which Common Stock is issuable upon such conversion, exercise or exchange is less than the Conversion Price in effect on the date of issuance or sale of such Convertible Securities, then the maximum total number of shares of Common Stock issuable upon the conversion, exercise or exchange of all such Convertible Securities shall, as of the date of the issuance or sale of such Convertible Securities, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. If the Convertible Securities so issued or sold do not have a fluctuating conversion or exercise price or exchange ratio, then for the purposes of the immediately preceding sentence, the “price per share for which Common Stock is issuable upon such conversion, exercise or exchange” shall be determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion, exercise or exchange thereof (determined in accordance with the calculation method set forth in this Section 4(e)(ii)(B)) at the time such Convertible Securities first become convertible, exercisable or exchangeable, by (B) the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Convertible Securities. If the Convertible Securities so issued or sold have a fluctuating conversion or exercise price or exchange ratio (a “Variable Rate Convertible Security”), then for purposes of the first sentence of this Section 4(e)(ii)(B), the “price per share for which Common Stock is issuable upon such conversion, exercise or exchange” shall be deemed to be the lowest price per share which would be applicable (assuming all holding period and other conditions to any discounts contained in such Variable Rate Convertible Security have been satisfied) if the conversion price of such Variable Rate Convertible Security on the date of issuance or sale thereof were equal to the actual conversion price on such date (or such higher minimum conversion price if such Variable Rate Convertible Security is subject to a minimum conversion price) (the

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“Assumed Variable Market Price”), and, further, if the conversion price of such Variable Rate Convertible Security at any time or times thereafter is less than or equal to the Assumed Variable Market Price last used for making any adjustment under this Section 4(e) with respect to any Variable Rate Convertible Security, the Conversion Price in effect at such time shall be readjusted to equal the Conversion Price which would have resulted if the Assumed Variable Market Price at the time of issuance of the Variable Rate Convertible Security had been equal to the actual conversion price of such Variable Rate Convertible Security existing at the time of the adjustment required by this sentence; provided, however, that if the conversion or exercise price or exchange ratio of a Convertible Security may fluctuate solely as a result of provisions designed to protect against dilution, such Convertible Security shall not be deemed to be a Variable Rate Convertible Security. No further adjustment to the Conversion Price shall be made upon the actual issuance of such Common Stock upon conversion, exercise or exchange of such Convertible Securities.

(C)Change In Option Price Or Conversion Rate. If there is a change at any time (including, without limitation, a change with respect to any Options or Convertible Securities outstanding as of the Issue Date) in (x) the amount of additional consideration payable to the Company upon the exercise of any Options; (y) the amount of additional consideration, if any, payable to the Company upon the conversion, exercise or exchange of any Convertible Securities; or (z) the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for Common Stock (in each such case, other than under or by reason of provisions designed to protect against dilution), the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration or changed conversion, exercise or exchange rate, as the case may be, at the time initially issued or sold.

(D)Calculation Of Consideration Received. If any Common Stock, Options or Convertible Securities are issued or sold for cash, the consideration received therefor will be the amount received by the Company therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Company (including the net present value of the consideration expected by the Company for the provided or purchased services) shall be the fair market value of such consideration. In case any Common Stock, Options or Convertible Securities are issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair market value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The independent members of the Company’s Board of Directors shall calculate reasonably and in good faith, using standard commercial valuation methods appropriate for valuing such assets, the fair market value of any consideration.

(iii)Exceptions To Adjustment Of Conversion Price. Notwithstanding the foregoing, no adjustment to the Conversion Price shall be made pursuant to this Section 4(e) upon the issuance of any Excluded Securities.

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(iv)Notice Of Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 4(e) resulting in a change in the Conversion Price by more than one percent (1%), or any change in the number or type of stock, securities and/or other property issuable upon Conversion of this Note, the Company, at its expense, shall promptly compute such adjustment, readjustment or change and prepare and furnish to the Holder a certificate setting forth such adjustment, readjustment or change and showing in detail the facts upon which such adjustment, readjustment or change is based. The Company shall, upon the written request at any time of the Holder, furnish to the Holder a like certificate setting forth (i) such adjustment, readjustment or change, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon Conversion of this Note.

(f)Adjustments; Additional Shares, Securities or Assets. In the event that at any time, as a result of an adjustment made pursuant to this Section 4, the Holder of this Note shall, upon conversion of this Note, become entitled to receive securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this Section 4.

5.EVENTS OF DEFAULT; MANDATORY REDEMPTION.

(a)Mandatory Redemption. In the event that an Event of Default or a Change of Control occurs, the Holder shall have the right, upon written notice to the Company (a “Mandatory Redemption Notice”), to have all or any portion of the unpaid principal amount of this Note, plus all accrued and unpaid Interest (including default interest (if any), redeemed by the Company (a “Mandatory Redemption”) at the Mandatory Redemption Price in same day funds. The Mandatory Redemption Notice shall specify the effective date of such Mandatory Redemption (the “Mandatory Redemption Date”), which date must be at least two (2) Business Days following the Business Day on which the Mandatory Redemption Notice is delivered to the Company, and the amount of principal and interest (and other amounts, if any) to be redeemed. In order to effect a Mandatory Redemption hereunder, the Holder must deliver a Mandatory Redemption Notice no later than, in the case of an Event of Default, the close of business on the third (3^rd) Business Day following the date on which an Event of Default is no longer continuing and, with respect to a Change of Control, the close of business on the third (3^rd) Business Day following the date on which the Change of Control is completed.

(b) Payment of Mandatory Redemption Price.

(i)The Company shall pay the Mandatory Redemption Price to the Holder on the Mandatory Redemption Date. In the event that the Company redeems the entire remaining unpaid principal amount of this Note, all accrued and unpaid Interest and any other amounts due hereunder, and pays such amount to the Holder in cash, the Holder shall return this Note to the Company for cancellation.

(ii)If the Company fails to pay the Mandatory Redemption Price to the Holder on Mandatory Redemption Date, the Holder shall be entitled to interest thereon at the Default Interest Rate from the Mandatory Redemption Date until the date on which Mandatory Redemption Price has been paid in full.

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6.OPTIONAL REDEMPTION.

(a)Redemption. Upon the satisfaction of the Equity Conditions on the Optional Redemption Date and on each of the twenty (20) Trading Days occurring immediately prior to such date, the Company shall have the right, at any time after the Issue Date, to redeem all but not less than all of the unpaid principal amount of this Note, plus all accrued and unpaid Interest, at the Optional Redemption Price (an “Optional Redemption”). In order to effect an Optional Redemption, the Company must deliver to the Holder written notice thereof (an “Optional RedemptionNotice”), specifying the effective date of such Optional Redemption (the “Optional Redemption Date”), which date must be at least twenty(20) Trading Days following delivery of the Optional Redemption Notice to the Holder. In the event that the Company effects an Optional Redemption with respect to this Note, it must contemporaneously effect an Optional Redemption of all but not less than all of the other Notes. Notwithstanding the delivery by the Company of an Optional Redemption Notice, the right of the Company to exercise its redemption rights under this Section 6(a) shall be subordinate to and shall not limit in any way (x) the right of the Holder to convert this Note prior to the Optional Redemption Date, (y) the availability of any and all remedies that are provided to the Holder hereunder in the event that the Company does not satisfy its obligations with respect to any such conversion, or (z) the right of the Holder to effect a Mandatory Redemption pursuant to Section 5.

(b)Payment of Optional Redemption Price.

(i)The Company shall pay the Optional Redemption Price to the Holder on the Optional Redemption Date. In the event that the Company redeems the entire remaining unpaid principal amount of this Note, and pays to the Holder the Optional Redemption Price and all other amounts due in connection therewith, the Holder shall return this Note to the Company for cancellation.

(ii)If the Company fails to pay the Optional Redemption Price to the Holder on the Optional Redemption Date, the Holder shall be entitled to interest thereon at the Default Interest Rate from the Optional Redemption Date until the date on which Optional Redemption Price and accrued and unpaid default interest thereon have been paid in full.

7.FORCED CONVERSION.

(a)Forced Conversion. Subject to the terms and conditions of this Section 7(a), the Company shall have the right, exercisable at any time after December 31, 2007, to require Conversion of this Note (a “Forced Conversion”). In order to effect a Forced Conversion, (i) the daily VWAP must, on each of twenty (20) Trading Days occurring during any period of thirty (30) consecutive Trading Days (such period of thirty Trading Days, a “Forced Conversion Period”), be equal to or greater than the Forced Conversion Price and (ii) each of the Equity Conditions must be satisfied on each Trading Day occurring during the Forced Conversion Period and through and including the Forced Conversion Date. Notwithstanding the foregoing, in no event shall the Company be permitted to effect a Forced Conversion to the extent that, upon receipt of the shares of Common Stock deliverable

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thereby, the Holder would beneficially own more than 4.99% of the number of shares of Common Stock then outstanding.

(b)Forced Conversion Notice; Number of Conversion Shares. In order to effect a Forced Conversion hereunder, the Company must deliver to the Holder written notice thereof (a “Forced Conversion Notice”) at any time after the fifth (5^th) Business Day immediately following the last Trading Day of the Forced Conversion Period but not later than the tenth (10^th) Business Day following such last Trading Day. A Forced Conversion Notice shall specify the aggregate principal amount of the Notes that the Company elects to submit to a Forced Conversion. A Forced Conversion shall be effected on the date (the “Forced Conversion Date”) that is the third (3^rd) Trading Day immediately following delivery of a Forced Conversion Notice to the Holder. On the Forced Conversion Date, the Company must deliver to the Holder a number of shares of Common Stock equal to (A) the amount of principal being converted as set forth on the applicable Forced Conversion Notice plus all Interest accrued and unpaid thereon as of such Forced Conversion Date divided by the (B) the Conversion Price in effect on such date. The Company must deliver such shares of Common Stock to the Holder in accordance with the provisions of Section 3(d) of this Note, with the Forced Conversion Date being deemed the Delivery Date for purposes hereof. If any fractional share would be issuable upon a Forced Conversion, such fractional share shall be disregarded and the number of shares issuable shall, in the aggregate, be equal to the nearest whole number of shares.

(c)Notwithstanding the delivery by the Company of a Forced Conversion Notice, nothing contained herein shall be deemed to limit in any way (x) the right of the Holder to convert this Note prior to the Forced Conversion Date or (y) the availability of any and all remedies that are provided to the Holder hereunder, including without limitation in the event that the Company fails to deliver Conversion Shares upon a Forced Conversion as required by the terms of Section 3 of this Note, provided, that, in the event of such failure, the Forced Conversion shall be terminated with respect to the Holder upon the delivery of written notice thereof by the Holder to the Company, and the Company shall forfeit its right to require a Forced Conversion of the Notes thereafter. In the event of multiple Forced Conversions, at least sixty (60) days must elapse between Forced Conversion Dates.

8.MISCELLANEOUS.

(a)Failure to Exercise Rights not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof. All rights and remedies of the Holder hereunder are cumulative and not exclusive of any rights or remedies otherwise available. In the event that the Company does not pay any amount under this Note when such amount becomes due, the Company shall bear all costs incurred by the Holder in collecting such amount, including without limitation reasonable legal fees and expenses.

(b)Notices. Any notice, demand or request required or permitted to be given by the Company or the Holder pursuant to the terms of this Note shall be in writing and shall be deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such delivery is made on a day that is not a Business Day, in which case such delivery will be deemed to be made on the next succeeding Business Day, (ii) on the next Business Day after timely delivery to an overnight courier and (iii) on the Business Day actually received if deposited in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed as follows:

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If to the Company:

ZAP

501 Fourth Street

Santa Rosa, California 95401

Attn: Steven Kim

Tel:(707) 525-8658

Fax: (707) 525-8692

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

Donahue Gallagher Woods LLP

Suite 1900

300 Lakeside Drive

Oakland, CA 94612

Attn:Michael J. Dalton

Tel:(510) 451-0544

Fax:(510) 832-1486

and if to the Holder, to such address for the Holder as shall appear on the signature page of the Securities Purchase Agreement executed by the Holder, or as shall be designated by the Holder in writing to the other parties hereto in accordance this Section 8(b).

(c) Amendments and Waivers. No amendment, modification or other change to, or waiver of any provision of, this Note or any other Note may be made unless such amendment, modification or change, or request for waiver, is (A) set forth in writing and is signed by the Company, (B) consented to in writing by the holders of at least sixty-six percent (66%) of the unpaid principal amount of the Notes, and (C) applied to all of the Notes. Upon the satisfaction of the conditions described in (A), (B) and (C) above, this Note shall be deemed to incorporate any the amendment, modification, change or waiver effected thereby as of the effective date thereof, even if the Holder did not consent to such amendment, modification, change or waiver. Notwithstanding the foregoing, the limitation on beneficial ownership set forth in Section 3(f) may not be amended without the consent of the holders of a majority of the shares of Common Stock then outstanding; provided, however, that such limitation may be waived by the Holder upon sixty (60) days’ prior written notice to the Company, and such waiver shall be valid and shall not require the consent of the Company or any other holder of Common Stock or Notes.

(d) Transfer of Note. The Holder may sell, transfer or otherwise dispose of all or any part of this Note (including without limitation pursuant to a pledge) to any person or entity as long as such sale, transfer or disposition is the subject of an effective registration statement under the Securities Act of 1933, as amended, and applicable state securities laws, or is exempt from registration thereunder, and is otherwise made in accordance with the applicable provisions of the Securities Purchase Agreement. From and after the date of any such sale, transfer or disposition, the transferee hereof shall be deemed to be the holder of a Note in the principal amount acquired by

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such transferee, and the Company shall, as promptly as practicable, issue and deliver to such transferee a new Note identical in all respects to this Note, in the name of such transferee. The Company shall be entitled to treat the original Holder as the holder of this entire Note unless and until it receives written notice of the sale, transfer or disposition hereof.

(e) Lost or Stolen Note. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Note, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of the Note, if mutilated, the Company shall execute and deliver to the Holder a new Note identical in all respects to this Note.

(f) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed entirely within the State of California.

(g)Successors and Assigns. The terms and conditions of this Note shall inure to the benefit of and be binding upon the respective successors (whether by merger or otherwise) and permitted assigns of the Company and the Holder. The Company may not assign its rights or obligations under this Note except as specifically required or permitted pursuant to the terms hereof.

(h)Usury. This Note is subject to the express condition that at no time shall the Company be obligated or required to pay interest hereunder at a rate which could subject the Holder to either civil or criminal liability as a result of being in excess of the maximum interest rate which the Company is permitted by applicable law to contract or agree to pay.  If by the terms of this Note, the Company is at any time required or obligated to pay interest hereunder at a rate in excess of such maximum rate, the rate of interest under this Note shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of this Note. 

[Signature Page to Follow]

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IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name by its duly authorized officer on the date first above written.

ZAP

By:____________________________

Name:

Title:

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ANNEX I

NOTICE OF CONVERSION

The undersigned hereby elects to convert principal of the 8% Senior Convertible Note (the “Note”) issued by ZAP (the “Company”) into shares of common stock (“Common Stock”) of the Company according to the terms and conditions of the Note. Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Note.

Date of Conversion:  _______________________________________________

Principal Amount of                                                                                               

Note to be Converted: _____________________________________________

Amount of Interest                                                                                                  

to be Converted (if any): ____________________________________________

Number of Shares of                                                                                               

Common Stock to be Issued: _________________________________________

Name of Holder: __________________________________________________

Address: ________________________________________________________

________________________________________________________

________________________________________________________

Signature:  ________________________________________________________

Name:                                                                0;                                     

Title:                                                               
60;                                        

Holder Requests Delivery to be made: (check one)

o By Delivery of Physical Certificates to the Above Address

o Through Depository Trust Corporation (Account ____________________________)

EX-99.3

Exhibit 99.3

THIS WARRANT (THIS “WARRANT”)AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVENOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE OR SOLD UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER OR SALE. THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (I) MAY BE PLEDGED OR HYPOTHECATED IN CONNECTION WITH A BONA FIDE MARGIN LOAN OR OTHER FINANCING SECURED BY SUCH SECURITIES OR (II) MAY BE TRANSFERRED OR ASSIGNED TO AN AFFILIATE OF THE HOLDER HEREOF WITHOUT THE NECESSITY OF AN OPINION OF COUNSEL OR THE CONSENT OF THE ISSUER HEREOF.

WARRANT

TO PURCHASE COMMON STOCK

OF

ZAP

Issue Date: December 5, 2006                                                                                                                                                                Warrant No. [__]

THIS CERTIFIES that [GEMINI MASTER FUND, LTD.] or any permitted subsequent holder hereof (the “Holder”), has the right to purchase from ZAP, a California corporation (the “Company”), up to [____] fully paid and nonassessable shares of the Company’s common stock, no par value (the “Common Stock”), subject to adjustment as provided herein, at a price per share equal to the Exercise Price (as defined below), at any time and from time to time beginning on the date on which this Warrant is issued (the “Issue Date”) and ending at 5:00 p.m., New York City time, on the fifth (5^th) anniversary of the Issue Date or, if such day is not a Business Day, on the next succeeding Business Day (the “Expiration Date”). This Warrant is issued pursuant to a Securities Purchase Agreement, dated as of December 5, 2006 (the “Securities Purchase Agreement”). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Securities Purchase Agreement.

1.EXERCISE.

(a) Right to Exercise; Exercise Price. The Holder shall have the right to exercise this Warrant at any time and from time to time during the period beginning on the Issue Date and

ending at 5 p.m., New York City time, on the Expiration Date as to all or any part of the shares of Common Stock covered hereby (the “Warrant Shares”). The “Exercise Price” for each Warrant Share purchased by the Holder upon the exercise of this Warrant shall be $1.10, subject to adjustment for the events specified in Section 6 of this Warrant.

(b) Exercise Notice. In order to exercise this Warrant, the Holder shall (i) send by facsimile transmission (followed by a telephonic or email confirmation that such facsimile was sent), at any time prior to 5:00 p.m., New York City time, on the Business Day on which the Holder wishes to effect such exercise (the “Exercise Date”), to the Company an executed copy of the notice of exercise in the form attached hereto as Exhibit A (the “Exercise Notice”) and (ii) in the case of a Cash Exercise (as defined below), deliver the Exercise Price to the Company by wire transfer of immediately available funds. The Holder shall promptly thereafter deliver the original Warrant to the Company for cancellation (and replacement with a new Warrant if exercised in part) pursuant to Section 1(d) of this Warrant. Subject to Section 8(d), the Exercise Notice shall also state the name or names in which the Warrant Shares issuable on such exercise shall be issued if other than the Holder. In the case of a dispute as to the calculation of the Exercise Price or the number of Warrant Shares issuable hereunder (including, without limitation, the calculation of any adjustment pursuant to Section 6 below), the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed, the Company and the Holder shall provide each other with their respective calculations, and the Company shall submit the disputed calculations to a certified public accounting firm of national recognition (other than the Company’s independent accountants) within two (2) Business Days following the later of the date on which the Holder delivers its calculations to the Company and the date on which the Exercise Notice is delivered to the Company. The Company shall use its best efforts to cause such accountant to calculate the Exercise Price and/or the number of Warrant Shares issuable hereunder and to notify the Company and the Holder of the results in writing no later than two (2) Business Days following the day on which such accountant received the disputed calculations (the “Dispute Procedure”). Such accountant’s calculation shall be deemed conclusive absent manifest error. The fees of any such accountant shall be borne by the party whose calculations were most at variance with those of such accountant.

(c) Holder of Record. The Holder shall, for all purposes, be deemed to have become the holder of record of the Warrant Shares specified in an Exercise Notice on the Exercise Date specified therein, irrespective of the date of delivery of such Warrant Shares. Except as specifically provided herein, nothing in this Warrant shall be construed as conferring upon the Holder hereof any rights as a stockholder of the Company prior to the Exercise Date.

(d) Cancellation of Warrant. This Warrant shall be canceled upon its exercise and, if this Warrant is exercised in part, the Company shall, at the time that it delivers Warrant Shares to the Holder pursuant to such exercise as provided herein, issue a new warrant, and deliver to the Holder a certificate representing such new warrant, with terms identical in all respects to this Warrant (except that such new warrant shall be exercisable into the number of shares of Common Stock with respect to which this Warrant shall remain unexercised); provided, however, that the Holder shall be entitled to exercise all or any portion of such new warrant at any time following the time at which this Warrant is exercised, regardless of whether the Company has actually issued such new warrant or delivered to the Holder a certificate therefor.

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2.DELIVERY OF WARRANT SHARES UPON EXERCISE.

Upon receipt of an Exercise Notice pursuant to Section 1 of this Warrant, the Company shall, (A) in the case of a Cash Exercise (as defined below) no later than the close of business on the later to occur of (i) the sixth (6th) Business Day following the Exercise Date set forth in such Exercise Notice and (ii) the date on which the Company has received payment of the Exercise Price, (B) in the case of a Cashless Exercise (as defined below), no later than the close of business on the sixth (6th) Business Day following the Exercise Date set forth in such Exercise Notice, and (C) with respect to Warrant Shares that are the subject of a Dispute Procedure, the close of business on the sixth (6th) Business Day following the determination made pursuant to Section 1(b) of this Warrant (each of the dates specified in the foregoing clauses (A), (B) or (C) being referred to as a “Delivery Date”), issue and deliver or cause to be delivered to the Holder the number of Warrant Shares as shall be determined as provided herein. The Company shall effect delivery of Warrant Shares to the Holder, as long as the Company’s designated transfer agent or co-transfer agent in the United States for the Common Stock (the “Transfer Agent”) participates in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program (“FAST”), by crediting the account of the Holder or its nominee at DTC (as specified in the applicable Exercise Notice) with the number of Warrant Shares required to be delivered, no later than the close of business on such Delivery Date. In the event that the Transfer Agent is not a participant in FAST, or if the Holder so specifies in an Exercise Notice or otherwise in writing on or before the Exercise Date, the Company shall effect delivery of Warrant Shares by delivering to the Holder or its nominee physical certificates representing such Warrant Shares, no later than the close of business on such Delivery Date. If any exercise would create a fractional Warrant Share, such fractional Warrant Share shall be disregarded and the number of Warrant Shares issuable upon such exercise, in the aggregate, shall be the nearest whole number of Warrant Shares. Warrant Shares delivered to the Holder shall not contain any restrictive legend unless such legend is required pursuant to the terms of the Securities Purchase Agreement.

3.FAILURE TO DELIVER WARRANT SHARES.

(a)In the event that the Company fails for any reason (other than as a result of the Holder’s failure, in the case of a Cash Exercise (as defined below), to pay the aggregate Exercise Price for the Warrant Shares being purchased) to deliver to the Holder the number of Warrant Shares specified in the applicable Exercise Notice (without any restrictive legend to the extent permitted by applicable law and the terms of the Securities Purchase Agreement) on or before the Delivery Date therefor, or fails to remove any restrictive legend from outstanding Warrant Shares at the request of the Holder in accordance with Section 2.5 of the Securities Purchase Agreement on or before the tenth (10th) Business Day following such request (an “Exercise Default”), the Holder shall have the right to receive from the Company an amount equal to (i) (N/365) multiplied by (ii) the aggregate Exercise Price of the Warrant Shares which are the subject of such Exercise Default multiplied by (iii) the lower of twelve percent (12%) and the maximum rate permitted by applicable law or by the applicable rules or regulations of any Governmental Agency (the “Default Interest Rate”), where “N” equals the number of days elapsed between the original Delivery Date of such Warrant Shares (or from such tenth Business Day in the event of a failure to remove a legend from outstanding Warrant Shares) and the date

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on which such Exercise Default has been cured. In the event that shares of Common Stock are purchased by or on behalf of the Holder in order to make delivery on a sale effected in anticipation of receiving Warrant Shares upon an exercise, and there is an Exercise Default with respect to such exercise, the Holder shall have the right to receive from the Company, in addition to the foregoing amounts, (i) the aggregate amount paid by or on behalf of the Holder for such shares of Common Stock minus (ii) the aggregate amount of net proceeds, if any, received by the Holder from the sale of the Warrant Shares issued by the Company pursuant to such exercise. Amounts payable under this Section 3(a)shall be paid to the Holder in immediately available funds on or before the second (2nd) Business Day following written notice from the Holder to the Company specifying the amount owed to it by the Company pursuant to this Section 3(a) and, if an Exercise Default continues to exist thereafter, at the end of each period of thirty (30) days following such second Business Day.

(b)In addition to its rights under Section 3(a) of this Warrant, the Holder shall have the right to pursue all other remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief).

4.EXERCISE LIMITATION.

In no event shall the Holder be permitted to exercise this Warrant, or part thereof, if, upon such exercise, the number of shares of Common Stock beneficially owned by the Holder (other than shares which may be deemed beneficially owned except for being subject to a limitation on exercise or exercise analogous to the limitation contained in this Section 4, would exceed 4.99% of the number of shares of Common Stock then issued and outstanding, it being the intent of the Company and the Holder that the Holder not be deemed at any time to have the power to vote or dispose of greater than 4.99% of the number of shares of Common Stock issued and outstanding at any time. Nothing contained herein shall be deemed to restrict the right of the Holder to exercise this Warrant at such time as such exercise will not violate the provisions of this Section 4. As used herein, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this Section 4 applies (and without limiting any rights the Company may otherwise have), the submission of an Exercise Notice by the Holder shall be deemed to be the Holder’s representation that this Warrant is exercisable pursuant to the terms hereof, the Company may rely on the Holder’s representation that this Warrant is exercisable pursuant to the terms hereof, and the Company shall have no obligation whatsoever to verify or confirm the accuracy of such representation. The Company shall have no liability to any person if the Holder’s determination of whether this Warrant is exercisable pursuant to the terms hereof is incorrect. The holders of Common Stock are to be deemed third-party beneficiaries of the limitation imposed hereby and, accordingly, this Section 4 may not be amended without the consent of the holders of a majority of the shares of Common Stock then outstanding; provided, however, that the Holder shall have the right, upon sixty (60) days’ prior written notice to the Company, to waive the provisions of this Section 4, without obtaining such consent.

5.  PAYMENT OF THE EXERCISE PRICE; CASHLESS EXERCISE.

 The Holder may pay the Exercise Price in either of the following forms or, at the election of Holder, a combination thereof:

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(a)through a cash exercise (a “Cash Exercise”) by delivering immediately available funds, or

(b)through a cashless exercise (a “Cashless Exercise”) if an effective Registration Statement is not available for the resale of all of the Warrant Shares issuable hereunder at the time an Exercise Notice is delivered to the Company, or if the Company otherwise consents in writing. The Holder shall effect a Cashless Exercise by surrendering this Warrant to the Company and noting on the Exercise Notice that the Holder wishes to effect a Cashless Exercise, upon which the Company shall issue to the Holder a number of Warrant Shares determined as follows:

X = Y x (A-B)/A

where:                          X = the number of Warrant Shares to be issued to the Holder;

Y = the number of Warrant Shares with respect to which this Warrant is being exercised;

A = the Market Price as of the Exercise Date; and

B = the Exercise Price.

It is intended and acknowledged that the Warrant Shares issued in a Cashless Exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares required by Rule 144 shall be deemed, subject to applicable law, to have been commenced, on the Issue Date.

6.ANTI-DILUTION ADJUSTMENTS; DISTRIBUTIONS; OTHER EVENTS.

The Exercise Price and the number of Warrant Shares issuable hereunder shall be subject to adjustment from time to time as provided in this Section 6.

(a)Stock Splits, Stock Interests, Etc. If, at any time on or after the Issue Date, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, reclassification or other similar event, the Exercise Price shall be proportionately reduced, or if the number of outstanding shares of Common Stock is decreased by a reverse stock split, combination, reclassification or other similar event, the Exercise Price shall be proportionately increased. In such event, the Company shall notify the Company’s transfer agent of such change on or before the effective date thereof.

(b)Major Transactions. If, at any time after the Issue Date, any Major Transaction shall occur, then the Holder shall thereafter have the right to receive upon exercise, in lieu of the shares of Common Stock otherwise issuable upon exercise of this Warrant, such shares of stock, securities and/or other property as would have been issued or payable upon such Major Transaction with respect to or in exchange for the number of shares of Common Stock which would have been issuable upon exercise of this Warrant had such Major Transaction not taken place (without giving effect to any limitations on such exercise contained in this Warrant or the

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Securities Purchase Agreement). The Company shall not effect any Major Transaction unless (i) the Holder has received written notice of such transaction at least thirty (30) days prior thereto (which period shall be increased to sixty one (61) days if, at such time, without giving effect to the limitation on exercise contained in Section 4 hereof, the Holder would beneficially own more than 4.99% of the Common Stock then outstanding, and the Holder has notified the Company in writing of such circumstance) but in no event later than fifteen (15) days prior to the record date for the determination of stockholders entitled to vote with respect thereto; provided, however, that the Company shall publicly disclose the material terms of any such Major Transaction on or before the date on which it delivers notice of a Major Transaction to the Holder, and (ii) the resulting successor or acquiring entity (if not the Company) assumes by written instrument (in form and substance reasonable satisfactory to the Holder) the obligations of the Company under this Warrant. The above provisions shall apply regardless of whether or not there would have been a sufficient number of shares of Common Stock authorized and available for issuance upon exercise of this Warrant as of the date of such transaction, and shall similarly apply to successive Major Transactions.

(c)Distributions. If, at any time after the Issue Date, the Company declares or makes any distribution of cash or any other assets (or rights to acquire such assets) to holders of Common Stock, including without limitation any dividend or distribution to the Company’s stockholders in shares (or rights to acquire shares) of capital stock of a subsidiary) (a “Distribution”), the Company shall deliver written notice of such Distribution (a “Distribution Notice”) to the Holder at least fifteen (15) days prior to the earlier to occur of (i) the record date for determining stockholders entitled to such Distribution (the “Record Date”) and (ii) the date on which such Distribution is made (the “Distribution Date”) (the earlier of such dates being referred to as the “Determination Date”). Upon receipt of the Distribution Notice, the Holder shall promptly (but in no event later than three (3) Business Days) notify the Company whether it has elected (A) to receive the same amount and type of assets (including, without limitation, cash) being distributed as though the Holder were, on the Determination Date, a holder of a number of shares of Common Stock into which this Warrant is exercisable as of such Determination Date (such number of shares to be determined without giving effect to any limitations on such exercise) or (B) upon any exercise of this Warrant on or after the Distribution Date, to reduce the Exercise Price in effect on the Business Day immediately preceding the Record Date by an amount equal to the fair market value of the assets to be distributed divided by the number of shares of Common Stock as to which such Distribution is to be made, such fair market value to be reasonably determined in good faith by the independent members of the Company’s Board of Directors. Upon receipt of such election notice from the Holder, the Company shall timely effectuate the transaction or adjustment contemplated in the foregoing clause (A) or (B), as applicable. If the Holder does not notify the Company of its election pursuant to the preceding sentence on or prior to the Determination Date, the Holder shall be deemed to have elected clause (A) of the preceding sentence.

(d)Convertible Securities; Options. If, at any time after the Issue Date, the Company issues Convertible Securities or Options to the record holders of the Common Stock, whether or not such Convertible Securities or Options are immediately convertible, exercisable or exchangeable, then the Holders shall be entitled, upon any exercise of this Warrant after the date of record for determining stockholders entitled to receive such Convertible Securities or Options (or if no such record is taken, the date on which such Convertible Securities or Options are

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issued), to receive the aggregate number of Convertible Securities or Options which the Holder would have received with respect to the shares of Common Stock issuable upon such exercise (without giving effect to any limitations on such exercise contained in this Warrant or the Securities Purchase Agreement) had the Holder been the holder of such shares of Common Stock on the record date for the determination of stockholders entitled to receive such Convertible Securities or Options (or if no such record is taken, the date on which such Convertible Securities or Options were issued).

(e)Dilutive Issuances.

(i) Adjustment Upon Dilutive Issuance. If, at any time after the Issue Date, and on or prior to the date that is the later of (1) the earlier of (x) the Effective Date and (y) two years from the Issue Date, and (2) the six month anniversary of the Issue Date, the Company issues or sells, or in accordance with Section 6(e)(ii) is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share less than the Exercise Price on the date of such issuance or sale (or deemed issuance or sale) (a “Dilutive Issuance”), then the Exercise Price shall be adjusted so as to equal 110% of the consideration received or receivable by the Company (on a per share basis) for the additional shares of Common Stock so issued, sold or deemed issued or sold in such Dilutive Issuance (which, in the case of a deemed issuance or sale, shall be calculated in accordance with Section 6(e)(ii) of this Warrant).

Notwithstanding the foregoing, no adjustment shall be made pursuant to this Section 6(e)(i) if such adjustment would result in an increase in the Exercise Price.

(ii)Effect On Exercise Price Of Certain Events. For purposes of determining the adjusted Exercise Price under Section 6(e)(i) of this Warrant, the following will be applicable:

(A)Issuance Of Options. If the Company issues or sells any Options, whether or not immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options (and the price of any conversion of Convertible Securities, if applicable) is less than the Exercise Price in effect on the date of issuance or sale of such Options, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion, exercise or exchange of Convertible Securities, if applicable) shall, as of the date of the issuance or sale of such Options, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon the exercise of such Options” shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options, plus, in the case of Convertible

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Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion, exercise or exchange thereof (determined in accordance with the calculation method set forth in Section 6(e)(ii)(B) below) at the time such Convertible Securities first become convertible, exercisable or exchangeable, by (y) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion, exercise or exchange of Convertible Securities, if applicable). No further adjustment to the Exercise Price shall be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion, exercise or exchange of Convertible Securities issuable upon exercise of such Options. To the extent that shares of Common Stock or Convertible Securities are not delivered pursuant to such Options, upon the expiration or termination of such Options, the Exercise Price shall be readjusted to the Exercise Price that would then be in effect had the adjustments made upon the issuance of such Options been made on the basis of delivery of only the number of shares of Common Stock actually delivered.

(B)Issuance Of Convertible Securities. If the Company issues or sells any Convertible Securities, whether or not immediately convertible, exercisable or exchangeable, and the price per share for which Common Stock is issuable upon such conversion, exercise or exchange is less than the Exercise Price in effect on the date of issuance or sale of such Convertible Securities, then the maximum total number of shares of Common Stock issuable upon the conversion, exercise or exchange of all such Convertible Securities shall, as of the date of the issuance or sale of such Convertible Securities, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. If the Convertible Securities so issued or sold do not have a fluctuating conversion or exercise price or exchange ratio, then for the purposes of the immediately preceding sentence, the “price per share for which Common Stock is issuable upon such conversion, exercise or exchange” shall be determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion, exercise or exchange thereof (determined in accordance with the calculation method set forth in this Section 6(e)(ii)(B)) at the time such Convertible Securities first become convertible, exercisable or exchangeable, by (B) the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Convertible Securities. If the Convertible Securities so issued or sold have a fluctuating conversion or exercise price or exchange ratio (a “Variable Rate Convertible Security”), then for purposes of the first sentence of this Section 6(e)(ii)(B), the “price per share for which Common Stock is issuable upon such conversion, exercise or exchange” shall be deemed to be the lowest price per share which would be applicable (assuming all holding period and other conditions to any discounts contained in such Variable Rate Convertible Security have been satisfied) if the conversion price of such Variable Rate Convertible Security on the date of issuance or sale thereof were equal to the actual conversion price on such date (or such higher minimum conversion price if such Variable Rate Convertible Security is subject to a minimum conversion price) (the “Assumed Variable Market Price”), and, further, if the conversion price of such Variable Rate Convertible Security at any time or times thereafter is less than or equal to the Assumed Variable

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Market Price last used for making any adjustment under this Section 6(e) with respect to any Variable Rate Convertible Security, the Exercise Price in effect at such time shall be readjusted to equal the Exercise Price which would have resulted if the Assumed Variable Market Price at the time of issuance of the Variable Rate Convertible Security had been equal to the actual conversion price of such Variable Rate Convertible Security existing at the time of the adjustment required by this sentence; provided, however, that if the conversion or exercise price or exchange ratio of a Convertible Security may fluctuate solely as a result of provisions designed to protect against dilution, such Convertible Security shall not be deemed to be a Variable Rate Convertible Security. No further adjustment to the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion, exercise or exchange of such Convertible Securities.

(C)Change In Option Price Or Conversion Rate. If there is a change at any time (including, without limitation, a change with respect to any Options or Convertible Securities outstanding as of the Issue Date) in (x) the amount of additional consideration payable to the Company upon the exercise of any Options; (y) the amount of additional consideration, if any, payable to the Company upon the conversion, exercise or exchange of any Convertible Securities; or (z) the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for Common Stock (in each such case, other than under or by reason of provisions designed to protect against dilution), the Exercise Price in effect at the time of such change shall be readjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration or changed conversion, exercise or exchange rate, as the case may be, at the time initially issued or sold.

(D)Calculation Of Consideration Received. If any Common Stock, Options or Convertible Securities are issued or sold for cash, the consideration received therefor will be the amount received by the Company therefor. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Company (including the net present value of the consideration expected by the Company for the provided or purchased services) shall be the fair market value of such consideration. In case any Common Stock, Options or Convertible Securities are issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair market value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The independent members of the Company’s Board of Directors shall calculate reasonably and in good faith, using standard commercial valuation methods appropriate for valuing such assets, the fair market value of any consideration.

(iii)Exceptions To Adjustment Of Exercise Price. Notwithstanding the foregoing, no adjustment to the Exercise Price shall be made pursuant to this Section 6(e) upon the issuance of any Excluded Securities.

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(iv)Notice Of Adjustments. Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to this Section 6(e) resulting in a change in the Exercise Price by more than one percent (1%), or any change in the number or type of stock, securities and/or other property issuable upon exercise of this Warrant, the Company, at its expense, shall promptly compute such adjustment, readjustment or change and prepare and furnish to the Holder a certificate setting forth such adjustment, readjustment or change and showing in detail the facts upon which such adjustment, readjustment or change is based. The Company shall, upon the written request at any time of the Holder, furnish to the Holder a like certificate setting forth (i) such adjustment, readjustment or change, (ii) the Exercise Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon exercise of this Warrant.

(f)Adjustments; Additional Shares, Securities or Assets. In the event that at any time, as a result of an adjustment made pursuant to this Section 6, the Holder of this Warrant shall, upon exercise of this Warrant, become entitled to receive securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this Section 6. Any adjustment made herein that results in a decrease in the Exercise Price shall also effect a proportional increase in the number of shares of Common Stock into which this Warrant is exercisable.

7.FORCED EXERCISE.

(a)Forced Exercise. Subject to the terms and conditions of this Section 7(a), the Company shall have the right, exercisable at any time after December 31, 2007, to require exercise of this Warrant in whole or in part (a “Forced Exercise”). In order to effect a Forced Exercise, (i) the daily VWAP must, on each of twenty (20) Trading Days occurring during any period of thirty (30) consecutive Trading Days (such period of thirty Trading Days, a “Forced Exercise Period”), be equal to or greater than the Forced Exercise Price (as defined below) and (ii) each of the Equity Conditions must be satisfied on each Trading Day occurring during the Forced Exercise Period and through and including the Forced Exercise Date. For purposes hereof, “Forced Exercise Price” means, as of any date, the lesser of (i) $2.20 and (ii) two hundred percent (200%) of the Exercise Price in effect as of such date (provided that the Forced Exercise Price shall be appropriately adjusted for any stock dividend, stock split, reverse stock split or other similar transaction). Notwithstanding the foregoing, in no event shall the Company be permitted to effect a Forced Exercise to the extent that, upon receipt of the shares of Common Stock deliverable thereby, the Holder would beneficially own more than 4.99% of the number of shares of Common Stock then outstanding.

(b)Forced Exercise Notice; Number of Warrant Shares. In order to effect a Forced Exercise hereunder, the Company must deliver to the Holder written notice thereof (a “Forced Exercise Notice”) at any time after the fifth (5^th) Business Day immediately following the last Trading Day of the Forced Exercise Period but not later than the tenth (10^th) Business Day following such last Trading Day. A Forced Exercise Notice shall specify the number of Warrant Shares that the Company elects to submit to a Forced Exercise. Within three (3) Business Days after its receipt of a Forced Exercise Notice, the Holder shall deliver to the Company, in accordance

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with Section 1 of this Warrant, an Exercise Notice and, if applicable, the Exercise Price for the number of Warrant Shares specified in the Forced Exercise Notice. On the date that is the third (3^rd) Trading Day immediately following delivery of such Exercise Notice by the Holder (the “Forced Exercise Date”), the Company must deliver the specified shares of Common Stock to the Holder in accordance with the provisions of Section 2 of this Warrant, with the Forced Exercise Date being deemed the Delivery Date for purposes hereof. If any fractional share would be issuable upon a Forced Exercise, such fractional shares shall be disregarded and the number of shares issuable shall, in the aggregate, be equal to the nearest whole number of shares.

(c)Notwithstanding the delivery by the Company of a Forced Exercise Notice, nothing contained herein shall be deemed to limit in any way (x) the right of the Holder to exercise this Warrant prior to the Forced Exercise Date or (y) the availability of any and all remedies that are provided to the Holder hereunder, including without limitation in the event that the Company fails to deliver Warrant Shares upon a Forced Exercise as required by the terms of Section 3 of this Warrant, provided, that, in the event of such failure, the Forced Exercise shall be terminated with respect to the Holder upon the delivery of written notice thereof by the Holder to the Company, and the Company shall forfeit its right to require a Forced Exercise of the Warrants thereafter. In the event of multiple Forced Exercises, at least sixty (60) days must elapse between Forced Exercise Dates.

8.MISCELLANEOUS.

(a)Failure to Exercise Rights not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof. All rights and remedies of the Holder hereunder are cumulative and not exclusive of any rights or remedies otherwise available. In the event that the Company breaches any of its obligations hereunder to issue Warrant Shares or pay any amounts as and when due, the Company shall bear all costs incurred by the Holder in collecting such amount, including without limitation reasonable legal fees and expenses.

(b)Notices. Any notice, demand or request required or permitted to be given by the Company or the Holder pursuant to the terms of this Warrant shall be in writing and shall be deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such delivery is made on a day that is not a Business Day, in which case such delivery will be deemed to be made on the next succeeding Business Day, (ii) on the next Business Day after timely delivery to an overnight courier and (iii) on the Business Day actually received if deposited in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed as follows:

If to the Company:

ZAP

501 Fourth Street

Santa Rosa, California 95401

Attention:

Steven Kim

Telephone: (707) 525-8658

Facsimile: (707) 525-8692

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with a copy (for informational purposes only) to:

Donahue Gallagher Woods LLP

Suite 1900

300 Lakeside Drive

Oakland, CA 94612

Attn:Michael J. Dalton

Tel:(510) 451-0544

Fax:(510) 832-1486

and if to the Holder, to such address for such party as shall appear on the signature page of the Securities Purchase Agreement executed by such party, or as shall be designated by such party in writing to the other parties hereto in accordance this Section 8(b).

(c) Amendments and Waivers. No amendment, modification or other change to, or waiver of any provision of, this Warrant or any other Warrant may be made unless such amendment, modification or change, or request for waiver, is (A) set forth in writing and is signed by the Company, (B) consented to in writing by the holders of at least sixty-six percent (66%) of the Warrant Shares underlying the Warrants then outstanding, and (C) applied to all of the Warrants. Upon the satisfaction of the conditions described in (A), (B) and (C) above, this Warrant shall be deemed to incorporate the amendment, modification, change or waiver effected thereby as of the effective date thereof, even if the Holder did not consent to such amendment, modification, change or waiver. Notwithstanding the foregoing, the limitation on beneficial ownership set forth in Section 4 may not be amended without the consent of the holders of a majority of the shares of Common Stock then outstanding; provided, however, that such limitation may be waived by the Holder upon sixty (60) days’ prior written notice to the Company, and such waiver shall be valid and shall not require the consent of the Company or any other holder of Common Stock or Warrants.

(d) Transfer of Warrant. The Holder may sell, transfer or otherwise dispose of all or any part of this Warrant (including without limitation pursuant to a pledge) to any person or entity as long as such sale, transfer or disposition is the subject of an effective registration statement under the Securities Act of 1933, as amended, and applicable state securities laws, or is exempt from registration thereunder, and is otherwise made in accordance with the applicable law and applicable provisions of the Securities Purchase Agreement. From and after the date of any such sale, transfer or disposition, the transferee hereof shall be deemed to be the holder of the portion of this Warrant acquired by such transferee, and the Company shall, as promptly as practicable, issue and deliver to such transferee a new Warrant identical in all respects to this Warrant, in the name of such transferee. The Company shall be entitled to treat the original Holder as the holder of this entire Warrant unless and until it receives written notice of the sale, transfer or disposition hereof.

(e) Lost or Stolen Warrant. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and

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cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant identical in all respects to this Warrant.

(f) Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed entirely within the State of California.

(g)Successors and Assigns. The terms and conditions of this Warrant shall inure to the benefit of and be binding upon the respective successors (whether by merger or otherwise) and permitted assigns of the Company and the Holder. The Company may not assign its rights or obligations under this Warrant except as specifically required or permitted pursuant to the terms hereof.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the Company has duly executed and delivered this Warrant as of the Issue Date.

  ZAP

  By: __________________________

Name:

   Title:

EXHIBIT A to WARRANT

EXERCISE NOTICE

The undersigned Holder hereby irrevocably exercises the right to purchase _____ of the shares of Common Stock (“Warrant Shares”) of ZAPevidenced by the attached Warrant (the “Warrant”). Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.

1. Form of Exercise Price. The Holder intends that payment of the Exercise Price shall be made as:

______ a Cash Exercise with respect to _________________ Warrant Shares; and/or

______ a Cashless Exercise with respect to _________________ Warrant Shares, as permitted by Section 5(b) of the attached Warrant.

2. Payment of Exercise Price. In the event that the Holder has elected a Cash Exercise with respect to some or all of the Warrant Shares to be issued pursuant hereto, the Holder shall pay the sum of $________________ to the Company in accordance with the terms of the Warrant.

Date: ______________________

___________________________________

Name of Registered Holder

By: _______________________________

 Name:

 Title:

Holder Requests Delivery to be made: (check one)

o By Delivery of Physical Certificates to the Above Address

o Through Depository Trust Corporation (Account _________________________)

EX-99.4

Exhibit 99.4

Execution Copy

REGISTRATION RIGHTS AGREEMENT

This REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of December 5, 2006, is by and between ZAP, a California corporation (the “Company”), and each of the entities whose names appear on the signature pages hereof. Such entities are each referred to herein as an “Investor” and, collectively, as the “Investors”.

The Company has agreed, on the terms and subject to the conditions set forth in the Securities Purchase Agreement, dated as of December 5, 2006 (the “Securities Purchase Agreement”), to issue and sell to each Investor named therein (A) one or more 8% Senior Convertible Notes in the form attached to the Securities Purchase Agreement (each, a “Note” and, collectively, the “Notes”) and (B) a Warrant in the form attached to the Securities Purchase Agreement (each, a “Warrant” and, collectively, the “Warrants”).

The Notes are convertible into shares (the “Conversion Shares”) of the Company’s common stock, no par value (the “Common Stock”). The Warrants are exercisable into shares of Common Stock (the “Warrant Shares”) in accordance with their terms.

In order to induce each Investor to enter into the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended (the “Securities Act”), and under applicable state securities laws.

In consideration of each Investor entering into the Securities Purchase Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1.DEFINITIONS.

For purposes of this Agreement, the following terms shall have the meanings specified:

“Business Day” means any day other than a Saturday, a Sunday or a day on which the Commission is closed or on which banks in the City of New York are authorized by law to be closed.

“Commission” means the Securities and Exchange Commission.

“Effective Date” means the date on which the Registration Statement is declared effective by the Commission.

“Filing Deadline” means the ninetieth (90th) calendar day following the Closing Date.

“Holder” means any person owning or having the right to acquire, through conversion of the Notes or exercise of the Warrants or otherwise, Registrable Securities, including initially each Investor and thereafter any permitted assignee thereof.

“Registrable Securities” means the Conversion Shares, the Warrant Shares and any other shares of Common Stock (or other securities) issued or issuable pursuant to the terms of the Notes or the Warrants, and any shares of capital stock issued or issuable from time to time (with any adjustments) in replacement of, in exchange for or otherwise in respect of the Conversion Shares and the Warrant Shares.

“Registration Deadline” means the one hundred and eightieth (180^th) calendar day following the Closing Date.

“Registration Period” has the meaning set forth in Section 2(d) of this Agreement.

“Registration Statement” means a registration statement or statements prepared in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act (“Rule 415”) or any successor rule providing for the offering of securities on a continuous or delayed basis.

Capitalized terms used herein and not otherwise defined shall have the respective meanings specified in the Securities Purchase Agreement. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words “hereof”, “herein” and “hereunder” and words of similar import contained in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement.

2.REGISTRATION.

(a)Filing of Registration Statement. On or before the Filing Deadline, the Company shall prepare and file with the Commission a Registration Statement on Form SB-2 as a “shelf” registration statement under Rule 415 covering the resale of a number of shares of Registrable Securities equal to two hundred percent (200%) of the number of shares of Common Stock issuable upon conversion in full of the Notes and exercise in full of the Warrants (such number to be determined without regard to any restriction on such conversion or exercise). Such Registration Statement shall state, to the extent permitted by Rule 416 under the Securities Act, that it also covers such indeterminate number of additional shares of Common Stock as may become issuable upon the conversion of the Notes and exercise of the Warrants in order to prevent dilution resulting from stock splits, stock dividends or similar events.

(b)S-3 Registration Statement. Notwithstanding the foregoing Section 2(a), in the event that the Company files a Registration Statement on Form SB-2, and thereafter meets the eligibility requirements to use Form S-3 for the resale of Registrable Securities by the Investors, the Company shall re-file such Registration Statement, or file a new Registration Statement on Form S-3 covering the greater of (i) the number of shares then registered on the existing Registration Statement(s) (and not previously sold pursuant to an existing Registration Statement or pursuant to

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Rule 144 under the Securities Act (“Rule 144”)) and (ii) the number of shares required to be registered pursuant to the terms of this Agreement, as promptly as practicable (but in no event later than thirty (30) days) after the Company meets such requirements.

(c)Effectiveness. The Company shall use its best efforts to cause the Registration Statement to become effective as soon as practicable following the filing thereof, but in no event later than the Registration Deadline. The Company shall respond promptly to any and all comments made by the staff of the Commission with respect to a Registration Statement, and shall submit to the Commission, within five (5) Business Days after the Company learns that no review of such Registration Statement will be made by the staff of the Commission or that the staff of the Commission has no further comments on such Registration Statement, as the case may be, a request for acceleration of the effectiveness of such Registration Statement to a time and date not later than two (2) Business Days after the submission of such request. The Company will maintain the effectiveness of each Registration Statement filed pursuant to this Agreement until the earlier to occur of (i) the date on which all of the Registrable Securities eligible for resale thereunder have been publicly sold pursuant to the Registration Statement or Rule 144, and (ii) the date on which all of the Registrable Securities remaining to be sold under such Registration Statement (in the reasonable opinion of counsel to the Company) may be immediately sold to the public under Rule 144(k) under the Securities Act (“Rule 144(k)”) or any successor provision (the period beginning on the Registration Deadline and ending on the earliest to occur of clause (i) or (ii) above being referred to herein as the “Registration Period”) or until such later date as the Company shall determine.

(d)Registration Default. If (i) the Registration Statement is not filed on or before the Filing Deadline or declared effective by the Commission on or before the Registration Deadline, (ii) after a Registration Statement has been declared effective by the Commission, sales of Registrable Securities (other than such Registrable Securities as are then freely saleable pursuant to Rule 144(k)) cannot be made by a Holder under a Registration Statement for any reason not within the exclusive control of such Holder or (iii) an amendment or supplement to a Registration Statement, or a new registration statement, required to be filed pursuant to the terms of Section 3(j) of this Agreement, is not filed on or before the date required by such paragraph (each of the foregoing clauses (i), (ii) and (iii) being referred to herein as a “Registration Default”), the Company shall make monthly cash payments (pro rated for partial periods) to each Holder equal to such Holder’s pro rata share (based on the aggregate number of Registrable Securities then held by or issuable to such Holder as of the occurrence of the Registration Deadline) equal to one percent (1%) of the aggregate Purchase Price paid by such Holder for such Holder’s Note and Warrant for each thirty (30) day period (pro rated for partial periods) in which a Registration Default exists. Each payment required to be made under this Section 2(d) shall be made within two (2) Business Days following the last day of each calendar month in which a Registration Default exists. Any such payment shall be in addition to any other remedies available to each Holder at law or in equity, whether pursuant to the terms hereof, the Securities Purchase Agreement, the Notes, or otherwise.

(e)Allocation of Registered Shares. The initial number of Conversion Shares and Warrant Shares included in any Registration Statement and each increase in the number thereof included therein shall be allocated pro rata among the Holders based on the aggregate number of Registrable Securities issued or issuable to each Holder at the time the Registration Statement

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covering such initial number of Registrable Securities or increase thereof is declared effective by the Commission (such number to be determined using the Conversion Price or Exercise Price, as applicable, in effect at such time and without regard to any restriction on the ability of a Holder to convert such Holder’s Note or exercise such Holder’s Warrant as of such date). In the event that a Holder sells or otherwise transfers any of such Holder’s Registrable Securities, each transferee shall be allocated the portion of the then remaining number of Registrable Securities included in such Registration Statement and allocable to such Holder.

(f)Registration of Other Securities. During the period beginning on the date hereof and ending on the Effective Date, the Company shall refrain from filing any registration statement (other than (i) a Registration Statement filed hereunder or that otherwise includes the Registrable Securities or (ii) a registration statement on Form S-8 with respect to stock option plans and agreements and stock plans currently in effect and disclosed in the Securities Purchase Agreement or the schedules thereto). In no event shall the Company include any securities other than Registrable Securities on any Registration Statement filed by the Company on behalf of the Holders pursuant to the terms hereof.

3.OBLIGATIONS OF THE COMPANY.

In addition to performing its obligations hereunder, including without limitation those pursuant to Section 2 above, the Company shall, with respect to each Registration Statement:

(a)prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to comply with the provisions of the Securities Act or to maintain the effectiveness of such Registration Statement during the Registration Period, or as may be reasonably requested by a Holder in order to incorporate information concerning such Holder or such Holder’s intended method of distribution;

(b)as soon as practicable following the Closing, take all steps necessary and otherwise use its best efforts to secure the listing on the Principal Market of all Registrable Securities issuable upon conversion of the Notes and exercise of the Warrants, and at any Holder’s request, provide such Holder with reasonable evidence thereof;

(c)so long as a Registration Statement is effective covering the resale of the applicable Registrable Securities owned by a Holder, furnish to each Holder such number of copies of the prospectus included in such Registration Statement, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as such Holder may reasonably request in order to facilitate the disposition of such Holder’s Registrable Securities;

(d)use commercially reasonable efforts to register or qualify the Registrable Securities under the securities or “blue sky” laws of such jurisdictions within the United States as shall be reasonably requested from time to time by a Holder, and do any and all other acts or things which may reasonably be necessary or advisable to enable such Holder to consummate the public sale or other disposition of the Registrable Securities in such jurisdictions; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such jurisdiction;

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(e)notify each Holder immediately after becoming aware of the occurrence of any event (but shall not, without the prior written consent of such Holder, disclose to such Holder any facts or circumstances constituting material non-public information) as a result of which the prospectus included in such Registration Statement, as then in effect, contains an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and as promptly as practicable prepare and file with the Commission and furnish to each Holder a reasonable number of copies of a supplement or an amendment to such prospectus as may be necessary so that such prospectus does not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing;

(f)use commercially reasonable efforts to prevent the issuance of any stop order or other order suspending the effectiveness of such Registration Statement and, if such an order is issued, to use commercially reasonable efforts obtain the withdrawal thereof at the earliest possible time and to notify each Holder in writing of the issuance of such order and the resolution thereof;

(g)furnish to each Holder, on the date that such Registration Statement, or any successor registration statement, becomes effective, a letter, dated such date, signed by outside counsel to the Company and addressed to such Holder, confirming such effectiveness and, to the knowledge of such counsel, the absence of any stop order;

(h)provide to each Holder and its representatives the opportunity to conduct a reasonable inquiry of the Company’s financial and other records during normal business hours and make available during normal business hours its officers, directors and employees for questions regarding information which such Holder may reasonably request in order to fulfill any due diligence obligation on its part;

(i)permit counsel for each Holder to review such Registration Statement and all amendments and supplements thereto, and any comments made by the staff of the Commission and the Company’s responses thereto, within a reasonable period of time prior to the filing thereof with the Commission (or, in the case of comments made by the staff of the Commission, within a reasonable period of time following the receipt thereof by the Company); and

(j)in the event that, at any time, the number of shares available under the Registration Statement is insufficient to cover one hundred and twenty-five percent (125%) of the Registrable Securities issued or issuable under the Notes and the Warrants (such number to be determined using the Conversion Price or Exercise Price, as applicable, in effect at such time and without regard to any restriction on the ability of any Holder to convert such Holder’s Note or exercise such Holder’s Warrant) the Company shall promptly amend such Registration Statement or file a new registration statement, in any event as soon as practicable, but not later than the tenth (10^th) day following notice from a Holder of the occurrence of such event, so that such Registration Statement or such new registration statement, or both, covers no less than two hundred percent (200%) of the Registrable Securities issued or issuable under the Notes and the Warrants (such number to be determined using the Conversion Price or Exercise Price, as applicable, in effect at the

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time of such amendment or filing and without regard to any restriction on the ability of any Holder to convert such Holder’s Note or exercise such Holder’s Warrant). The Company shall use its best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. Any Registration Statement filed pursuant to this Section 3(j) shall state that, to the extent permitted by Rule 416 under the Securities Act, such Registration Statement also covers such indeterminate number of additional shares of Common Stock as may become issuable under the Notes and the Warrants in order to prevent dilution resulting from stock splits, stock dividends or similar events. Unless and until such amendment or new Registration Statement becomes effective, each Holder shall have the rights described in Section 2(d) of this Agreement.

4.OBLIGATIONS OF EACH HOLDER.

In connection with the registration of Registrable Securities pursuant to a Registration Statement, each Holder shall:

(a) timely furnish to the Company in writing such information regarding itself and the intended method of disposition of such Registrable Securities as the Company shall reasonably request in order to effect the registration thereof;

(b) upon receipt of any notice from the Company of the happening of any event of the kind described in Sections 3(e) or 3(f) of this Agreement, immediately discontinue any sale or other disposition of such Registrable Securities pursuant to such Registration Statement until the filing of an amendment or supplement as described in such Section 3(e) or withdrawal of the stop order referred to in such Section 3(f), and use commercially reasonable efforts to maintain the confidentiality of such notice and its contents;

(c) to the extent required by applicable law, deliver a prospectus to the purchaser of such Registrable Securities;

(d) promptly notify the Company when it has sold all of the Registrable Securities beneficially owned by it; and

(e) notify the Company in the event that any information supplied by such Holder in writing for inclusion in such Registration Statement or related prospectus contains an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make such information not misleading in light of the circumstances then existing; and immediately discontinue any sale or other disposition of such Registrable Securities pursuant to such Registration Statement until the filing of an amendment or supplement to such prospectus as may be necessary so that such prospectus does not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing.

5.INDEMNIFICATION.

In the event that any Registrable Securities are included in a Registration Statement under this Agreement:

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(a)the Company shall indemnify and hold harmless each Holder, the officers, directors, employees, agents and representatives of such Holder, and each person, if any, who controls such Holder within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), against any losses, claims, damages, liabilities or reasonable out-of-pocket expenses (whether joint or several) (collectively, including reasonable legal expenses or other expenses reasonably incurred in connection with investigating or defending same, “Losses”), insofar as any such Losses arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement under which such Registrable Securities were registered, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Subject to the provisions of Section 5(c) of this Agreement, the Company will reimburse such Holder, and each such officer, director, employee, agent, representative or controlling person, for any reasonable legal expenses or other out-of-pocket expenses (promptly as such expenses are incurred) by any such entity or person in connection with investigating or defending any Loss; provided, however, that the foregoing indemnity shall not apply to amounts paid in settlement of any Loss if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be obligated to indemnify any person for any Loss to the extent that such Loss arises out of or is based upon (i) any omission to state a material fact required to be stated therein or necessary to make statements therein not misleading that conforms in all material respects to written information furnished by such person expressly for use in such Registration Statement or (ii) a failure of such person to deliver or cause to be delivered the final prospectus contained in the Registration Statement and made available by the Company, if such delivery is required by applicable law.

(b)each Holder who is named in such Registration Statement as a selling shareholder, acting severally and not jointly, shall indemnify and hold harmless the Company, the officers, directors, employees, agents and representatives of the Company, and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any Losses to the extent (and only to the extent) that any such Losses arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact stated therein or any omission to state a material fact required to be stated therein or necessary to make statements therein not misleading that conforms in all material respects to written information furnished by such person expressly for use in such Registration Statement, or (ii) a failure of such Holder to deliver or cause to be delivered the final prospectus contained in the Registration Statement and made available by the Company, if such delivery is required under applicable law. Subject to the provisions of Section 5(c) of this Agreement, such Holder will reimburse any reasonable legal or other expenses (promptly as such expenses are incurred) by the Company and any such officer, director, employee, agent, representative, or controlling person, in connection with investigating or defending any such Loss; provided, however, that the foregoing indemnity shall not apply to amounts paid in settlement of any such Loss if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld); and provided, further, that, in no event shall any indemnity under this Section 5(b) exceed the amount of the net proceeds resulting from the sale of Registrable Securities by such Holder under such Registration Statement.

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(c)Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action or proceeding (including any governmental action or proceeding), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 5, promptly deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in and to assume the defense thereof with counsel selected by the indemnifying party and reasonably acceptable to the indemnified party; provided, however, that an indemnified party shall have the right to retain its own counsel, with the reasonably incurred fees and expenses of such counsel to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate under applicable standards of professional conduct due to actual or potential conflicting interests between such indemnified party and any other party represented by such counsel in such action or proceeding. The failure by an indemnified party to notify the indemnifying party within a reasonable time following the commencement of any action or proceeding of which the indemnified party is aware, to the extent materially prejudicial to such indemnifying party’s ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 5 with respect to such action or proceeding, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 5 or with respect to any other action or proceeding.

(d)In the event that the indemnity provided in paragraph (a) or (b) of this Section 5 is unavailable or insufficient to hold harmless an indemnified party for any reason, the Company and each Holder agree, severally and not jointly, to contribute to the aggregate Losses to which the Company or such Holder (or its respective officers, directors, employees, agents, representatives or controlling persons), may be subject in such proportion as is appropriate to reflect the relative fault of the Company and such Holder in connection with the statements or omissions which resulted in such Losses; provided, however, that in no case shall such Holder be responsible for any amount in excess of the net proceeds resulting from the sale of Registrable Securities under the Registration Statement. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or by such Holder. The Company and each Holder agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 5 (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 5, each person who controls a Holder within the meaning of either the Securities Act or the Exchange Act and each officer, director, employee, agent or representative of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Securities Act or the Exchange Act and each officer, director, employee, agent or representative of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this Section 5(d).

(e)The obligations of the Company and each Holder under this Section 5 shall survive the conversion of the Note and exercise of the Warrants in full, the completion of any

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offering or sale of Registrable Securities pursuant to a Registration Statement under this Agreement, or otherwise.

6.REPORTS.

With a view to making available to each Holder the benefits of Rule 144 and any other similar rule or regulation of the Commission that may at any time permit such Holder to sell securities of the Company to the public without registration, the Company agrees to:

(a)make and keep public information available, as those terms are understood and defined in Rule 144;

(b)file with the Commission in a timely manner all reports and other documents required of the Company under the Exchange Act; and

(c)furnish to such Holder, so long as such Holder owns any Registrable Securities, promptly upon written request (i) a written statement by the Company, if true, that it has complied with the reporting requirements of Rule 144 and the Exchange Act, (ii) to the extent not publicly available through the Commission’s EDGAR database, a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company with the Commission, and (iii) such other information as may be reasonably requested by such Holder in connection with such Holder’s compliance with any rule or regulation of the Commission which permits the selling of any such securities without registration.

7.MISCELLANEOUS.

(a)Expenses of Registration. Except as otherwise provided in the Securities Purchase Agreement, all reasonable expenses, other than underwriting discounts and commissions and fees and expenses of counsel and other advisors to each Holder, incurred in connection with the registrations, filings or qualifications described herein, including (without limitation) all registration, filing and qualification fees, printers’ and accounting fees, the fees and disbursements of counsel for the Company, and the fees and disbursements incurred in connection with the letter described in Section 3(g) of this Agreement, shall be borne by the Company.

(b)Amendment; Waiver. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended or waived except pursuant to a written instrument executed by the Company and the Holders of at least two-thirds (2/3) of the Registrable Securities into which all of the Notes and Warrants then outstanding are convertible or exercisable (without regard to any limitation on such conversion or exercise). Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

(c)Notices. Any notice, demand or request required or permitted to be given by the Company or a Holder pursuant to the terms of this Agreement shall be in writing and shall be deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such delivery is made on a day that is not a Business Day, in which case such delivery will be deemed to

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be made on the next succeeding Business Day and (ii) on the next Business Day after timely delivery to a reputable overnight courier, addressed as follows:

If to the Company:

ZAP

501 Fourth Street

Santa Rosa, California 95401

Attn: Steven Kim

Tel:(707) 525-8658

Fax: (707) 525-8692

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

Donahue Gallagher Woods LLP

Suite 1900

300 Lakeside Drive

Oakland, CA 94612

Attn:Michael J. Dalton

Tel:(510) 451-0544

Fax:(510) 832-1486

and if to a Holder, to such address for such party as shall appear on the signature page of the Securities Purchase Agreement executed by such party, or as shall be designated by such party in writing to the other parties hereto in accordance this Section 7(c).

(d)Assignment. Upon the transfer of any Note, Warrant or Registrable Securities by a Holder, the rights of such Holder hereunder with respect to such securities so transferred shall be assigned automatically to the transferee thereof, and such transferee shall thereupon be deemed to be a “Holder” for purposes of this Agreement, as long as: (i) the Company is, within a reasonable period of time following such transfer, furnished with written notice of the name and address of such transferee, (ii) the transferee agrees in writing with the Company to be bound by all of the provisions hereof, and (iii) such transfer is made in accordance with the applicable law and the requirements of the Securities Purchase Agreement, the Notes or the Warrants, as applicable.

(e)Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, and all of which together shall be deemed one and the same instrument. This Agreement, once executed by a party, may be delivered to any other party hereto by facsimile transmission.

(f)Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed entirely within the State of California.

(g)Holder of Record. A person is deemed to be a Holder whenever such person owns or is deemed to own of record such Registrable Securities. If the Company receives

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conflicting instructions, notices or elections from two or more persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the record owner of such Registrable Securities.

(h)Entire Agreement. This Agreement and the other Transaction Documents constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof, superseding all prior agreements and understandings, whether written or oral, between or among the parties hereto.

(i)Headings. The headings in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement.

(j)Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

[Signature Page to Follow]

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IN WITNESS WHEREOF, the undersigned have executed this Registration Rights Agreement as of the date first-above written.

ZAP

By: __________________________

 Name:

 Title:

GEMINI MASTER FUND, LTD.

By: Gemini Strategies, LLC

By:_______________________________

Name:

Title:

IN WITNESS WHEREOF, the undersigned have executed this Registration Rights Agreement as of the date first-above written.

ZAP

By: __________________________

 Name:

 Title:

GREY K OFFSHORE FUND, LTD.

By: RNK Capital LLC

By:_______________________________

Name:

Title:

GREY K FUND, LP

By:RNK Capital LLC

By:_______________________________

Name:

Title:

IN WITNESS WHEREOF, the undersigned have executed this Registration Rights Agreement as of the date first-above written.

ZAP

By: __________________________

 Name:

 Title:

[____________________________]

By: [___________________________]

By:_______________________________

Name:

Title: