~ ASHER ~

[lmcat]

ELRAY RESOURCES, INC.

On February 1, 2012, the Company entered into a convertible promissory note with Asher Enterprises, Inc. (“Asher”) for $42,500 (the “First Asher Note”). The note bears interest at 8% and matures on November 6, 2012. In the event that the note remains unpaid at that date, the Company will pay default interest of 22%. Asher has the right after a period of 180 days to convert the balance outstanding into common shares in the Company at a rate equal to 58% of the average lowest three closing prices during the ten trading days prior to the conversion date.

On March 15, 2012, the Company entered into a convertible promissory note with Asher for $32,500 (the “Second Asher Note”). The note bears interest at 8% and matures on December 19, 2012. In the event that the note remains unpaid at that date, the Company will pay default interest of 22%. Asher has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 58% of the average lowest three closing prices during the ten trading days prior to the conversion date.

On April 25, 2012, the Company entered into a promissory note with Rousay Holdings Ltd (“Rousay”) for $10,000,000. If funded in full, the note will be secured by the issuance of 923,206,006 shares of the Company’s common stock and will be due in one year at an interest rate of 20% payable in arrears. On maturity, the interest of $2,000,000 is payable in cash and the note holder may elect to take ownership of the shares held, in lieu of repayment of principal. As of June 30, 2012, $2 million of the promissory note had been funded. The Company will seek to have Rousay fund the balance of $8 million of the note.

Due to the JSJ and Asher notes’ conversion feature, the actual number of shares of common stock that would be required if a conversion of the note was made through the issuance of common stock cannot be predicted, and the Company could be required to issue an amount of shares that may cause it to exceed its authorized common share amount. As a result, the conversion feature requires derivative accounting treatment and will be bifurcated from the note and “marked to market” each reporting period through the income statement.

The conversion feature of the Second JSJ Note, the First Asher Note and the Second Asher Note was valued at $40,743, $54,486, and $42,236, respectively, on the issuance date. As a result, these notes were fully discounted and the fair value of the conversion feature in excess of the principal amount of these notes totaled $37,465 was expensed immediately as additional interest expense.