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): February 2, 2012

WORLD SURVEILLANCE GROUP INC.

(Exact name of registrant as specified in its charter)

Delaware	001-32509	88-0292161
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

State Road 405, Building M6-306A, Room 1400, Kennedy Space Center, Florida 32815

(Address of principal executive offices and Zip Code)

Registrant's telephone number, including area code (321) 452-3545

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):

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

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

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

¨ 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

ITEM 2.03             CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT

ITEM 3.02             UNREGISTERED SALES OF EQUITY SECURITIES

On February 2, 2012 (the “Closing Date”), World Surveillance Group Inc. (the “Company”) closed on a Securities Purchase Agreement (the “Agreement”) with La Jolla Cove Investors, Inc. (“La Jolla”) relating to an aggregate $5.5 million financing, the initial investment of $500,000 of which was paid at closing, for the issuance by the Company of a 4 ¾% Secured Convertible Debenture (the “Debenture”) and an Equity Investment Agreement (the “EIA”) subject to the terms and conditions set forth therein (the “Financing”).

Pursuant to the EIA, La Jolla has agreed to invest in the Company an aggregate of $5.0 million in minimum monthly tranches of $250,000 beginning on the date that is earlier to occur of (i) the effectiveness of the Registration Statement but in no event prior to 91 days after the Closing Date, or (ii) one hundred eighty (180) days following the Closing Date and on each successive thirty (30) day anniversary of such initial investment date; provided, however, that such minimum investment shall increase from $250,000 to $500,000 as long as the VWAP of the Company’s common stock, par value $0.00001 per share (the “Common Stock”) is above $0.09 for the period of ten (10) consecutive Trading Days prior to an investment date; and provided, further, however, that La Jolla shall invest an additional $500,000 on each investment date for each and every increase in the VWAP of the Company’s Common Stock of at least $0.02 above $0.09 for the period of ten (10) consecutive Trading Days prior to an investment date. Pursuant to the EIA, La Jolla also has a right to purchase up to an additional $5,000,000 of Common Stock of the Company, or an aggregate of 23,809,523 shares, at a purchase price equal to $0.21 as follows: on each investment date, La Jolla shall receive the right to purchase a number of shares of Common Stock equal to the amount invested on such investment date divided by $0.21. Under no circumstances will the Common Stock pursuant to this right be settled on a cashless exercise basis.

The Debenture is in the principal amount of $500,000, has a three (3) year term, and has an interest rate of 4 ¾%. The Debenture is convertible by La Jolla into shares of Common Stock beginning on the earlier to occur of (i) the effectiveness of the Registration Statement, but in no event prior to ninety-one (91) days following the Closing Date, or (ii) one hundred eighty one (181) days following the Closing Date as follows: from time to time during each thirty (30) day period from the Closing, La Jolla may convert up to five percent (5%) of the face amount of the Debenture if the VWAP of the Company’s Common Stock is at or below $0.09 or up to ten percent (10%) if the VWAP of the Company’s Common Stock is above $0.09 and for every $0.02 increase in the VWAP of the Company’s Common Stock above $0.09, La Jolla can convert an additional ten percent (10%) of the Debenture. The number of shares of Common Stock into which the Debenture can be converted is equal to the dollar amount of the Debenture being converted divided by the quotient of the Conversion Price divided by 10, plus the Debenture amount being converted divided by the Conversion Price. The Conversion Price is equal to the lesser of (i) $0.35 or (ii) 75% of the average of the VWAP of the Company’s Common Stock during the thirty (30) Trading Days prior to the date of the Conversion Notice, subject to a floor price of $0.075 (subject to adjustment), which if triggered gives the Company the option to convert the portion of the Debenture at a conversion price of $0.075 per share plus pay a cash True-Up Payment on the difference in value of the Common Stock issued versus the Common Stock that would have been issued but for the Floor Price.

The Debenture is secured by a personal guaranty of Michael K. Clark, our Chairman of the Board, and is backed by a mortgage on certain real estate property owned by Mr. Clark. The guaranty terminates on the earlier of nine (9) months, the conversion of the entire principal amount of the Debenture by La Jolla, or the date that La Jolla has converted at least $350,000 of the Debenture and the VWAP of our Common Stock has exceeded $0.09 for at least ten (10) consecutive Trading Days. Pursuant to the terms of the Debenture, La Jolla also has a right of first refusal on future financings of the Company on the terms identified by the Company so long as at least 10% of the Principal Amount of the Debenture is outstanding. La Jolla may require 120% of the principal amount, and accrued and unpaid interest, to become immediately due and payable on certain Events of Default, including but not limited to, the Company’s failure to make payments when due under the Debenture or other material agreements, a breach of the Transaction Documents, a Bankruptcy Event, the Company’s failure to make its SEC filings, the Company’s Common Stock not being eligible to be traded on a Trading Market, the Company’s VWAP being less than $0.01 per share, or not being able to find a broker to trade shares of the Company’s stock.

The Debenture and EIA issued pursuant to the Agreement were issued as restricted securities under an exemption provided by Regulation D, Rule 506, promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and/or Section 4(2) of the Securities Act. Pursuant to the Agreement, the Company has agreed to file a registration statement (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) covering 50,000,000 shares of Common Stock of the Company (the “Shares”), which Shares may be issuable pursuant to the Debenture and the EIA. The Shares to be issued pursuant to the Debenture and the EIA pursuant to the respective terms thereof shall be issued as restricted securities under an exemption provided by Regulation D, Rule 506, promulgated under the Securities Act and/or Section 4(2) of the Securities Act, unless the Registration Statement has been declared effective by the SEC.

A commission will be paid in connection with the Financing as follows: a cash fee of 8% on the first $2 million of proceeds, 6% on the next $2 million, and 4% on any proceeds above $4 million, as well as warrants to purchase a number of shares equal to 10% multiplied by the proceeds. The warrants will have a three-year term, a purchase price of $0.21 and no cashless exercise feature. Such commissions will be paid as the proceeds of the Financing are received by the Company.

Capitalized terms used but not defined herein have the meanings set forth in the applicable agreements. The foregoing information is a summary of certain of the agreements involved in the transactions described above, is not complete, and is qualified in its entirety by reference to the full text of those agreements, certain of which are attached as exhibits to this Current Report on Form 8-K.  Readers should review those agreements for a complete understanding of the terms and conditions associated with this transaction.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS

Exhibit Number	Description
10.1	Securities Purchase Agreement, dated January 25, 2012, by and between World Surveillance Group Inc. and La Jolla Cove Investors, Inc.
10.2	Equity Investment Agreement, dated January 25, 2012, by and between World Surveillance Group Inc. and La Jolla Cove Investors, Inc.
10.3	4 ¾% Secured Convertible Debenture, dated January 25, 2012, by World Surveillance Group Inc
99.1	Press Release dated February 7, 2012.

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.

	World Surveillance Group Inc.
	(Registrant)
Date:  February 7, 2012	/s/ Glenn D. Estrella
	By: Glenn D. Estrella
	Title:  President and Chief Executive Officer

EX-10.1

SECURITIES PURCHASE AGREEMENT

This Securities Purchase Agreement (this “Agreement”) is dated as of January 25, 2012, among World Surveillance Group Inc., a Delaware corporation (the “Company”) and La Jolla Cove Investors, Inc., a California corporation (the "Investor"), with respect to the following facts.

A.           The Company is engaged in the business of developing unique lighter-than-air unmanned aerial vehicles, has registered its Common Stock under the Exchange Act (as defined below), and shares of its Common Stock currently trade on the OTCBB market.

B.           Subject to the terms and conditions set forth in this Agreement and pursuant to the Securities Act (as defined below), the Company desires to issue and sell to the Investor, and the Investor desires to purchase from the Company certain Securities (as defined below) of the Company.

NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and intending to be legally bound, the Company and the Investor agree as follows:

ARTICLE 1.
DEFINITIONS

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

“Action” as to any Person, means any action, suit, inquiry, notice of violation, proceeding (including any partial proceeding such as a deposition) or investigation pending or threatened in writing against or affecting such Person, any of such Person’s Subsidiaries or any of such Person’s or such Subsidiaries’ respective properties, before or by any Governmental Authority, arbitrator, regulatory authority (federal, state, county, local or foreign), stock market, stock exchange or trading facility.

“Affiliate” has the meaning ascribed to such term in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.

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

“Buy-In” has the meaning set forth in Section 4.1(c).

“California Courts” means the state and federal courts sitting in the City of San Francisco, State of California.

“Commission” means the Securities and Exchange Commission.

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“Common Stock” means the common stock of the Company, par value $0.00001 per share, and any securities into which such common stock may hereafter be reclassified or for which it may be exchanged as a class.

“Company” has the meaning set forth in the recitals to this Agreement.

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

“Convertible Debenture” means that certain 4¾% Convertible Debenture, issued by Company to Investor or its registered assigns (the “Holder), in the form of Exhibit B to this Agreement.

“Environmental Laws” has the meaning set forth in Section 3.1(t).

“Equity Investment Agreement” means the Equity Investment Agreement of even date herewith, between the Company and the Investor, providing the Investor with the right to purchase up to $5,000,000 of Common Stock in accordance with the terms set forth therein, in the form of Exhibit A to this Agreement.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Existing Company Entities” means the Company and its Subsidiaries in existence as of the date of this Agreement, and “Existing Company Entity” means any of the Company and any of its Subsidiaries in existence as of the date of this Agreement.

“Force Majeure Event” means an act or event, including, as applicable, an act of God, act of the public enemy, fire, earthquake, flood, explosion, war, invasion, insurrection, riot, mob violence, sabotage, terrorism, inability to procure or a general shortage of labor, equipment, facilities, materials, or supplies in the open market, failure or unavailability of transportation, strike, lockout, actions of labor unions, a taking by eminent domain, requisitions and laws or orders of government or civil, military, or naval authorities, or any other cause, whether similar or dissimilar to the foregoing that is not within the reasonable control of the Company, so long as such act or event, in each case, (i) is not due to the fault or negligence of Company, and (ii) is not reasonably foreseeable and avoidable with reasonable efforts by the Company.

“Fundamental Transaction” means each of (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination).

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“GAAP” means U.S. generally accepted accounting principles applied on a consistent basis during the periods involved.

“Governmental Body” shall mean any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; or (c) governmental or quasi-governmental authority of any nature (including any governmental or administrative division, department, agency, commission, instrumentality, official, organization, unit, body or entity) and any court or other tribunal.

“Intellectual Property Rights” has the meaning set forth in Section 3.1(o).

“Knowledge” shall mean with respect to the Company and the Existing Company Entities those facts that are actually known by Glenn D. Estrella, W. Jeffrey Sawyers, Barbara M. Johnson and Daniyel Erdberg.

“Legal Requirement” shall mean any federal state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body (or under the authority of any national securities exchange upon which the Common Stock is then listed or traded). Reference to any Legal Requirement means such Legal Requirement as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, and reference to any section or other provision of any Legal Requirement means that provision of such Legal Requirement from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision.

“Lien” means any lien, charge, encumbrance, security interest, right of first refusal, right of participation, right of redemption or other restrictions of any kind.

“Material Adverse Effect” means any of (i) a material and adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material and adverse effect on the results of operations, assets, properties, prospects, business or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material and adverse impairment to the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document.

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“Material Contracts” has the meaning set forth in Section 3.1(w).

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

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

“SEC Reports” has the meaning set forth in Section 3.1(h).

“Securities Act” means the Securities Act of 1933, as amended.

“Share Delivery Date” has the meaning set forth in Section 4.1(c).

“Securities” means the Convertible Debenture and Equity Investment Agreement being issued and sold to the Investor by the Company hereunder, as well as the shares of Common Stock underlying the Convertible Debenture and Equity Investment Agreement.

“Short Sales” include, without limitation, all “short sales” as defined in Rule 200 promulgated under Regulation SHO under the Exchange Act and all types of direct and indirect stock pledges, forward sale contracts, options, puts, calls, swaps and similar arrangements (including on a total return basis), and sales and other transactions through non-US broker dealers or foreign regulated brokers.

“Subsidiary” of the Company means any “subsidiary” as defined in Rule 1-02(x) of the Regulation S-X promulgated by the Commission under the Exchange Act of such Person.

“Trading Day” means (i) a day on which the Common Stock is traded on a Trading Market or (ii) if the Common Stock is not quoted on any Trading Market, a day on which the Common Stock is quoted in the over the counter market as reported by the Pink Sheets LLC (or any similar organization or agency succeeding to its functions of reporting prices); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i) or (ii) hereof, then Trading Day shall mean a Business Day.

“Trading Market” means whichever of the New York Stock Exchange, the NYSE Amex Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market or OTC Bulletin Board or OTC Pink Sheets on which the Common Stock is listed or quoted for trading on the date in question.

“Transaction Documents” means this Agreement, the Convertible Debenture, the Equity Investment Agreement and any other documents or agreements executed in connection with the transactions contemplated hereunder.

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“Transfer Agent” means American Stock Transfer & Trust Company, LLC, the current transfer agent of the Company, with a mailing address of 6201 15^th Avenue, Brooklyn, NY 11219 and a facsimile number of (718) 765-8719, and any successor transfer agent of the Company.

ARTICLE 2.
PURCHASE AND SALE

2.1          Purchase and Sale. The Company hereby issues to the Investor, and the Investor hereby purchases from the Company the Convertible Debenture and the Equity Investment Agreement in exchange for payment of $500,000. The Company and the Investor intend that: (i) the Convertible Debenture is debt for U.S. federal income Tax purposes, (ii) the Convertible Debenture and the Equity Investment Agreement constitute an “investment unit” as of the date hereof within the meaning of Section 1273 of the Code, (iii) that the Convertible Debenture issued to the Investor constitutes a single debt instrument for purposes of Sections 1271 through 1275 of the Code and the Treasury Regulations thereunder (pursuant to Treasury Regulations Section 1.1275-2(c). The Company and the Investor agree to adhere to the terms of this Agreement for U.S. federal income Tax purposes and not to take any action or file any Tax Return, report or declaration inconsistent herewith, except as required by applicable law.

2.2          Closing Deliveries.

(a)          In connection with the execution and delivery of this Agreement, the Company is concurrently delivering to the Investor the following:

(i)          the Convertible Debenture, duly signed by the Company;

(ii)         the Equity Investment Agreement, duly signed by the Company;

(iii)         a legal opinion from counsel of Investor's choice, in agreed form, addressed to the Investor stating that the structure of this Agreement, the Convertible Debenture and the Equity Investment Agreement complies with current securities law and SEC regulations, and that the Common Stock issuable shall be freely trading and saleable under Rule 144 six (6) months after the respective investment is made by the Investor;

(iv)        the names of two licensed brokers who are able and willing to sell shares of the Company's Common Stock for Holder, and a letter from each Broker confirming such willingness and ability;

(v)         a statement from an officer of the company certifying as to the signatures and authority of persons signing the Transaction Documents and related documents on behalf of the Company.

(vi)         that certain Secured Continuing Personal Guaranty (the “Guaranty”), in the form of Exhibit C to this Agreement, duly signed by Michael K. Clark; and

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(vii)         a Mortgage, in the form of Exhibit D to this Agreement, on the Property (as defined below), duly signed by Michael K. Clark.

(viii)        a certificate of the Company executed by an officer of the Company, dated as of the Closing, certifying the resolutions adopted by the Company’s board of directors authorizing the execution of the Transaction Documents, the issuance of the Securities, and the transactions contemplated hereby, and copies of any required third party consents, approvals and filings required in connection with the consummation of the transactions contemplated by this Agreement.

(b)          In connection with the execution and delivery of this Agreement, the Investor is concurrently delivering to the Company the following:

(i)          the Equity Investment Agreement, duly signed by the Investor;

(ii)         a certificate of the Investor executed by an officer of the Investor, dated as of the Closing, certifying the resolutions adopted by the Investor’s board of directors authorizing the execution of the Transaction Documents, and the transactions contemplated hereby;

(iii)          a statement from an officer of the Investor certifying as to the signatures and authority of persons signing the Transaction Documents and related documents on behalf of the Investor.

(c)          The Investor will at Closing deliver to the Company the purchase price for the Securities by wire transfer of $500,000 in immediately available funds, but Closing shall only occur when the real property known as 187 Beach 135 Street Rockaway, NY 11694 (the "Property") has been pledged to Investor as security for the Guaranty of Michael K. Clark guaranteeing repayment of the Convertible Debenture to be purchased hereunder, and title insurance for the Property can be issued showing the Property as lien free except for the lien to be created by the Guaranty.

2.3          Closing Conditions. The Company understands that Holder’s obligation to purchase the Securities on the Closing Date pursuant to this Agreement is conditioned upon paragraphs (a) through (f) below and the Investor understands that the Company’s obligation to sell the Securities on the Closing Date pursuant to this Agreement is conditioned upon paragraph (g) below:

(a)          The accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained in this Agreement as if made on the Closing Date (except (i) for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date and (ii) as affected by the transactions contemplated by the Transaction Documents) and the performance by the Company in all material respects on or before the Closing Date of all covenants and agreements of the Company required to be performed by it pursuant to this Agreement on or before the Closing Date, all of which shall be confirmed to Holder by delivery of the certificate of the chief executive officer of the Company to that effect;

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(b)          There not having occurred (i) any general suspension of trading in, or limitation on prices listed for, the Common Stock on the OTC Bulletin Board/Pink Sheet, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States or any of its territories, protectorates or possessions, or (iv) in the case of the foregoing existing at the date of this Agreement, a material acceleration or worsening thereof or (v) any Event of Default;

(c)          There shall not be in effect any law, order, ruling, judgment or writ of any court or public or governmental authority restraining, enjoining or otherwise prohibiting any of the transactions contemplated by this Agreement;

(d)          The Company shall have obtained all consents, approvals or waivers from governmental authorities and third persons necessary for the execution, delivery and performance of the Transaction Documents and the transactions contemplated thereby, all without material cost to the Company;

(e)          Holder shall have received such additional documents, certificates, payment, assignments, transfers and other deliveries as it or its legal counsel may reasonably request and as are customary to effect a closing of the matters herein contemplated;

(f)          Holder shall have received a validly executed and properly recorded Mortgage, with title insurance guaranteeing it in a first priority position, on the Property, as security for the Convertible Debenture being purchased hereunder; and

(g)          The accuracy in all material respects on the Closing Date of the representations and warranties of the Investor contained in this Agreement as if made on the Closing Date (except (i) for representations and warranties which, by their express terms, speak as of and relate to a specified date, in which case such accuracy shall be measured as of such specified date and (ii) as affected by the transactions contemplated by the Transaction Documents) and the performance by the Investor in all material respects on or before the Closing Date of all covenants and agreements of the Investor required to be performed by it pursuant to this Agreement on or before the Closing Date, all of which shall be confirmed to the Company by delivery of the certificate of the chief executive officer of the Investor to that effect.

2.4          Additional Debenture. Intentionally Omitted.

2.5          Company Right to Early Termination. If (i) the VWAP is above $0.35 on the OTCBB for a period of at least ten (10) consecutive Trading Days or (ii) the Company effects a Fundamental Transaction, then the Company shall have the option, in its sole and absolute discretion, to terminate Holder's right to provide any further financing hereunder, by informing Holder of its decision in writing. If the Company fails to give Holder written notice within five (5) Business Days after the end of the ten (10) day period on which the VWAP has risen above $0.35, then the Company will have lost its right to terminate this Agreement and must honor any further Conversion Notices and equity investments, if delivered by Holder, and issue said shares to Holder as set forth in the Convertible Debenture or Equity Investment Agreement. If the Company has notified the Investor that it is exercising its right to terminate the Convertible Debenture and Equity Investment Agreement, Company must pay to Holder within five (5) Business Days thereafter, an amount equal to two hundred percent (200%) of the outstanding principal balance of the Convertible Debenture, plus fifty percent (50%) of the unfunded remaining principal balance of the Equity Investment Agreement, at which time, the Convertible Debenture, the Equity Investment Agreement, and this Agreement shall be terminated and cancelled. If payment is not made to Holder within the five (5) Business Days, then this right to early termination shall be void and of no further force and effect thereafter.

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ARTICLE 3.
REPRESENTATIONS AND WARRANTIES

3.1          Representations and Warranties of the Company. Except as disclosed in the SEC Reports, the Company hereby makes the following representations and warranties to the Investor:

(a)          Subsidiaries. The SEC Reports disclose each Subsidiary of the Company, showing the jurisdiction of its incorporation or organization and showing the percentage of ownership of such Subsidiary by the relevant Existing Company Entity. The Existing Company Entities have no direct or indirect Subsidiaries other than as disclosed in the SEC Reports. Except as disclosed in the SEC Reports, the Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any and all Liens, and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights.

(b)          Organization and Qualification. Each of the Existing Company Entities is duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. No Existing Company Entity is in violation of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each Existing Company Entity is duly qualified to conduct its respective businesses and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, has not had, individually or in the aggregate, or would not reasonably be expected to result in a Material Adverse Effect.

(c)          Authorization; Enforcement. The Company has the requisite corporate and other power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and to carry out its obligations thereunder. The execution and delivery of the Transaction Documents, by the Company and the consummation of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of the Company, and no further action is required in connection with such authorization. Each Transaction Document has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar Legal Requirement relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.

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(d)          No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not (i) conflict with or violate any provision of the Company’s articles of incorporation, bylaws or other charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any Material Agreement, credit facility, debt or other instrument (evidencing any of the debt of any Existing Company Entity or otherwise) or other understanding to which any of the Existing Company Entities is a party or by which any property or asset of any of the Existing Company Entities is bound or affected, or (iii) create or impose a lien, mortgage, security interest, charge or encumbrance of any nature on any property of the Existing Company Entity under any Material Agreement or any commitment to which any of the Existing Company Entity is a party or by which any of the Existing Company Entity is bound or by which any of its respective properties or assets are bound, or (iv) result in a violation of any Legal Requirement to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of any Existing Company Entity is bound or affected; except in the case of each of clauses (ii), (iii) and (iv), such as could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.

(e)          Filings, Consents and Approvals. None of the Existing Company Entities is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any Governmental Body in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) filings required by state securities laws, (ii) the filing of a Notice of Sale of Securities on Form D with the Commission under Regulation D of the Securities Act, (iii) filings that are required by the Transaction Documents, (iv) filings required by the Exchange Act, and (v) those that have been made or obtained prior to the date of this Agreement.

(f)         Issuance of the Common Stock. The Securities have been duly authorized and, the Common Stock when issued and paid for in accordance with the Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens.

(g)          Capitalization. The Company’s capitalization is as disclosed in the SEC Reports. Except as specified in the SEC Reports, no securities of the Company are entitled to preemptive or similar rights, and no Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as described in the SEC Reports, there are no voting agreements, buy-sell agreements, option or right of first purchase agreements or other agreements of any kind among the Company and any of the securities-holders of the Company relating to the securities of the Company held by them. Except as described in the SEC Reports, no Person has registration rights with respect to any securities of the Company, whether on a demand basis or in connection with the registration of securities of the Company for its own account or for the account of any other Person, which have not been satisfied.

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(h)          SEC Reports; Financial Statements. The Company has filed all reports and registration statements required to be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the twelve months preceding the date hereof (or such shorter period as the Company was required by law to file such reports) (the foregoing materials being collectively referred to herein as the “SEC Reports”) on a timely basis or has timely filed a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company and each Subsidiary included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved, except as may be otherwise specified in such financial statements or the notes thereto or, in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. Except as disclosed in the financial statements of the Company included in the SEC Reports, there are no liabilities of the Existing Company Entities of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and, to the Company’s Knowledge, there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability, other than: (i) liabilities incurred in the ordinary course of business subsequent to such financial statements of the Company; (ii) liabilities or obligations under contracts and commitments incurred in the ordinary course of business and not required under GAAP to be reflected in such financial statements; and (ii) other undisclosed liabilities which, individually or in the aggregate, have not resulted in or could reasonably be expected to result in a Material Adverse Effect.

(i)         Material Changes. Except as disclosed in the SEC Reports or as otherwise disclosed to Investor, to the Company’s Knowledge, there has been no event, occurrence or development that has had or that would reasonably be expected to result in a Material Adverse Effect.

(j)         Litigation. There is no Action which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) except as disclosed in the SEC Reports, would, if there were an unfavorable decision, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect. Except as disclosed in the SEC Reports, neither the Existing Company Entities, nor to the Knowledge of the Existing Company Entities, any director or officer thereof (in his or her capacity as such), is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. Except as disclosed in the SEC Reports, there has not been, and to the Knowledge of the Company, there is not pending any investigation by the Commission involving any Existing Company Entity or any current or former director or officer of an Existing Company Entity (in his or her capacity as such).

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(k)          Labor Relations. No material labor dispute exists or, to the Knowledge of the Company, is imminent with respect to any of the employees of any of the Existing Company Entities. No Existing Company Entity is a party to any collective bargaining agreement with any Person.

(l)          Compliance. Except as disclosed in the SEC Reports, none of the Existing Company Entities (i) is in default under or in violation of (and, to the Company’s Knowledge, no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by an Existing Company Entity under), nor has any Existing Company Entity received notice of a claim that it is in default under or that it is in violation of, any Material Agreement, indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or Governmental Body, or (iii) is or has been in violation of any statute, rule or regulation of any Governmental Body, including all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case, such as could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect.

(m)         Regulatory Permits. Except as disclosed in the SEC Reports, the Existing Company Entities possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses, except where the failure to possess such permits could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, and the Existing Company Entities have not received any notice of proceedings relating to the revocation or modification of any such permits.

(n)          Title to Assets. The Existing Company Entities own, lease or otherwise have a valid right to use, all real property that is material to their respective businesses and good and marketable title in all personal property owned by them that is material to their respective businesses, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made of such property by the Existing Company Entities. Any real property and facilities held under lease by the Existing Company Entities are held by them under valid, subsisting and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made of such property.

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(o)          Patents and Trademarks. To the Knowledge of the Company and except as disclosed in the SEC Reports, the Existing Company Entities have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights (collectively, the “Intellectual Property Rights”) that are necessary or material for use in connection with their respective businesses and which the failure to so have could, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect. No Existing Company Entity has received a written notice that the Intellectual Property Rights used by such Existing Company Entity violates or infringes upon the rights of any Person that has not been resolved. To the Knowledge of the Existing Company Entities, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights.

(p)          Transactions With Affiliates and Employees; Customers. Except as described in the SEC Reports, none of the officers or directors of any of the Existing Company Entities, and, to the Knowledge of the Company, none of the employees or 5% or more shareholders of any of the Existing Company Entities, is presently a party to any transaction with any of the Existing Company Entities (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 such Person or, to the Knowledge of the Company, any entity in which any officer, director, or such employee or 5% or more shareholder has a substantial interest or is an officer, director, trustee or partner. None of the Existing Company Entities owes any money or other compensation to any of their respective officers or directors or shareholders, except to the extent of ordinary course compensation arrangements or as otherwise disclosed to Investor. No material customer of any of the Existing Company Entities has indicated their intention to diminish their relationship with such Existing Company Entity and none of the Existing Company Entities has any knowledge from which it could reasonably conclude that any such customer relationship may be adversely affected.

(q)          Brokers Fees. Other than to Vista Capital, LLC, no brokerage or finder’s fees or commissions are required to be paid by any of the Existing Company Entities to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement. The Investor shall have no obligation with respect to any fees or with respect to any claims (other than such fees or commissions owed by the Investor pursuant to written agreements executed by the Investor which fees or commissions shall be the sole responsibility of the Investor) made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement.

(r)          Investment Company. The Company is not, and is not an Affiliate of, and immediately following the Closing will not have become, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

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(s)          Taxes. The Existing Company Entities have timely and properly filed all tax returns required to be filed by them for all years and periods (and portions thereof) for which any such tax returns were due, except where the failure to so file would not have or reasonably be expected to result in a Material Adverse Effect or as otherwise disclosed to Investor. All such filed tax returns are accurate in all material respects. The Company has timely paid all taxes due and payable (whether or not shown on filed tax returns), except where the failure to so pay would not have or reasonably be expected to result in a Material Adverse Effect. There are no pending assessments, asserted deficiencies or claims for additional taxes that have not been paid. The reserves for taxes, if any, reflected in the SEC Reports are adequate, and there are no Liens for taxes on any property or assets of any of the Existing Company Entities (other than Liens for taxes not yet due and payable). There have been no audits or examinations of any tax returns by any Governmental Body, and none of the Existing Company Entities has received any notice that such audit or examination is pending or contemplated. No claim has been made by any Governmental Body in a jurisdiction where any of the Existing Company Entities does not file tax returns that it is or may be subject to taxation by that jurisdiction. To the knowledge of the Company, no state of facts exists or has existed which would constitute grounds for the assessment of any penalty or any further tax liability beyond that shown on the respective tax returns. There are no outstanding agreements or waivers extending the statutory period of limitation for the assessment or collection of any tax. None of the Existing Company Entities is a party to any tax-sharing agreement or similar arrangement with any other Person.

(t)         Environmental Matters. To the Company’s Knowledge, none of the Existing Company Entities: (i) is in violation of any statute, rule, regulation, decision or order of any Governmental Body relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, “Environmental Laws”), (ii) owns, leases, has rights to or operates any real property contaminated with any substance that is subject to any Environmental Laws, (iii) is liable for any off-site disposal or contamination pursuant to any Environmental Laws, or (iv) is subject to any claim relating to any Environmental Laws, and there is no pending or, to the Company's Knowledge, threatened investigation that might lead to such a claim.

(u)          Off Balance Sheet Arrangements. There is no transaction, arrangement, or other relationship between any Existing Company Entity and an unconsolidated or other off balance sheet entity that is required to be disclosed by the Company in the SEC Reports and is not so disclosed.

(v)         Solvency. The Company has not (i) made a general assignment for the benefit of creditors; (ii) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by its creditors; (iii) suffered the appointment of a receiver to take possession of all, or substantially all, of its assets; (iv) suffered the attachment or other judicial seizure of all, or substantially all, of its assets; (v) admitted in writing its inability to pay its debts as they come due; or (vi) made an offer of settlement, extension or composition to its creditors generally.

(w)          Material Contracts. The contracts that are material to the Company’s business to which the Company is a party (each, a “Material Contract”) are disclosed in the SEC Reports and each is valid and in full force and effect, is enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or similar laws affecting creditors' rights generally and general principles of equity,.

(x)          Disclosure. All disclosure provided to the Investors regarding the Company, the Subsidiaries or their respective businesses and the transactions contemplated hereby, furnished by or on behalf of the Company (including the Company's representations and warranties set forth in this Agreement) are true and correct in all material aspects and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading.

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(y)          Broker.  The Company identifies Basis Financial, LLC as a registered securities dealer or securities broker who has agreed to process all sales of the Common Stock for Investor pursuant to Rule 144 ("Broker"), which Company can replace within ten (10) days with another securities dealer or securities broker in the event that the originally identified Broker cannot or refuses to process trades for Holder ("Replacement Broker"), and the Company understands and agrees that in the event the Broker or a Replacement Broker cannot or refuses to process sales of the Common Stock for Holder, it shall be a breach of this Agreement, and a material failure of consideration, allowing Holder to cancel this Agreement, and return the Convertible Debenture to Company, obtain the return or cancellation of the Equity Investment Agreement, and immediately receive the return from Company of all funds advanced and unconverted toward the purchase of the Debenture.

(z)          DWAC Eligibility. The Company shall use commercially reasonable efforts to obtain approval by the Depository Trust Corporation (DTC) to have its Common Stock become eligible for DWAC/FAST transfer with its transfer agent.

3.2           Representations and Warranties of the Investors. The Investor represents and warrants to the Company on the date hereof, as of the Closing Date and as of each date a sale of Common Stock occurs under the Equity Investment Agreement as follows:

(a)          Organization; Authority. The Investor is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate and other power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents to which it is a party or a signatory and otherwise to carry out its obligations thereunder. The execution, delivery and performance by the Investor of the Transaction Documents and the transactions contemplated thereby has been duly authorized by all necessary corporate action on the part of the Investor. Each Transaction Document executed by the Investor has been duly executed by the Investor, and when delivered by the Investor in accordance with the terms hereof, will constitute the valid and legally binding obligation of the Investor, enforceable against it in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar Legal Requirements relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.

(b)          Investment Intent. The Investor is acquiring the Securities for its own account and not with a view to or for distributing or reselling such Securities or any part thereof, without prejudice, however, to the Investor’s right at all times to sell or otherwise dispose of all or any part of such Securities in compliance with applicable federal and state securities laws. Subject to the immediately preceding sentence, nothing contained herein shall be deemed a representation or warranty by the Investor to hold the Securities for any period of time. The Investor is acquiring the Securities hereunder in the ordinary course of its business. The Investor does not have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities.

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(c)          Investor Status. The Investor is not a registered broker-dealer under Section 15 of the Exchange Act. The Investor has such experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in the Securities. The Investor acknowledges that an investment in the Securities is speculative and involves a high degree of risk. At the time the Investor was offered the Securities, it was, and at the date hereof it is, an “accredited investor” as defined in Rule 501(a) under the Securities Act.

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

(e)          Access to Information. The Investor acknowledges that it has reviewed the SEC Reports and has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Existing Company Entities and their respective financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment. Neither such inquiries nor any other investigation conducted by or on behalf of the Investor or its representatives or counsel shall modify, amend or affect the Investor’s right to rely on the truth, accuracy and completeness of the SEC Reports and the Existing Company Entities’ representations and warranties contained in the Transaction Documents.

(f)         Certain Trading Activities. The Investor has not directly or indirectly, nor has any Person acting on behalf of or pursuant to any understanding with the Investor, engaged in any transactions in the securities of the Company (including, without limitations, any Short Sales involving the Company’s securities) since the earlier to occur of (i) the time that the Investor was first contacted by the Company regarding an investment in the Company and (ii) the 30th day prior to the date of this Agreement.

(g)          Rule 144. The Investor understands that the Securities must be held indefinitely unless such Securities are registered under the Securities Act or an exemption from registration is available. The Investor acknowledges that it is familiar with Rule 144 and that the Investor has been advised that Rule 144 permits resales only under certain circumstances. The Investor understands that to the extent that Rule 144 is not available, the Investor will be unable to sell any Securities without either registration under the Securities Act or the existence of another exemption from such registration requirement.

(h)          General. The Investor understands that the Securities are being offered and sold in reliance on a transactional exemption from the registration requirements of federal and state securities laws and the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Investor set forth herein in order to determine the applicability of such exemptions and the suitability of the Investor to acquire the Securities. The Investor understands that no United States federal or state agency or any Governmental Body has passed upon or made any recommendation or endorsement of the Securities.

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(i)         No Conflicts. The execution, delivery and performance of the Transaction Documents by the Investor and the consummation by the Investor of the transactions contemplated thereby do not and will not (i) conflict with or violate any provision of the Investor’s articles of incorporation, bylaws or other charter documents, or (ii) result in a violation of any Legal Requirement to which the Investor is subject (including federal and state securities laws and regulations); except in the case of clause (ii), such as has not had, individually or in the aggregate, or would not reasonably be expected to result in a Material Adverse Effect.

ARTICLE 4.
OTHER AGREEMENTS OF THE PARTIES

4.1          Transferability; Certificate.

(a)          The Securities may only be disposed of in compliance with state and federal securities laws.

(b)          Certificates evidencing Securities will contain the following legends, until such time as they are not required under Section 4.1(c):

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

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The Company acknowledges and agrees that the Investor may from time to time pledge, and/or grant a security interest in some or all of the Securities pursuant to a bona fide margin agreement in connection with a bona fide margin account and, if required under the terms of such agreement or account, the Investor may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval or consent of the Company and no legal opinion of legal counsel to the pledgee, secured party or pledgor shall be required in connection with the pledge, but such legal opinion may be required in connection with a subsequent transfer following default by the Investor transferee of the pledge. No notice shall be required of such pledge. At the appropriate Investor’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer thereof including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder. Except as otherwise provided in Section 4.1(c), any Securities subject to a pledge or security interest as contemplated by this Section 4.1(b) shall continue to bear the legend set forth in this Section 4.1(b) and be subject to the restrictions on transfer set forth in Section 4.1(a).

(c)          Certificates evidencing Securities shall not contain any legend (including the legend set forth in Section 4.1(b)): (i) while a registration statement covering such Securities is then effective, or (ii) following a sale or transfer of such Securities pursuant to Rule 144 (assuming the transferee is not an Affiliate of the Company), or (iii) while such Securities are eligible for sale by the selling Investor without volume restrictions under Rule 144. The Company agrees that following such time as legends are no longer required to be set forth on certificates representing Securities under this Section 4.1(c), it will, no longer than three Trading Days following the delivery by the Investor to the Company or the Transfer Agent of a certificate representing such Securities containing a restrictive legend and a representation letter in customary form, deliver or instruct the Transfer Agent to deliver to the Investor, Securities which are free of all restrictive and other legends. If the Company is then eligible, certificates for Securities subject to legend removal hereunder shall be transmitted by the Transfer Agent to the Investor by crediting the prime brokerage account of the Investor with the Depository Trust Company System as directed by the Investor. If the Investor shall make a sale or transfer of Securities either (x) pursuant to Rule 144 or (y) pursuant to a registration statement and in each case shall have delivered to the Company or the Company’s transfer agent the certificate representing the applicable Securities containing a restrictive legend which are the subject of such sale or transfer and a representation letter in customary form (the date of such sale or transfer and Securities delivery being the “Share Delivery Date”) and (1) the Company shall fail to deliver or cause to be delivered to the Investor a certificate representing such Securities that is free from all restrictive or other legends by the third Trading Day following the Share Delivery Date and (2) following such third Trading Day after the Share Delivery Date and prior to the time such Securities are received free from restrictive legends, the Investor, or any third party on behalf of the Investor, purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Investor of such Securities (a “Buy In”), then, in addition to any other rights available to the Investor under the Transaction Documents and applicable law, the Company shall pay in cash to the Investor (for costs incurred either directly by the Investor or on behalf of a third party) the amount by which the total purchase price paid for Common Stock as a result of the Buy-In (including brokerage commissions, if any) exceed the proceeds received by the Investor as a result of the sale to which such Buy-In relates. The Investor shall provide the Company written notice indicating the amounts payable to the Investor in respect of the Buy In and, upon request of the Company, evidence of the amount of such loss. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section.

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4.2           Reverse Split Requirement.         Intentionally Omitted

4.3           Furnishing of Information. As long as any Investor owns any Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. As long as any Investor owns Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and furnish to the Investors and make publicly available in accordance with Rule 144(c) such information as is required for the Investors to sell the Securities under Rule 144. The Company further covenants that it will take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell the Securities, including the underlying Common Stock, without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.

4.4           Integration. The Company shall not, and shall use its best efforts to ensure that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Investors, or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market in a manner that would require stockholder approval of the sale of the Securities to the Investors.

4.5           Securities Laws Disclosure; Publicity. The Company shall not publicly disclose the name of any Investor, or include the name of any Investor in any filing with the Commission (other than any exhibits to filings made in respect of this transaction in accordance with periodic filing requirements under the Exchange Act) or any regulatory agency or Trading Market, without the prior written consent of the Investor, except to the extent such disclosure is required by law or Trading Market regulations.

4.6           Intentionally Omitted.

4.7           Intentionally Omitted.

4.8           Non-Public Information. The Company covenants and agrees that, except as specifically contemplated by the Transaction Document, neither it, any Existing Company Entity nor any other Person acting on its or their behalf will provide any Investor or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto the Investor shall have executed a written agreement regarding the confidentiality and use of such information or consented thereto. The Company understands and confirms that the Investor shall be relying on the foregoing representations in effecting transactions in securities of the Company.

4.9           Use of Proceeds. The Company will use the net proceeds from the sale of the Securities hereunder for working capital purposes and/or capital expenditure and not to redeem any Common Stock or Common Stock Equivalents or engage in any related party transaction.

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4.10         Reservation of Shares. The Company has reserved and will keep available, out of the authorized and unissued shares of Common Stock, 50 million shares of Common Stock for issuance under the Transaction Documents and covenants and agrees to reserve additional shares of Common Stock at such time as is necessary to ensure a number of shares sufficient to effect the conversion or purchase of all Common Stock under the Transaction Documents. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion or purchase of all Common Stock available under the Transaction Documents, then, in addition to such other remedies as shall be available to the Investor, the Company will take such corporate action as may, in the opinion of its counsel, be reasonably necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in commercially reasonable efforts to obtain the requisite shareholder approval to file an amendment to the charter of the Company.

4.11         Short Sales. Investor will not engage in any Short Sales with respect to the Common Stock of the Company as long as the Convertible Debenture or the Equity Investment Agreement is outstanding.

ARTICLE 5.
MISCELLANEOUS

5.1           Fees and Expenses. Each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of the Transaction Documents. The Company shall pay all stamp and other taxes and duties levied in connection with the sale of the Securities.

5.2           Entire Agreement. The Transaction Documents, together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements, understandings, discussions and representations, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. Except as specifically set forth herein or in any of the Transaction Documents, neither the Company nor any of the Existing Company Entities or the Investor makes any representation, warranty, covenant or undertakings with respect to the matters set forth herein.

5.3           Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed by the Company and the Investor. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

5.4           Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. This Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement or any of the Transaction Documents.

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5.5           Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via (i) facsimile (provided the sender receives a machine-generated confirmation of successful transmission) at the facsimile number specified in this Section or (ii) electronic mail (i.e., Email) prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via (i) facsimile at the facsimile number specified in this Section or (ii) electronic mail (i.e., Email) on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, or (c) the Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given, if sent by any means other than facsimile or Email transmission. The address for such notices and communications shall be as follows:

If to the Company by hand or courier delivery:	World Surveillance Group Inc. State Road 405 Building M6-306A, Room 1400 Kennedy Space Center, FL 32815
If to the Company by mail delivery:	World Surveillance Group Inc. Mail Code: SWC Kennedy Space Center, FL 32899 Telephone:     (321) 452-3545 Facsimile:        (321) 452-8965
If to the Investor:	La Jolla Cove Investors, Inc. 1150 Silverado Street, Suite 218 La Jolla, California 92037 Telephone:     858-551-8789 Facsimile:        858-551-8779

or such other address as may be designated in writing hereafter, in the same manner, by such Person.

5.6           Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Investors except in an assignment in the case of a Fundamental Transaction.

5.7           No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person,.

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5.8           Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. Each party agrees that all Actions concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective Affiliates, employees or agents) shall be commenced exclusively in the California Courts. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the California Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any Action, any claim that it is not personally subject to the jurisdiction of any such California Court, or that such Action has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Action by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence an Action to enforce any provisions of a Transaction Document, then the prevailing party in such Action shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Action.

5.9           Survival. The representations, warranties, agreements and covenants contained herein shall survive the Closing and the delivery of the Securities; provided, however, that the representations and warranties contained in Sections 3.1(e) through 3.1(y) shall survive the Closing and delivery of the Securities for a period of twelve (12) months.

5.10         Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever any Investor exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then the Investor may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.

5.11         Replacement of Securities. If any certificate or instrument evidencing any Security is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Security. If a replacement certificate or instrument evidencing any Security is requested due to a mutilation thereof, the Company may require delivery of such mutilated certificate or instrument as a condition precedent to any issuance of a replacement.

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

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

5.14         Limitation of Liability. Notwithstanding anything herein to the contrary, the Company acknowledges and agrees that the liability of the Investor arising directly or indirectly, under any Transaction Document of any and every nature whatsoever shall be satisfied solely out of the assets of the Investor, and that no trustee, officer, other investment vehicle or any other Affiliate of the Investor or any investor, shareholder or holder of shares of beneficial interest of such a Investor shall be personally liable for any liabilities of the Investor.

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

5.16         Cancellation. In the event of any of the following conditions, Investor may cancel this Agreement, the Convertible Debenture and Equity Investment Agreement, and receive the return of all funds advanced and unconverted, upon the occurrence of the following event:

(a)          Holder is unable to sell the Common Stock through the Broker (or a Replacement Broker) identified herein pursuant to Rule 144;

(b)          It becomes unlawful for Holder to sell the Common Stock pursuant to Rule 144 in any respect; or

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(c)          If the average Volume Weighted Average Price (“VWAP”) per share of the Common Stock for any period of three (3) consecutive Trading Days during the term of the Agreement is less than $0.01 per share (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or similar reorganizations of capital);

In such event, Holder shall give notice to the Company of the occurrence of such event, and if the event is one under Section 5.16(a) and Company is unable to find a Replacement Broker within ten (10) days of the notice, or if under Sections 5.15(b) or (c), then Investor may cancel this Agreement, return the Convertible Debenture, obtain the return or cancellation of the Equity Investment Agreement, and immediately receive from the Company the return of all funds advanced and unconverted toward the purchase of the Debenture and Equity Investment Agreement.

5.17         Intentionally Omitted.

5.18         Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY LAW, EACH OF THE PARTIES HERETO KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OTHER DOCUMENT OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND OTHER DOCUMENTS. EACH PARTY:

(A)       CERTIFIES THAT NEITHER OF THEIR RESPECTIVE REPRESENTATIVES, AGENTS OR ATTORNEYS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS; AND

(B)         ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS AGREEMENT.

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

WORLD SURVEILLANCE GROUP INC

By: /s/ Glenn D. Estrella

Name: Glenn D. Estrella

Title: Chief Executive Officer

LA JOLLA COVE INVESTORS, INC.

By: /s/ Travis W. Huff

Name: Travis W. Huff

Title: PortfolioManager/VP

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EX-10.2

-THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

EQUITY INVESTMENT AGREEMENT

Issuer:	World Surveillance Group Inc., a Delaware corporation
Class of Stock:	Common Stock
Issue Date:	January 25, 2012
Expiration Date:	January 25, 2015

THIS EQUITY INVESTMENT AGREEMENT (“Agreement”) is being issued as of the date hereof by and between World Surveillance Group Inc., a Delaware corporation (the “Company”), to La Jolla Cove Investors, Inc. (“Holder”). The Company and Holder are parties to, and this Agreement is being issued and entered into pursuant to the terms of, that certain Securities Purchase Agreement dated January 25, 2012. Capitalized terms used but not defined in this Agreement shall have the meanings ascribed in the Securities Purchase Agreement.

ARTICLE 1
DESCRIPTION OF RIGHTS

1.1           Purchase Rights. The Company hereby grants to Holder the right during the term of this Agreement to invest in the Company through the purchase of up to $5,000,000 of the Company's Common Stock in accordance with the terms of this Agreement.

1.2           Purchase Price. On each Investment Date (including the Initial Investment Date (as such terms are hereinafter defined)), the Holder shall have a right to purchase a number of shares of Common Stock equal to the amount invested on such Investment Date pursuant to Section 2.1 divided by $0.21 from Company at $0.21 per share ("Purchase Price"). The Holder shall have the right to purchase Common Stock at the Purchase Price for a period of three (3) years from the Issue Date hereinabove set forth. For avoidance of doubt, Holder shall not be permitted to purchase more than 23,809,523 shares of Common Stock pursuant to this Agreement.

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For purposes of this Agreement, "VWAP" means for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted for trading as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time); (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the "Pink Sheets" published by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company.

1.3           Term. The term of this Agreement is from the Issue Date through the Expiration Date set forth above.

ARTICLE 2
PURCHASE

2.1           Investment. Holder hereof agrees to purchase $5,000,000 of Common Stock of the Company as follows: a minimum of $250,000 of Common Stock per month ("Minimum Monthly Purchase Amount") (a) beginning on the date that is the earlier to occur of (i) the effectiveness of a registration statement with the SEC covering the resale of Fifty Million (50,000,000) shares of Common Stock (the "S-1"), but in no event prior to 91 days following the closing date, or (ii) one hundred eighty (180) days following the Closing (the “Initial Investment Date”), and (b) on each successive 30 day anniversary of such Initial Investment Date (each, an “Investment Date”). The Minimum Monthly Purchase Amount shall increase from $250,000 to $500,000 as long as the VWAP is above $0.09 for the period of ten (10) consecutive Trading Days prior to the Investment Date and Holder shall fund an additional $500,000 on each Investment Date for each and every increase in the VWAP of at least $0.02 above $0.09 for the period of ten (10) consecutive Trading Days prior to the Investment Date.

2.2           Method of Purchase. Holder shall purchase Common Stock pursuant to the rights granted to Holder in Section 1.2 above by delivering a duly executed Notice of Purchase in substantially the form attached as Appendix 1 to the principal office of the Company. The Notice of Purchase will be accompanied by wire transfer of immediately available funds for the aggregate Purchase Price. The Holder shall not be required to physically surrender this Agreement to the Company until the Holder has purchased all of the Common Stock purchasable hereunder, in which case, the Holder shall surrender this Agreement to the Company for cancellation. Purchases of a portion of the total amount of Common Stock available hereunder shall have the effect of lowering the amount of Common Stock purchasable hereunder in an amount equal to the amount purchased. The Holder and the Company shall maintain records showing the amount of Common Stock purchased and the date of such purchases. The Holder and any assignee, by acceptance of this Agreement, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Common Stock hereunder, the amount of Common Stock available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

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2.3           Delivery of Certificate. As promptly as practicable after the receipt of the Notice of Purchase, but in any event not more than three (3) Business Days after the Company’s receipt of the Notice of Purchase, the Company shall issue the Common Stock purchased and cause to be mailed for delivery by overnight courier to Holder, or party of Holder’s choosing, a certificate representing the Common Stock acquired.

2.4           Taxes and Expenses. Issuance of certificates for Common Stock shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder.

2.5           Purchase Limits. The Holder shall not have the right to purchase Common Stock under this Agreement, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Purchase, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock being purchased under this Agreement with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are still subject to purchase under this Agreement or the exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents). Except as set forth in the preceding sentence, for purposes of this Section 2.5, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Upon the written or oral request of a Holder, the Company shall within two Business Days confirm orally and/or in writing to the Holder the number of shares of Common Stock then outstanding. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding.

2.6           Conditions Precedent. As a condition precedent to Holder's obligations hereunder (provided that Holder may, in Holder’s sole and absolute discretion, waive all or any of the following conditions):

(a)          No Event of Default has occurred under this Agreement, or any other Transaction Document.

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ARTICLE 3
ADJUSTMENT TO THE SHARES

The number of shares of Common Stock issuable upon the investments or purchases under this Agreement shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

3.1           Reclassification. In case of any reclassification or change of outstanding Common Stock under this Equity Investment Agreement, and in any such case, the Holder, upon the purchase hereof at any time after the consummation of such reclassification or change, shall be entitled to receive in lieu of each share of Common Stock theretofore issuable upon the purchase under this Agreement, the kind and amount of shares of stock, other securities, money and/or property received upon such reclassification or change by a holder of one share of Common Stock. The provisions of this Section 3.1 shall similarly apply to successive reclassifications or changes.

3.2           Fundamental Transaction. Subject to Section 3.5, if, at any time during the term of this Agreement, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), upon any subsequent purchase under this Agreement, the Holder shall have the right to receive, for each share of Common Stock that would have been issuable upon such purchase immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction. For purposes of any such exercise, the determination of the purchase price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the purchase price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. Subject to Section 3.5, if holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any purchase under this Agreement following such Fundamental Transaction.

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3.3           Notice to Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall retain its right to purchase Common Stock under this Agreement during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

3.4           Fractional Shares. No fractional Shares shall be issuable upon the purchase of Common Stock under this Agreement, and the number of shares to be issued shall be rounded down to the nearest whole share.

ARTICLE 4
TRANSFER

4.1           Compliance with Securities Laws. This Agreement may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company). The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder.

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4.2           Transfer Procedure. Holder shall have the right without the consent of the Company to transfer or assign in whole or in part this Equity Investment Agreement and the Common Stock issuable upon exercise of the rights granted pursuant to this Equity Investment Agreement. Holder shall give written notice to the Company (a “Transfer Notice”) of such transfer. Each Transfer Notice shall describe the manner and circumstances of the proposed transfer in reasonable detail and, if the Company so requests, shall be accompanied by an opinion of legal counsel, in a form reasonably satisfactory to the Company.

ARTICLE 5
MISCELLANEOUS

5.1           No Rights of Shareholder. This Equity Investment Agreement does not entitle Holder to any voting rights or any other rights as a shareholder of the Company prior to the Holder’s acquisition of Common Stock as provided herein.

5.2           No Impairment. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Agreement, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Agreement against impairment.

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

5.4           Restrictions. The Holder acknowledges that the Common Stock acquired under this Agreement, if not registered pursuant to the Securities Act of 1933, as amended, will have restrictions upon resale imposed by state and federal securities laws. Under no circumstances will this Agreement or the Common Stock issued upon the exercise of rights granted hereunder be settled on a net cash basis.

5.5           Entire Agreement. This Agreement, the Securities Purchase Agreement and the other Transaction Documents, together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements, understandings, discussions and representations, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.

5.6           Amendments; Waivers; No Additional Consideration. No provision of this Agreement may be waived or amended except in a written instrument signed by the Company and the Holder. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

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5.7           Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. This Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement or any of the Transaction Documents.

5.8           Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective if delivered in the manner and to the address as specified in the Securities Purchase Agreement.

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

5.10         Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or electronic mail in portable document format or other means intended to preserve the original graphic content of a signature, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

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IN WITNESS WHEREOF, the parties hereto have duly caused this Equity Investment Agreement to be executed and delivered by their duly authorized representatives as of the date first above written.

WORLD SURVEILLANCE GROUP INC.		La Jolla Cove Investors, Inc.
By:	/s/ Glenn D. Estrella	By:	Travis W. Huff
Title:	President and CEO	Title:	Portfolio Manager/VP

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APPENDIX 1

NOTICE OF PURCHASE

1.          The undersigned hereby purchases _____ shares of the Common Stock of World Surveillance Group Inc. pursuant to the terms of the Equity Investment Agreement issued to La Jolla Cove Investors, Inc. on January __, 2012.

2.          In connection with this purchase we are delivering by wire transfer the aggregate Purchase Price of $____________ by wire transfer in immediately available funds.

3.          Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below:

La Jolla Cove Investors, Inc.

1793 Union Street

San Francisco, California 94123

(Signature)

(Date)

______________________
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EX-10.3

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

	4¾% SECURED CONVERTIBLE DEBENTURE
Company:	World Surveillance Group Inc., a Delaware corporation
Company Address:	State Road 405, Building M6-306A, Room 1400, Kennedy Space Center, FL 32815
Closing Date:	January 25, 2012
Maturity Date:	January 25, 2015
Principal Amount:	$500,000

This 4¾% CONVERTIBLE DEBENTURE is duly authorized and validly issued by World Surveillance Group Inc., a Delaware corporation, (the “Company”) to La Jolla Cove Investors, Inc. or its registered assigns (the “Holder”), pursuant to the terms of a Securities Purchase Agreement dated January 25, 2012 between the Company and the Holder (the “Securities Purchase Agreement”). Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Securities Purchase Agreement.

FOR VALUE RECEIVED, the Company promises to the Holder the principal sum of $500,000, subject to adjustment as provided herein (the “Principal Amount”) on January 25, 2015 (the “Maturity Date”) or such earlier date as this Debenture is required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture at the rate of four and three quarters percent (4¾%) per annum (the “Interest Rate”), all in accordance with the terms and conditions contained in this Debenture. Interest shall accrue from the date hereof and be payable on a monthly basis, commencing on the 15th day of each month following the month of issuance of this Debenture, with the final payment to be made on the Maturity Date (each, an “Interest Payment Due Date”). Interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be, for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. Payment of interest on this Debenture shall be in cash or, at the option of the Holder, in shares of Common Stock of the Company valued at the then applicable Conversion Price (as defined below). At the Maturity Date, the Company shall pay in cash the full outstanding Principal Amount of this Debenture, together with all accrued and unpaid interest. Subject to the Section 2.5 of the Securities Purchase Agreement, this Debenture may not be prepaid without the written consent of the Holder. This Debenture is subject to the following additional provisions:

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ARTICLE 1

DEFINITIONS

1.1        Definitions. Capitalized terms used but not defined in this Debenture shall have the meaning ascribed in the Securities Purchase Agreement. The terms defined in this Article whenever used in this Debenture have the following meanings:

“Alternate Consideration” shall have the meaning set forth in Section 3.1.

“Bankruptcy Code” means the United States Bankruptcy Code of 1986, as amended (11 U.S.C. §§ 101 et. seq.).

“Bankruptcy Event” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof; (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 calendar days after commencement; (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment; (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.

“Capital Shares” means the Common Stock and any other shares of any other class or series of capital stock, whether now or hereafter authorized and however designated, which have the right to participate in the distribution of earnings and assets (upon dissolution, liquidation or winding-up) of the Company.

“Closing Date” means the closing date set forth at the beginning of this Debenture.

“Common Stock Issued at Conversion”, when used with reference to the securities deliverable upon conversion of this Debenture pursuant to Section 2.1 hereof, means all Common Stock or securities of any other class or series into which this Debenture hereafter shall have been changed or substituted, whether now or hereafter created and however designated.

“Conversion Date” means the date specified in accordance with the provisions of Section 2.2.

“Conversion Notice” means a written notice of conversion substantially in the form annexed hereto as Exhibit A.

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“Conversion Price” means the applicable price for the conversion of this Debenture as set forth in 2.1.

“Current Market Price” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a national securities exchange, the VWAP of the Common Stock for such date (or the nearest preceding date) on the principal exchange on which the Common Stock is then listed or quoted for trading as reported as reported by Bloomberg L.P. at 4:15 p.m. (New York City time); (b) if the Common Stock is traded on the OTC Bulletin Board, the VWAP of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board as reported by Bloomberg L.P. at 4:15 p.m. (New York City time); (c) if the Common Stock is not then quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the last reported VWAP of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company.

“Debenture” means this 4¾% Convertible Debenture issued by the Company or debenture issue in exchange or replacement.

“Discount Multiplier” has the meaning set forth in Section 2.1(a).

“Event of Default” has the meaning set forth in Section 5.1.

“Excluded Securities” means (a) securities issued by the Company pursuant to a stock option or equity incentive plan or pursuant to an agreement or arrangement that has been approved by the Company’s Board of Directors or its Compensation Committee and provides for the grant of the Company’s securities solely to any employee, officer, director, consultant or adviser in exchange for services provided to the Company, (b) shares of Common Stock issued by the Company upon the conversion, exchange or exercise of any right, option, obligation or security outstanding on the date prior to the Closing Date, provided that the terms of such right, option, obligation or security are not amended or otherwise modified on or after the Closing Date, and provided that the conversion price, exchange price, exercise price or other purchase price is not reduced, adjusted or otherwise modified and the number of shares of Common Stock issued or issuable is not increased (whether by operation of, or in accordance with, the relevant governing documents or otherwise) on or after the Closing Date, (c) securities issued in connection with any acquisition, whether through an acquisition of stock, assets or technologies, leasing arrangement or in any other transaction the primary purpose of which is not to raise equity capital, and (d) the shares of Common Stock issued upon conversion of this Debenture.

“Floor Price” has the meaning set forth in Section 2.1(c).

“Holder” has the meaning set forth in the first paragraph of this Debenture.

“Interest Payment Due Date” has the meaning set forth in the second paragraph of this Debenture.

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“Interest Rate” means the interest rate as defined in the second paragraph of this Debenture.

“Maturity Date” means the maturity date set forth in the second paragraph of this Debenture.

“Outstanding” when used with reference to Common Stock or Capital Shares means, on any date of determination, all issued and outstanding Common Stock or Capital Shares, and includes all such Common Stock or Capital Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Common Stock or Capital Shares; provided, however, that any such Common Stock or Capital Shares directly or indirectly owned or held by or for the account of the Company or any Subsidiary of the Company shall not be deemed “Outstanding” for purposes hereof.

“Principal Amount” has the meaning set forth in the second paragraph of this Debenture.

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a national securities exchange, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the principal exchange on which the Common Stock is then listed or quoted for trading as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time); (b) if the Common Stock is traded on the OTC Bulletin Board, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company.

All references to “cash” or “$” herein means the currency of the United States of America.

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ARTICLE 2

CONVERSION OF DEBENTURE

2.1        Conversion; Conversion Price.

(a)        Beginning on the earlier to occur of (i) the effectiveness of a registration statement with the SEC covering the resale of the shares of Common Stock to which Holder shall be entitled to under this Agreement (the "S-1"), but in no event prior to ninety-one (91) days following the Closing Date, or (ii) one hundred eighty-one (181) days following the Closing Date, the Holder shall have the right to convert a portion of the Principal Amount and any accrued interest outstanding under this Debenture from time to time during each thirty (30) day period from the Closing up to five percent (5%) of the face amount of this Debenture, or $25,000, if the VWAP is at or below $0.09 for the period of ten (10) consecutive days prior to the conversion date, and up to ten percent (10%), or $50,000, if the VWAP is above $0.09 for the period of ten (10) consecutive days prior to the conversion date, and for every $0.02 increase in the VWAP above $0.09 for the period of ten (10) consecutive days prior to the conversion date, Holder shall have the right to convert up to an additional ten percent (10%), or an additional $50,000, into shares of Common Stock (calculated as to each such conversion to the nearest 1/100th of a share), on any Business Day. Such percentage limitation above shall be accumulated so that in the event that Holder has not converted up to the maximum allowed, any such excess shall be added to the next 30 day period's percentage allowance. For example, if in the first thirty (30) day period the Holder has converted 3%, then during the subsequent thirty (30) day period, Holder shall be allowed to convert up to 7%.

(b)        Subject to Section 2.1(c) below, the number of shares into which this Debenture can be converted is equal to the dollar amount of this Debenture being converted, as reflected in the applicable Conversion Notice, divided by the quotient of the Conversion Price divided by 10, plus the Debenture amount being converted divided by the Conversion Price. The “Conversion Price” shall be equal to the lesser of (i) $0.35, or (ii) 75% of the average of the VWAPs during the thirty (30) Trading Days prior to the date of the Conversion Notice (such percentage amount being the “Discount Multiplier”); provided, however, that if the Company’s election in Section 2.1(c)(ii) below is exercised, the “Conversion Price” shall be equal to the Floor Price.

(c)        If, on the date the Holder delivers a Conversion Notice, the applicable Conversion Price is below $0.075 (the “Floor Price”), the Company shall have the right in its sole discretion, exercisable within two (2) Business Days after the Company’s receipt of such Conversion Notice, in lieu of issuing the shares of Common Stock as set forth in the Conversion Notice to either (i) convert the portion of the Debenture that Holder elected to convert using the Floor Price as the Conversion Price and paying to the Holder in cash an amount equal to the difference in the value of the actual Common Stock Issued at Conversion to Holder hereunder using the Floor Price as a Conversion Price and the value of the Common Stock that would have been delivered to Holder had the conversion been done without regard to the Floor Price (the “Cash True-Up Payment”) – SEE EXAMPLE EXH. A. In the event that the Company fails to make the Cash True-Up Payment within two (2) Business Days after the Company’s receipt of such Conversion Notice, the Company shall no longer have the right to do the partial conversion and Cash True-Up Payment and shall issue to Holder the applicable Common Stock Issued at Conversion set forth in the Conversion Notice under the terms of this Debenture. In the event that the Company elects to do the partial conversion and Cash True-Up Payment, Holder shall have the right to withdraw its Conversion Notice.

2.2        Exercise of Conversion Privilege. Holder shall exercise its conversion rights any Business Day by emailing or telecopying an executed and completed Conversion Notice to the Company. The Conversion Notice shall specify the date on which such conversion shall be effected (such date, the “Conversion Date”) and the amount that is to be converted, subject to the limitations set forth in Section 2.1(a) hereof. If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is deemed delivered hereunder. Each date on which a Conversion Notice is emailed or telecopied to the Company shall constitute a Conversion Date. The Conversion Notice also shall state the name or names (with addresses) of the persons who are to become the holders of the Common Stock Issued at Conversion in connection with such conversion. To effect conversions hereunder, the Holder shall not be required to physically surrender this Debenture to the Company unless the entire Principal Amount of this Debenture, plus all accrued and unpaid interest thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Debenture in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the Principal Amount(s) converted and the date of such conversion(s). The Company may deliver an objection to any Notice of Conversion within one Business Day of delivery of such Notice of Conversion. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this Debenture, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Debenture, the unpaid and unconverted Principal Amount of this Debenture may be less than the amount stated on the face hereof.

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2.3        Delivery of Common Stock. The Company shall convert this Debenture and issue the Common Stock Issued at Conversion in the manner provided below, and all voting and other rights associated with the beneficial ownership of the Common Stock Issued at Conversion shall vest with the Holder, effective as of the Conversion Date at the time specified in the Conversion Notice, subject to Section 2.1 above. As promptly as practicable after the receipt of the Conversion Notice as aforesaid, but in any event not more than two (2) Business Days after the Company’s receipt of such Conversion Notice unless the Company elects the prepayment as set forth in Section 2.1(c), the Company shall (a) issue the Common Stock Issued at Conversion in accordance with the provisions of this Debenture and (b) unless a transfer of the Common Stock Issued at Conversion is requested by DWAC in the Conversion Notice, cause to be mailed for delivery by overnight courier (x) a certificate or certificate(s) representing the number of shares of Common Stock to which the Holder is entitled by virtue of such conversion, and (y) cash, as provided in Section 2.5, in respect of any fraction of a share of Common Stock deliverable upon such conversion. Pursuant to the terms of a Conversion Notice indicating a DWAC transfer, unless the Company elects the prepayment as set forth in Section 2.1(c), the Company will issue instructions to the transfer agent accompanied by an opinion of counsel (if so required by Company’s transfer agent), and, except as otherwise provided below, shall cause the transfer agent to transmit the certificates representing the Common Stock Issued at Conversion to the Holder by crediting the account of the Holder’s designated broker with the Depository Trust Corporation (“DTC”) through its Deposit Withdrawal Agent Commission (“DWAC”) system within two (2) business days after receipt by Company of the Notice of Conversion (the “Delivery Date”). The Holder shall be treated for all purposes as the beneficial holder of such shares of Common Stock Issued at Conversion, or, in the case that Company delivers physical certificates as set forth above, the record holder of such shares of Common Stock, unless the Holder provides Company written instructions to the contrary. Notwithstanding the foregoing to the contrary, Company or its transfer agent shall only be obligated to issue and deliver the shares to the DTC on the Holder’s behalf via DWAC (or certificates free of restrictive legends) if the registration statement providing for the resale of the shares of Common Stock issuable upon the conversion of this Debenture is effective.

2.4        Transfer Taxes. Conversion of this Debenture shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Debenture so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

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2.5        Fractional Shares. No fractional shares or scrip representing fractional shares of Common Stock shall be delivered upon conversion of this Debenture. Instead of any fractional share which otherwise would be delivered upon conversion of this Debenture, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction multiplied by the Current Market Price on the Conversion Date. No cash payment of less than $1.00 shall be required to be given unless specifically requested by the Holder.

2.6        Beneficial Ownership Limitation  Notwithstanding the foregoing, the Holder may not convert this Debenture to the extent that such conversion would cause the Holder to exceed the Beneficial Ownership Limitation as set forth in Section 6.13. To the extent that Holder delivers a Conversion Notice which would result in the issuance of shares of Common Stock in excess of the Beneficial Ownership Limitation, such Conversion Notice shall be deemed to provide for conversion of only that portion of the Debenture as can be issued without exceeding the Beneficial Ownership Limitation.

2.7        Obligations Absolute. The Conversion Notice shall constitute a contract between the Holder and the Company, whereby the Holder shall be deemed to subscribe for the number of shares of Common Stock which it will be entitled to receive upon such conversion, subject to the Company’s options set forth in Section 2.1, and, in payment and satisfaction of such subscription, to surrender this Debenture and to release the Company from all liability thereon (except if and to the extent that any Principal Amount thereof remains unconverted). Subject to the Company’s options set forth in Section 2.1, the Company’s obligations to issue and deliver the Common Stock upon conversion in accordance with the terms of this Debenture are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Common Stock Issued at Conversion. Subject to the Company’s options set forth in Section 2.1, if the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 2.3 by the third Day after the Conversion Date, and if after such Delivery Date the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by such Holder of the shares of Common Stock which the Holder was entitled to receive upon the conversion, then the Company shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount by which (x) the Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Debenture in a principal amount equal to the principal amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements. The Holder shall provide the Company written notice indicating the amounts payable to the Holder and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon conversion of this Debenture as required pursuant to the terms hereof.

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ARTICLE 3
RECLASSIFICATION AND ADJUSTMENTS

3.1        Reclassification. Subject to the Company’s early termination rights as set forth in Section 2.5 of the Securities Purchase Agreement, in the event that (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one transaction or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a “Fundamental Transaction”), then, upon any subsequent conversion of this Debenture, the Holder shall have the right to receive, for each share of Common Stock that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of Common Stock (the “Alternate Consideration”).

(b)        For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. Subject to the Company’s early termination rights as set forth in Section 2.5 of the Securities Purchase Agreement, if holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Debenture following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new debenture consistent with the foregoing provisions and evidencing the Holder’s right to convert such debenture into Alternate Consideration.

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(c)        Subject to the Company’s early termination rights as set forth in Section 2.5 of the Securities Purchase Agreement, in the event of a Fundamental Transaction, the Holder of this Debenture shall have the right thereafter, at its sole option, to (x) declare an Event of Default and require the Company to prepay this Debenture as set forth in Section 5.1(i), (y) elect to receive the number of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Alternate Consideration as is receivable upon or as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock into which the outstanding portion of this Debenture may be converted at the Conversion Price applicable immediately prior to such Fundamental Transaction, or (z) require the Company, or such successor, resulting or purchasing corporation, as the case may be, to, without benefit of any additional consideration therefor, execute and deliver to the Holder a debenture with substantial identical rights, privileges, powers, restrictions and other terms as this Debenture in an amount equal to the amount outstanding under this Debenture immediately prior to such Fundamental Transaction. The foregoing provisions shall similarly apply to successive Fundamental Transactions.

3.2        Adjustments to Floor Price.

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

(b)        Issuance of Capital Shares. If the Company, at any time while this Debenture is outstanding, issues or sells, any shares of Common Stock or rights, warrants or options to subscribe for or purchase shares of Common Stock (collectively, “Common Stock Equivalents”), excluding any Excluded Securities, for a consideration per share less than the Floor Price, then immediately after such sale or issuance the Floor Price then in effect shall be reduced to an amount equal to 90% of the effective price at which the Common Stock was issued. For purposes of determining the adjusted Floor Price under this Section, the following shall be applicable:

(A)        Issuance of Equity Securities. If the Company in any manner grants or sells any Common Stock Equivalents and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Common Stock Equivalent is less than the Floor Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Common Stock Equivalent for such price per share. For purposes of this Section, the “lowest price per share” for which one share of Common Stock is issuable upon the exercise of any such Common Stock Equivalent shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock (x) upon granting or sale of the Common Stock Equivalent, (y) upon exercise of the Common Stock Equivalent and (z) upon conversion or exchange or exercise of such Common Stock Equivalent. No further adjustment of the Floor Price shall be made upon the actual issuance of such share of Common Stock upon the exercise or conversion of the Common Stock Equivalent.

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

(C)        Calculation of Consideration Received. If any Common Stock Equivalent is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Common Stock Equivalent by the parties thereto, the Common Stock Equivalent will be deemed to have been issued for the difference of (x) the aggregate fair market value of such Common Stock Equivalent and other securities issued or sold in such integrated transaction, less (y) the fair market value of the securities other than such Common Stock Equivalent, issued or sold in such transaction and the other securities issued or sold in such integrated transaction will be deemed to have been issued or sold for the balance of the consideration received by the Company. If any Common Stock or Common Stock Equivalents are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount raised by the Company; provided, however, that such gross amount is not greater than 110% of the net amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the Holder.

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

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(c)        Other Events. If any event occurs of the type contemplated by the provisions of this Section 3.2 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company's Board of Directors will make an appropriate adjustment in the Floor Price so as to protect the rights of the Holder under this Debenture; provided that no such adjustment will increase the Floor Price as otherwise determined pursuant to this Section 3.2.

3.3        Notice of Certain Events.

(a)        Adjustment to Floor Price. Whenever the Floor Price is adjusted pursuant to any provision of Section 3.2, the Company shall promptly mail to the Holder a notice setting forth the Floor Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

(b)        Notice to Allow Conversion by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Debenture, and shall cause to be delivered to the Holder at its last address as it shall appear upon the Debenture Register, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder is entitled to convert this Debenture during the 20-day period commencing on the date of such notice through the effective date of the event triggering such notice.

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(c)        If at any time that this Debenture is outstanding: (i) the VWAP is below $0.03 (ii) the Company has not authorized or reserved the lesser of at least 50 million shares of its Common Stock or enough shares of its Common Stock to account for the conversion of this Debenture in full and the issuance of shares of the Common Stock in accordance with its terms; or (iii) the Holder is prohibited for any reason, including without limitation in connection with any claim, suit, federal or state law, regulation, order, interpretation, statute, or similar authority, from otherwise converting this Debenture, then the Holder may elect in Holder’s sole and absolute discretion to convert any portion of the outstanding Principal Amount and accrued and unpaid interest under this Debenture into such number of shares of Common Stock of the Company equal to the dollar amount of the Debenture being converted divided by the Conversion Price, subject to the provisions of Section 2.1 (c).

ARTICLE 4

COVENANTS

4.1        Notice of Default. If any one or more events occur which constitute or which, with notice, lapse of time, or both, would constitute an Event of Default, the Company shall forthwith give notice to the Holder, specifying the nature and status of the Event of Default or such other event(s), as the case may be.

4.2        Payment of Obligations. So long as this Debenture shall be outstanding, the Company shall pay, extend, or discharge at or before maturity, all its respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings.

4.3        Compliance with Laws. So long as this Debenture shall be outstanding, the Company shall comply with all applicable laws, ordinances, rules, regulations and requirements of governmental authorities, except for such noncompliance which would not have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations of the Company and the Subsidiaries.

4.4        Inspection of Property, Books and Records. So long as this Debenture shall be outstanding, the Company shall keep proper books of record and account in which full, true and correct entries shall be made of all material dealings and transactions in relation to its business and activities and shall permit representatives of the Holder at the Holder’s expense to visit and inspect any of its respective properties, to examine and make abstracts from any of its respective books and records, not reasonably deemed confidential by the Company, and to discuss its respective affairs, finances and accounts with its respective officers and independent public accountants, all at such reasonable times during normal business hours and upon reasonable notice as shall be effected in a manner so as not to interfere unreasonably with the Company’s normal business operations.

4.5        Negative Covenants. As long as at least 25% of the Principal Amount of this Debenture remains outstanding, without the Holder’s prior written consent which consent shall not unreasonably be withheld or delayed, the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly:

(a)         intentionally omitted;

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(b)        amend its charter documents, including, without limitation, the certificate of incorporation and bylaws, in any manner that materially and adversely affects any rights of the Holder;

(c)        repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of shares of its Common Stock or Capital Shares;

(d)        pay cash dividends or distributions on any equity securities of the Company;

(e)        enter into any transaction with any Affiliate of the Company which would be required to be disclosed in any public filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company (even if less than a quorum otherwise required for board approval); or

(f)        enter into any agreement with respect to any of the foregoing.

4.6        No Impairment.  Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Agreement, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Agreement against impairment.

4.7        Right of First Refusal on Other Financing. In the event that the Company offers any securities in a financing transaction (either debt, equity, or a combination thereof) which is intended to close during a time at least 10% of the Principal Amount of this Debenture remains outstanding, Holder shall be entitled to a right of first refusal to enable it to match the terms of such financing. The Company shall deliver to Holder, at least 20 days prior to the proposed closing date of such transaction, written notice describing the proposed transaction, including the terms and conditions thereof, and providing Holder an option during the 20 day period following delivery of such notice to provide the financing being offered in such transaction on the same terms as contemplated by such transaction. Notwithstanding the foregoing, if the Company seeks to consummate such financing on terms less favorable to the Company than those terms that were provided to Holder, such financing shall be subject to Holder’s right of first refusal set forth in this Section 4.7.

4.8        DWAC Eligibility.  The Company shall use commercially reasonable efforts to obtain approval by the Depository Trust Corporation (DTC) to have its Common Stock become eligible for DWAC/FAST transfer with its transfer agent.

ARTICLE 5
EVENTS OF DEFAULT; REMEDIES

5.1        Events of Default.  “Event of Default” wherever used herein means any one of the following events:

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(a)        the Company shall default in the payment of principal of or interest on this Debenture as and when the same shall be due and payable;

(b)        a default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument) shall occur under (A) any of the Transaction Documents or (B) any other material agreement, lease, document or instrument to which the Company or any Subsidiary is obligated;

(c)        any representation or warranty made in this Debenture, any other Transaction Documents, any written statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder or any other Holder shall be untrue or false or misleading, in light of the circumstances under which they were made, in any material respect as of the date when made or deemed made;

(d)        the Company or any Subsidiary shall be subject to a Bankruptcy Event;

(e)        the Company or any Subsidiary shall default on any of its obligations under any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement that (a) involves an obligation greater than $150,000, whether such indebtedness now exists or shall hereafter be created, and (b) results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable;

(f)        it becomes unlawful for the Company to perform or comply with its obligations under this Debenture in any respect;

(g)        the Common Stock shall not be eligible for listing or quotation for trading on a Trading Market and shall not be eligible to resume listing or quotation for trading thereon within five Trading Days;

(h)        the Company shall fail to timely file all reports required to be filed by it with the Commission pursuant to Section 13 or 15(d) of the Exchange Act otherwise required by the Exchange Act;

(i)        intentionally omitted;

(j)        Company, within ten (10) days after written notice from Holder that it cannot find a broker who will sell the Common Stock issued to Holder upon conversion, has been unable to identify to Holder a broker who will sell the Common Stock for Holder;

(k)        If the average Volume Weighted Average Price per share of the Common Stock for any period of three (3) consecutive Trading Days during the term of the Debenture is less than $0.01 per share (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or similar reorganizations of capital); or

(l)        The total authorized shares of Common Stock of the Company less the aggregate issued and outstanding shares of Common Stock of the Company multiplied by the Conversion Price is greater than the unconverted Principal Amount and any accrued interest outstanding under this Debenture multiplied by four (4), or a shown in mathematical terms as:

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(No. of Authorized - No. of Issued) x Conversion Price > (Unconverted Principal Balance + Interest) X 4

5.2        Acceleration of Maturity; Rescission and Annulment. If an Event of Default occurs and is continuing, then and in every such case the Holder may, in Holder’s sole and absolute discretion, send a notice in writing to the Company, and if the Event of Default has not been cured within fifteen (15) Business Days following the delivery of such default notice to the Company by the Holder, the Holder may rescind any outstanding Conversion Notice and declare that any or all amounts owing or otherwise outstanding under this Debenture are immediately due and payable and upon any such declaration this Debenture or such portion thereof, as applicable, shall become immediately due and payable in cash in an amount equal to one hundred ten percent (110%) of the sum of (i) the unconverted Principal Amount thereof, plus (ii) all accrued and unpaid interest thereon to the date of payment.

5.3        Late Payment Penalty. All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law which shall accrue daily from the date such interest is due hereunder through and including the date of payment in full.

5.4        Intentionally omitted.

5.5        Maximum Interest Rate. Notwithstanding anything herein to the contrary, if at any time the applicable Interest Rate as provided for herein shall exceed the maximum lawful rate which may be contracted for, charged, taken or received by the Holder in accordance with any applicable law, the rate of interest applicable to this Debenture shall automatically be deemed to be the maximum lawful rate. To the greatest extent permitted under applicable law, the Company hereby waives and agrees not to allege or claim that any provisions of this Debenture could give rise to or result in any actual or potential violation of any applicable usury laws.

5.6        Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Debenture will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Debenture, that the Holder shall be entitled to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Debenture and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.

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5.7        No Penalty. Whenever pursuant to this Debenture the Company is required to pay an amount in excess of the Principal Amount plus accrued and unpaid interest, the Company and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this Debenture may be difficult to determine and the amount to be so paid by the Company represents stipulated damages and not a penalty and is intended to compensate the Holder in part for loss of the opportunity to convert this Debenture and to earn a return from the sale of shares of Common Stock acquired upon conversion of this Debenture at a price in excess of that price paid for such shares pursuant to this Debenture. The Company and the Holder hereby agree that such amount of stipulated damages is not disproportionate to the possible loss to the Holder from the receipt of a cash payment without the opportunity to convert this Debenture into shares of Common Stock.

ARTICLE 6
MISCELLANEOUS

6.1        Surrender of Debentures. Upon conversion or payment in full on the Maturity Date, the Holder shall either deliver this Debenture by hand to the Company at its principal executive offices or surrender the same to the Company at such address by nationally recognized overnight courier. Payment of the Debenture on the Maturity Date, shall be made by the Company to the Holder against receipt of this Debenture by wire transfer of immediately available funds to such account(s) as the Holder shall specify by written notice to the Company. If payment of such redemption price is not made in full by the redemption date, or the amount due on maturity is not paid in full by the Maturity Date, the Holder shall continue to have the right to convert this Debenture for such unpaid amount as provided in Article 2 hereof or to declare an Event of Default as provided in Article 5.

6.2        Effect of Bankruptcy Event. The Holder shall be entitled to exercise its conversion privilege notwithstanding the occurrence of a Bankruptcy Event or the commencement of any case under the Bankruptcy Code. The Company hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. § 362 in respect of the conversion of this Debenture. To the extent that the Company makes a payment or payments to the Holder or the Holder enforces or exercises its rights under this Debenture, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

6.3        Withholding. To the extent required by applicable law, the Company may withhold amounts for or on account of any taxes imposed or levied by or on behalf of any taxing authority in the United States having jurisdiction over the Company from any payments made pursuant to this Debenture.

6.4        No Rights as Shareholder. This Debenture does not entitle Holder to any voting rights or any other rights as a shareholder of the Company prior to the conversion of the Debenture into shares of Common Stock as provided herein.

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

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6.6        Entire Agreement. This Agreement, the Securities Purchase Agreement and the other Transaction Documents, together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements, understandings, discussions and representations, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.

6.7        Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed by the Company and the Holder. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

6.8        Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. This Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement or any of the Transaction Documents.

6.9        Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective if delivered in the manner and to the address as specified in the Securities Purchase Agreement.

6.10      Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof. Each party agrees that all Actions concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective Affiliates, employees or agents) shall be commenced exclusively in the California Courts (as defined in the Securities Purchase Agreement). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the California Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any Action, any claim that it is not personally subject to the jurisdiction of any such California Court, or that such Action has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Action by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence an Action to enforce any provisions of a Transaction Document, then the prevailing party in such Action shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Action.

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6.11        Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or electronic mail in portable document format or other means intended to preserve the original graphic content of a signature, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

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

6.13        Beneficial Ownership Limitation. The number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock being converted under this Agreement with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are still subject to conversion under this Agreement or the purchase, exercise or conversion of the unpurchased, unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents). Except as set forth in the preceding sentence, for purposes of this Section 6.13, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Upon the written or oral request of a Holder, the Company shall within two Business Days confirm orally and/or in writing to the Holder the number of shares of Common Stock then outstanding. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding.

IN WITNESS WHEREOF, the Company has caused this Debenture to be signed by its duly authorized officer on the date of this Debenture.

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World Surveillance Group Inc., a Delaware corporation
By:	/s/ Glenn D. Estrella
Name:	Glenn D. Estrella
Title:	President & CEO

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EXHIBIT A
CONVERSION NOTICE

TO:       Attn: _______________

World Surveillance Group Inc., a Delaware corporation

The undersigned owner of the Convertible Debenture due January __, 2015 (the “Debenture”) issued by World Surveillance Group Inc., a Delaware corporation (the “Company”) hereby irrevocably exercises its option to convert a portion of the Debenture in accordance with its terms, as follows:

Conversion Date:		[●]
Conversion Time:		[●]
Principal Amount converted:		[●]
Accrued Interest converted:	$	[●]
Total amount converted	$	[●]
Conversion Price	$	[●]
Shares of Common Stock to be issued:		[●]

The undersigned hereby instructs the Company to (i) deliver a stock certificate representing the Common Stock Issued at Conversion, a new Debenture representing the new Principal Amount outstanding, and a check in payment of any fractional shares to the following address:

La Jolla Cove Investors, Inc.

1793 Union Street

San Francisco, California 94123

or (ii) to DWAC the Common Stock Issued at Conversion to the following account information:

[La Jolla to cross out the option not elected]

Name: 

Title:

A-1

Appendix A

Cash True-Up Payment example:

1)   Market Price: $0.0625

2)   Conversion Price = $0.05 (20% discount)

3)   Debenture Conversion Amount = $10,000

Value of Common Stock Delivered Pursuant to Conversion Price:

$10,000/($0.05/10) + ($10,000/$0.05) = 2,200,000 shares * $0.0625 = $137,500

Value of Common Stock Delivered Pursuant to Cash True-Up Payment:

$10,000/($0.075/10) + ($10,000/$0.075) = 1,466,667 shares * $0.0625 = $91,667

Cash True-Up Payment:

$137,500 - $91,667 = $45,833 Cash

Total Value Received:

1,466,667 shares of Common Stock + $45,833 Cash

A-2

EX-99.1

WORLD SURVEILLANCE GROUP ANNOUNCES $5.5 MILLION INSTITUTIONAL FINANCING

Funds to be Utilized to Commercialize Argus One and Expand GTC Customer Base

KENNEDY SPACE CENTER, FL – February 07, 2012 (Marketwire) – World Surveillance Group Inc. (OTCBB: WSGI), a developer of lighter-than-air unmanned aerial vehicles (“UAVs”) and related technologies, announced today that the Company has closed on a Securities Purchase Agreement with a California-based institutional investor (the “Investor”) for an aggregate of $5.5 million (the “Financing”). The $500,000 initial tranche of the Financing, which was funded at the closing, was issued in connection with a Convertible Debenture due in January 2015 and an Equity Investment Agreement (the “EIA”). Pursuant to the EIA, the Investor agreed to invest an additional $5.0 million in monthly tranches beginning on the effectiveness of a registration statement the Company will file with the Securities and Exchange Commission, but not prior to 91 days following the closing. The Investor also has the right to purchase an additional $5.0 million of our common stock at an exercise price of $0.21 per share for a period of three years, for a total potential investment of $10.5 million.

The Company plans on using the proceeds of the Financing to expand the operations of both WSGI and its subsidiary, Global Telesat Corp. (“GTC”), as well as to commercialize and further market our Argus One line of UAVs. The Company expects to deploy resources to continue the Government sponsored flight testing and demonstration of our Argus One UAV in Nevada where the aircraft currently resides, inflated in a hangar. We also intend to use a portion of the proceeds from the Financing to pursue GTC contracts for the construction of satellite ground stations, as well as to expand GTC’s sales and marketing efforts to both potential Government and commercial customers. The Company also expects to advance it’s partnership with Oklahoma State University – University Multispectral Laboratories, LLC (“UML”), to support additional technical development of our airships as well as flight testing and demonstrations at UML’s Oklahoma Training Center-Unmanned Systems (“OTC-US”) within the U.S. Army’s Fort Sill restricted airspace. WSGI and UML recently completed certain required flight safety procedures and are in the process of finalizing a series of flight exercises in Oklahoma following the Argus One UAV flight exercises in Nevada.

WSGI Chairman of the Board, Michael K. Clark stated “I am pleased we have formed a relationship with such an established institutional partner and we look forward to growing our institutional investor base as we progress with our business plan throughout 2012. The additional financial resources now available to the Company should allow our team and partners to accelerate and continue to execute the Company’s strategic plan.”

WSGI President and CEO, Glenn D. Estrella indicated “With the proceeds from the Financing, in addition to commercializing and marketing our UAV airships, we intend to deploy substantial resources to accelerate our GTC product and marketing efforts. We look forward to a successful relationship with our new institutional partner and expect that with the additional resources available to us, we will be able to continue to strengthen our balance sheet and increase shareholder value.”

For further information on the Financing, current events and technical updates, please visit our website at www.wsgi.com

About World Surveillance Group Inc.

World Surveillance Group Inc. (OTCBB: WSGI) designs, develops, markets and sells autonomous, lighter-than-air UAVs capable of carrying payloads that provide persistent security and/or wireless communications solutions at low, mid, and high altitudes. WSGI’s airships, when integrated with electronics systems and other high technology payloads, are designed for use by government-related and commercial entities that require real-time intelligence, surveillance and reconnaissance or communications support for military, homeland defense, border control, drug interdiction, natural disaster relief and maritime missions. For more information regarding WSGI, please visit www.wsgi.com, or view our reports and filings with the Securities and Exchange Commission on http://www.sec.gov.

About Global Telesat Corp.

GTC provides satellite airtime and tracking services to the U.S. government and defense industry end users and resells airtime and equipment from leading satellite network providers such as Globalstar, Inmarsat, Iridium and Thuraya. GTC specializes in satellite tracking services using the Globalstar satellite network and owns a number of network infrastructure devices containing the signal processing technology that powers the Globalstar Simplex Data Service. GTC’s equipment is installed in various ground stations across Africa, Asia, Australia, Europe and South America. For more information regarding GTC, please visit www.gtc-usa.com.

Forward-Looking Statements

Certain statements in this release constitute forward-looking statements. These statements include those regarding the timing or receipt of additional tranches of Financing, any use of proceeds from the Financing, the exercise of Investor’s purchase rights under the Financing documents, the timing and ability of the Company to get a registration statement effective, the timing, location or results of any flight testing or demonstrations of our Argus One UAV, the outcome of any demonstrations of the Company’s airships, the roles to be performed or capabilities provided during any testing of our UAVs, the further advancement, development or commercialization of the Company’s UAVs or GTC products, the capabilities and advantages of, and costs related to, the Company's technology and products, the Company’s proprietary technology, the ability to secure ground station construction contracts, the benefits, conduct, results or development of the Company’s relationship with UML, the launch of any new GTC products, the ability to capitalize on commercial demand for satellite based tracking products or accelerate the Company’s access to the global surveillance and communications market or any other market, the Company’s ability to strengthen any partnership relationships or expand its institutional shareholder base, the Company’s ability to strengthen its balance sheet or to accelerate or execute on its strategies or business plan or accomplish any of its goals, and the Company’s ability to deliver increased shareholder value. The words "forecast," "project," "intend," "expect," “plan, ” "should," "would," and similar expressions and all statements, which are not historical facts, are intended to identify forward-looking statements. These forward-looking statements involve and are subject to known and unknown risks, uncertainties and other factors, any of which could cause the Company to not achieve some or all of its goals or the Company’s previously reported actual results, performance (finance or operating) to change or differ from future results, performance (financing and operating) or achievements, including those expressed or implied by such forward-looking statements. The Company assumes no, and hereby disclaims any, obligation to update the forward-looking statements contained in this press release.

Contact:	World Surveillance Group Inc.
	321-452-3545
	Barbara M. Johnson
	investors@wsgi.com