DRAFT

                         FOR INFORMATIONAL PURPOSES ONLY
            NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY

                      FORM OF SECURITIES PURCHASE AGREEMENT

      Securities  Purchase  Agreement  (together with the schedules and exhibits
hereto, this "Agreement"), dated as of May ___, 2005, by and between United Fuel
& Energy  Corporation,  a Nevada  corporation  (the  "Company"),  and the person
identified on the signature page to this Agreement ("Purchaser").


                              W I T N E S S E T H:

      WHEREAS,  the Company desires to issue and sell to the Purchaser,  and the
Purchaser  desires to purchase from the Company,  the Common Stock (as such term
is defined below) as set forth below.

      NOW, THEREFORE,  in consideration of the premises and the mutual covenants
and  agreements  hereinafter   contained,   and  for  other  good  and  valuable
consideration,  the receipt and  sufficiency  of which are hereby  acknowledged,
intending to be legally bound, the parties hereto hereby agree as follows:

      1. Offer and Sale of Common Stock.

      1.1 The Offering. The Company is offering for sale up to 2,000,000 "Units"
of its securities.  A "Unit" shall mean one share of the Company's Common Stock,
par value $.001 per share (the  "Common  Stock")  and a warrant to purchase  one
share of the Common  Stock at $1.50 per share in the form set forth as Exhibit A
hereto ("Warrant"). The Purchaser shall have the benefit of certain registration
rights in respect of the shares of Common Stock purchased  (including  shares of
Common  Stock  underlying  the  Warrants)  on  the  terms  and  conditions  of a
Registration   Rights   Agreement,   in  the  form  of  Exhibit  B  hereto  (the
"Registration Rights Agreement"). The Company is offering Units (the "Offering")
for sale only to individuals, entities or groups, including, without limitation,
corporations,  limited  liability  companies,  limited or general  partnerships,
joint ventures,  associations,  joint stock  companies,  trusts,  unincorporated
organizations,  or governments or any agencies or political subdivisions thereof
(each,  a "Person") who are  "accredited  investors"  (as defined  herein).  The
Company is making the  Offering  of the Units  directly  through  certain of its
officers and its  directors,  but may engage a placement  agent (the  "Placement
Agent"), and other registered  broker-dealers ("Other Participating Agents") may
also place Units.  All subscription  proceeds will be paid upon  subscription to
the account or accounts of the escrow agent  utilized by the Company for receipt
of funds (the "Escrow Agent").

      1.2 Subscription.

      Subject  to the  terms  and  conditions  hereinafter  set  forth  in  this
Agreement,  the  Purchaser  hereby  offers to purchase,  at a price of $1.50 per
share,  the  number  of  shares of  Common  Stock  set  forth  beneath  each the
Purchaser's  name on the  signature  page of this  Agreement,  for an  aggregate
purchase price (the "Purchase  Price") to be paid by the Purchaser in the amount
set forth on the signature page beneath the Purchaser's name, to such account or
accounts as the Company may specify by written notice to the Purchaser.

      1.3 Subscription  Procedures.  To submit this Subscription,  the Purchaser
must deliver (i) this  Agreement,  including,  without  limitation,  the annexed
Purchaser Questionnaire,  both duly completed and executed, and (ii) an executed
Registration Rights Agreement to the following address, unless otherwise advised
by the Company:


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            United Fuel & Energy Corporation
            405 North Marienfeld
            Suite 300
            Midland, Texas 79701
            Attention:  President

            With a copy to:

            Richardson & Patel LLP
            10900 Wilshire Blvd., Suite 500
            Los Angeles, California 90024
            Attention:  Ryan S. Hong, Esq.

            (with  any  questions  to be  raised  with  Scott  Heller  at  (432)
            571-8001)

      The Purchaser shall,  promptly  following the delivery of the subscription
documents as described above,  deliver and pay the applicable  purchase price in
full for the Common Stock being  subscribed for by the Purchaser,  in the amount
of $1.50  for each  share of  Common  Stock,  in U.S.  dollars,  in  immediately
available funds, in accordance with the payment instructions  attached hereto as
Exhibit C. The Company may accept or reject  subscriptions,  in whole or in part
in its sole  discretion.  The Company shall notify the Purchaser of the portion,
if any, of the  Purchaser's  subscription  which has been  accepted  and, if any
portion of the  Purchaser's  subscription  is  rejected,  shall cause the Escrow
Agent to refund to the  Purchaser  the purchase  price paid by the Purchaser for
the shares of Common  Stock with respect to which the  Purchaser's  subscription
was rejected.

      2. Closing.

      2.1 Timing of Closing. Upon acceptance of subscriptions for Units totaling
at least $1,000,000,  the Company may hold a closing of the purchase and sale of
such  Units  (the  "Closing").  The  Closing  may,  but is not  required  to, be
completed  simultaneously with the closing of other purchases and sales of Units
in the  Offering.  The  Company  may hold  one or more  additional  closings  in
connection with the Offering. At the Closing with respect to the subscription by
the  Purchaser,  to the extent the same is accepted by the Company,  the Company
will register in the name of the Purchaser that number of Units being  purchased
by the Purchaser in accordance with the information on the applicable  signature
page of this Agreement.

      2.2  Escrow.  Pending  the  Closing,  all funds  paid in  respect  of this
Agreement  with regard to the Closing  shall be deposited  in an escrow  account
(the "Escrow Account")  maintained by the Escrow Agent. The Escrow Account shall
not be interest  bearing.  If the Offering is  terminated by the Company and the
Closing has not then occurred, then the subscription shall be void and all funds
paid  hereunder  by the  Purchaser,  without  deduction  therefrom  or  interest
thereon,  shall be promptly  returned to the Purchaser.  The subscription  under
this Agreement  shall be void and all funds  deposited by the Purchaser shall be
refunded to the Purchaser as provided in this Section 2.2 (which refund shall be
made on or before the fourth day after the Expiration Date (as defined  below)),
unless on or before July 1, 2005 or such other date as determined by the Company
(the "Expiration Date") all of the conditions set forth in Section 3 hereof have
been satisfied and the Closing shall have  occurred.  The  Purchaser's  offer to
purchase Common Stock pursuant to this Agreement  shall be irrevocable  prior to
the Expiration Date.


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      2.3.  Return of Funds.  The Purchaser  hereby  authorizes  and directs the
Escrow  Agent to return  or direct  the  return  of any  funds  from the  Escrow
Account,  without deduction  therefrom or interest thereon,  to the same account
from which the funds were  originally  drawn, to the extent that the Purchaser's
subscription is not accepted prior to the termination of the Offering.

      3. Conditions to the Obligations of the Purchaser at Closing.

      The  obligation of the  Purchaser to purchase the Common Stock  subscribed
for by the Purchaser at the Closing is subject to the  satisfaction  on or prior
to the Closing Date of the following conditions,  each of which may be waived by
the applicable Purchaser:

      3.1  Opinion of Counsel to the  Company.  The  Placement  Agent shall have
received from counsel for the Company,  its opinion  dated as of the  applicable
Closing Date,  and  addressed to the  Purchaser,  covering the matters  attached
hereto as Exhibit C.

      3.2 Representations and Warranties.  The representations and warranties of
the Company  contained in this  Agreement  which are qualified as to materiality
must be true and correct in all respects and the  representations and warranties
of the  Company  contained  in this  Agreement  which  are not  qualified  as to
materiality must be true and correct in all material  respects as of the Closing
Date except to the extent that the  representations  and warranties relate to an
earlier date in which case the  representations  and warranties must be true and
correct as written or true and correct in all material respects, as the case may
be, as of the earlier date.

      3.3 Performance of Covenants. The Company shall have performed or complied
in all  material  respects  with all  covenants  and  agreements  required to be
performed  by it on  or  prior  to  the  Closing  pursuant  to  this  Agreement,
including,  without  limitation,  the delivery of  certificates  evidencing  the
Common Stock issued to the Purchaser at the Closing.

      3.4 No  Injunctions;  etc. No court or governmental  injunction,  order or
decree  prohibiting the purchase and sale of the Common Stock will be in effect.
There  will  not be in  effect  any  law,  rule  or  regulation  prohibiting  or
restricting the sale or requiring any consent or approval of any Person that has
not been obtained to issue and sell the Common Stock to the Purchaser.

      3.5 Closing Documents. At the Closing, the Company shall have delivered to
the Purchaser the following:

      (a) a  certificate  of the  President of the Company  certifying  that the
conditions in Sections 3.2 and 3.3 have been satisfied;

      (b) a  certificate  of the  Secretary  of the  Company,  dated  as of that
Closing  Date,   certifying   (i)  the  attached   copies  of  the  Articles  of
Incorporation  and By-laws of the Company,  (ii) the resolutions of the Board of
Directors of the Company (the "Board")  authorizing the execution,  delivery and
performance of this Agreement and the issuance of the Common Stock and (iii) the
incumbency  of the officers duly  authorized  to execute this  Agreement and the
other documents contemplated by this Agreement;

      (c) a certificate of the Secretary of State of the State of Nevada,  dated
as of a recent  date (but no more  than  thirty  days)  prior to the date of the
Closing,  to the effect  that the  Company is in good  standing  in the State of
Nevada;


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      (d) a certificate  evidencing the Common Stock purchased by the Purchaser;
and

      (e) a Registration Rights Agreement duly executed by the Company.

      3.6 Waivers and Consents.  The Company will have obtained all consents and
waivers  necessary  to (i) execute and deliver  this  Agreement  and all related
documents and agreements, and (ii) to issue and deliver the Common Stock.

      3.7 Receipt of Minimum  Proceeds of Offering of Common  Stock.  The Escrow
Agent shall have received at least $1.0 million from investors in this Offering.

      4. Conditions to the Obligations of the Company at Closing.

      The  obligation  of the Company to issue and sell the Common  Stock to the
Purchaser is subject to the satisfaction on or prior to each Closing Date of the
following conditions, each of which may be waived by the Company:

      4.1  Receipt of  Purchase  Price.  The Escrow  Agent  shall have  received
payment in full in immediately  available funds in U.S.  dollars of the Purchase
Price for the Common  Stock with  respect to which the Company has  accepted the
Subscription  made by the  Purchaser by means of this  Agreement and the Company
has received at least $1.0 million from investors in this Offering.

      4.2 Representations and Warranties.  The representations and warranties of
the Purchaser  contained in this Agreement which are qualified as to materiality
must be true and correct in all respects and the  representations and warranties
of the  Purchaser  contained  in this  Agreement  which are not  qualified as to
materiality  must  be  true  and  correct  in all  material  respects  as of the
applicable Closing Date.

      4.3  Performance  of  Covenants.  The  Purchaser  will have  performed  or
complied in all material respects with all covenants and agreements  required to
be  performed  by the  Purchaser  on or prior to the  Closing  pursuant  to this
Agreement.

      4.4  Purchaser  Questionnaire.  All of the  information  furnished  by the
Purchaser  in  the  confidential  purchaser   questionnaire   accompanying  this
Agreement (the "Purchaser  Questionnaire") shall have been accurate and complete
in all material respects.

      4.5 No Injunctions.  No court or governmental injunction,  order or decree
prohibiting the purchase or sale of the Common Stock will be in effect.

      4.6 Closing  Document.  The Purchaser will have delivered to the Company a
Registration Rights Agreement duly executed by the Purchaser.

      5. Representations and Warranties of the Purchaser.

      The Purchaser,  in order to induce the Company to perform this  Agreement,
hereby represents and warrants as follows:

      5.1 Due Authorization.  The Purchaser has full power and authority and has
taken all action  necessary to authorize the  Purchaser to execute,  deliver and
perform the Purchaser's obligations under this Agreement.  This Agreement is the
legal,  valid and binding  obligation of the  Purchaser in  accordance  with its
terms.


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      5.2 Accredited  Investor.  The Purchaser is an Accredited Investor as that
term is defined in Regulation D promulgated under the Securities Act of 1933, as
amended (the "Securities Act").

      5.3  No   Investment   Advice.   The   Company  has  not  made  any  other
representations or warranties to the Purchaser other than as set forth herein or
incorporated  herein by  reference  with  respect to the Company or rendered any
investment advice.

      5.4 Investment Experience.  The Purchaser has not authorized any Person to
act as the  Purchaser's  Purchaser  Representative  (as that term is  defined in
Regulation D of the General Rules and  Regulations  under the Securities Act) in
connection  with  this  transaction.   The  Purchaser  has  such  knowledge  and
experience in financial,  investment and business  matters that the Purchaser is
capable of evaluating the merits and risks of the prospective  investment in the
securities of the Company.  The Purchaser  has consulted  with such  independent
legal  counsel or other  advisers as the  Purchaser  has deemed  appropriate  to
assist the Purchaser in evaluating the proposed investment in the Company.

      5.5 Adequate Means.  The Purchaser (i) has adequate means of providing for
the Purchaser's current financial needs and possible contingencies; and (ii) can
afford (a) to hold  unregistered  securities for an indefinite period of time as
required;  and  (b)  sustain  a  complete  loss  of  the  entire  amount  of the
subscription.

      5.6 Access to Information. The Purchaser has been afforded the opportunity
to ask questions of, and receive answers from the officers  and/or  directors of
the Company  acting on its behalf  concerning  the terms and  conditions of this
transaction  and to obtain any  additional  information,  to the extent that the
Company possesses such information or can acquire it without unreasonable effort
or expense,  necessary to verify the accuracy of the information furnished;  and
has had such opportunity to the extent the Purchaser considers it appropriate in
order to permit the  Purchaser to evaluate the merits and risks of an investment
in  the  Company.  It is  understood  that  all  documents,  records  and  books
pertaining to this investment have been made available for inspection,  and that
the books and records of the Company will be available  upon  reasonable  notice
for inspection by investors  during  reasonable  business hours at its principal
place of business.  The foregoing shall in no way be deemed to limit the ability
of the Purchaser to rely on the  representations and warranties set forth herein
or incorporated herein by reference.

      5.7 No Endorsement.  The Purchaser further acknowledges that the offer and
sale of the Units has not been  passed  upon or the merits  thereof  endorsed or
approved by any state or federal authorities.

      5.8 Non-Registered  Securities.  The Purchaser acknowledges that the offer
and sale of the Units have not been  registered  under the Securities Act or any
state  securities laws and the Common Stock  (including  Common Stock underlying
the  Warrants)  may be resold  only if  registered  pursuant  to the  provisions
thereunder or if an exemption  from  registration  is  available.  The Purchaser
understands  that the offer and sale of the Units is  intended to be exempt from
registration under the Securities Act, based, in part, upon the representations,
warranties and agreements of the Purchaser contained in this Agreement.


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      5.9 No Resale.  The Units being  subscribed for are being acquired  solely
for the account of the Purchaser for the  Purchaser's  investment and not with a
view to, or for resale in connection  with, any distribution in any jurisdiction
where such sale or distribution would be precluded. By such representation,  the
Purchaser means that no other Person has a beneficial interest in the Units, and
that no other Person has furnished or will furnish  directly or indirectly,  any
part of or guarantee the payment of any part of the  consideration to be paid by
the Purchaser to the Company in  connection  therewith.  The Purchaser  does not
intend to dispose of all or any part of the Common Stock (including Common Stock
underlying  the  Warrants)  except  in  compliance  with the  provisions  of the
Securities Act and applicable  state  securities  laws, and understands that the
Units are being offered pursuant to a specific exemption under the provisions of
the Securities Act, which  exemption(s)  depends,  among other things,  upon the
compliance with the provisions of the Securities Act.

      5.10 Legend. The Purchaser hereby acknowledges and agrees that the Company
may  insert the  following  or  similar  legend on the face of the  certificates
evidencing  the Common Stock  (including  Common Stock  underlying the Warrants)
purchased by the Purchaser if required in compliance  with the Securities Act or
state securities laws:

      "These  securities  have not been  registered  under the Securities Act of
      1933, as amended (the "Securities  Act"), or any state securities laws and
      may not be sold or otherwise transferred or disposed of except pursuant to
      an  effective  registration  statement  under the  Securities  Act and any
      applicable state securities laws, or an opinion of counsel satisfactory to
      counsel  to the  issuer  that an  exemption  from  registration  under the
      Securities Act and any applicable state securities laws is available."

      5.11 Broker's or Finder's Commissions.  Other than the Placement Agent (as
placement agent on behalf of the Company) or any Other  Participating  Agent, if
any, no finder,  broker, agent, financial person or other intermediary has acted
on  behalf  of the  Purchaser  in  connection  with the sale of the Units by the
Company  or the  consummation  of  this  Agreement  or  any of the  transactions
contemplated hereby.

      5.12 General Solicitation.  The Purchaser is not purchasing the Units as a
result of any advertisement,  article,  notice or other communication  regarding
the Units  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.

      5.13 No Tax or Legal  Advice.  The Purchaser  understands  that nothing in
this  Agreement,  any other  agreement or any other  materials  presented to the
Purchaser in  connection  with the purchase and sale of the Units or exercise of
any Warrants  constitutes  legal,  tax or investment  advice.  The Purchaser has
consulted such legal, tax and investment advisors as it, in its sole discretion,
has deemed  necessary or appropriate in connection with its purchase of Units or
exercise of any Warrants.

      The Purchaser  certifies  that each of the foregoing  representations  and
warranties  by the  Purchaser set forth in this Section 5 is true as of the date
hereof and shall survive such date.

      6. Representations and Warranties of the Company.

      The Company  represents and warrants to the Purchaser as follows as of the
Closing,  each such  representation  and  warranty  being  made  subject to such
disclosures  as are made  pursuant to this  Agreement,  any schedule  (including
Disclosure Schedule) or exhibit delivered in connection herewith at the Closing,
or any report  (including any exhibit or schedule filed thereto)  required to be
filed by the Company under the  Securities  Act and the Exchange Act,  including
without limitation  Schedule 14C, Form 8-K, Form 10-Q and Form 10-K, for the two
years preceding the date hereof:

      6.1  Organization,  Good  Standing  and  Qualification.  The  Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada.  The  Subsidiaries  (as defined in Section 6.2) are each
corporations  duly  organized,  validly  existing and in good standing under the
laws of the  jurisdiction in which they are  incorporated.  The Company and each
Subsidiary has full corporate power and authority to own and hold its properties
and to conduct its business. The Company and each Subsidiary is duly licensed or
qualified to do business,  and in good standing,  in each  jurisdiction in which
the nature of its business requires  licensing,  qualification or good standing,
except for any failure to be so licensed or qualified or in good  standing  that
would not have a material  adverse effect on the Company and the Subsidiaries or
their results of operations,  assets and financial condition,  taken as a whole,
or on the Company's  ability to perform its obligations  under this Agreement or
to issue the Common Stock (collectively, a "Material Adverse Effect").


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      6.2  Capitalization.  The authorized capital stock of the Company consists
of 55,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. As
of May 17,  2005,  (i)  11,254,457  shares of Common  Stock  (plus the number of
shares  issuable  in lieu of  fractional  shares  resulting  from the  Company's
1-for-40  reverse  stock  split  effected  on January  31,  2005) are issued and
outstanding,  and (ii) no shares of Preferred  Stock were issued or outstanding.
All the outstanding shares of Common Stock have been duly authorized and validly
issued,  are fully paid and  nonassessable and free of preemptive rights created
by or through the Company,  have been issued in compliance  with all federal and
state  securities  laws, and not have been issued in violation of any preemptive
rights or similar rights to subscribe for or purchase securities.  As of May 17,
2005,  there  were no  options,  warrants  or other  rights,  convertible  debt,
agreements,  arrangements or commitments of any character obligating the Company
to issue or sell any shares of capital stock of or other equity interests in the
Company. The Company is not obligated to retire, redeem, repurchase or otherwise
reacquire  any  of  its  capital  stock  or  other  securities.   There  are  no
stockholders  agreements,  voting  agreements or other similar  agreements  with
respect to the Common  Stock to which the Company is a party.  The Company  owns
all of the  issued  and  outstanding  capital  stock  of  United  Fuel &  Energy
Corporation,  a Texas corporation  ("United Fuel"),  which, in turn, owns all of
the issued and outstanding capital stock of Eddins-Walcher Oil Company and Three
D Oil Company, Inc. (United Fuel and such entities are referred to herein as the
"Subsidiaries").  There are no options,  warrants or other  rights,  convertible
debt,  agreements,  arrangements or commitments of any character  obligating any
Subsidiary  to issue or sell any  shares  of  capital  stock of or other  equity
interests  in the  Subsidiary.  Except  as  disclosed  in or  pursuant  to  this
Agreement,  the  Company  does  not  directly  or  indirectly  own or  have  any
investment in any of the capital stock of, or any other proprietary interest in,
any  Person  other  than  the  Subsidiaries.  The  Company  has  not  adopted  a
stockholders rights plan, poison pill or similar arrangement.

      6.3 Corporate Power, Authorization;  Enforceability.  The Company has full
corporate power and authority to execute, deliver and enter into this Agreement,
and  the   Registration   Rights  Agreement   (collectively,   the  "Transaction
Documents") and to consummate the transactions  contemplated hereby and thereby.
Except as  contemplated  by this  Agreement,  including the next two  succeeding
sentences,  all action on the part of the Company, its directors or stockholders
necessary for the  authorization,  execution,  delivery and  performance  of the
Transaction  Documents by the Company,  the  authorization,  sale,  issuance and
delivery of the Common  Stock  contemplated  hereby and the  performance  of the
Company's  obligations hereunder and thereunder has been taken. The Common Stock
to be purchased on the Closing Date has been duly authorized and, when issued in
accordance  with  this  Agreement  will  be  validly  issued,   fully  paid  and
nonassessable and will be free and clear of any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or preference,
priority,  right or other security  interest or preferential  arrangement of any
kind  or  nature  whatsoever  (excluding  preferred  stock  and  equity  related
preferences)  (collectively,  "Liens")  imposed by or through the Company  other
than  restrictions  imposed  by  this  Agreement  and  the  Registration  Rights
Agreement,  as the case may be, and applicable securities laws. No preemptive or
other  rights to  subscribe  for or purchase  equity  securities  of the Company
exists  with  respect to the  issuance  and sale of the Units.  The  Transaction
Documents  have been duly executed and delivered by the Company,  and constitute
the legal, valid and binding obligations of the Company, enforceable against the
Company in accordance with their terms,  except as enforceability may be limited
by applicable bankruptcy, insolvency,  reorganization,  fraudulent conveyance or
transfer,  moratorium or similar laws  affecting the  enforcement  of creditors'
rights generally and by general  principles of equity relating to enforceability
(regardless of whether considered in a proceeding at law or in equity).


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      6.4 Financial Statements;  Undisclosed Liabilities. (a) Attached hereto as
Exhibit D are true and complete copies of the audited consolidated balance sheet
(the "2004 Balance Sheet") of United Fuel and its  subsidiaries,  as of December
31, 2004, and the related  audited income  statement and statement of cash flows
for the period then ended and the unaudited consolidated balance sheet of United
Fuel as of March 31,  2005,  and the  related  unaudited  income  statement  and
statement of cash flows for the  three-month  periods then ended  (collectively,
the  "Financial  Statements").  The Financial  Statements  have been prepared in
accordance  with  U.S.  generally  accepted  accounting   principles   ("GAAP"),
consistently  applied,  during  the  periods  involved  (except  in the  case of
unaudited interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material respects the
consolidated  financial  position of the Company as of the dates thereof and the
results of its operations and cash flows for the periods then ended (subject, in
the case of unaudited  statements,  to normal year-end audit  adjustments).  The
Company  keeps  proper  accounting  records  in which all  material  assets  and
liabilities  and all  material  transactions  of the  Company  are  recorded  in
conformity with GAAP.

      (b) Since March 31,  2005,  neither the  Company  nor any  Subsidiary  has
incurred any  liabilities  or  obligations,  whether or not  accrued,  absolute,
contingent or otherwise,  of a type required by GAAP to be included in a balance
sheet  ("Liabilities"),  other than  Liabilities (i) incurred in connection with
this  Agreement,  the  Transaction  Documents or the  transactions  contemplated
hereby and thereby (collectively,  "Transaction Liabilities"),  (ii) incurred in
the ordinary course of business,  or (iii) that would not reasonably be expected
to have a Material Adverse Effect.

      6.5 No Material Adverse Changes.  Since March 31, 2005, there has not been
any material  adverse change in the business,  financial  condition or operating
results of United  Fuel that would  reasonably  be  expected  to have a Material
Adverse Effect.

      6.6 Absence of Certain Developments. Except as contemplated in or pursuant
to this Agreement,  since March 31, 2005, through the date immediately preceding
the Closing  Date,  neither the  Company nor any  Subsidiary  has (a) issued any
stock,  options,  bonds or other corporate securities other than as reflected in
Section 6.2 hereof, (b) borrowed any amount or incurred or became subject to any
Liabilities   (absolute,   accrued  or  contingent),   other  than   Transaction
Liabilities, current Liabilities incurred in the ordinary course of business and
Liabilities under contracts entered into in the ordinary course of business, (c)
discharged  or  satisfied  any  material  Lien or  adverse  claim  or  paid  any
obligation or Liability  (absolute,  accrued or contingent),  other than current
Liabilities shown on the Balance Sheet and current  Liabilities  incurred in the
ordinary course of business, (d) declared or made any payment or distribution of
cash or other  property  to the  stockholders  of the  Company or  purchased  or
redeemed any securities of the Company,  (e) mortgaged,  pledged or subjected to
any material Lien or adverse claim any of its  properties or assets,  except for
Liens for taxes not yet due and payable or otherwise  in the ordinary  course of
business,  (f) sold,  assigned or  transferred  any of its  assets,  tangible or
intangible,  except in the ordinary course of business or in an amount less than
$250,000, (g) suffered any extraordinary losses or waived any rights of material
value  other  than in the  ordinary  course of  business,  (h) made any  capital
expenditures  or  commitments  therefor  other  than in the  ordinary  course of
business  or in an  amount  less  than  $250,000,  (i)  entered  into any  other
transaction other than in the ordinary course of business in an amount less than
$250,000  or  entered  into  any  material  transaction,  whether  or not in the
ordinary course of business,  (j) made any charitable  contributions  or pledges
other  than in the  ordinary  course of  business,  (k)  suffered  any  damages,
destruction or casualty loss, whether or not covered by insurance, affecting any
of its  properties  or assets which,  individually  or in the  aggregate,  would
reasonably be expected to have or result in a Material Adverse Effect,  (l) made
any  material  change  in  the  nature  or  operations  of  its  business,   (m)
participated  in any  transaction  that would  reasonably  be expected to have a
Material  Adverse  Effect or  otherwise  acted  outside the  ordinary  course of
business,  (n) increased the  compensation of any of its officers or the rate of
pay of any of its employees, except as part of regular compensation increases in
the ordinary course of business, or (o) entered into any agreement or commitment
to do any of the foregoing.


                                      -8-
<PAGE>
                                                                           DRAFT


      6.7 No Conflict;  Governmental Consents. (a) The execution and delivery by
the  Company  of  the  Transaction   Documents  and  the   consummation  of  the
transactions  contemplated  hereby  and  thereby  will  not  (i)  result  in the
violation of any provision of the Articles of  Incorporation or By-laws or other
organizational  documents  of the Company,  (ii) result in any  violation of any
law, statute, rule, regulation,  order, writ, injunction,  judgment or decree of
any court or  Governmental  Authority  to or by which the  Company is bound,  or
(iii)  conflict with, or result in a breach or violation of, any of the terms or
provisions  of,  or  constitute  (with  due  notice  or lapse of time or both) a
default under, any bond, debenture,  note or other evidence of indebtedness,  or
any  material  lease,  contract,  indenture,   mortgage,  deed  of  trust,  loan
agreement,  joint venture or other  agreement or instrument to which the Company
or any Subsidiary is a party or by which any of them or their property is bound,
nor result in the creation or imposition of any Lien upon any of the  properties
or assets of the Company or any  Subsidiary,  except for, in the case of clauses
(ii) and (iii) of this subsection  6.7(a),  any violation,  conflict,  breach or
default  which  would not  reasonably  be  expected  to have a Material  Adverse
Effect.

      (b) No material consent, approval, license, permit, order or authorization
of, or  registration,  declaration  or filing  with,  any court,  administrative
agency or commission or other Governmental  Authority or Person, and no lapse of
any waiting  period under any  Requirements  of Law,  remains to be obtained (or
lapsed) or is  otherwise  required to be  obtained by the Company in  connection
with the authorization,  execution and delivery of the Transaction  Documents or
the consummation of the transactions contemplated hereby or thereby,  including,
without  limitation  the  issue and sale of the  Common  Stock,  except  for any
registration,  notice or filing with (i) the Securities and Exchange Commission,
(ii) the National  Association of Securities  Dealers,  Inc. ("NASD"),  or (iii)
state blue sky or other securities regulatory authorities.  For purposes of this
Agreement,  "Requirements  of Law" means,  as to any Person,  any law,  statute,
treaty, rule, regulation, right, privilege, qualification,  license or franchise
or  determination of an arbitrator or a court or other government of any nation,
state,  city,  locality  or other  political  subdivision  thereof,  any  entity
exercising  executive,  legislative,   judicial,  regulatory  or  administrative
functions of or pertaining to  government,  and any  corporation or other entity
owned or controlled,  through stock or capital ownership or otherwise, by any of
the foregoing  (each, a  "Governmental  Authority"),  in each case applicable or
binding  upon such Person or any of its  property or to which such Person or any
of its  property  is subject  or  pertaining  to any or all of the  transactions
contemplated or referred to herein.

      6.8  Litigation.  Except as  disclosed  in or pursuant to this  Agreement,
there are no claims, actions,  suits,  investigations or proceedings pending or,
to the Company's  knowledge,  threatened  proceedings  against the Company,  any
Subsidiary or their  respective  assets,  at law or in equity,  by or before any
Governmental  Authority,  or by or on behalf of any third party,  except for any
claim, action,  suit,  investigation or proceeding which would not reasonably be
expected to have a Material Adverse Effect. There are no claims, actions, suits,
investigations or proceedings pending or, to the Company's knowledge, threatened
proceedings  against the Company or any  Subsidiary  contesting the right of the
Company or Subsidiary to use, sell,  import,  license,  or make available to any
Person any of the Company's or  Subsidiary's  products or services  currently or
previously  sold,  offered,  licensed or made available to any Person or used by
the  Company  or  opposing  or   attempting  to  cancel  any  of  the  Company's
Intellectual  Property (as defined below) rights,  except for any claim, action,
suit, investigation or proceeding which would not reasonably be expected to have
a Material Adverse Effect.


                                      -9-
<PAGE>
                                                                           DRAFT


      6.9 Compliance  with Laws; No Default or Violation;  Contracts.  Except as
disclosed in or pursuant to this  Agreement,  the Company and each Subsidiary is
in compliance  in all material  respects  with all  Requirements  of Law and all
orders issued by any court or Governmental  Authority against the Company or any
Subsidiary.  To the  Company's  knowledge,  there is no  existing  or  currently
proposed  Requirement  of Law which would  reasonably be expected to prohibit or
restrict the Company or any Subsidiary from, or otherwise  materially  adversely
affect  the  Company  or any  Subsidiary  in,  conducting  its  business  in any
jurisdiction in which it now conducts or proposes to conduct such business.  The
Company has all material  licenses,  permits and  approvals of any  Governmental
Authority  (collectively,  "Permits")  that are necessary for the conduct of the
business of the Company or such  Subsidiary  as currently  conducted;  (ii) such
Permits are in full force and effect;  and (iii) no violations  are or have been
recorded in respect of any Permit. No material expenditure is presently required
by the Company or any Subsidiary to comply with any existing Requirements of Law
or order.  Except as disclosed in or pursuant to this  Agreement or as would not
reasonably be expected to have a Material  Adverse  Effect,  neither the Company
nor any  Subsidiary  is (i) in default  under or in violation of any  indenture,
loan or credit  agreement or any other  agreement or instrument to which it is a
party of by which it or any of its  properties  is bound or (ii) in violation of
any order,  decree or judgment of any court,  arbitrator  or other  Governmental
Authority.  The contracts that are material to the Company and the  Subsidiaries
taken as a whole (collectively, the "Contractual Obligations") are in full force
and effect on the date hereof,  and neither the Company,  any Subsidiary nor, to
the Company's  knowledge,  any other party to such  contracts is in breach of or
default under any of such  contracts nor, to the Company's  knowledge,  does any
condition  exist that with  notice or lapse of time or both would  constitute  a
default  thereunder,  except,  in each  case,  for any  default  that  would not
reasonably be expected to have a Material Adverse Effect. Except as disclosed in
or pursuant to this  Agreement,  neither  the  Company  nor any  Subsidiary  has
received  notice  of a  default  under,  or with  respect  to,  any  Contractual
Obligation.  All of the Contractual Obligations are valid,  subsisting,  in full
force and effect and binding upon the Company or the applicable  Subsidiary and,
to the Company's knowledge, the other parties thereto.

      6.10  Insurance.  The  Company  and the  Subsidiaries  maintain  and  will
continue to maintain  insurance of the types and in the amounts that the Company
reasonably believes is adequate for their respective  business,  including,  but
not limited to,  insurance  covering  all real and  personal  property  owned or
leased by the Company or Subsidiary against theft, damage, destruction,  acts of
vandalism and all other risks customarily  insured against by similarly situated
companies, all of which insurance is in full force and effect.

      6.11  Environmental  Matters.  The  Company  and the  Subsidiaries  are in
compliance,  in all material respects,  with all applicable  Environmental Laws.
There is no civil,  criminal or administrative  judgment,  action, suit, demand,
claim, hearing, notice of violation, investigation, proceeding, notice or demand
letter pending or, to the Company's knowledge, threatened against the Company or
any Subsidiary pursuant to Environmental Laws. To the Company's knowledge, there
are no past or present events, conditions, circumstances, activities, practices,
incidents,  agreements,  actions or plans which could  reasonably be expected to
prevent  compliance  with,  or which  have  given  rise to or will  give rise to
liability which would  reasonably be expected to have a Material Adverse Effect,
under  Environmental Laws. For purposes of the foregoing,  "Environmental  Laws"
means  federal,  state and local laws,  principles  of common laws,  civil laws,
regulations,  and codes, as well as orders,  decrees,  judgments or injunctions,
issued,  promulgated,  approved or entered  thereunder  relating  to  pollution,
protection of the environment or public health and safety.


                                      -10-
<PAGE>
                                                                           DRAFT


      6.12 Taxes. The Company and each Subsidiary has paid or caused to be paid,
or has  established  reserves in  accordance  with GAAP for all Tax  liabilities
applicable to the Company or such  Subsidiary for all fiscal years that have not
been examined and reported on by the taxing authorities (or closed by applicable
statutes).  No additional Tax  assessment  against the Company or any Subsidiary
has been heretofore proposed or, to the Company's  knowledge,  threatened by any
Governmental Authority for which provision has not been made on the Company's or
the applicable Subsidiary's balance sheet.

      No  tax  audit  is  currently  in  progress  and  there  is no  unassessed
deficiency  proposed  or, to the  Company's  knowledge,  threatened  against the
Company or any  Subsidiary.  The Company has no  knowledge  of any change in the
rates or basis of  assessment  of any Tax (other  than  federal or state  income
tax),  of the Company or any  Subsidiary  which would  reasonably be expected to
have a Material  Adverse  Effect.  Neither the Company  nor any  Subsidiary  has
agreed to or is required to make any  adjustments  under section 481 of the Code
by reason of a change of accounting  method or otherwise.  None of the assets of
the Company or any  Subsidiary  are required to be treated as being owned by any
Person,  other than the Company or the  applicable  Subsidiary,  pursuant to the
"safe harbor" leasing  provisions of Section 168(f)(8) of the Code.  Neither the
Company  nor  any  Subsidiary  is  a  "United   States  real  property   holding
corporation"  (a "USRPHC")  as that term is defined in Section  897(c)(2) of the
Code and the regulations promulgated thereunder.

      For purposes of this Agreement,  "Code" means the Internal Revenue Code of
1986, as amended,  and "Taxes"  means any federal,  state,  provincial,  county,
local, foreign and other taxes (including,  without limitation, income, profits,
windfall profits,  alternative minimum,  accumulated earnings,  personal holding
company, capital stock, premium, estimated, excise, sales, use, occupancy, gross
receipts, franchise, ad valorem, severance, capital levy, production,  transfer,
withholding,  employment, unemployment compensation, payroll and property taxes,
import duties and other  governmental  charges and assessments),  whether or not
measured  in  whole  or in  part  by net  income,  and  including  deficiencies,
interest,  additions to tax or interest, and penalties with respect thereto, and
including expenses  associated with contesting any proposed  adjustments related
to any of the foregoing.

      6.13 Intellectual Property.

      (a)  "Intellectual  Property"  shall mean all of the following as they are
necessary in connection with the business of the Company and the Subsidiaries as
presently conducted and as they exist in all jurisdictions throughout the world,
in  each  case,  to the  extent  owned  by or  licensed  to the  Company  or any
Subsidiary:  (i)  patents,  patent  applications  and  inventions,  designs  and
improvements  described and claimed  therein,  patentable  inventions  and other
patent rights  (including any divisions,  continuations,  continuations-in-part,
reissues,  reexaminations,  or interferences thereof, whether or not patents are
issued on any such  applications  and whether or not any such  applications  are
modified,  withdrawn,  or resubmitted)  ("Patents");  (ii)  trademarks,  service
marks,  trade dress,  trade names,  brand names,  designs,  logos,  or corporate
names,   whether   registered  or  unregistered,   and  all   registrations  and
applications for registration thereof ("Trademarks");  (iii) copyrights and mask
works,  including all renewals and extensions thereof,  copyright  registrations
and  applications  for  registration  thereof,  and  non-registered   copyrights
("Copyrights");  (iv) trade secrets,  inventions,  know-how, process technology,
databases, confidential business information, customer lists, technical data and
other  proprietary  information  and  rights  ("Trade  Secrets");  (v)  computer
software programs,  including, without limitation, all source code, object code,
and documentation related thereto ("Software");  (vi) Internet addresses, domain
names, web sites,  web pages and similar rights and items  ("Internet  Assets");
and  (vii)  all  licenses,  sublicenses  and  other  agreements  or  permissions
including the right to receive royalties,  or any other consideration related to
the property  described in (i)-(vi).  The Intellectual  Property contains all of
the intellectual  property  necessary to operate the business of the Company and
the Subsidiaries as currently conducted.


                                      -11-
<PAGE>
                                                                           DRAFT


      (b) The Company or the  applicable  Subsidiary  owns (or otherwise has the
right to use the Intellectual  Property pursuant to a valid license,  sublicense
or other agreement), free and clear of all Liens, and has the unrestricted right
(subject to any such license terms,  if applicable)  to use, sell,  license,  or
sublicense all Intellectual Property.

      (c) As used in this  Agreement,  the term "IP Licenses" means all material
licenses,   sublicenses,   distributor   agreements  and  other   agreements  or
permissions  under which the Company or a Subsidiary is a (i) licensor,  or (ii)
licensee,  distributor, or reseller, except such licenses, sublicenses and other
agreements relating to off-the-shelf software which is commercially available on
a retail basis for less than $500 per license and $25,000 in the  aggregate  and
used solely on the computers of the Company or the Subsidiaries  ("Off-the-Shelf
Software").  To the knowledge of the Company,  all of the IP Licenses are valid,
enforceable,  and in full force and effect,  and, with respect to the Company or
the applicable  Subsidiary,  will continue to be on identical terms  immediately
following the completion of the transactions contemplated by this Agreement.

      (d) To the  Company's  knowledge,  all the  Company's or any  Subsidiary's
Intellectual  Property  rights  are valid and  enforceable.  The  Company or the
applicable  Subsidiary has taken reasonable actions to maintain and protect each
item of Intellectual Property owned by the Company or such Subsidiary.

      (e) To the knowledge of the Company,  none of the  Intellectual  Property,
products or services owned, used, developed,  provided,  sold or licensed by the
Company  or any  Subsidiary,  or made for,  used or sold by or  licensed  to the
Company or any Subsidiary by any person infringes upon or otherwise violates any
Intellectual Property rights of others.

      (f) To the  knowledge  of the  Company,  no Person is  infringing  upon or
otherwise  violating  the  Intellectual  Property  rights of the  Company or any
Subsidiary.

      6.14 Employee Benefit Plans.

      (a) Neither the Company,  any  Subsidiary nor any other entity which is or
was under common control with the Company within the meaning of Section  414(b),
(c),  (m) or (o) of the Code  maintains  or  contributes  to, or has  within the
preceding six years maintained or contributed to, or may have any liability with
respect to any employee benefit plan subject to Title IV of Employee  Retirement
Income Security Act of 1974, as amended ("ERISA"), or Section 412 of the Code or
any  "multiple  employer  plan"  within the  meaning of the Code or ERISA.  Each
employee benefit plan,  arrangement,  policy,  program,  agreement or commitment
which the Company or any  Subsidiary  maintains,  contributes to or may have any
liability in respect to (each, a "Plan") has been  established and  administered
in all material  respects in accordance with its terms, and complies in form and
in  operation  with the  applicable  requirements  of ERISA,  the Code and other
applicable  Requirements of Law. No claim with respect to the  administration or
the  investment  of the  assets  of any Plan  (other  than  routine  claims  for
benefits)  is  pending.  No event has  occurred  in  connection  with  which the
Company, any Subsidiary or any Plan, directly or indirectly, could be subject to
any material  liability  under ERISA,  the Code or any other law,  regulation or
governmental  order applicable to any Plan, or under any agreement,  instrument,
statute,  rule of law or  regulation  pursuant to or under which the Company has
agreed to  indemnify  any person  against  liability  incurred  under,  or for a
violation or failure to satisfy the requirement of, any such statute, regulation
or order.  Neither the Company nor any  Subsidiary  has any material  liability,
whether absolute or contingent,  including any obligations  under any Plan, with
respect  to any  misclassification  of any person as an  independent  contractor
rather than as an employee.


                                      -12-
<PAGE>
                                                                           DRAFT


      (b) Neither the Company nor any Subsidiary has any  obligations to provide
or any direct or indirect  liability,  whether  contingent  or  otherwise,  with
respect to the  provision  of health or death  benefits  to or in respect of any
former employee, except as may be required pursuant to Section 4980B of the Code
and the  corresponding  provisions of ERISA and the cost of which are fully paid
by such former employees.

      (c) There are no unfunded  obligations  under any Plan which are not fully
reflected on the Financial Statements.

      6.15 Investment Company.  The Company is not an "investment company" or an
"affiliated  person"  of,  or  "promoter"  or  "principal  underwriter"  for  an
investment company, within the meaning of the Investment Company Act of 1940, as
amended.

      6.16   Private   Offerings.   Assuming   the  truth  of  the   Purchaser's
representations  and   acknowledgments   contained  in  Section  5  hereof  (and
corresponding  representations and acknowledgments  made by each other purchaser
of Units in the Offering  (each,  an  "Investor")),  neither the Company nor any
Person acting on its behalf  (other than the  Purchaser or any  Investor,  as to
whom the  Company  makes no  representations)  has  offered or sold the Units by
means of any general  solicitation or general  advertising within the meaning of
Rule 502(c) under the  Securities  Act. The Company has not sold Units to anyone
other than the Purchaser and the Investors. Each certificate representing shares
of Common  Stock shall bear  substantially  the same legend set forth in Section
5.10 hereof for at least so long as required by the Securities Act.

      6.17 Broker's or Finder's Commissions.  Other than the Placement Agent (as
placement agent on behalf of the Company) or any Other  Participating  Agent, no
finder,  broker,  agent,  financial  person or other  intermediary  has acted on
behalf of the  Company in  connection  with the sale of the Common  Stock by the
Company  or the  consummation  of  this  Agreement  or  any of the  transactions
contemplated hereby. The Company has not had any direct or indirect contact with
any other investment banking firm (or similar firm) with respect to the offer of
the Common Stock by the Company to the Purchaser or Investors or the Purchaser's
or Investors' subscriptions for the Common Stock.

      6.18  Disclosure.  The  Transaction  Documents  do not  contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make  the  statements  contained  herein  or  therein,  in the  light  of the
circumstances  under which they were made, not misleading.  The Company does not
have any knowledge of any fact that has specific  application  to the Company or
any Subsidiary  (other than general  economic or industry  conditions)  and that
would reasonably be expected to have a Material Adverse Effect that has not been
disclosed in or pursuant to the Transaction Documents.

      The  Company  certifies  that each of the  foregoing  representations  and
warranties  by the Company  set forth in this  Section 6 are true as of the date
hereof and shall survive such date as contemplated in Section 7.1.

      7. Indemnification.


                                      -13-
<PAGE>
                                                                           DRAFT


      7.1 The Company agrees to indemnify and hold harmless the  Purchaser,  its
affiliates and each of their respective directors, officers, general and limited
partners,   principals,   agents  and  attorneys  (individually,   a  "Purchaser
Indemnified Party" and collectively,  the "Purchaser  Indemnified Parties") from
and against any and all losses, claims, damages,  Liabilities,  costs (including
reasonable attorneys' fees) and expenses  (collectively,  "Losses") to which any
Purchaser Indemnified Party may become subject, insofar as such Losses arise out
of or result from (i) any breach of any  representation  or warranty made by the
Company contained in or made pursuant to this Agreement,  or (ii) the failure of
the Company to fulfill any  agreement or covenant  contained in or made pursuant
to this Agreement. All of the representations and warranties of the Company made
herein shall survive the execution and delivery of this Agreement until the date
that  is  one  year  after  the  Closing  Date,  except  for  (a)  Sections  6.1
(Organization,  Good  Standing and  Qualification),  6.2  (Capitalization),  6.3
(Corporate Power, Authorization;  Enforceability),  6.16 (Private Offerings) and
6.17 (Broker's or Finder's  Commission),  which  representations  and warranties
shall survive  indefinitely (or if indefinite  survival is not permitted by law,
then for the maximum  period  permitted  by  applicable  law),  (b) Section 6.12
(Taxes),  which  representation  and warranty  shall  survive until the later to
occur  of (i) the  lapse of the  statute  of  limitations  with  respect  to the
assessment  of  any  tax to  which  such  representation  and  warranty  relates
(including any extensions or waivers thereof) and (ii) sixty (60) days after the
final  administrative  or  judicial  determination  of the  Taxes to which  such
representation  and warranty relates,  and no claim with respect to Section 6.12
may be asserted thereafter with the exception of claims arising out of any fact,
circumstance, action or proceeding to which the party asserting such claim shall
have  given  notice  to  the  other  parties  to  this  Agreement  prior  to the
termination  of such  period of  reasonable  belief  that a tax  liability  will
subsequently  arise  therefrom,  and (c) Section 6.11  (Environmental  Matters),
which  representation  and  warranty  shall  survive  until  the  lapse  of  the
applicable  statute  of  limitations.  Except  as set forth  herein,  all of the
covenants,  agreements and  obligations of the Company shall survive the Closing
indefinitely  (or if  indefinite  survival is not permitted by law, then for the
maximum period permitted by applicable law).

      7.2 The Purchaser agrees, severally and not jointly, to indemnify and hold
harmless the Company,  its  affiliates and each of their  respective  directors,
officers,  general  and  limited  partners,  principals,  agents  and  attorneys
(individually,  a "Company  Indemnified  Party" and  collectively,  the "Company
Indemnified  Parties")  from and against any and all Losses to which any Company
Indemnified  Party may become  subject,  insofar as such Losses  arise out of or
result  from  (i) any  breach  of any  representation  or  warranty  made by the
Purchaser  contained in or made pursuant to this Agreement,  or (ii) the failure
of the  Purchaser  to fulfill any  agreement  or covenant  contained  in or made
pursuant to this  Agreement.  All of the  representations  and warranties of the
Purchaser made herein shall survive the execution and delivery of this Agreement
until the date that is three years after the Closing  Date.  Except as set forth
herein, all of the covenants,  agreements and obligations of the Purchaser shall
survive the Closing  indefinitely (or if indefinite survival is not permitted by
law, then for the maximum period permitted by applicable law).


                                      -14-
<PAGE>
                                                                           DRAFT


      7.3 Promptly  after  receipt by a Purchaser  Indemnified  Party or Company
Indemnified  Party (each an  "Indemnified  Party")  under  Section 7.1 or 7.2 of
notice of any claim as to which  indemnity  may be  sought,  including,  without
limitation,  the commencement of any action or proceeding, the Indemnified Party
will,  if a claim in respect  thereof  may be made  against  the  Company or the
applicable  Purchaser  (as  applicable,  the  "Indemnifying  Party")  under this
Section 7, promptly notify the Indemnifying Party in writing of the commencement
thereof;  provided  that the failure of the  Indemnified  Party to so notify the
Indemnifying  Party will not relieve the Indemnifying Party from its obligations
under this Section 7 unless,  and only to the extent that, such omission results
in the  Indemnifying  Party's  forfeiture of  substantive  rights or defenses or
being  materially  prejudiced by the  Indemnified  Party's  failure to give such
notice.  In case any action or  proceeding  is brought  against any  Indemnified
Party, and it notifies the Indemnifying Party of the commencement  thereof,  the
Indemnifying  Party shall be  entitled to assume the defense  thereof at its own
expense,  with counsel  satisfactory to such Indemnified Party in its reasonable
approval  (which  approval  will  not  be  withheld  or  delayed  unreasonably);
provided,  however,  that any Indemnified Party may, at its own expense,  retain
separate counsel to participate in such defense at its own expense. After notice
from the  Indemnifying  Party to the  Indemnified  Party of its  election  to so
assume the defense  thereof,  the  Indemnifying  Party will not be Liable to the
Indemnified  Party  under  this  Section 7 for any  legal or any other  expenses
subsequently  incurred by the  Indemnified  Party in connection with the defense
thereof (other than reasonable  costs of  investigation)  unless incurred at the
written  request of the  Indemnifying  Party.  Notwithstanding  the  above,  the
Indemnified Party will have the right to employ counsel of its own choice in any
action  or  proceeding  (and be  reimbursed  by the  Indemnifying  Party for the
reasonable  fees and expenses of the counsel and other  reasonable  costs of the
defense)  if,  in the  written  opinion  of such  Indemnified  Party's  counsel,
representation  of  the  Indemnified  Party  by  the  counsel  retained  by  the
Indemnifying  Party would be inappropriate due to actual or potential  differing
interests  or  conflicts  between  the  Indemnified  Party and any  other  party
represented  by  the  counsel  in  the  action;  provided,   however,  that  the
Indemnifying  Party will not in connection  with any one action or proceeding or
separate but  substantially  similar  actions or proceedings  arising out of the
same general allegations, be Liable for the reasonable fees and expenses of more
than one separate  firm of attorneys  at any time for all  Indemnified  Parties,
except to the extent that local  counsel,  in addition  to regular  counsel,  is
required in order to effectively  defend  against the action or proceeding.  For
purposes of the proviso in the preceding sentence,  "Indemnified Parties" in the
context of Purchaser  Indemnified  Parties shall include all Investors and other
Persons  entitled to  indemnification  by the Company pursuant to any Securities
Purchase Agreement entered into by the Company with respect to the Offering.  An
Indemnifying  Party  will  not  be  Liable  to any  Indemnified  Party  for  any
settlement or entry of judgment  concerning  any action or  proceeding  effected
without  the  consent of the  Indemnifying  Party,  which  consent  shall not be
unreasonably  withheld.  The Indemnifying Party agrees that it will not, without
the prior  written  consent of the  Indemnified  Party,  settle,  compromise  or
consent to the entry of any judgment in any pending or threatened claim relating
to the matters  contemplated hereby (if any Indemnified Party is a party thereto
or has  been  actually  threatened  to be  made a  party  thereto)  unless  such
settlement,  compromise  or consent  includes an  unconditional  release of each
Indemnified  Party  from all  liability  arising  or that may  arise out of such
claim.  The  rights  accorded  to an  Indemnified  Party  hereunder  shall be in
addition  to any rights  that any  Indemnified  Party may have at common law, by
separate agreement or otherwise;  provided,  however,  that  notwithstanding the
foregoing or anything to the contrary  contained in this Agreement,  (a) nothing
in this Section 7 shall restrict or limit any rights that any Indemnified  Party
may have to seek  equitable  relief and (b) this Section 7 shall be the sole and
exclusive   remedy  for  any  breach  of  the   Company's  or  the   Purchaser's
representations  and warranties  contained in Section 5 or 6 except with respect
to claims arising out of fraud or willful misconduct.

      8. Covenants.

      8.1 Use of Proceeds.  The Company may use the proceeds  from this Offering
for  working  capital  and  general  corporate  purposes,   including,   without
limitation,  for such acquisitions as the Company has considered or may consider
from time to time.

      8.2 Conduct of the  Company's  Business.  Except as  contemplated  by this
Agreement,  during the period  from the date  hereof to the  Closing  Date,  the
Company will,  and will cause the  Subsidiaries  to,  conduct  their  respective
business and  operations  solely in the ordinary  course of business  consistent
with past practice and use reasonable  commercial  efforts to keep available the
services of its officers and  employees  and preserve its current  relationships
with  customers,  suppliers,  licensors,  creditors and others  having  business
dealings with it.

      8.3 Reasonable  Best Efforts.  Subject to the terms and conditions of this
Agreement,  each of the parties hereto will use its  reasonable  best efforts to
take,  or cause to be taken,  all actions,  and to do, or cause to be done,  all
things  necessary,  proper or advisable under applicable laws and regulations to
consummate  the  transactions  contemplated  by this  Agreement  at the earliest
practicable date.


                                      -15-
<PAGE>
                                                                           DRAFT


      8.4 Tax Matters.

      The Company covenants that it will use commercially reasonable efforts not
to become a USRPHC at any time  while the  Purchaser  owns any of the  shares of
Common Stock.

      9. FOR RESIDENTS OF ALL STATES:  THE  SECURITIES  OFFERED  HEREBY HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,  OR THE SECURITIES
LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS  FROM
THE  REGISTRATION  REQUIREMENTS  OF SAID ACT AND SUCH LAWS.  THE  SECURITIES ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED
OR  RESOLD  EXCEPT  AS  PERMITTED  UNDER  SAID ACT AND  SUCH  LAWS  PURSUANT  TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD
OF TIME.

      10. No Waiver.

      Notwithstanding any of the representations, warranties, acknowledgments or
agreements  made herein by the  Purchaser,  the Purchaser does not thereby or in
any manner  waive any rights  granted to the  Purchaser  under  federal or state
securities laws.

      11. Miscellaneous.

      11.1 Notices.  Any notice or other  communication  given  hereunder by any
party  hereto  to any other  party  hereto  shall be in  writing  and  delivered
personally or by facsimile  transmission or sent by registered or certified mail
or by any express mail or overnight courier service, postage or fees prepaid:

            If to the Company, to:

                  United Fuel & Energy Corporation
                  405 N. Marienfeld
                  Midland, Texas  79701
                  Attention: President
                  Facsimile No.:  432-571-8098

                  With a copy to :

                  Richardson & Patel LLP
                  10900 Wilshire Blvd., Suite 500
                  Los Angeles, California 90024
                  Attention: Ryan S. Hong, Esq.

            If to the Purchaser, to:

                  To  the  Purchaser  at  the  Purchaser's  name,   address  and
                  facsimile  number  set  forth  on the  signature  page to this
                  Agreement

Any notice that is  delivered  personally  or by facsimile  transmission  in the
manner  provided  herein shall be deemed to have been duly given to the party to
whom it is directed upon actual  receipt by such party or its agent.  Any notice
that is addressed  and mailed or sent by courier in the manner  herein  provided
shall be conclusively  presumed to have been duly given to the party to which it
is  addressed  at the close of  business,  local time of the  recipient,  on the
fourth  business  day after the day it is so placed in the mail or, if  earlier,
the time of actual receipt.


                                      -16-
<PAGE>
                                                                           DRAFT


      11.2 Successors and Assigns. This Agreement will be binding upon and inure
to the  benefit of the  parties  hereto  and to their  respective  heirs,  legal
representatives, successors and assigns; provided, that no party may assign this
Agreement  or its rights  hereunder  without  the prior  written  consent of the
Company, in the case of an assignment by the Purchaser,  or the Purchaser in the
case of an  assignment  by the  Company,  such  consent  not to be  unreasonably
withheld  (however,  the Company  shall under no  circumstances  be obligated to
consent to an  assignment  by the  Purchaser  to a purchaser  of Common  Stock);
provided,  further,  that  the  Purchaser  may  assign  this  Agreement  to  its
affiliates  without consent;  provided that any transfer of Common Stock must be
in compliance with the Transaction Documents and all applicable law.

      11.3 Entire Agreement.  This Agreement sets forth the entire agreement and
understanding  among the parties as to the subject  matter hereof and merges and
supersedes all prior discussions, agreements and understandings of any and every
nature among them;  provided,  that any  confidentiality  agreement  between the
Company and the Purchaser shall remain in effect.  This Agreement may be amended
only by mutual written agreement of the Company and the Purchaser.

      11.4 Governing  Law. This Agreement  shall be governed by and construed in
accordance  with the laws of the State of Texas with respect to  contracts  made
and to be fully  performed  therein,  without  regard to the  conflicts  of laws
principles thereof.  The parties hereto hereby agree that any suit or proceeding
arising under this  Agreement,  or in connection  with the  consummation  of the
transactions  contemplated hereby, shall be brought solely in a federal or state
court  located  in the County of Midland  and State of Texas.  By its  execution
hereof, both the Company and the Purchaser hereby consent and irrevocably submit
to the in personam  jurisdiction  of the federal and state courts located in the
County of Midland  and State of Texas and agree that any  process in any suit or
proceeding  commenced in such courts under this  Agreement may be served upon it
personally or by certified or registered mail, return receipt  requested,  or by
Federal Express or other courier  service,  with the same force and effect as if
personally  served upon the applicable  party in Texas and in the city or county
in which such other  court is located.  The parties  hereto each waive any claim
that  any such  jurisdiction  is not a  convenient  forum  for any such  suit or
proceeding  and any defense of lack of in  personam  jurisdiction  with  respect
thereto.

      11.5  Severability.  The holding of any provision of this  Agreement to be
invalid or  unenforceable by a court of competent  jurisdiction  will not affect
any other  provision  of this  Agreement,  which  will  remain in full force and
effect.  If any provision of this  Agreement is declared by a court of competent
jurisdiction  to be invalid,  illegal or incapable of being enforced in whole or
in part, the provision  will be  interpreted so as to remain  enforceable to the
maximum  extent  permissible  consistent  with  applicable law and the remaining
conditions and provisions or portions thereof will  nevertheless  remain in full
force and  effect  and  enforceable  to the  extent  they are  valid,  legal and
enforceable,  and no provisions will be deemed dependent upon any other covenant
or provision unless so expressed herein.

      11.6 No Waiver.  A waiver by either party of a breach of any  provision of
this Agreement will not operate, or be construed,  as a waiver of any subsequent
breach by that same party.

      11.7  Further  Assurances.  The  parties  agree to execute and deliver all
further documents,  agreements and instruments and take further action as may be
necessary or appropriate to carry out the purposes and intent of this Agreement.


                                      -17-
<PAGE>
                                                                           DRAFT


      11.8  Counterparts.  This  Agreement  may  be  executed  in  two  or  more
counterparts,  each of which will be deemed an  original,  but all of which will
together constitute the same instrument.

      11.9 No Third Party  Beneficiaries.  Nothing in this Agreement  creates in
any Person not a party to this Agreement any legal or equitable right, remedy or
claim under this Agreement,  and this Agreement is for the exclusive  benefit of
the parties hereto.  The parties expressly  recognize that this Agreement is not
intended to create a  partnership,  joint venture or other  similar  arrangement
between any of the parties or their respective affiliates.

      11.10 Headings.  The headings in this Agreement are solely for convenience
of reference and shall be given no effect in the construction or  interpretation
of this Agreement.

      11.11 Specific Performance.  The Purchaser acknowledges and agrees that in
the event of any breach of this  Agreement,  the  Company  would be  irreparably
harmed  and  could  not  be  made  whole  by  monetary  damages.  The  Purchaser
accordingly agrees to waive the defense in any action for injunction or specific
performance  that a remedy at law would be adequate and that the parties hereto,
in  addition  to any other  remedy to which  they may be  entitled  at law or in
equity,  shall be entitled to an injunction or to compel specific performance of
this Agreement.

      11.12  Publicity  Restrictions.  Except as may be required  by  applicable
Requirements of Law, none of the parties hereto shall issue a publicity  release
or  public  announcement  or  otherwise  make  any  disclosure  concerning  this
Agreement,  the transactions  contemplated  hereby without prior approval by the
other party hereto;  provided that after the issuance of the Common Stock to the
Purchaser has been publicly  disclosed by the Company the Purchaser may disclose
on its worldwide web pages and its offering  materials,  if any, the name of the
Company,  the  name of the  Chief  Executive  Officer  of the  Company,  a brief
description of the business of the Company  consistent  with the Company's press
releases or other public statements, the Company's logo and the aggregate amount
of the Purchaser's investment in the Company. If any announcement is required by
applicable law or the rules of any securities exchange or market on which shares
of Common Stock are traded to be made by any party hereto,  prior to making such
announcement  such party will deliver a draft of such  announcement to the other
parties  and shall  give the other  parties  reasonable  opportunity  to comment
thereon.  The parties agree to attribute and otherwise indicate ownership of the
other parties' trademarks and logos.

      11.13  Certification.  The Purchaser certifies that the Purchaser has read
this entire  Agreement and that every statement on the Purchaser's part made and
set forth herein is true and complete.

                  [Remainder of page intentionally left blank.]


                                      -18-
<PAGE>
                                                                           DRAFT


      IN WITNESS WHEREOF,  the undersigned has executed this Securities Purchase
Agreement on the date his signature has been subscribed and sworn to below.

<TABLE>
<S>                                                          <C>
The shares of Common Stock                                   _____________________________________________________
are to be issued in:                                         Print Name of Investor

____ individual name                                         __________________ Units subscribed for

                                                             Subscription price paid herewith:
                                                             $_________________ (being $1.50 x the number of Units
____ tenants in the entirety                                 listed above)

                                                             _____________________________________________________
____ corporation (an officer must sign)                      Print Name of Joint Investor
                                                             (if applicable)

                                                             _____________________________________________________
____ partnership (all general partners must sign)            Signature of Investor

                                                             _____________________________________________________
____ trust                                                   Signature of Joint Investor
                                                             Address of Investor:

____ limited liability company                               _____________________________________________________

                                                             _____________________________________________________

                                                             Facsimile No.: ______________________________________

                                                             (with a copy to:)
                                                             _____________________________________________________

                                                             _____________________________________________________

                                                             Facsimile No.: ______________________________________
</TABLE>

Accepted  as of the ___ day of  _________,  2005  as to  _______________  Units;
Subscription price accepted being  $______________,  being $1.50 x the number of
Units as to which this Subscription is accepted:

UNITED FUEL & ENERGY CORPORATION

By:      ___________________________________________
Name:    Scott Heller
Title:   President and Chief Executive Officer


                                      -19-
<PAGE>


                        [Insert Purchaser Questionnaire]


                                       xx
<PAGE>

                                    Exhibit A


                                 Form of Warrant


                                       iv
<PAGE>

                                    Exhibit B


                      Form of Registration Rights Agreement


                                       v
<PAGE>

                                    Exhibit C


                   Wire Transfer Instructions for Escrow Agent


                                       vi
<PAGE>

                                    Exhibit D

           Matters to be Covered in Legal Opinion of Company's Counsel

      1. The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Nevada.

      2. The Company has all necessary corporate power and authority to execute,
deliver,  enter into and perform its  obligations  under each of the Transaction
Documents and to consummate the transactions  contemplated  thereby,  including,
without  limitation,  to issue,  sell and  deliver  the  Common  Stock  issuable
pursuant  thereto.  The  execution,  delivery,  and  performance  of each of the
Transaction Documents has been duly authorized by all necessary corporate action
on the part of the Company.

      3. The Transaction  Documents have been duly executed and delivered by the
Company and  constitute  legal,  valid and binding  obligations  of the Company,
subject to laws of general  application  relating to bankruptcy,  insolvency and
the  relief  of  debtors  and  rules  of  law  governing  specific  performance,
injunctive  relief or other  equitable  remedies,  and to  limitations of public
policy.

      4. The shares of Common Stock have been duly  authorized  and, when issued
in accordance with the Securities  Purchase Agreement will be validly issued and
nonassessable  and will be free and clear of all Liens imposed by or through the
Company other than restrictions imposed by the Securities Purchase Agreement and
applicable  securities  laws.  Other than as  specified,  no preemptive or other
rights to subscribe for or purchase equity securities of the Company exist under
statute or the  Articles of  Incorporation  of the Company  with  respect to the
issuance and sale of the Common Stock by the Company pursuant to the Transaction
Documents.

      5. The execution and delivery by the Company of the Transaction  Documents
do not and the  consummation of the transactions  contemplated  thereby will not
(A) violate any  provision  of the Articles of  Incorporation  or By-laws of the
Company, or (B) violate any law, statute, rule,  regulation,  order, judgment or
decree  of any court or  Governmental  Authority  which,  to our  knowledge,  is
applicable to the Company, except for, in the case of clause (B), any violation,
breach or default  which  would not  reasonably  be  expected to have a Material
Adverse Effect.

      6. Except for filings,  authorizations  or approvals  contemplated  by the
Securities Purchase  Agreement,  to our knowledge no authorizations or approvals
of, and no filings with, any Governmental Authority are necessary or required by
the Company for the execution and delivery of the  Transaction  Documents or the
consummation of the transactions contemplated thereby.

      7. The Company is not an  "investment  company"  within the meaning of the
Investment Company Act of 1940, as amended.

      8.  Assuming the accuracy of the  representations  and  warranties  of the
Purchaser and the other Investors in the Offering in their respective Securities
Purchase  Agreements,  the offer and sale of the Common Stock is exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to
Section 4(2) and/or Rule 506 under Regulation D of the Securities Act.

The opinion will set forth counsel's customary assumptions and qualifications.


                                      vii
<PAGE>

                                    Exhibit E


                       Financial Statements of the Company


                                      viii