Nantahala Capital Management LLC

Item 5 – Fees and Compensation

A. Fee Schedule

   1. Management Fee
From the Funds, Nantahala typically receives a monthly or quarterly asset-based
management fee calculated as a percentage of each Investor’s capital account, payable
monthly in advance or quarterly in arrears, depending on the specific Fund or Fund class.
The management fee typically ranges between 1.0% and 2.0% annually. From Separate
Accounts, Nantahala generally receives management fees comparable to those paid by the
Funds; however, fee structures are subject to negotiation and may vary from those paid by
the Funds.

   2. Incentive Allocation or Fee
Nantahala generally receives a performance allocation or fee from the Funds equal to a
percentage of the net income allocated to each Investor for the year, subject to a “high water
mark” procedure such that the incentive allocation or fee is taken only to the extent net
income allocated to that Investor exceeds any cumulative losses that were allocated to that
Investor for earlier periods that have not been recovered. This incentive allocation or fee is
generally 20% and is typically made at the end of each calendar year. From Separate
Accounts, Nantahala generally receives performance allocations or fees comparable to those
paid by the Funds; however, fee structures are subject to negotiation and may vary from
those paid by the Funds.

The incentive allocation or fee will only be charged to accounts of those Investors who are
“qualified clients” as defined in Rule 205-3 of the Investment Advisers Act of 1940. Fees and
other compensation are negotiable in certain circumstances, and arrangements with any
particular Investor may vary. Although Nantahala believes its fees are competitive, lower fees
for comparable services may be available from other investment advisers.

Investors in a Fund may be subject to different economic arrangements depending on the
class of interests acquired or other negotiated terms. As a result, the management fees,
performance allocations, or other expenses applicable to certain investors may differ from
those applicable to other investors in the same Fund.

B. Payment of Fees

Advisory fees, incentive allocations or fees, and third-party fees (discussed below) are
generally deducted from Client assets as initiated by Nantahala or the Client. Advisory fees,
which are paid in advance or in arrears depending on the Fund or Separate Account, are
withdrawn at the beginning or end of the month or quarter. Incentive allocations or fees are
generally allocated or paid as of the last business day of the calendar year and as of or
following any date on which an Investor makes a withdrawal or receives a distribution from
such Investor’s capital account(s).

                                                                              Part 2A of ADV:
                                                   Nantahala Capital Management, LLC Brochure

C. Third-party Fees

The Clients shall generally pay such costs and expenses as Nantahala shall reasonably
determine to be necessary, appropriate, or advisable to carry on its business and realize its
objective, which may include but are not limited to: (i) advisory fees; (ii) all general
investment expenses (i.e., expenses which Nantahala reasonably determines to be directly
related to the investment of a Client’s assets); (iii) all administrative, legal, accounting,
auditing, record-keeping, tax form preparation, compliance and consulting costs and
expenses; (iv) fees, costs and expenses of third-party service providers that provide such
services; and (v) any extraordinary expenses, among other expenses. Investors should refer
to a Fund's offering documents or a Separate Account's governing documents for a full
disclosure of costs and expenses that may be borne by the Clients. Because each Client has
separate governing agreements that define the terms of the expenses borne by each Client,
some Clients bear expenses that others do not. In these circumstances, while one Client may
bear a lower portion of a given expense as a result of its governing agreements, Nantahala
will not have the ability to increase the portion of such expense borne by other Clients.

Nantahala’s fees are exclusive of brokerage commissions, transaction fees, and other related
costs and expenses which shall be incurred by the Clients. Such charges, fees, and
commissions are exclusive of and in addition to Nantahala’s advisory fee, and Nantahala shall
not receive any portion of these commissions, fees, and costs.

Please see Item 12 of this Brochure for more information about Nantahala’s brokerage
arrangements for its Clients.

D. Prepayment of Fees

Nantahala generally does not permit withdrawals on dates other than the last day of each
calendar month. In the event that Nantahala makes an exception to this policy, it may agree
to prorate the management fee in whole or in part, in its sole direction or as stipulated in the
Client's governing documents.

E. Outside Compensation for the Sale of Securities

Neither Nantahala nor its supervised persons accepts compensation for the sale of securities
or other investment products outside of its association with Nantahala.

The foregoing response to Item 5 represents Nantahala’s basic compensation arrangements.
The management fees and incentive allocations or fees described above are structured to
comply with Rule 205-3 under the Advisers Act and applicable state laws.

                                                                              Part 2A of ADV:
                                                   Nantahala Capital Management, LLC Brochure

Item 7 – Types of Clients

Nantahala provides investment advice and management to the Funds and Separate Accounts.
Separate Account clients may include funds of funds, endowments, pension plans, or other
institutional investors.

Nantahala may, in the future, provide the same or similar services to other privately placed
investment funds and/or separately managed accounts.

Prospective Investors in the Funds must meet eligibility criteria and are subject to certain
withdrawal requirements and limitations. Depending on the Fund, interests are offered to
“Accredited Investors” (as defined in Regulation D under the Securities Act of 1933),
“Qualified Clients” (as defined in Rule 205-3 under the Investment Advisers Act of 1940),
“Qualified Purchasers” (as defined in Section 2(a)(51) of the U.S. Investment Company Act of
1940, as amended) and/or “Knowledgeable Employees” (as defined in Rule 3c-5 of the U.S.
Investment Company Act of 1940, as amended). Shares in the Offshore Funds are offered to
non-U.S. persons and a limited number of U.S. persons who are Qualified Purchasers,
Accredited Investors, and exempt from U.S. federal income taxation. Generally, similar terms
will apply to Separate Accounts, though Investors in such Separate Accounts may negotiate
terms that differ or are more favorable than those for the Funds.

The minimum initial investment in the Funds is $1,000,000, subject to waiver at the
discretion of Nantahala.

                                                                                Part 2A of ADV:
                                                     Nantahala Capital Management, LLC Brochure