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): June 19, 2007

WITS BASIN PRECIOUS MINERALS INC.

(Exact Name of Registrant as Specified in Charter)

Minnesota (State or Other Jurisdiction of Incorporation) 1-12401 (Commission File Number) 84-1236619 (IRS Employer Identification No.)

80 South 8^th Street, Suite 900 Minneapolis, Minnesota (Address of Principal Executive Offices)   55402-8773 (Zip Code)

612.349.5277

(Registrant’s telephone number, including area code)

(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:

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))

Item 1.01. Entry into a Material Definitive Agreement.

On June 19, 2007, Wits Basin Precious Minerals Inc. (the “Registrant”) entered into an Amendment to Convertible Notes Purchase Agreement with China Gold, LLC, a Kansas limited liability company (“China Gold”), whereby the parties amended the terms of that certain Convertible Notes Purchase Agreement dated April 10, 2007 (as amended, the “Purchase Agreement”) to (a) clarify that the obligations of the parties under the Purchase Agreement to sell and purchase convertible notes under the Purchase Agreement shall terminate at the earlier of (i) April 10, 2008 and (ii) the date of effectiveness of the Registrant’s proposed merger with Easyknit Enterprises Holdings Limited (“Easyknit”), (b) to provide the Registrant an opportunity to prepay its obligations under notes issued under the Purchase Agreement, in which case China Gold is entitled to a purchase right to acquire shares of the Registrant’s common stock at equivalent terms to its rights to otherwise convert the notes issued under the Purchase Agreement, and (c) extend certain registration rights of China Gold.

On June 19, 2007, the Registrant sold China Gold an additional note under the Purchase Agreement in the principal amount of $4,000,000 (“Note 3”). Note 3 bears interest at a rate of 8.25% per annum, and is convertible at the option of China Gold into shares of the Registrant’s common stock at a conversion price of $1.00 per share, subject to anti-dilutive adjustments. Additionally, the outstanding balance on the Notes is subject to automatic conversion in the event the Registrant completes its proposed merger transaction with Easyknit. Note 3 is payable in full at the earlier of maturity or at such time the Registrant and its subsidiaries receive financing in the aggregate of amount of at least $50,000,000 from a third party. The maturity date of Note 3 is September 17, 2007, but may be extended upon the Registrant’s request for additional periods of thirty (30) days, but in no event later than December 31, 2007, provided that at the time of each such extension the Registrant and Easyknit have not terminated their proposed merger. In the event the merger is terminated after September 17, 2007, the Registrant’s obligations under Note 3 shall become due and payable upon the expiration of fifteen (15) days following demand of China Gold. The Registrant has also provided China Gold demand and piggyback registration rights relating to the resale of the shares of common stock issuable upon conversion of Note 3.

To date, the Registrant has issued an aggregate of $9,000,000 of notes under the Purchase Agreement, including the initial note in the amount of $3,000,000 issued on April 10, 2007 and a note in the amount of $2,000,000 issued on May 7, 2007. In additional to $2,000,000 used for general and administrative purposes by the Registrant, the Registrant has loaned $7,000,000 of the aggregate proceeds from the China Gold notes to China Global Mining Resources Limited, a British Virgin Islands corporation (“China Global”), for uses relating to the acquisition of certain nickel and iron ore mines in which China Global is involved. The Registrant has negotiated an agreement to acquire China Global, paid the nominal purchase consideration and currently awaits consent of Easyknit prior to the consummation of such acquisition. In consideration of the loans to China Global, China Global has issued the Registrant promissory notes in the amounts of $5,000,000 and $2,000,000, respectively. China Global’s obligations under the $5,000,000 promissory note are secured by its rights to (i) an Equity Transfer Heads of Agreement dated May 4, 2007, in respect of purchase of 95% of the equity in Yun County Changjiang Mining Company Limited; and (ii) an Equity and Asset Transfer Heads of Agreement, dated May 4, 2007, in respect of purchase of 100% equity in Nanjing Sudan Mining Co., Ltd. and assets from both of Mannshan Zhaoyuan Mining Co., Ltd. and Xiaonanshan Mining Co., Ltd. China Global’s obligations under the $2,000,000 promissory note are secured by its rights under (i) a Joint Venture Agreement dated April 14, 2007 and Supplemental Agreement dated June 6, 2007, in respect of acquisition of 80% equity interest in Sino-American Hua Ze Nickel & Cobalt Metal Co., Ltd; and (ii) a commodity purchase agreement dated June 15, 2007, for the purchase of 40 tons of electrolytic nickel.

As security for the Registrant’s obligations under the notes issued to China Gold under the Purchase Agreement, including Note 3, the Registrant has entered into a Security Agreement dated June 19, 2007 (the “Security Interest”) with China Gold whereby the Registrant has granted China Gold a security interest in its receivables under the $5,000,000 and $2,000,000 promissory notes of China Global and the Registrant’s security rights received from China Global as identified above. The obligations to China Gold are further secured by a Pledge Agreement dated April 10, 2007 with China Gold (the “Pledge Agreement”), whereby the Registrant pledged to China Gold its shares in Wits-China Acquisition Corp., a wholly owned subsidiary of the Registrant (“Wits-China”), and delivered to China Gold a guaranty of Wits-China (the “Guaranty”).

The Registrant has previously disclosed its entry in the original Purchase Agreement, the Initial Note, the Pledge Agreement and Guaranty in a Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2007, which is incorporated herein by reference. Copies of the Amendment to the Convertible Notes Purchase Agreement, Note 3 and the Security Agreement are filed herewith as Exhibits 10.1, 10.2 and 10.3, and are incorporated herein by reference.

Item 3.02 Unregistered Sales of Equity Securities.

As indicated under Item 1.01 above, on June 19, 2007, the Registrant offered and sold to China Gold, Note 3, in the principal amount of $4,000,000. Note 3 bears interest at a rate of 8.25% per annum, and is convertible at the option of China Gold into shares of the Registrant’s common stock at a conversion price of $1.00 per share, subject to anti-dilutive adjustments. Additionally, the outstanding balance on the Note is subject to automatic conversion in the event the Registrant completes its proposed merger transaction with Easyknit. The Registrant has also provided China Gold demand and piggyback registration rights relating to the resale of the shares of common stock issuable upon conversion of Note 3. Note 3 is payable in full at the earlier of maturity or at such time the Registrant and its subsidiaries receive financing in the aggregate of amount of at least $50,000,000 from a third party. The maturity date of Note 3 is September 17, 2007, but may be extended upon the Registrant’s request for additional periods of thirty (30) days, but in no event later than December 31, 2007, provided that at the time of each such extension the Registrant and Easyknit have not terminated their proposed merger. In the event the merger is terminated after September 17, 2007, the Registrant’s obligations under Note 3 shall become due and payable upon the expiration of fifteen (15) days following demand of China Gold. In the transaction, the Registrant received gross proceeds aggregating approximately $3,920,000, and paid a loan fee of $80,000 to an affiliate of China Gold.

Neither the securities offered and sold in the private placement nor the shares of common stock underlying such securities were registered under the Securities Act, and therefore may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The Registrant offered and sold the above-referenced securities in reliance on the statutory exemption from registration in Section 4(2) of the Securities Act, and on Rule 506 promulgated thereunder. The Registrant relied on this exemption and/or the safe harbor rule thereunder based on the fact that (i) the purchaser had knowledge and experience in financial and business matters such that it was capable of evaluating the risks of the investment, and (ii) the Registrant has obtained representations from the purchaser indicating that it was an accredited investor and purchasing for investment only.

Item 9.01.   Financial Statements and Exhibits.

(d) Exhibits

Exhibit	Description of Document
10.1	Form of Convertible Notes Purchase Agreement, as amended June 19, 2007, by and between Wits Basin Precious Minerals Inc. and China Gold, LLC.
10.2	Form of Secured Convertible Note 3 of Wits Basin Precious Minerals Inc. to be issued pursuant to Convertible Notes Purchase Agreement, as amended June 19, 2007.
10.3	Form of Security Agreement dated June 19, 2007 by and between Wits Basin Precious Minerals Inc. and China Gold, LLC.

SIGNATURES

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

	Wits Basin Precious Minerals Inc.
Date: June 25, 2007	By:	/s/ Mark D. Dacko
		Mark D. Dacko
		Chief Financial Officer

EXHIBIT INDEX

Exhibit	Description of Document
10.1	Form of Convertible Notes Purchase Agreement, as amended June 19, 2007, by and between Wits Basin Precious Minerals Inc. and China Gold, LLC.
10.2	Form of Secured Convertible Note 3 of Wits Basin Precious Minerals Inc. to be issued pursuant to Convertible Notes Purchase Agreement, as amended June 19, 2007.
10.3	Form of Security Agreement dated June 19, 2007 by and between Wits Basin Precious Minerals Inc. and China Gold, LLC.

EX-10.1

EXHIBIT 10.1

AMENDMENT TO

CONVERTIBLE NOTES PURCHASE AGREEMENT

This Amendment to Convertible Notes Purchase Agreement (this “Amendment”) is entered into on this 19th day of June, 2007, by and between Wits Basin Precious Minerals Inc., a Minnesota corporation (the “Issuer”), and China Gold, LLC, a Kansas limited liability company, its successors and assigns (together with its successors and assigns “Purchaser”), to amend, as hereinafter set forth, the terms of that certain Convertible Notes Purchase Agreement dated April 10, 2007 by and between Issuer and Purchaser (the “Purchase Agreement”). Capitalized terms used in this Amendment and not otherwise defined herein shall have the same meanings as defined in the Purchase Agreement.

A.Issuer and Purchaser entered into the Purchase Agreement on April 10, 2007, which contemplated the initial sale by Issuer, and purchase by Purchaser, of an aggregate minimum of $12,000,000 and an aggregate maximum of $25,000,000 in convertible notes of Issuer within 12 months of the Initial Closing Date.

B.Pursuant to the Purchase Agreement, on April 10, 2007, Issuer sold, and Purchaser purchased, the Initial Note in the amount of $3,000,000. On May 7, 2007, Issuer sold, and Purchaser purchased, an Additional Note in the amount of $2,000,000.

C.Issuer and Purchaser wish to amend the Purchase Agreement, in the respects, but only in the respects, as set forth herein. Issuer and Purchaser intend for this amendment to (a) clarify that the obligations of Issuer and Purchaser under the Purchase Agreement to sell and purchase, respectively, convertible notes under the Purchase Agreement shall terminate at the earlier of (i) 12 months from the Initial Closing Date and (ii) the date of effectiveness of Issuer’s proposed merger with Easyknit Enterprises Holdings Limited (defined herein and in the Purchase Agreement as the “Permitted Business Combination”); (b) to provide for anti-dilution protections for the Purchase Rights (defined herein) provided by this amendment; and (c) extend certain registration rights to the common stock underlying the Registration Rights.

D.On the date hereof, and in the form attached hereto as Exhibit A, Issuer is selling, and Purchaser is purchasing, an Additional Note in the aggregate amount of $4,000,000.

Now, Therefore, the parties hereto hereby agree as follows:

Section 1.AMENDMENTS

1.1Section 2.1 of the Purchase Agreement is hereby deleted in its entirety and replaced with the following:

2.1Authorization of the Notes. Issuer shall authorize the issuance and sale to the Purchaser of an initial 8.25% Secured Convertible Note in the principal amount of $3,000,000.00 (the “Initial Note”) and, prior to the earlier of (i) 12 months from the Initial Closing Date and (ii) the effectiveness of the Permitted Business Combination, may authorize the issuance and sale to the Purchaser of one or more additional 8.25% Secured Convertible Notes in a minimum aggregate principal amount of $9,000,000 and a maximum aggregate principal amount of $22,000,000.00, with each such 8.25% Secured Convertible Note containing the terms and conditions and in the form set forth in Exhibit A attached hereto and with all such 8.25% Secured Convertible Notes, including the Initial Note, not to exceed a total aggregate principal amount of $25,000,000.00 (each a “Note” and collectively, together with any notes issued by any Person with respect to the purchase of Securities, the “Notes”). The Notes authorized for sale to Purchaser other than the Initial Note are collectively the “Additional Notes”. The Notes are sometimes referred to herein as the “Securities.”

1.2Section 2.3 of the Purchase Agreement is hereby deleted in its entirety and replaced with the following:

2.3Purchase and Sales of the Additional Notes. Prior to the earlier of (i) 12 months from the Initial Closing Date and (ii) effectiveness of the Permitted Business Combination, Issuer shall direct, by written notice, that Purchaser purchase one or more Additional Notes in an aggregate principal amount not to exceed $9,000,000 authorized in accordance with Section 2.1. Within 5 days of its receipt of such notice, and, subject to the terms and conditions set forth in this Agreement, Purchaser shall purchase from the Issuer one or more Additional Notes in an aggregate principal amount not to exceed $9,000,000 at a purchase price equal to the principal amount of the Additional Note or Additional Notes being purchased by wire transfer of immediately available funds against delivery of the Additional Notes or Additional Notes. From time to time, but prior to the earlier of (i) 12 months from the Initial Closing Date and (ii) effectiveness of the Permitted Business Combination, at Issuer’s request by written notice to Purchaser that Purchaser purchase one or more Additional Notes in an aggregate amount of up to an additional $13,000,000, Purchaser may purchase, at its discretion, Additional Notes in an aggregate amount of up to an additional $13,000,000.

1.3The following shall be incorporated as Section 2.5 of the Purchase Agreement:

2.5Prepayment of Notes in Event of Substantial Financing. Notwithstanding the specific terms and conditions of any Additional Notes, in the event Issuer and/or any of Issuer’s majority-owned subsidiaries receive, at a time when any Notes remain outstanding, cumulative financing in the form of cash or immediately available funds from one or more third parties in the aggregate amount of at least $50,000,000 from and after June 19, 2007] (a “Substantial Financing”), the outstanding Notes issued under the Purchase Agreement shall be due and payable out of the proceeds from such Substantial Financing. In the event such prepayment of any or all outstanding Notes, the respective Holder of each such prepaid Note shall be entitled to receive from Issuer, from the date of such prepayment until the earlier of (i) immediately prior to the Permitted Business Combination or (ii) five (5) years from the date of such prepayment, at a purchase price of $1.00 per share, the right to purchase the number of shares of Issuer’s common stock equal to the amount prepaid on such Note divided by $1.00 (the “Purchase Right”). In the event the issuance of a Purchase Right is required pursuant to the terms of this Section 2.5, Issuer shall deliver to Holder an option agreement, with standard terms and conditions as agreed upon by Issuer and Holder, evidencing Holder’s Purchase Rights as set forth herein. Issuer shall provide, as reasonably practicable, Holder notice of the proposed time of effectiveness of a Substantial Financing or Permitted Business Combination within a reasonable time prior to any such proposed effectiveness. The number of shares that may be purchased under any Purchase Right shall be entitled to anti-dilution protection substantially similar to the anti-dilution protections provided in Section 7 of the Initial Note. As such, the provisions of Section 7 of the Initial Note shall apply as practicable to any such Purchase Right arising from this Section 2.5 to avoid any inequity to Issuer and Holder.

1.4The following shall be incorporated as Section 8.25 of the Purchase Agreement:

8.25Limitation of Conversionof Notes or Exercise of Purchase Right. Despite anything to the contrary in the respective Notes, except pursuant to an Automatic Conversion (as defined in the Notes), Purchaser may not convert any or all of the Notes or exercise its Purchase Right pursuant to Section 2.5 hereof during the time period and to the extent that the shares of Common Stock that Purchaser could acquire upon such conversion or exercise would cause the Beneficial Ownership (as defined below) of Common Stock held by Purchaser and its Affiliates to exceed 4.99%. The parties shall compute “Beneficial Ownership" of Common Stock in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Purchaser will, at the request of Issuer, from time to time, notify Issuer of Purchaser’s computation of Purchaser’s Beneficial Ownership. By written notice to Issuer, Purchaser may waive the provisions of this Section 8.25, but any such waiver will not be effective until the 61^st day after delivery thereof. Nothing herein shall preclude Purchaser or its Affiliates from disposing of a sufficient number of other shares of Common Stock beneficially owned by Purchaser or its Affiliates so as to thereafter permit the conversion of the respective Notes or exercise of any Purchase Right.

1.5The definition of the terms “Purchase Agreement” and Registrable Securities” in Section 2 of Appendix 1 to the Purchase Agreement are hereby deleted and the following definitions are substituted in place thereof:

“Purchase Agreement” means that certain Convertible Notes Purchase Agreement by and between Issuer and China Gold, LLC, of even date herewith as may be amended or restated from time to time.

“Registrable Securities” means (i) any shares of Common Stock issuable upon conversion of the Notes or the exercise of any Purchase Right, and (ii) any additional shares of Common Stock issued pursuant stock splits, in-kind dividends and similar distributions with respect to the stock described in the foregoing clause, but does not include any such shares, which, at the time the identity of the Registrable Securities is to be determined, previously have been sold pursuant to a registration or Rule 144, including Rule 144(k) or Rule 144A.

1.6The following shall be added as a new definition in alphabetical order to Section 2 of Appending 1 to the Purchase Agreement:

“Purchase Right” means any Purchase Right arising under Section 2.5 of the Purchase Agreement or under Section 2 of any of the Notes.

Section 2.SUPPLEMENTAL REPRESENTATION

2.1On June 19, 2007, Issuer makes to Purchaser the supplemental representation and warranty identified in Exhibit B hereto (the “Supplemental Representation”). The Supplemental Representation is accurate as of June 19, 2007, and Issuer does not undertake any obligation to update the applicability, veracity or accuracy of such representation on any other date except as otherwise required under the Purchase Agreement.

Section 3.MISCELLANEOUS

3.1This Amendment shall be construed in connection with and as part of the Purchase Agreement, and, except as modified and expressly amended by this Amendment, all terms, conditions and covenants contained in the Purchase Agreement, are hereby ratified and shall be and remain in full force and effect.

3.2Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this Amendment may refer to the Purchase Agreement without making specific reference to this Amendment, but nevertheless all such references shall include this Amendment, unless the context otherwise requires.

3.3The description headings of the various sections or parts of this Amendment are for convenience only and shall not affect the meaning or construction of any of the provisions hereof.

3.4This Amendment shall be governed by and construed in accordance with Kansas law.

3.5This Amendment may be executed in any number of counterparts, each executed counterpart constituting an original, but all together only one agreement. Signature to this Amendment may be given by facsimile or other electronic transmission and such signatures shall be fully binding on the party sending the same.

[Signature page follows]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above.

ISSUER:	WITS BASIN PRECIOUS MINERALS INC.,
	a Minnesota corporation
	By:
	Name:	Mark D. Dacko
	Title:	Chief Financial Officer
PURCHASER:	CHINA GOLD, LLC,
	a Kansas limited liability company
	By:	Pioneer Holdings, LLC
	Its:	Manager
	By:
	Name:
	Title:

Exhibit B

SUPPLEMENTAL REPRESENTATION

With respect to Section 6.22 of the Convertible Notes Purchase Agreement, please note that Section 7.01(k) of the Merger Agreement with Easyknit Enterprises provides that it is a condition to the obligations of the parties under the Merger Agreement that the Hong Kong Securities and Futures Commission (the "SFC") issue a ruling that the merger and related transactions do not require the holders of record of Wits Basin shares to make a mandatory general offer for all shares of Easyknit as a result of, or in connection with, the merger under the Hong Kong Code on Takeovers.  Easyknit has a made a request to the SFC for the ruling.  The sole issue for the ruling is whether there will be an acquisition of "control" of Easyknit upon the merger, which under the Hong Kong Code on Takeovers means an aggregate of 30% or more of the voting rights of Easyknit.  To further satisfy the SFC with respect to establishing that a block of Wits Basin shareholders that would hold an aggregate of 30% of the post-merger shares of Easyknit are not acting in concert, Wits Basin has submitted questionnaires from its officers, directors and 5% holders certifying that they are not so acting in concert.  The SFC has not yet made its final decision on the ruling, but has indicated that it needs evidence that a larger number of Wits Basin shares are not held by shareholders acting in concert.  Accordingly, Wits Basin is currently preparing a questionnaire to be sent to a larger group of its shareholders (possibly all other shareholders) to obtain similar certifications that they are not acting in concert, respectively.

In the event Wits Basin cannot affirmatively establish that its shareholders are not acting in concert to acquire control of Easyknit in a manner acceptable to the SFC, it is likely the SFC will not provide the necessary ruling.  Absent a waiver of the aforementioned condition in the Merger Agreement by Easyknit and Wits Basin, the parties would not be able to complete the merger as currently intended without the SFC ruling.  Easyknit has informally indicated that it might not provide such waiver should it become necessary.

EX-10.2

EXHIBIT 10.2

NEITHER THIS CONVERTIBLE NOTE NOR THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION (TOGETHER, THE “SECURITIES LAWS”) AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED OR ENCUMBERED IN THE ABSENCE OF COMPLIANCE WITH SUCH SECURITIES LAWS AND UNTIL THE ISSUER THEREOF SHALL HAVE RECEIVED AN OPINION FROM COUNSEL ACCEPTABLE TO IT THAT THE PROPOSED DISPOSITION WILL NOT VIOLATE ANY APPLICABLE SECURITIES LAWS. TRANSFER OF THIS CONVERTIBLE NOTE IS ALSO RESTRICTED BY THE CONVERTIBLE NOTES PURCHASE AGREEMENT REFERRED TO HEREIN.

THE PAYMENT AND PERFORMANCE OF THIS CONVERTIBLE NOTE IS SUBJECT TO THE TERMS AND CONDITIONS OF THAT CERTAIN CONVERTIBLE NOTES PURCHASE AGREEMENT ENTERED INTO AS OF APRIL 10, 2007, AS AMENDED BY THAT CERTAIN AMENDMENT TO CONVERTIBLE NOTES PURCHASE AGREEMENT DATED JUNE 19, 2007, BY THE HOLDER AND ISSUER.

CERTIFICATE NO: 3

CONVERTIBLE PROMISSORY NOTE

$4,000,000.00 June 19, 2007

FOR VALUE RECEIVED, Wits Basin Precious Minerals Inc., a corporation organized and existing under the laws of the State of Minnesota (“Issuer”), hereby unconditionally promises to pay to the order of China Gold LLC, a Kansas limited liability company, or its successors and assigns (the “Holder”) on or before September 17, 2007, subject to extension as set forth below (the “Maturity Date”), the principal sum of up to Four Million Dollars and 00/100 Cents ($4,000,000.00) (the “Principal”), together with accrued and unpaid interest thereon, as provided herein, from the date set forth in Section 3 below until fully paid (the “Indebtedness”), all without relief from valuation or appraisement laws. This Convertible Promissory Note (the “Note”) is issued pursuant to that certain Convertible Notes Purchase Agreement dated as of April 10, 2007, as amended by that certain Amendment to Convertible Notes Purchase Agreement dated June 19, 2007, by and between Issuer and Holder (as amended, modified, or replace from time to time, the “Convertible Notes Purchase Agreement”). The Maturity Date may be extended for additional periods of thirty (30) days, but in no event later than December 31, 2007, upon the written request of Issuer, provided that at the time of the original Maturity Date defined above and the last day of any extension period that certain Agreement and Plan of Merger dated April 20, 2007 by and among Issuer, Easyknit Enterprises Holdings Limited and Race Merger, Inc. (as the same may be amended from time to time, the “Merger Agreement”) has not been terminated by the parties thereto. In the event the Merger Agreement is terminated after the original Maturity Date defined above, the Indebtedness shall become due and payable upon the expiration of fifteen (15) days following Issuer’s receipt of written notice of Holder calling such Indebtedness due and payable due to the termination of the Merger Agreement.

1.Payment of Principal and Interest. Subject to acceleration, earlier required payment, in cash or by conversion, as provided for elsewhere in this Note, the Convertible Notes Purchase Agreement or any of the other agreements, documents, and instruments relating to any of the Indebtedness or any security therefor that are required by the Convertible Notes Purchase Agreement to be executed and delivered to or for the benefit of Holder (collectively, together with this Note and the Convertible Notes Purchase Agreement, the “Investment Documents”), the principal balance of this Note, and any accrued and unpaid interest thereon, shall be due and payable at the earlier of (i) the Maturity Date or (ii) such time Issuer and/or Issuer’s majority-owned subsidiaries receive cumulative financing from one or more third parties in the aggregate amount of at least $50,000,000 from and after the date of this Note (a “Substantial Financing”).

Issuer shall make all payments payable in cash under this Note in lawful money of the United States. All payments paid by Issuer to Holder under this Note and under the other Investment Documents shall be applied in the following order of priority: (a) to amounts, other than principal and interest, due to Holder pursuant to this Note for all costs of collection of any kind, including reasonable attorneys’ fees and expenses; (b) to accrued but unpaid interest on this Note; and (c) to the unpaid principal balance of this Note. If Issuer makes any payment of principal, interest or other amounts upon the Indebtedness by check, draft, or other remittance, Holder shall not be deemed to have received such payment until Holder actually receives the payment instrument.

2.Additional Conditional Consideration. In the event this Note is paid in full by Issuer in cash or other immediately available funds, whether pursuant to a Substantial Financing, Prepayment of the entire outstanding balance of this Note, or at the Maturity Date (but not upon the conversion or other satisfaction of this Note), Holder shall, subject to the limitations of Section 7.6, have the right to purchase, from the date of such payment in full until the earlier of (i) immediately prior to the Merger (as defined in Section 7.3) or (ii) five (5) years from the date such payment, up to 4,000,000 shares of Issuer’s common stock at a price per share of $1.00 (the “Purchase Right”). In the event the issuance of a Purchase Right is required pursuant to the terms of this Section 2, Issuer shall deliver to Holder an option agreement, with standard terms and conditions as agreed upon by Issuer and Holder, evidencing Holder’s purchase rights as set forth herein. Issuer shall provide, as reasonably practicable, Holder notice of the proposed time of effectiveness of a Substantial Financing or Merger within a reasonable time prior to such proposed effectiveness. The provisions of Section 8 shall apply as practicable to any such purchase rights arising from this Section to avoid any inequity to Issuer and Holder.

3.Calculation of Interest. Interest shall accrue on the outstanding principal balance at the end of each day on which any amount is outstanding under this Note at the rate of 8.25% (the “Interest Rate”) per annum. Interest shall be calculated on a basis of the actual number of days elapsed over a year of 365 days, commencing as of the date hereof.

4.Prepayment. This Note may be prepaid in cash or other immediately available funds, in whole or in part, by Issuer at any time and from time to time, without premium or penalty (a “Prepayment”).

5.Waiver. Payment of principal and interest due under this Note shall be made without presentment or demand. The Issuer and all others at any time liable directly or indirectly (including, without limitation, the Issuer, any co-makers, endorsers, sureties and guarantors, all of which are referred to herein as “Parties”), severally waive presentment, demand and protest, notice of protest, demand, and dishonor, and nonpayment of this Note, and all diligence in collection and agree to pay all costs of collection when incurred, including reasonable attorneys’ fees, and to perform and comply with each of the covenants, conditions, provisions, and agreements of the Issuer contained in every instrument now evidencing the Indebtedness. No release by Holder of any security for payment of the Indebtedness or any modification or restructuring in respect of any lien or security interest held or at any time obtained or acquired by Holder for payment of such Indebtedness shall operate to release, discharge, impair or alter the liability of any Party liable at any time directly or indirectly for payment of such Indebtedness.

6.Renewal and Modification. Issuer further agrees that the Indebtedness may be from time to time, extended, renewed, modified, rearranged, or evidenced by one or more other notes or obligations in substitution for this Note and upon and for such term or terms agreed to by Issuer and Holder in writing, and with or without notice to other Parties. Issuer agrees that upon and after such extension, renewal, modification, rearrangement, substitution, or other change in form of the Indebtedness, each of the other Parties shall remain liable in respect of the Indebtedness so renewed, extended, modified, rearranged, or otherwise evidenced in the same capacity and to the same extent as prior thereto. No release or discharge (in whole or in part) of any Party hereto by Holder shall in any manner impair, release, discharge, or alter the liability of any other Party.

7.Conversion.

7.1Optional Conversion. Subject to the limitations set forth in Section 7.6 hereof, from and after the expiration of one hundred twenty (120) days from the date hereof, at any time while any portion of the Principal or accrued and unpaid interest under this Note is outstanding, the Holder shall have the right, at the Holder’s option, to convert (an “Optional Conversion”) all or any portion of the unpaid Principal and accrued interest under this Note (the “Conversion Amount”) into the number of shares of Issuer’s common stock (the “Common Stock”) computed by dividing the Conversion Amount by a conversion price of $1.00 per share (the “Conversion Price”). The Conversion Price shall be subject to adjustment from time to time pursuant to Section 8 hereof.

7.2Effect and Procedure of Optional Conversion. An Optional Conversion shall occur pursuant to the terms of this Note by Holder’s delivery to Issuer at its principal office a notice of Optional Conversion identifying the amount of the Optional Conversion (a “Notice of Optional Conversion”) (by facsimile or other reasonable means of communication) prior to 5:00 p.m. local time in Minneapolis, Minnesota on the Conversion Date. Holder shall not be required to physically surrender this Note to Issuer unless the entire unpaid Principal amount of this Note, together with accrued and unpaid interest, is so converted or otherwise paid in full. The Holder and Issuer shall maintain records showing the Principal and accrued and unpaid interest under the Note so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and Issuer, so as not to require physical surrender of this Note upon each such Optional Conversion. In the event of any dispute or discrepancy, such records of Issuer shall be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Note is converted as aforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders this Note to Issuer, whereupon Issuer will forthwith issue and deliver upon the order of the Holder a new note of like tenor, registered as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid Principal and any unpaid and accrued interest of this Note. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted Principal amount of this Note may be less than the amount stated on the face hereof.

Upon receipt of any Notice of Optional Conversion, Issuer shall, within five (5) Business Days, issue and deliver to such Holder at the address designated by such Holder a certificate or certificates for the number of shares of Common Stock the Holder shall be entitled to upon such Optional Conversion (bearing such legends as are required by applicable state and federal securities laws in the opinion of counsel to Issuer). The person or persons entitled to receive the shares of Common Stock issuable upon such Optional Conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of the Conversion Date. Upon Optional Conversion of all or a portion of this Note, Issuer will be forever released from all of its obligations and liabilities under this Note with regard to that portion of the Principal and accrued interest being converted, including without limitation the obligation to pay such portion of the Principal and accrued interest.

7.3 Automatic Conversion. All unpaid Principal and accrued and unpaid interest on this Note shall be automatically converted (an “Automatic Conversion”), effective immediately prior to the effective date of Issuer’s proposed merger transaction with Easyknit Enterprises Holdings Limited (the “Merger”), into the number of shares of Common Stock computed by dividing such outstanding amount by the then current Conversion Price.

7.4 Effect and Procedure of Automatic Conversion. Upon Automatic Conversion, Issuer will be forever released from all of its obligations and liabilities to Holder under this Note, including without limitation the obligation to pay the principal amount and accrued interest under the Note. Upon Holder’s surrender of this Note to Issuer at its principal office, Issuer shall, at its expense and as soon as practicable thereafter, issue and deliver to Holder one or more certificates representing that number of shares of Common Stock to which Holder is entitled, or, as applicable capital stock of the surviving company to the Merger pursuant to Section 7.3 hereof (in any case, bearing such legends as are required by applicable state and federal securities laws in the opinion of counsel to Issuer). The Automatic Conversion of this Note shall be deemed to have been made immediately prior to the effective time of the Merger, and the person or persons entitled to receive Common Stock upon such conversion shall be treated for all purposes as the record holder(s) of such Common Stock as of such date.

7.5 No fractional shares. No fractional shares shall be issued upon any conversion of this Note. In lieu of any fractional share of Common Stock to which Holder would otherwise be entitled, an amount in cash equal to such fraction multiplied by the fair market value of a share of Common Stock, such fair market value to be determined as follows (as applicable): (a) if the Common Stock is traded on an exchange or is quoted on The NASDAQ National Market, NASDAQ SmallCap Market or the OTC Bulletin Board, then the average closing or last sale prices, respectively, reported for the date of conversion; (b) if the Common Stock is traded in the over-the-counter market, then the average of the closing bid and asked prices reported on the date of conversion; or (c) if the Common Stock is not publicly traded and there has been no Qualifying Sale, then fair market value of such stock will be determined by Issuer’s board of directors, acting in good faith utilizing customary business valuation criteria and methodologies (without discount for lack of marketability or minority interest).

7.6 Limitation of Conversion of Note or Exercise of Purchase Right. Except with respect to a conversion pursuant to Section 7.3 hereof, Holder may not convert any or all of the outstanding balance of this Note or exercise any Purchase Right set forth in Section 2 during the time period and to the extent that the shares of Common Stock that Purchaser could acquire upon such conversion or exercise would cause the Beneficial Ownership (as defined below) of Common Stock held by Holder and its Affiliates (as defined in the Convertible Notes Purchase Agreement) to exceed 4.99%. The parties shall compute “Beneficial Ownership" of Common Stock in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Holder will, at the request of Issuer, from time to time, notify Issuer of Holder’s computation of Holder’s Beneficial Ownership. By written notice to Issuer, Holder may waive the provisions of this Section 7.6, but any such waiver will not be effective until the 61st day after delivery thereof. Nothing herein shall preclude Holder or its Affiliates from disposing of a sufficient number of other shares of Common Stock beneficially owned by Holder or its Affiliates so as to thereafter permit the conversion of this Note or exercise of the Purchase Right.

8.Conversion Price Adjustments.

8.1Adjustment for Stock Splits or Combinations. In the event of: (a) the payment of dividends on any of Issuer’s capital stock payable in Common Stock or securities convertible into or exercisable for Common Stock; (b) the subdivision of Issuer’s outstanding shares of Common Stock into a greater number of shares; or (c) the combination of Issuer’s outstanding shares of Common Stock, by reclassification or otherwise; then the Conversion Price shall be adjusted proportionately to reflect the reduction or increase in the value of each share of Common Stock.

8.2Notice of Adjustment. Upon any adjustment of the Conversion Price, Issuer shall give written notice thereof within thirty (30) days, by first-class mail, postage prepaid, addressed to Holder as shown on Issuer’s books, which notice shall state the adjusted Conversion Price and set forth in reasonable detail the method of calculation and the facts upon which such calculation is based.

8.3Effect of Reorganization, Reclassification, Merger, Etc. If at any time Issuer: (a) reorganizes its capital stock (other than by the issuance of shares of Common Stock in subdivision of outstanding shares of Common Stock, and other than by a share combination, as provided for in Section 8.1); (b) consolidates or merges with another corporation, or sells, conveys, leases or otherwise transfers all or substantially all of its property to any other corporation or entity, which transaction is effected in a manner such that the holders of Common Stock shall be entitled to receive cash, stock, securities, ownership interest, or assets with respect to or in exchange for Common Stock; or (c) pays a dividend or makes any other distribution upon any class of its capital stock, which dividend or distribution is payable in Issuer securities or other Issuer property (other than cash); then, as a part of such transaction, lawful provision shall be made so that Holder shall have the right thereafter to receive, upon conversion of this Note, the number of shares of stock, ownership interests, or other securities or property of the Issuer or of the successor corporation or entity resulting from such transaction, or of the corporation or entity to which the Issuer property has been sold, conveyed, leased or otherwise transferred, as the case may be, which Holder would have been entitled to receive upon transaction if this Note had been converted immediately prior thereto. In any such case, appropriate adjustments (as determined by the Issuer’s board of directors) shall be made in the application of the provisions set forth in this Note (including an adjustment to the Conversion Price) so that the provisions set forth herein shall thereafter be applicable, as near as reasonably may be, in relation to any shares, ownership interests, or other property thereafter deliverable upon the conversion of this Note as if the Note had been converted immediately prior to such transaction and Holder had carried out the terms of the exchange as provided for by such transaction. The Issuer shall not effect any such capital reorganization, consolidation, merger or transfer unless, upon or prior to the consummation thereof, the successor corporation(s) or entity(ies) to which Issuer property has been sold, conveyed, leased or otherwise transferred shall assume by written instrument the obligation to deliver to Holder such shares of stock, ownership interests, securities, cash, or property which Holder is entitled to receive under the foregoing provisions of this Section 8.3.

8.4Subsequent Issuance or Sale of Common Stock.

(a)In the event Issuer shall issue, after the date hereof and while this Note remains outstanding (a “Dilutive Issuance”), (i) any additional shares of Common Stock or other class of the Issuer’s common stock (“Additional Shares”) or (ii) options, warrants or other securities that can, by their terms, be converted into Common Stock or other classes of Issuer’s common stock (“Additional Option Shares”) for consideration per share less than the Conversion Price, the Conversion Price shall automatically be adjusted to a price (calculated to the nearest cent) determined by dividing:

(i) an amount equal to the sum of (x) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Conversion Price, (y) the number of shares of Common Stock issuable upon conversion or exchange of any obligations or of any shares of stock of Issuer outstanding immediately prior to such issue or sale multiplied by the Conversion Price, and (z) an amount equal to the aggregate “consideration actually received” by Issuer pursuant to such Dilutive Issuance, by

(ii) the sum of the number of shares of Common Stock outstanding immediately after such issue or sale and the number of shares of Common Stock issuable upon conversion or exchange of any obligations or of any shares of stock of Issuer outstanding immediately after such issue or sale.

Issuer shall immediately notify the holder of such adjusted Conversion Price.

(b)If Issuer shall sell and issue shares of Common Stock or other class of Issuer’s common stock, or rights, options, warrants, or convertible securities containing the right to subscribe for or purchase shares of Common Stock or other class of Issuer’s common stock, for consideration consisting, in whole or in part, of property other than cash or its equivalent, then in determining the total consideration per share paid to Issuer for the purposes of this Section 8.4, the board of directors of Issuer shall determine, in its discretion, the fair value of said property and such determination, if made in good faith, shall be binding upon the Holder.

For purposes of this Section 8.4, the following provisions will be applicable:

(A)In the case of an issue or sale for cash of shares of Common Stock, the “consideration actually received’” by Issuer relating to a Dilutive Issuance therefore shall be deemed to be the amount of cash received in such Dilutive Issuance, before deducting therefrom any commissions or expenses paid by Issuer.

(B)In case of a Dilutive Issuance (otherwise than upon conversion or exchange of obligations or shares of stock of Issuer) of additional shares of Common Stock for a consideration other than cash or a consideration partly other than cash, the amount of the consideration other than cash received by Issuer for such shares, then the board of directors shall determine, in its discretion, the fair the value of such consideration, which, if made in good faith, shall be binding upon the Holder.

(C)In case of a Dilutive Issuance by Issuer in any manner of any rights to subscribe for or to purchase shares of Common Stock, or any option for the purchase of shares of Common Stock or stock convertible into Common Stock, all shares of Common Stock or stock convertible into Common Stock to which the holders of such rights or options shall be entitled to subscribe for or purchase pursuant to such rights or options shall be deemed “outstanding” as of the date of the offering of such rights or the granting of such options, as the case may be, and the minimum aggregate consideration named in such rights or options for the shares of Common Stock or stock convertible into Common Stock covered thereby, plus the consideration, if any, received by Issuer for such rights or options, shall be deemed to be the “consideration actually received” by Issuer (as of the date of the offering of such rights or the granting of such options, as the case may be) for the issuance of such shares.

(D)In case of a Dilutive Issuance by Issuer in any manner of any obligations or of any shares of stock of Issuer that shall be convertible into or exchangeable for Common Stock, all shares of Common Stock issuable upon the conversion or exchange of such obligations or shares shall be deemed issued as of the date such obligations or shares are issued, and the amount of the “consideration actually received” by Issuer for such additional shares of Common Stock shall be deemed to be the total of (X) the amount of consideration received by Issuer upon the issuance of such obligations or shares, as the case may be, plus (Y) the minimum aggregate consideration, if any, other than such obligations or shares, receivable by Issuer upon such conversion or exchange, except in adjustment of dividends.

(E)The amount of the “consideration actually received” by Issuer upon the issuance of any rights or options referred to in subparagraph (C) above or upon the issuance of any obligations or shares which are convertible or exchangeable as described in subparagraph (D) above, and the amount of the consideration, if any, other than such obligations or shares so convertible or exchangeable, receivable by Issuer upon the exercise, conversion or exchange thereof shall be determined in the same manner provided in subparagraphs (A) and (B) above with respect to the consideration received by Issuer in case of the issuance of additional shares of Common Stock; provided, however, that if such obligations or shares of stock so convertible or exchangeable are issued in payment or satisfaction of any dividend upon any stock of Issuer other than Common Stock, the amount of the “consideration actually received” by Issuer upon the original issuance of such obligations or shares or stock so convertible or exchangeable shall be deemed to be the value of such obligations or shares of stock, as of the date of the adoption of the resolution declaring such dividend, as determined by the board of directors of Issuer at or as of that date. On the expiration of any rights or options referred to in subparagraph (C), or the termination of any right of conversion or exchange referred to in subparagraph (D), or any change in the number of shares of Common Stock deliverable upon exercise of such options or rights or upon conversion of or exchange of such convertible or exchangeable securities, the Conversion Price shall forthwith be readjusted to such Conversion Prices as would have obtained had the adjustments made upon the issuance of such options, rights or convertible or exchangeable securities been made upon the basis of the delivery of only the number of shares of Common Stock actually delivered or to be delivered upon the exercise of such rights or options or upon the conversion or exchange of such securities.

9.Events of Default. Any one or more of the following events shall constitute an event of default (each, an “Event of Default”) under this Note: (a) Issuer fails to timely pay as and when due any monetary obligation under this Note in accordance with the terms hereof; (b) Issuer’s assignment for the benefit of creditors, or filing of a petition in bankruptcy or for reorganization or to effect a plan or arrangement with creditors; (c) Issuer’s application for, or voluntary permission of, the appointment of a receiver of trustee for any or all Company property; (d) any action or proceeding described in the foregoing paragraphs (b) or (c) is commenced against Issuer and such action or proceeding is not vacated within sixty (60) days of its commencement; (e) Issuer’s dissolution or liquidation; and (f) an event of default under any other Investment Document shall have occurred.

10.Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default (a) all Indebtedness and all other amounts due and owing under this Note shall (at the option of Holder) immediately become due and payable without demand and without notice to Issuer, (b) Holder shall have all rights, powers and remedies set forth in the Investment Documents, as well as any and all rights and remedies available to it under any applicable law or as otherwise provided at law or in equity; (c) Issuer shall pay to Holder, in addition to the sums stated above, the costs of collection, regardless of whether litigation is commenced, including reasonable attorneys’ fees; and (d) notwithstanding any other provision of this Note, during the period of existence of such Event of Default, upon written notice from Holder, interest on the Indebtedness shall accrue and be paid, not at the Interest Rate, but at a default interest rate that is equal to 11.25% per annum.

Holder may employ an attorney to enforce its rights and remedies hereunder and Issuer hereby agrees to pay Holder’s reasonable attorneys’ fees and other reasonable expenses, including reasonable expenses relating to any assistance provided by Holder to Issuer in resolving such defaults and amounts incurred by Holder in exercising any of Holder’s rights and remedies upon an Event of Default. Holder’s rights and remedies under this Note and the other Investment Documents shall be cumulative. Holder shall have all other rights and remedies not inconsistent herewith as provided under the Uniform Commercial Code as in effect in the State of Kansas, or otherwise by law, or in equity. No exercise by Holder of one right or remedy shall be deemed an election, and no waiver by Holder of any Event of Default shall be deemed a continuing waiver. No delay by Holder shall constitute a waiver, election, or acquiescence by it.

11.Revival and Reinstatement of Note. To the extent that any payment to Holder or any payment or proceeds of any collateral received by Holder in reduction of the Indebtedness is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, to Issuer (or Issuer’s successor) as a debtor-in-possession, or to a receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then the portion of the Indebtedness intended to have been satisfied by such payment or proceeds shall remain due and payable hereunder, be evidenced by this Note, and shall continue in full force and effect as if such payment or proceeds had never been received by Holder whether or not this Note has been marked “paid” or otherwise canceled or satisfied or has been delivered to Issuer, and in such event Issuer shall be immediately obligated to return the original Note to Holder and any marking of “paid” or other similar marking shall be of no force and effect.

12.Authority. Issuer warrants and represents that the persons or officers who are executing this Note and the other Investment Documents on behalf of Issuer have full right, power and authority to do so, and that this Note and the other Investment Documents constitute valid and binding documents, enforceable against Issuer in accordance with their terms, and that no other person, entity, or party is required to sign, approve, or consent to, this Note.

13.Governing Law; Consent to Forum. This Note shall be governed by the laws of the State of Kansas without giving effect to any choice of law rules thereof; provided, however, that if any of the collateral securing the Indebtedness shall be located in any jurisdiction other than Kansas, the laws of such jurisdiction shall govern the method, manner and procedure for foreclosure of Holder’s security interest, lien or mortgage upon such collateral and the enforcement of Holder’s other remedies in respect of such collateral to the extent that the laws of such jurisdiction are different from or inconsistent with the laws of Kansas. AS PART OF THE CONSIDERATION FOR NEW VALUE THIS DAY RECEIVED, ISSUER HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE COURT LOCATED WITHIN JOHNSON COUNTY, KANSAS OR FEDERAL COURT IN THE DISTRICT OF KANSAS, AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED OR REGISTERED MAIL AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. ISSUER WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED AGAINST IT AS PROVIDED HEREIN AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE. ISSUER FURTHER AGREES NOT TO ASSERT AGAINST HOLDER (EXCEPT BY WAY OF A DEFENSE OR COUNTERCLAIM IN A PROCEEDING INITIATED BY HOLDER) ANY CLAIM OR OTHER ASSERTION OF LIABILITY WITH RESPECT TO THIS NOTE, THE OTHER INVESTMENT DOCUMENTS, HOLDER’S CONDUCT OR OTHERWISE IN ANY JURISDICTION OTHER THAN THE FOREGOING JURISDICTIONS.

14.WAIVER OF JURY TRIAL AND COUNTERCLAIMS. TO THE FULLEST EXTENT PERMITTED BY LAW, AND AS SEPARATELY BARGAINED-FOR CONSIDERATION TO HOLDER, ISSUER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY (WHICH HOLDER ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR IN ANY COUNTERCLAIM OF ANY KIND ARISING OUT OF OR OTHERWISE RELATING TO THIS NOTE, THE INDEBTEDNESS, THE COLLATERAL SECURING THE INDEBTEDNESS, OR THE HOLDER’S CONDUCT IN RESPECT OF ANY OF THE FOREGOING.

15.Transfer of Note. Issuer shall not transfer any obligations hereunder without Holder’s prior written consent, which may be withheld in Holder’s sole and absolute discretion. With the prior written consent of Issuer, which shall not be unreasonably withheld, conditioned, or delayed, Holder may participate, sell, assign, transfer or otherwise dispose of all or any portion of its interest in this Note (including Holder’s rights, title, interests, remedies, powers and duties hereunder) to a purchaser, participant, any syndicate, or any other Person (each, a “Note Purchaser”). In connection with any such disposition (and thereafter), Holder may, with adequate safeguards of confidentiality in a manner satisfactory to Issuer, disclose any financial information Holder may have concerning Issuer to any such Note Purchaser or potential Note Purchaser.

16.Further Assurances. Issuer agrees to execute and deliver such further documents and to do such other acts as Holder may request in order to effect or carry out the terms of this Note and the other Investment Documents and the due performance of Issuer’s obligations hereunder and thereunder.

17.Relationship to Security Agreement. This Note shall be entitled to the benefits of, shall be construed in accordance with any Security Agreement securing the Indebtedness.

18.Miscellaneous.

(a)Time is of the essence with respect to this Note.

(b)Issuer hereby waives presentment, demand, protest, and notice of dishonor and protest. No waiver of any right or remedy of the Holder under this Note shall be valid unless in a writing executed by the Holder and any such waiver shall be effective only in the specific instance and for the specific purpose given. All rights and remedies of the Holder of this Note shall be cumulative and may be exercised singly, concurrently, or successively.

(c)Unless otherwise provided herein, any notice required or permitted to be given hereunder shall be given by Issuer to the Holder or the Holder to the Company in accordance with the Convertible Notes Purchase Agreement.

(d)Any provision of this Note that is prohibited or unenforceable in any jurisdiction shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof in that jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction.

(e)This Note and the other Investment Documents collectively: (i) constitute the final expression of the agreement between Issuer and Holder concerning the Indebtedness; (ii) contain the entire agreement between Issuer and Holder respecting the matters set forth herein and in the other Investment Documents; and (iii) may not be contradicted by evidence of any prior or contemporaneous oral agreements or understandings between Issuer and Holder. Neither this Note nor any of the terms hereof may be terminated, amended, supplemented, waived or modified orally, but only by an instrument in writing executed by the party against which enforcement of the termination, amendment, supplement, waiver or modification is sought.

(f)If there is a conflict between or among the terms, covenants, conditions or provisions of this Note and the other Investment Documents, then any term, covenant, condition and/or provision that Holder may elect to enforce from time to time so as to enlarge the interest of Holder in its security for the Indebtedness, afford Holder the maximum financial benefits or security for the Indebtedness, and/or provide Holder the maximum assurance of payment of the Indebtedness and the Indebtedness in full, shall control. ISSUER ACKNOWLEDGES AND AGREES THAT IT HAS BEEN PROVIDED WITH SUFFICIENT AND NECESSARY TIME AND OPPORTUNITY TO REVIEW THE TERMS OF THIS NOTE AND EACH OF THE INVESTMENT DOCUMENTS WITH ANY AND ALL COUNSEL IT DEEMS APPROPRIATE, AND THAT NO INFERENCE IN FAVOR OF, OR AGAINST, HOLDER OR ISSUER SHALL BE DRAWN FROM THE FACT THAT EITHER SUCH PARTY HAS DRAFTED ANY PORTION OF THIS NOTE OR ANY OF THE INVESTMENT DOCUMENTS.

(g)The terms “include”, “including” and similar terms shall be construed as if followed by the phrase “without being limited to.” The term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or.” Words of masculine, feminine or neuter gender shall mean and include the correlative words of the other genders, and words importing the singular number shall mean and include the plural number, and vice versa. All article, section, schedule, and exhibit captions are used for convenient reference only and in no way define, limit or describe the scope or intent of, or in any way affect, any such article, section, schedule, or exhibit. Unless the context of this Note clearly requires otherwise, references to the plural include the singular, references to the singular include the plural. Any reference in this Note or in the Investment Documents to this Note or to any of the Investment Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, and supplements thereto and thereof, as applicable. An Event of Default shall “continue” or be “continuing” until such Event of Default has been waived in writing by Holder or completely cured in accordance with the terms of the applicable Investment Documents.

[The remainder of this page is intentionally blank. Signature page follows.]

IN WITNESS WHEREOF, Issuer has executed and delivered this Note as of the date first stated above.

ISSUER:

WITS BASIN PRECIOUS MINERALS INC.

By:

Name:

Title:

EX-10.3

EXHIBIT 10.3

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (this “Agreement”) is dated as of June 19, 2007, and is by and between Wits Basin Precious Minerals Inc., a Minnesota corporation (“Issuer”), and China Gold, LLC a Kansas limited liability company, its successors and assigns (together with its successors and assigns, “Purchaser”).

RECITALS

The following recitals are a material part of this Agreement.

A.Issuer and Purchaser are parties to that certain Convertible Notes Purchase Agreement dated as of April 10, 2007, as amended by the Amendment to the Convertible Notes Purchase Agreement dated as of June 19, 2007 (as the same may hereafter be further modified, amended, restated or supplemented from time to time, the “Convertible Notes Purchase Agreement”), pursuant to which, among other things, Issuer has agreed to issue and sell, and Purchaser has agreed to purchase from Issuer 8.25% Secured Convertible Notes in an aggregate principal amount of at least $12,000,000 (the “Notes”) within 12 month of the Initial Closing Date. All capitalized terms used in this Agreement without definition have the definitions given to them in the Convertible Notes Purchase Agreement.

B.Pursuant to the Purchase Agreement, on April 10, 2007, Issuer sold, and Purchaser purchased, the Initial Note in the amount of $3,000,000. On May 7, 2007, Issuer sold, and Purchaser purchased, an Additional Note in the amount of $2,000,000.

C.Issuer desires that Purchaser acquire an Additional Note in the principal amount of $4,000,000.

D.Under the terms of the Convertible Notes Purchase Agreement, Purchaser’s obligation to purchase the Additional Note is subject to Purchaser’s receipt of a Security Agreement, in form and substance satisfactory to Purchaser and Issuer, granting Purchaser a security interest in all of the assets acquired from the use of proceeds for the sale of all of the Additional Notes.

E.To cause Purchaser to purchase the Additional Notes as contemplated in the Convertible Notes Purchase Agreement, Issuer has agreed to grant to Purchaser a security interest in certain of its existing property to secure all of its existing and future obligations to Purchaser, including all of its Obligations.

AGREEMENT

NOW, THEREFORE, to cause Purchaser to purchase the Additional Notes, and in recognition that Purchaser would not be required to purchase the Additional Notes but for Issuer’s promises and agreements hereunder, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, Issuer and Purchaser agree as follows:

1.Grant of Security Interest. Issuer grants to Purchaser a present and continuing security interest in all of Issuer’s right, title and interest in and to all the following property of Issuer (collectively, the “Collateral”):

(a)Promissory note of China Global Mining Resources Limited, a corporation organized and existing under the laws of the British Virgin Islands (“China Global”) in the amount of US$2,000,000 dated as of June 15, 2007 in favor of Issuer;

(b)All contract rights and privileges and instruments now or hereafter assigned or pledged as security or guaranty the payment of the promissory note referenced in subsection (a) above, including but not limited to: (i) Joint Venture Agreement dated April 14, 2007 and Supplemental Agreement dated June 6, 2007 with Shaanxi Hua Ze Nickle Smelting Co. in respect of acquisition of 80% equity interest in Sino-American Hua Ze Nickel & Cobalt Metal Co., Ltd; and (ii) commodity purchase agreement dated June 15, 2007 with Shaanxi Hua Ze Nickle Smelting Co. for purchase of 40 tons of electrolytic nickel with purity of not less than 99%;

(c)Promissory note of China Global in the amount of US $5,000,000 dated as of June 15, 2007 in favor of Issuer;

(d)All contract rights and privileges and instruments now or hereafter assigned or pledged to secure or guaranty payment of the promissory note referenced in subsection (c) above, including, but not limited to: (i) Equity Transfer Heads of Agreement dated May 4, 2007 with Lu Benzhao in respect of purchase of 95% of the equity in Yun County Changjiang Mining Company Limited; and (ii) Equity and Asset Transfer Heads of Agreement, dated May 4, 2007 with Lu Benzhao, Lu Nan, Maanshan Zhaoyuan Mining Co., Ltd.and Xiananshan Mining Co., Ltd. In respect of purchase of 100% equity in Nanjing Sudan Mining Co., Ltd. And assets from both of Mannshan Zhaoyuan Mining Co., Ltd. And Xiaonanshan Mining Co., Ltd.;

(e)All financing statements and other writings which now or hereafter evidence a security interest for the benefit of Issuer in the items specified in subsection (a) through (d) above;

(f)All additions and accessions to, replacements and substitutions for, proceeds of, and the use or operation of the property described in subsections (a) through (e) above, whether tangible or intangible, and, to the extent not otherwise included, all payments under any insurance policy (whether or not Purchaser is the loss payee thereof) and under any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral.

To the extent that the Uniform Commercial Code does not apply to any item of the Collateral, it is the intention of the parties and this Agreement that Purchaser have a common law pledge or collateral assignment of such item of Collateral.

2.Security for Obligations. This Agreement secures the payment and performance of all of the Obligations.

3.[Reserved.]

4.Further Assurances.

(a)Issuer agrees that it shall, from time to time and at its sole expense, promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Purchaser may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Purchaser to exercise and enforce its rights and remedies under this Agreement with respect to any Collateral. Without limiting the generality of the foregoing, Issuer shall: (i) if any Collateral is or shall become evidenced by any promissory note or other instrument or any certificate or document of title or the like, deliver and pledge to Purchaser such note, instrument, certificate or document duly endorsed with recourse by Issuer, and accompanied by duly executed instruments of transfer or assignment, all in form and content satisfactory to Purchaser; and (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Purchaser may request, in order to perfect and preserve the security interests granted or purported to be granted hereby.

(b)Issuer hereby authorizes Purchaser to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Collateral, without the signature of Issuer to the extent permitted by law. A copy of this Agreement shall be sufficient as a financing statement to the extent permitted by law.

(c)Issuer will furnish to Purchaser from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Purchaser may reasonably request from time to time, all in reasonable detail.

5.Purchaser’s Duties. The powers conferred on Purchaser under this Agreement are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for monies actually received by it under this Agreement, Purchaser shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against other parties or any other rights pertaining to any Collateral. Upon full and complete payment and performance of all of the Obligations under the Investment Documents, Purchaser shall release the Collateral of the Liens created and granted under this Agreement and, at Issuer’s expense, execute and deliver to Issuer such documents as Issuer shall reasonably request to evidence such release.

6.Issuer Remains Liable. Notwithstanding anything in this Agreement to the contrary, (a) Issuer shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Purchaser of any of its rights under this Agreement shall not release Issuer from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Purchaser shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall Purchaser be obligated to perform any of the obligations or duties of Issuer thereunder or to take any action to collect or enforce any claim for payment assigned under this Agreement.

7.Remedies. If any Event of Default shall have occurred and be continuing:

(a)Purchaser shall have the right pursuant to the applicable Uniform Commercial Code (or pursuant to applicable law for any Collateral not subject to the Uniform Commercial Code) to take immediate possession of the Collateral, and (i) to require Issuer to assemble the Collateral, at Issuer’s expense, and make it available to Purchaser at a place designated by Purchaser which is reasonably convenient to both parties, and (ii) to enter any of the premises of Issuer or wherever any of the Collateral shall be located, and to keep and store the same on such premises until sold or otherwise realized upon (and if such premises are the property of Issuer, Issuer agrees not to charge Purchaser for storage thereof).

(b)Purchaser shall have the right to sell or otherwise dispose of all or any Collateral at public or private sale or sales, with such notice as may be required by law, all as Purchaser, in its sole discretion, may deem advisable. Issuer agrees that ten (10) days written notice to Issuer of any public or private sale or other disposition of such Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Purchaser may designate in such notice. Purchaser shall have the right to conduct such sales on Issuer’s premises, without charge therefor. All public or private sales may be adjourned from time to time in accordance with applicable law. Purchaser shall have the right to sell, lease or otherwise dispose of such Collateral, or any part thereof, for cash, credit or any combination thereof, and Purchaser may purchase all or any part of such Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations.

(c)Purchaser may exercise with respect to the Collateral all of the rights and remedies (i) provided for in this Agreement, (ii) provided under the Convertible Notes Purchase Agreement or under the other Investment Documents, (iii) afforded to a secured party upon a default under the Uniform Commercial Code, or (iv) otherwise available at law or in equity.

8.Indemnity and Expenses.

(a)Issuer agrees to indemnify Purchaser from and against any and all claims, losses and liabilities arising out of or relating to this Agreement or any of the Obligations (including enforcement of this Agreement and Purchaser’s exercise of its rights and remedies under this Agreement), unless such claims, losses and liabilities are caused solely by Purchaser’s gross negligence or willful misconduct.

(b)Issuer shall upon demand pay to Purchaser the amount of any and all charges, costs, fees and expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, that Purchaser may incur following Issuer’s default in connection with (i) the custody, preservation, use of, or the sale of, collection from, or other realization upon, any of the Collateral, (ii) the exercise or enforcement of any of the rights of Purchaser under this Agreement, or (iii) the failure by Issuer to perform or observe any of the provisions of this Agreement. All such fees, expenses and disbursements shall be deemed Obligations secured by this Agreement.

9.Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Kansas without regard to any choice of law rule thereof giving effect to the laws of any other jurisdiction; provided, however, that if any of the Collateral is located in any jurisdiction other than Kansas, then the laws of such jurisdiction shall govern the method, manner and procedure for foreclosure of Purchaser’s security interest in such Collateral and the enforcement of Purchaser’s other remedies in respect of such Collateral to the extent that the laws of such jurisdiction are different from or inconsistent with the laws of Missouri.

10.Organizational Representations; UCC Filing Offices. Issuer represents and warrants to Purchaser that (a) Issuer is a corporation incorporated under the laws of Minnesota and (b) Issuer’s chief executive office is located at 80 South Eighth Street, Suite 900, Minneapolis, Minnesota 55402-8773. If Issuer changes the address of its chief executive office, or if Issuer changes its name, identity, corporate structure or state of incorporation (without implying any right of Issuer to make any such change without the prior consent of Purchaser), then, in each case, Issuer shall give Purchaser not less than ten (10) Business Days prior written notice thereof.

11.Miscellaneous.

(a)No amendment or waiver of any provision of this Agreement nor consent to any departure by Issuer from the terms or provisions of this Agreement, shall in any event be effective unless it shall be in writing and signed by the party against whom enforcement of such amendment, waiver or consent is sought, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

(b)The paragraph and section headings in this Agreement are solely for convenience and shall not be deemed to limit or otherwise affect the meaning or construction of any part of this Agreement. This document shall be construed without regard to any presumption or rule requiring construction against the party causing such document or any portion thereof to be drafted. The section and other headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms of this Agreement. Any pronoun used in this Agreement shall be deemed to cover all genders. The terms “include”, “including” and similar terms shall be construed as if followed by the phrase “without being limited to.” The term “or” has, except where otherwise indicated, the inclusive meaning represented by the phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision or section of this Agreement. An Event of Default shall “continue” or be “continuing” until such Event of Default has been waived in writing by Purchaser.

(c)If any provision or provisions of this Agreement shall be unlawful, then such provision or provisions shall be null and void, but the remainder of the Agreement shall remain in full force and effect and be binding on the parties.

(d)This Agreement may be validly executed and delivered by fax or other electronic transmission and in one or more counterpart signature pages by different signatories thereto.

(e)Any notice or demand that Purchaser may wish to give to Issuer shall be served upon it in the fashion prescribed for notices in the Convertible Notes Purchase Agreement at the address and facsimile number for Issuer set forth in the Convertible Notes Purchase Agreement, and any notice or demand so sent shall be deemed to be served as set forth in the Convertible Notes Purchase Agreement.

12.Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY LAW, AND AS SEPARATELY BARGAINED-FOR CONSIDERATION TO PURCHASER, ISSUER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY (WHICH PURCHASER ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR OTHERWISE RELATING TO THIS AGREEMENT OR ANY OF THE OTHER INVESTMENT DOCUMENTS, THE OBLIGATIONS, THE COLLATERAL, PURCHASER’S CONDUCT IN RESPECT OF ANY OF THE FOREGOING, ANY OTHER INVESTMENT DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, REGARDLIESS OF WHICH PARTY INITATES SUCH ACTION, SUIT, PROCEEDING OR COUNTERCLAIM. TO EFFECTUATE THE FOREGOING, PURCHASER IS HEREBY GRANTED AN IRREVOCABLE POWER OF ATTORNEY TO FILE, AS ATTORNEY-IN-FACT FOR ISSUER, A COPY OF THIS AGREEMENT IN ANY COURT, AND THE COPY OF THIS AGREEMENT SO FILED SHALL CONCLUSIVELY BE DEEMED TO CONSTITUTE ISSUER’S WAIVER OF TRIAL BY JURY IN ANY PROCEEDING ARISING OUT OF OR OTHERWISE RELATING TO THIS AGREEMENT OR ANY OF THE OTHER INVESTOR DOCUMENTS, THE OBLIGATIONS, THE COLLATERAL OR PURCHASER’S CONDUCT IN RESPECT OF ANY OF THE FOREGOING.

[Remainder of page intentionally left blank; signature page follows.]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first written above.

ISSUER:	Wits Basin Precious Minerals Inc.
	a Minnesota corporation
	By:
PURCHASER:	China Gold, LLC
	a Kansas limited liability company
	By:	China Gold, LLC
	Its:	General Partner
	By:

[SIGNATURE PAGE TO SECURITY AGREEMENT]