Silver Dragon Resources, Inc.: Investment Agreement - Prepared by TNT
Filings Inc.



 



INVESTMENT AGREEMENT 


INVESTMENT AGREEMENT (this "AGREEMENT"), dated
as of November 29, 2005 by and between Silver Dragon Resources, Inc., a Delaware
corporation (the "Company"), and Dutchess Private Equities Fund, LP, a Delaware
limited partnership (the "Investor"). 

Whereas, the parties desire that, upon the
terms and subject to the conditions contained herein, the Investor shall invest
up to Ten Million dollars ($10,000,000) to purchase the Company's Common Stock,
$0.0001 par value per share (the "Common Stock"); 

Whereas, such investments will be made in
reliance upon the provisions of Section 4(2) under the Securities Act of 1933,
as amended (the "1933 Act"), Rule 506 of Regulation D, and the rules and
regulations promulgated thereunder, and/or upon such other exemption from the
registration requirements of the 1933 Act as may be available with respect to
any or all of the investments in Common Stock to be made hereunder; and 


Whereas, contemporaneously with the execution
and delivery of this Agreement, the parties hereto are executing and delivering
a Registration Rights Agreement substantially in the form attached hereto (as
amended from time to time, the "Registration Rights Agreement") pursuant to
which the Company has agreed to provide certain registration rights under the
1933 Act, and the rules and regulations promulgated thereunder, and applicable
state securities laws. 

NOW THEREFORE, in consideration of the
foregoing recitals, which shall be considered an integral part of this
Agreement, the covenants and agreements set forth hereafter, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Company and the Investor hereby agree as follows: 

SECTION 1. DEFINITIONS. 

As used in this
Agreement, the following terms shall have the following meanings specified or
indicated below, and such meanings shall be equally applicable to the singular
and plural forms of such defined terms. 

"1933 Act" shall have the
meaning set forth in the preamble of this agreement. 

"1934 Act" shall mean the
Securities Exchange Act of 1934, as it may be amended. 

"Affiliate" shall have the
meaning specified in Section 5(h), below. 

"Agreement" shall mean this
Investment Agreement. 


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"Best Bid" shall mean the
highest posted bid price of the Common Stock. 

"Buy In" shall have the meaning
specified in Section 6, below. 

"Buy In Adjustment Amount"
shall have the meaning specified in Section 6. 

"By-laws" shall have the
meaning specified in Section 4(c). 

"Certificate of Incorporation"
shall have the meaning specified in Section 4(c). 

"Closing" shall have the
meaning specified in Section 2(h). 

"Closing Date" shall mean no
more than seven (7) Trading Days following the Put Notice Date. 

"Common Stock" shall have the
meaning set forth in the preamble of this Agreement. 

"Control" or "Controls"
shall have the meaning specified in Section 5(h). 

"Covering Shares" shall have
the meaning specified in Section 6. 

"Effective Date" shall mean the
date the SEC declares effective under the 1933 Act the Registration Statement
covering the Securities. 

"Environmental Laws" shall have
the meaning specified in Section 4(m). 

"Execution Date" shall mean the
date indicated in the preamble to this Agreement. 

"Indemnities" shall have the
meaning specified in Section 11. 

"Indemnified Liabilities" shall
have the meaning specified in Section 11. 

"Ineffective
Period" shall mean any period of time that the Registration Statement or any
Supplemental Registration Statement (as defined in the Registration Rights
Agreement) becomes ineffective or unavailable for use for the sale or resale, as
applicable, of any or all of the Registrable Securities (as defined in the
Registration Rights Agreement) for any reason (or in the event the prospectus
under either of the above is not current and deliverable) during any time period
required under the Registration Rights Agreement. 

"Investor" shall have the
meaning indicated in the preamble of this Agreement. 


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"Material Adverse Effect" shall
have the meaning specified in Section 4(a). 

"Maximum Common Stock Issuance"
shall have the meaning specified in Section 2(I). 

"Minimum Acceptable
Price" with respect to any Put Notice Date shall mean seventy-five percent
(75%) of the lowest closing bid prices for the ten (10) Trading Day period
immediately preceding such Put Notice Date. 

"Open Period"
shall mean the period beginning on and including the Trading Day immediately
following the Effective Date and ending on the earlier to occur of (i) the date
which is thirty-six (36) months from the Effective Date; or (ii) termination of
the Agreement in accordance with Section 9, below. 

"Pricing Period"
shall mean the period beginning on the Put Notice Date and ending on and
including the date that is five (5) Trading Days after such Put Notice Date.


"Principal Market"
shall mean the American Stock Exchange, Inc., the National Association of
Securities Dealers, Inc. Over-the-Counter Bulletin Board, the NASDAQ National
Market System or the NASDAQ SmallCap Market, whichever is the principal market
on which the Common Stock is listed. 

"Prospectus" shall mean the
prospectus, preliminary prospectus and supplemental prospectus used in
connection with the Registration Statement. 

"Purchase Amount" shall mean
the total amount being paid by the Investor on a particular Closing Date to
purchase the Securities. 

"Purchase Price" shall mean
ninety-five percent (95%) of the lowest closing Best Bid price of the Common
Stock during the Pricing Period. 

"Put" shall have the meaning
set forth in Section 2(b)(1) hereof. 

"Put Amount" shall have the
meaning set forth in Section 2(b) hereof. 

"Put Notice"
shall mean a written notice sent to the Investor by the Company stating the Put
Amount in U.S. dollars, the Company intends to sell to the Investor pursuant to
the terms of the Agreement and stating the current number of Shares issued and
outstanding on such date. 

"Put Notice Date"
shall mean the Trading Day immediately following the day on which the Investor
receives a Put Notice, however a Put Notice shall be deemed delivered on
(a) the Trading Day it is received by facsimile or otherwise by the Investor
if such notice is received prior to 9:00 am Eastern Time, or (b)
the immediately succeeding Trading Day if it is received by facsimile or
otherwise after 9:00 am
Eastern Time on a Trading Day. No Put Notice may be deemed delivered on a day
that is not a Trading Day.


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"Put Restriction"
shall mean the days between the beginning of the Pricing Period and Closing
Date. During this time, the Company shall not be entitled to deliver another Put
Notice. 

"Registration Period" shall
have the meaning specified in Section 5(c), below. 

"Registration Rights Agreement"
shall have the meaning set forth in the recitals, above. 

"Registration
Statement" means the registration statement of the Company filed under the
1933 Act covering the Common Stock issuable hereunder. 

"Related Party" shall have the
meaning specified in Section 5(h). 

"Resolution" shall have the
meaning specified in Section 8(e). 

"SEC" shall mean the U.S.
Securities & Exchange Commission. 

"SEC Documents" shall have the
meaning specified in Section 4(f). 

"Securities" shall mean the
shares of Common Stock issued pursuant to the terms of the Agreement. 


"Shares" shall mean the shares
of the Company's Common Stock. 

"Sold Shares" shall have the
meaning specified in Section 6. 

"Subsidiaries" shall have the
meaning specified in Section 4(a). 

"Trading Day" shall mean any
day on which the Principal Market for the Common Stock is open for trading, from
the hours of 9:30 am until 4:00 pm. 

"Transaction
Documents" shall mean this Agreement, the Registration Rights Agreement, and
each of the other agreements entered into by the parties hereto in connection
with this Agreement. 

SECTION 2. PURCHASE AND SALE OF COMMON STOCK. 

(A) PURCHASE AND SALE OF COMMON STOCK. Subject
to the terms and conditions set forth herein, the Company shall issue and sell
to the Investor, and the Investor shall purchase from the Company, up to that
number of Shares having an aggregate Purchase Price of Ten Million dollars
($10,000,000). 


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(B) DELIVERY OF PUT NOTICES. 

(I) Subject to the terms and conditions of the
Transaction Documents, and from time to time during the Open Period, the Company
may, in its sole discretion, deliver a Put Notice to the Investor which states
the dollar amount (designated in U.S. Dollars) (the "Put Amount"), which the
Company intends to sell to the Investor on a Closing Date (the "Put"). The Put
Notice shall be in the form attached hereto as Exhibit C and incorporated herein
by reference. The amount that the Company shall be entitled to Put to the
Investor (the "Put Amount") shall be equal to, at the Company's election,
either: (A) Two Hundred percent (200%) of the average daily volume (U.S. market
only) of the Common Stock for the Ten (10) Trading Days prior to the applicable
Put Notice Date, multiplied by the average of the three (3) daily closing bid
prices immediately preceding the Put Date, or (B) Two Hundred Thousand dollars
($200,000). During the Open Period, the Company shall not be entitled to submit
a Put Notice until after the previous Closing has been completed. The Purchase
Price for the Common Stock identified in the Put Notice shall be equal to
Ninety-Five percent (95%) of the lowest closing Best Bid price of the Common
Stock during the Pricing Period. 

II) If any closing bid price during the applicable Pricing
Period with respect to that Put Notice is less than Minimum Acceptable Price, as
determined by the Company, for each Put, the Company may elect, by sending
written notice to the Investor to amend or cancel that portion of the Put below
the Minimal Acceptable Price. 

(C) RESERVED 

D) INVESTOR'S OBLIGATION TO PURCHASE SHARES.
Subject to the conditions set forth in this Agreement, following the Investor's
receipt of a validly delivered Put Notice, the Investor shall be required to
purchase from the Company during the related Pricing Period that number of
Shares having an aggregate Purchase Price equal to the Put Amount set forth in
the Put Notice. 

(E) Reserved 

(F) CONDITIONS TO INVESTOR'S OBLIGATION TO
PURCHASE SHARES. Notwithstanding anything to the contrary in this Agreement, the
Company shall not be entitled to deliver a Put Notice and the Investor shall not
be obligated to purchase any Shares at a Closing (as defined in Section 2(h))
unless each of the following conditions are satisfied: 

(I) a Registration Statement shall have been
declared effective and shall remain effective and available for the resale of
all the Registrable Securities (as defined in the Registration Rights Agreement)
at all times until the Closing with respect to the subject Put Notice; 



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(II) at all times during the period beginning
on the related Put Notice Date and ending on and including the related Closing
Date, the Common Stock shall have been listed on the Principal Market and shall
not have been suspended from trading thereon for a period of two (2) consecutive
Trading Days during the Open Period and the Company shall not have been notified
of any pending or threatened proceeding or other action to suspend the trading
of the Common Stock; 

(III) the Company has complied with its
obligations and is otherwise not in breach of a material provision of, or in
default under, this Agreement, the Registration Rights Agreement or any other
agreement executed in connection herewith which has not been corrected prior to
delivery of the Put Notice Date; 

(IV) no injunction shall have been issued and
remain in force, or action commenced by a governmental authority which has not
been stayed or abandoned, prohibiting the purchase or the issuance of the
Securities; and 

(V) the issuance of the Securities will not violate any
shareholder approval requirements of the Principal Market. 

If any of the events described in clauses (i)
through (v) above occurs during a Pricing Period, then the Investor shall have
no obligation to purchase the Put Amount of Common Stock set forth in the
applicable Put Notice. 

(G) RESERVED 

(H) MECHANICS OF PURCHASE OF SHARES BY
INVESTOR. Subject to the satisfaction of the conditions set forth in Sections
2(f), 7 and 8, the closing of the purchase by the Investor of Shares (a
"Closing") shall occur on the date which is no later than seven (7) Trading Days
following the applicable Put Notice Date (each a "Closing Date"). Prior to each
Closing Date, (I) the Company shall deliver to the Investor pursuant to this
Agreement, certificates representing the Shares to be issued to the Investor on
such date and registered in the name of the Investor; and (II) the Investor
shall deliver to the Company the Purchase Price to be paid for such Shares,
determined as set forth in Sections 2(b) and 2(d). In lieu of delivering
physical certificates representing the Securities and provided that the
Company's transfer agent then is participating in The Depository Trust Company
("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of the
Investor, the Company shall use its commercially reasonable efforts to cause its
transfer agent to electronically transmit the Securities by crediting the
account of the Investor's prime broker (which shall be specified by the Investor
a reasonably sufficient time in advance) with DTC through its Deposit Withdrawal
Agent Commission ("DWAC") system. 


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The Company understands
that a delay in the issuance of Securities beyond the Closing Date could result
in economic loss to the Investor. After the Effective Date, as compensation to
the Investor for such loss, the Company agrees to pay late payments to
the Investor for late issuance of Securities (delivery of Securities after the
applicable Closing Date) in accordance with the following schedule (where "No.
of Days Late" is defined as the number of trading days beyond the Closing Date.
The Amounts are cumulative.): 


	LATE PAYMENT
    FOR EACH	 
	NO. OF DAYS
    LATE	$10,000 OF COMMON STOCK
	 	 
	1	$0
	2	$0
	3	$300
	4	$400
	5	$500
	6	$600
	7	$700
	8	$800
	9	$900
	10	$1,000
	Over 10	$1,000 + $200 for each
	 	Business Day late beyond 10
    days



The Company shall pay any payments incurred
under this Section in immediately available funds upon demand by the Investor.
Nothing herein shall limit the Investor's right to pursue actual damages for the
Company's failure to issue and deliver the Securities to the Investor, except to
the extent that such late payments shall constitute payment for and offset any
such actual damages alleged by the Investor, and any Buy In Adjustment Amount.


(I) OVERALL LIMIT ON COMMON STOCK ISSUABLE.
Notwithstanding anything contained herein to the contrary, if during the Open
Period the Company becomes listed on an exchange that limits the number of
shares of Common Stock that may be issued without shareholder approval, then the
number of Shares issuable by the Company and purchasable by the Investor,
including the shares of Common Stock issuable to the Investors, shall not exceed
that number of the shares of Common Stock that may be issuable without
shareholder approval, subject to appropriate adjustment for stock splits, stock
dividends, combinations or other similar recapitalization affecting the Common
Stock (the "Maximum Common Stock Issuance"), in excess of the Maximum Common
Stock Issuance shall first be approved by the Company's shareholders in
accordance with applicable law and the By-laws and Amended and Restated
Certificate of Incorporation of the Company, if such issuance of shares of
Common Stock could cause a delisting on the Principal Market. The parties
understand and agree that the Company's failure to seek or obtain such
shareholder approval shall in no way adversely affect the validity and due
authorization of the issuance and sale of Securities or the Investor's
obligation in accordance with the terms and conditions hereof to purchase a
number of Shares in the aggregate up to the Maximum Common Stock Issuance
limitation, and that such approval pertains only to the applicability of the
Maximum Common Stock Issuance limitation provided in this Section 2(I). 



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SECTION 3. INVESTOR'S REPRESENTATIONS, WARRANTIES AND
COVENANTS. 

The Investor represents and warrants to the Company, and
covenants, that: 

(A) SOPHISTICATED INVESTOR. The Investor has,
by reason of its business and financial experience, such knowledge,
sophistication and experience in financial and business matters and in making
investment decisions of this type that it is capable of (I) evaluating the
merits and risks of an investment in the Securities and making an informed
investment decision; (II) protecting its own interest; and (III) bearing the
economic risk of such investment for an indefinite period of time. 

(B) AUTHORIZATION; ENFORCEMENT. This Agreement
has been duly and validly authorized, executed and delivered on behalf of the
Investor and is a valid and binding agreement of the Investor enforceable
against the Investor in accordance with its terms, subject as to enforceability
to general principles of equity and to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors' rights and
remedies. 

(C) SECTION 9 OF THE 1934 ACT. During the term
of this Agreement, the Investor will comply with the provisions of Section 9 of
the 1934 Act, and the rules promulgated thereunder, with respect to transactions
involving the Common Stock. The Investor agrees not to short, either directly or
indirectly through its affiliates, principals or advisors, the Company's common
stock during the term of this Agreement. 

(D) ACCREDITED INVESTOR. Investor is an "Accredited Investor"
as that term is defined in Rule 501(a)(3) of Regulation D of the 1933 Act.


(E) NO CONFLICTS. The execution, delivery and
performance of the Transaction Documents by the Investor and the consummation by
the Investor of the transactions contemplated hereby and thereby will not result
in a violation of Partnership Agreement or other organizational documents of the
Investor. 

(F) OPPORTUNITY TO DISCUSS. The Investor has
received all materials relating to the Company's business, finance and
operations which it has requested. The Investor has had an opportunity to
discuss the business, management and financial affairs of the Company with the
Company's management. 

(G) INVESTMENT PURPOSES. The Investor is purchasing the
Securities for its own account for investment purposes and not with a view
towards distribution and agrees to resell or otherwise dispose of the Securities
solely in accordance with the registration provisions of the 1933 Act (or
pursuant to an exemption from such registration provisions). 


8 




(H) NO REGISTRATION AS A DEALER. The Investor
is not and will not be required to be registered as a "dealer" under the 1934
Act, either as a result of its execution and performance of its obligations
under this Agreement or otherwise. 

(I) GOOD STANDING. The Investor is a Limited Partnership, duly
organized, validly existing and in good standing in the State of Delaware.


(J) TAX LIABILITIES. The Investor understands that it is
liable for its own tax liabilities. 

(K) REGULATION M. The Investor will comply with Regulation M
under the 1934 Act, if applicable. 

SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.


Except as set forth in the Schedules attached
hereto, or as disclosed on the Company's SEC Documents, the Company represents
and warrants to the Investor that: 

(A) ORGANIZATION AND QUALIFICATION. The
Company is a corporation duly organized and validly existing in good standing
under the laws of the State of Delaware, and has the requisite corporate power
and authorization to own its properties and to carry on its business as now
being conducted. Both the Company and the companies it owns or controls, its
"Subsidiaries," are duly qualified to do business and are in good standing in
every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have
a Material Adverse Effect. As used in this Agreement, "Material Adverse Effect"
means any material adverse effect on the business, properties, assets,
operations, results of operations, financial condition or prospects of the
Company and its Subsidiaries, if any, taken as a whole, or on the transactions
contemplated hereby or by the agreements and instruments to be entered into in
connection herewith, or on the authority or ability of the Company to perform
its obligations under the Transaction Documents (as defined in Section 1 and
4(b), below). 

(B) AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER
INSTRUMENTS. 

(I) The Company has the requisite corporate
power and authority to enter into and perform this Agreement, the Registration
Rights Agreement, and each of the other agreements entered into by the parties
hereto in connection with the transactions contemplated by this Agreement
(collectively, the "Transaction Documents"), and to issue the Securities in
accordance with the terms hereof and thereof. 


9 




(II) The execution and delivery of the
Transaction Documents by the Company and the consummation by it, of the
transactions contemplated hereby and thereby, including without limitation the
reservation for issuance and the issuance of the Securities pursuant to this
Agreement, have been duly and validly authorized by the Company's Board of
Directors and no further consent or authorization is required by the Company,
its Board of Directors, or its shareholders. 

(III) The Transaction Documents have been duly and validly
executed and delivered by the Company. 

(IV) The Transaction Documents constitute the
valid and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies. 


(C) CAPITALIZATION. As of the date hereof, the
authorized capital stock of the Company consists of (i) 150,000,000 shares of
Common Stock, $0.0001 par value per share, of which as of the date hereof,
35,970,533 shares are issued and outstanding; the Preferred Stock of the Company
consists of 20,000,000 shares, $0.0001 par value per share authorized, none
issued and outstanding; (as of September 30, 2005) 


10 




Except as disclosed in the Company's publicly available
filings with Periodic Filings, 

(I) no shares of the Company's capital stock
are subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company; (II) there are no outstanding
debt securities; (III) save and except for 1,000,000 stock purchase warrants
issued to directors of the Company and its subsidiary, there are no outstanding
shares of capital stock, options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its Subsidiaries; (IV) save and
except for 5,600,000 shares issued pursuant to private placements there are no
agreements or arrangements under which the Company or any of its Subsidiaries is
obligated to register the sale of any of their securities under the 1933 Act
(except the Registration Rights Agreement), (V) there are no outstanding
securities of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (VI) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities as described in this Agreement; (VII) the Company does not have
any stock appreciation rights or "phantom stock" plans or agreements or any
similar plan or agreement; and (VIII) there is no dispute as to the
classification of any shares of the Company's capital stock. The Company has
furnished to the Investor, or the Investor has had access through EDGAR to, true
and correct copies of the Company's Amended and Restated Certificate of
Incorporation, as in effect on the date hereof (the "Certificate of
Incorporation"), and the Company's By-laws, as in effect on the date hereof (the
"By-laws"), and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.


(D) ISSUANCE OF SHARES. The Company has
reserved 20,000,000 Shares for issuance pursuant to this Agreement, which shares
have been duly authorized and reserved for issuance (subject to adjustment
pursuant to the Company's covenant set forth in Section 5(f) below) pursuant to
this Agreement. Upon issuance in accordance with this Agreement, the Securities
will be validly issued, fully paid and non-assessable and free from all taxes,
liens and charges with respect to the issue thereof. In the event the Company
cannot register a sufficient number of Shares for issuance pursuant to this
Agreement, the Company will use its best efforts to authorize and reserve for
issuance the number of Shares required for the Company to perform its
obligations hereunder as soon as reasonably practicable. 


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(E) NO CONFLICTS. The execution, delivery and
performance of the Transaction Documents by the Company and the consummation by
the Company of the transactions contemplated hereby and thereby will not (I)
result in a violation of the Certificate of Incorporation, any Certificate of
Designations, Preferences and Rights of any outstanding series of preferred
stock of the Company or the By-laws; or (II) conflict with, or constitute a
material default (or an event which with notice or lapse of time or both would
become a material default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, contract,
indenture mortgage, indebtedness or instrument to which the Company or any of
its Subsidiaries is a party, or to the Company's knowledge result in a violation
of any law, rule, regulation, order, judgment or decree (including United States
federal and state securities laws and regulations and the rules and regulations
of the Principal Market or principal securities exchange or trading market on
which the Common Stock is traded or listed) applicable to the Company or any of
its Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected. Except as disclosed in Schedule 4(e), neither
the Company nor its Subsidiaries is in violation of any term of, or in default
under, the Certificate of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of preferred stock of the
Company or the Bylaws or their organizational charter or by-laws, respectively,
or any contract, agreement, mortgage, indebtedness, indenture, instrument,
judgment, decree or order or any statute, rule or regulation applicable to the
Company or its Subsidiaries, except for possible conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations that would
not individually or in the aggregate have a Material Adverse Effect. The
business of the Company and its Subsidiaries is not being conducted, and shall
not be conducted, in violation of any law, statute, ordinance, rule, order or
regulation of any governmental authority or agency, regulatory or
self-regulatory agency, or court, except for possible violations the sanctions
for which either individually or in the aggregate would not have a Material
Adverse Effect. Except as specifically contemplated by this Agreement and as
required under the 1933 Act or any securities laws of any states to the
Company's knowledge, the Company is not required to obtain any consent,
authorization, permit or order of, or make any filing or registration (except
the filing of a registration statement) with any court, governmental authority
or agency, regulatory or self-regulatory agency or other third party in order
for it to execute, deliver or perform any of its obligations under, or
contemplated by, the Transaction Documents in accordance with the terms hereof
or thereof. All consents, authorizations, permits, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof and are
in full force and effect as of the date hereof. Except as disclosed in Schedule
4(e), the Company and its Subsidiaries are unaware of any facts or circumstances
which might give rise to any of the foregoing. The Company is not, and will not
be, in violation of the listing requirements of the Principal Market as in
effect on the date hereof and on each of the Closing Dates and is not aware of
any facts which would reasonably lead to delisting of the Common Stock by the
Principal Market in the foreseeable future. 


12 




(F) SEC DOCUMENTS; FINANCIAL STATEMENTS. As of
the date hereof, the Company has filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the 1934 Act (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the "SEC Documents"). The Company has delivered to
the Investor or its representatives, or they have had access through EDGAR to,
true and complete copies of the SEC Documents. As of their respective dates, the
SEC Documents complied in all material respects with the requirements of the
1934 Act and the rules and regulations of the SEC promulgated thereunder
applicable to the SEC Documents, and none of the SEC Documents, at the time they
were filed with the SEC, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been
prepared in accordance with generally accepted accounting principles, by a firm
that is a member of the Public Companies Accounting Oversight Board ("PCAOB")
consistently applied, during the periods involved (except (I) as may be
otherwise indicated in such financial statements or the notes thereto, or (II)
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 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). No other written information provided by or on behalf of the
Company to the Investor which is not included in the SEC Documents, including,
without limitation, information referred to in Section 4(d) of this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact necessary to make the statements therein, in the light of the circumstance
under which they are or were made, not misleading. Neither the Company nor any
of its Subsidiaries or any of their officers, directors, employees or agents
have provided the Investor with any material, nonpublic information which was
not publicly disclosed prior to the date hereof and any material, nonpublic
information provided to the Investor by the Company or its Subsidiaries or any
of their officers, directors, employees or agents prior to any Closing Date
shall be publicly disclosed by the Company prior to such Closing Date. 


(G) ABSENCE OF CERTAIN CHANGES. Except as set
forth in the SEC Documents, the Company does not intend to change the business
operations of the Company in any material way. The Company has not taken any
steps, and does not currently expect to take any steps, to seek protection
pursuant to any bankruptcy law nor does the Company or its Subsidiaries have any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings. 

(H) ABSENCE OF LITIGATION. Except as set forth
in the SEC Documents, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the
executive officers of Company or any of its Subsidiaries, threatened against or
affecting the Company, the Common Stock or any of the Company's Subsidiaries or
any of the Company's or the Company's Subsidiaries' officers or directors in
their capacities as such, in which an adverse decision could have a Material
Adverse Effect. 


13 




(I) ACKNOWLEDGMENT REGARDING INVESTOR'S
PURCHASE OF SHARES. The Company acknowledges and agrees that the Investor is
acting solely in the capacity of arm's length purchaser with respect to the
Transaction Documents and the transactions contemplated hereby and thereby. The
Company further acknowledges that the Investor is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to
the Transaction Documents and the transactions contemplated hereby and thereby
and any advice given by the Investor or any of its respective representatives or
agents in connection with the Transaction Documents and the transactions
contemplated hereby and thereby is merely incidental to the Investor's purchase
of the Securities. The Company further represents to the Investor that the
Company's decision to enter into the Transaction Documents has been based solely
on the independent evaluation by the Company and its representatives. 


(J) NO UNDISCLOSED EVENTS, LIABILITIES,
DEVELOPMENTS OR CIRCUMSTANCES. Except as set forth in the SEC Documents, as of
the date hereof, no event, liability, development or circumstance has occurred
or exists, or to the Company's knowledge is contemplated to occur, with respect
to the Company or its Subsidiaries or their respective business, properties,
assets, prospects, operations or financial condition, that would be required to
be disclosed by the Company under applicable securities laws on a registration
statement filed with the SEC relating to an issuance and sale by the Company of
its Common Stock and which has not been publicly announced. 

(K) EMPLOYEE RELATIONS. Neither the Company
nor any of its Subsidiaries is involved in any union labor dispute nor, to the
knowledge of the Company or any of its Subsidiaries, is any such dispute
threatened. Neither the Company nor any of its Subsidiaries is a party to a
collective bargaining agreement, and the Company and its Subsidiaries believe
that relations with their employees are good. No executive officer (as defined
in Rule 501(f) of the 1933 Act) has notified the Company that such officer
intends to leave the Company's employ or otherwise terminate such officer's
employment with the Company. 

(L) INTELLECTUAL PROPERTY RIGHTS. The Company
and its Subsidiaries own or possess adequate rights or licenses to use all
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct their
respective businesses as now conducted. Except as set forth in the SEC
Documents, none of the Company's trademarks, trade names, service marks, service
mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, government authorizations, trade secrets or
other intellectual property rights necessary to conduct its business as now or
as proposed to be conducted have expired or terminated, or are expected to
expire or terminate within two (2) years from the date of this Agreement. The
Company and its Subsidiaries do not have any knowledge of any infringement by
the Company or its Subsidiaries of trademark, trade name rights, patents, patent
rights, copyrights, inventions, licenses, service names, service marks, service
mark registrations, trade secret or other similar rights of others, or of any
such development of similar or identical trade secrets or technical information
by others and, except as set forth in the SEC Documents, there is no claim,
action or proceeding being made or brought against, or to the Company's
knowledge, being threatened against, the Company or its Subsidiaries regarding
trademark, trade name, patents, patent rights, invention, copyright, license,
service names, service marks, service mark registrations, trade secret or other
infringement; and the Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing. The Company and its
Subsidiaries have taken commercially reasonable security measures to protect the
secrecy, confidentiality and value of all of their intellectual properties.



14 




(M) ENVIRONMENTAL LAWS. The Company and its
Subsidiaries (I) are, to the knowledge of management of the Company, in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"); (II) have, to the knowledge of management
of the Company, received all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective businesses;
and (III) are in compliance, to the knowledge of the Company, with all terms and
conditions of any such permit, license or approval where, in each of the three
(3) foregoing cases, the failure to so comply would have, individually or in the
aggregate, a Material Adverse Effect. 

(N) TITLE. The Company and its Subsidiaries
have good and marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiaries, in each case free
and clear of all liens, encumbrances and defects except such as are described in
the SEC Documents or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such property
by the Company or any of its Subsidiaries. Any real property and facilities held
under lease by the Company or any of its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries. 

(O) RESERVED 

(P) REGULATORY PERMITS. The Company and its
Subsidiaries have in full force and effect all certificates, approvals,
authorizations and permits from the appropriate federal, state, local or foreign
regulatory authorities and comparable foreign regulatory agencies, necessary to
own, lease or operate their respective properties and assets and conduct their
respective businesses, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, approval, authorization or permit, except for such
certificates, approvals, authorizations or permits which if not obtained, or
such revocations or modifications which, would not have a Material Adverse
Effect. 


15 




(Q) INTERNAL ACCOUNTING CONTROLS. The Company
and each of its Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (I) transactions are executed in
accordance with management's general or specific authorizations; (II)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles by a firm
with membership to the PCAOB and to maintain asset accountability; (III) access
to assets is permitted only in accordance with management's general or specific
authorization; and (IV) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences. 

(R) NO MATERIALLY ADVERSE CONTRACTS, ETC.
Neither the Company nor any of its Subsidiaries is subject to any charter,
corporate or other legal restriction, or any judgment, decree, order, rule or
regulation which in the judgment of the Company's officers has or is expected in
the future to have a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is a party to any contract or agreement which in the judgment of
the Company's officers has or is expected to have a Material Adverse Effect.


(S) TAX STATUS. The Company and each of its
Subsidiaries has made or filed all United States federal and state income and
all other tax returns, reports and declarations required by any jurisdiction to
which it is subject (unless and only to the extent that the Company and each of
its Subsidiaries has set aside on its books provisions reasonably adequate for
the payment of all unpaid and unreported taxes) and has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim. 

(T) CERTAIN TRANSACTIONS. Except as set forth
in the SEC Documents filed at least ten (10) days prior to the date hereof and
except for arm's length transactions pursuant to which the Company makes
payments in the ordinary course of business upon terms no less favorable than
the Company could obtain from third parties and other than the grant of stock
options disclosed in the SEC Documents, none of the officers, directors, or
employees of the Company is presently a party to any transaction with the
Company or any of its Subsidiaries (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
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner. 


16 




(U) DILUTIVE EFFECT. The Company understands
and acknowledges that the number of shares of Common Stock issuable upon
purchases pursuant to this Agreement will increase in certain circumstances
including, but not necessarily limited to, the circumstance wherein the trading
price of the Common Stock declines during the period between the Effective Date
and the end of the Open Period. The Company's executive officers and directors
have studied and fully understand the nature of the transactions contemplated by
this Agreement and recognize that they have a potential dilutive effect. The
Board of Directors of the Company has concluded, in its good faith business
judgment, that such issuance is in the best interests of the Company. The
Company specifically acknowledges that, subject to such limitations as are
expressly set forth in the Transaction Documents, its obligation to issue shares
of Common Stock upon purchases pursuant to this Agreement is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other shareholders of the Company. 

(V) LOCK-UP. The Company shall cause its
officers, insiders, directors, and affiliates or other related parties under
control of the Company, to refrain from selling Common Stock during each Pricing
Period. 

(W) NO GENERAL SOLICITATION. Neither the
Company, nor any of its affiliates, nor any person acting on its behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D) in connection with the offer or sale of the Common
Stock offered hereby. 

(X) NO BROKERS, FINDERS OR FINANCIAL ADVISORY
FEES OR COMMISSIONS. No brokers, finders or financial advisory fees or
commissions will be payable by the Company with respect to the transactions
contemplated by this Agreement, other than disclosed in this Agreement. 


SECTION 5. COVENANTS OF THE COMPANY 

(A) BEST EFFORTS. The Company shall use
commercially reasonable efforts timely to satisfy each of the conditions to be
satisfied by it as provided in Section 7 of this Agreement. 

(B) BLUE SKY. The Company shall, at its sole
cost and expense, on or before each of the Closing Dates, take such action as
the Company shall reasonably determine is necessary to qualify the Securities
for, or obtain exemption for the Securities for, sale to the Investor at each of
the Closings pursuant to this Agreement under applicable securities or "Blue
Sky" laws of such states of the United States, as reasonably specified by
Investor, and shall provide evidence of any such action so taken to the Investor
on or prior to the Closing Date. 


17 




(C) REPORTING STATUS. Until the earlier to
occur of (I) the first date which is after the date this Agreement is terminated
pursuant to Section 9 and on which the Holders (as that term is defined in the
Registration Rights Agreement) may sell all of the Securities without
restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor
thereto); and (II) the date on which (A) the Holders shall have sold all the
Securities; and (B) this Agreement has been terminated pursuant to Section 9
(the "Registration Period"), the Company shall file all reports required to be
filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate
its status as a reporting company under the 1934 Act. 

(D) USE OF PROCEEDS. The Company will use the
proceeds from the sale of the Shares (excluding amounts paid by the Company for
fees as set forth in the Transaction Documents) for general corporate and
working capital purposes and acquisitions or assets, businesses or operations or
for other purposes that the Board of Directors deem to be in the best interest
of the Company. 

(E) FINANCIAL INFORMATION. The Company agrees
to make available to the Investor via EDGAR or other electronic means the
following to the Investor during the Registration Period: (I) within five (5)
Trading Days after the filing thereof with the SEC, a copy of its Annual Reports
on Form 10-KSB, its Quarterly Reports on Form 10-QSB, any Current Reports on
Form 8-K and any Registration Statements or amendments filed pursuant to the
1933 Act; (II) on the same day as the release thereof, facsimile copies of all
press releases issued by the Company or any of its Subsidiaries; (III) copies of
any notices and other information made available or given to the shareholders of
the Company generally, contemporaneously with the making available or giving
thereof to the shareholders; and (IV) within two (2) calendar days of filing or
delivery thereof, copies of all documents filed with, and all correspondence
sent to, the Principal Market, any securities exchange or market, or the
National Association of Securities Dealers, Inc., unless such information is
material nonpublic information. 

(F) RESERVATION OF SHARES. Subject to the
following sentence, the Company shall take all action necessary to at all times
have authorized, and reserved for the purpose of issuance, a sufficient number
of shares of Common Stock to provide for the issuance of the Securities
hereunder. In the event that the Company determines that it does not have a
sufficient number of authorized shares of Common Stock to reserve and keep
available for issuance as described in this Section 5(f), the Company shall use
its commercially reasonable efforts to increase the number of authorized shares
of Common Stock by seeking shareholder approval for the authorization of such
additional shares. 


18 




(G) LISTING. The Company shall promptly secure
and maintain the listing of all of the Registrable Securities (as defined in the
Registration Rights Agreement) upon the Principal Market and each other national
securities exchange and automated quotation system, if any, upon which shares of
Common Stock are then listed (subject to official notice of issuance) and
shall maintain, such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents. Neither the Company nor
any of its Subsidiaries shall take any action which would be reasonably expected
to result in the delisting or suspension of the Common Stock on the Principal
Market (excluding suspensions of not more than one (1) trading day resulting
from business announcements by the Company). The Company shall promptly provide
to the Investor copies of any notices it receives from the Principal Market
regarding the continued eligibility of the Common Stock for listing on such
automated quotation system or securities exchange. The Company shall pay all
fees and expenses in connection with satisfying its obligations under this
Section 5(g). 

(H) TRANSACTIONS WITH AFFILIATES. The Company shall not, and
shall cause each of its Subsidiaries not to, enter into, amend, modify or
supplement, or permit any Subsidiary to enter into, amend, modify or supplement,
any agreement, transaction, commitment or arrangement with any of its or any
Subsidiary's officers, directors, persons who were officers or directors at any
time during the previous two (2) years, shareholders who beneficially own 5% or
more of the Common Stock, or Affiliates or with any individual related by blood,
marriage or adoption to any such individual or with any entity in which any such
entity or individual owns a 5% or more beneficial interest (each a "Related
Party"), except for (I) customary employment arrangements and benefit programs
on reasonable terms, (II) any agreement, transaction, commitment or arrangement
on an arms-length basis on terms no less favorable than terms which would have
been obtainable from a person other than such Related Party, or (III) any
agreement, transaction, commitment or arrangement which is approved by a
majority of the disinterested directors of the Company. For purposes hereof, any
director who is also an officer of the Company or any Subsidiary of the Company
shall not be a disinterested director with respect to any such agreement,
transaction, commitment or arrangement. "Affiliate" for purposes hereof means,
with respect to any person or entity, another person or entity that, directly or
indirectly, (I) has a 5% or more equity interest in that person or entity, (II)
has 5% or more common ownership with that person or entity, (III) controls that
person or entity, or (IV) is under common control with that person or entity.
"Control" or "Controls" for purposes hereof means that a person or entity has
the power, direct or indirect, to conduct or govern the policies of another
person or entity. 

(I) FILING OF FORM 8-K. On or before the date which is four
(4) Trading Days after the Execution Date, the Company shall file a Current
Report on Form 8-K with the SEC describing the terms of the transaction
contemplated by the Transaction Documents in the form required by the 1934 Act,
if such filing is required. 

(J) CORPORATE EXISTENCE. The Company shall use its
commercially reasonable efforts to preserve and continue the corporate existence
of the Company. 


19




(K) NOTICE OF CERTAIN EVENTS AFFECTING REGISTRATION;
SUSPENSION OF RIGHT TO MAKE A PUT. The Company shall promptly notify Investor
upon the occurrence of any of the following events in respect of a Registration
Statement or related prospectus in respect of an offering of the Securities: (I)
receipt of any request for additional information by the SEC or any other
federal or state governmental authority during the period of effectiveness of
the Registration Statement for amendments or supplements to the Registration
Statement or related prospectus; (II) the issuance by the SEC or any other
federal or state governmental authority of any stop order suspending the
effectiveness of any Registration Statement or the initiation of any proceedings
for that purpose; (III) receipt of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Securities for sale in any jurisdiction or the initiation or notice of any
proceeding for such purpose; (IV) the happening of any event that makes any
statement made in such Registration Statement or related prospectus or any
document incorporated or deemed to be incorporated therein by reference untrue
in any material respect or that requires the making of any changes in the
Registration Statement, related prospectus or documents so that, in the case of
a Registration Statement, it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and that in the case of
the related prospectus, it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and (V) the Company's reasonable
determination that a post-effective amendment to the Registration Statement
would be appropriate, and the Company shall promptly make available to Investor
any such supplement or amendment to the related prospectus. The Company shall
not deliver to Investor any Put Notice during the continuation of any of the
foregoing events. 

(L) REIMBURSEMENT. If (I) Investor becomes involved in any
capacity in any action, proceeding or investigation brought by any shareholder
of the Company, in connection with or as a result of the consummation of the
transactions contemplated by the Transaction Documents, or if Investor is
impleaded in any such action, proceeding or investigation by any person (other
than as a result of a breach of the Investor's representations and warranties
set forth in this Agreement); or (II)Investor becomes involved in any capacity
in any action, proceeding or investigation brought by the SEC against or
involving the Company or in connection with or as a result of the consummation
of the transactions contemplated by the Transaction Documents (other than as a
result of a breach of the Investor's representations and warranties set forth in
this Agreement), or if Investor is impleaded in any such action, proceeding or
investigation by any person, then in any such case, the Company will reimburse
Investor for its reasonable legal and other expenses (including the cost of any
investigation and preparation) incurred in connection therewith, as such
expenses are incurred. In addition, other than with respect to any matter in
which Investor is a named party, the Company will pay to Investor the charges,
as reasonably
determined by Investor, for the time of any officers or employees of Investor
devoted to appearing and preparing to appear as witnesses, assisting in
preparation for hearings, trials or pretrial matters, or otherwise with respect
to inquiries, hearing, trials, and other proceedings relating to the subject
matter of this Agreement. The reimbursement obligations of the Company under
this section shall be in addition to any liability which the Company may
otherwise have, shall extend upon the same terms and conditions to any
affiliates of Investor that are actually named in such action, proceeding or
investigation, and partners, directors, agents, employees, attorneys,
accountants, auditors and controlling persons (if any), as the case may be, of
Investor and any such affiliate, and shall be binding upon and inure to the
benefit of any successors of the Company, Investor and any such affiliate and
any such person.


20 




(M) TRANSFER AGENT. Upon effectiveness of the Registration
Statement, and for so long as the Registration Statement is effective, the
Company shall deliver instructions to its transfer agent to issue Shares to the
Investor that are covered for resale by the Registration Statement free of
restrictive legends. 

SECTION 6. COVER. 

If the number of Shares represented by any Put Notice (s)
become restricted or such Shares are no longer free trading for any reason, and
after the applicable Closing Date, the Investor purchases, in an open market
transaction or otherwise, the Company's Common Stock (the "Covering Shares") in
order to make delivery in satisfaction of a sale of Common Stock by the Investor
(the "Sold Shares"), which delivery such Investor anticipated to make using the
Shares represented by the Put Notice (a "Buy-In"), the Company shall pay to the
Investor the Buy-In Adjustment Amount (as defined below). The "Buy-In Adjustment
Amount" is the amount equal to the excess, if any, of (A) the Investor's total
purchase price (including brokerage commissions, if any) for the Covering Shares
over (B) the net proceeds (after brokerage commissions, if any) received by the
Investor from the sale of the Sold Shares. The Company shall pay the Buy-In
Adjustment Amount to the Investor in immediately available funds immediately
upon demand by the Investor. By way of illustration and not in limitation of the
foregoing, if the Investor purchases Common Stock having a total purchase price
(including brokerage commissions) of $11,000 to cover a Buy-In with respect to
the Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment
Amount which the Company will be required to pay to the Investor will be $1,000.


SECTION 7. CONDITIONS OF THE COMPANY'S OBLIGATION TO SELL. 

The obligation hereunder of the Company to issue and sell the
Securities to the Investor is further subject to the satisfaction, at or before
each Closing Date, of each of the following conditions set forth below. These
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion. 


21 




(A) The Investor shall have executed each of this Agreement and the
Registration Rights Agreement and delivered the same to the Company. 

(B) The Investor shall have delivered to the Company the
Purchase Price for the Securities being purchased by the Investor between the
end of the Pricing Period and the Closing Date via a Put Settlement Sheet
(hereto attached as Exhibit D) After receipt of confirmation of delivery of such
Securities to the Investor, the Investor, by wire transfer of immediately
available funds pursuant to the wire instructions provided by the Company will
disburse the funds constituting the Purchase Amount. 

(C) No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement. 

SECTION 8. FURTHER CONDITIONS OF THE INVESTOR'S OBLIGATION TO PURCHASE. 

The obligation of the Investor hereunder to purchase Shares
is subject to the satisfaction, on or before each Closing Date, of each of the
following conditions set forth below. 

(A) The Company shall have executed each of the Transaction Documents and
delivered the same to the Investor. 

(B) The Common Stock shall be authorized for quotation on the
Principal Market and trading in the Common Stock shall not have been suspended
by the Principal Market or the SEC, at any time beginning on the date hereof and
through and including the respective Closing Date (excluding suspensions of not
more than one (1) Trading Day resulting from business announcements by the
Company, provided that such suspensions occur prior to the Company's delivery of
the Put Notice related to such Closing). 

(C) The representations and warranties of the Company shall
be true and correct as of the date when made and as of the applicable Closing
Date as though made at that time (except for (I) representations and warranties
that speak as of a specific date and (II) with respect to the representations
made in Sections 4(g), (h) and (j) and the third sentence of Section 4(k)
hereof, events which occur on or after the date of this Agreement and are
disclosed in SEC filings made by the Company at least ten (10) Trading Days
prior to the applicable Put Notice Date) and the Company shall have performed,
satisfied and complied with the covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by the
Company on or before such Closing Date. The Investor may request an update as of
such Closing Date regarding the representation contained in Section 4(c) above.



22 




(D) The Company shall have executed and delivered to the
Investor the certificates representing, or have executed electronic book-entry
transfer of, the Securities (in such denominations as such Investor shall
request) being purchased by the Investor at such Closing. 

(E) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 4(b)(ii) above (the "Resolutions") and such
Resolutions shall not have been amended or rescinded prior to such Closing Date.


(F) Reserved 

(G) No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement. 

(H) The Registration Statement shall be effective on each
Closing Date and no stop order suspending the effectiveness of the Registration
statement shall be in effect or to the Company's knowledge shall be pending or
threatened. Furthermore, on each Closing Date (I) neither the Company nor
Investor shall have received notice that the SEC has issued or intends to issue
a stop order with respect to such Registration Statement or that the SEC
otherwise has suspended or withdrawn the effectiveness of such Registration
Statement, either temporarily or permanently, or intends or has threatened to do
so (unless the SEC's concerns have been addressed and Investor is reasonably
satisfied that the SEC no longer is considering or intends to take such action),
and (II) no other suspension of the use or withdrawal of the effectiveness of
such Registration Statement or related prospectus shall exist. 

(I) At the time of each Closing, the Registration Statement
(including information or documents incorporated by reference therein) and any
amendments or supplements thereto shall not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading or which would
require public disclosure or an update supplement to the prospectus. 

(J) If applicable, the shareholders of the Company shall have
approved the issuance of any Shares in excess of the Maximum Common Stock
Issuance in accordance with Section 2(i) or the Company shall have obtained
appropriate approval pursuant to the requirements of Delaware law and the
Company's Articles of Incorporation and By-laws. 

(K) The conditions to such Closing set forth in Section 2(f) shall have been
satisfied on or before such Closing Date. 

(L) The Company shall have certified to the Investor the number of Shares of
Common Stock outstanding when a Put Notice is given to the Investor. 


23 




SECTION 9. TERMINATION. 

This Agreement shall terminate upon any of the following events: 

(I) when the Investor has purchased an aggregate of Ten
Million dollars ($10,000,000) in the Common Stock of the Company pursuant to
this Agreement; or, 

(II) on the date which is Thirty-Six (36) months after the Effective Date;


SECTION 10. SUSPENSION 

This Agreement shall be suspended upon any of the following events, and shall
remain suspended until such event is rectified: 

(I) the trading of the Common Stock is suspended by the SEC,
the Principal Market or the NASD for a period of two (2) consecutive Trading
Days during the Open Period; or, 

(II) The Common Stock ceases to be registered under the 1934
Act or listed or traded on the Principal Market. Upon the occurrence of one of
the above-described events, the Company shall send written notice of such event
to the Investor. 

SECTION 11. INDEMNIFICATION. 

In consideration of the parties mutual obligations set forth
the Transaction Documents, each of the parties (in such capacity, an "Indemnitor")
shall defend, protect, indemnify and hold harmless the other and all of the
other party's shareholders, officers, directors, employees, counsel, and direct
or indirect investors and any of the foregoing person's agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the "Indemnitees")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and reasonable expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (I)
any misrepresentation or breach of any representation or warranty made by the
Indemnitor or any other certificate, instrument or document contemplated hereby
or thereby; (II) any breach of any covenant, agreement or obligation of the
Indemnitor contained in the Transaction Documents or any other certificate,
instrument or document contemplated hereby or thereby; or (III) any cause of
action, suit or claim brought or made against such Indemnitee by a third party
and arising out of or resulting from the execution, delivery, performance or
enforcement of the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, except insofar as any such
misrepresentation, breach or any untrue statement, alleged untrue
statement, omission or alleged omission is made in reliance upon and in
conformity with information furnished to Indemnitor which is specifically
intended for use in the preparation of any such Registration Statement,
preliminary prospectus, prospectus or amendments to the prospectus. To the
extent that the foregoing undertaking by the Indemnitor may be unenforceable for
any reason, the Indemnitor shall make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law. The indemnity provisions contained herein shall be in
addition to any cause of action or similar rights Indemnitor may have, and any
liabilities the Indemnitor or the Indemnitees may be subject to. 


24 




SECTION 12. GOVERNING LAW; MISCELLANEOUS. 

(A) GOVERNING LAW. This Agreement shall be
governed by and interpreted in accordance with the laws of the Commonwealth of
Massachusetts without regard to the principles of conflict of laws. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of Boston, County of Suffolk, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such 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. If any provision of this
Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity
or unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.




  (i) Disputes subject to arbitration governed by Massachusetts law 
  




All disputes arising under this agreement
shall be governed by and interpreted in accordance with the laws of the
Commonwealth of Massachusetts, without regard to principles of conflict of laws.
The parties to this agreement will submit all disputes arising under this
agreement to arbitration in Boston, Massachusetts before a single arbitrator of
the American Arbitration Association ("AAA"). The arbitrator shall be selected
by application of the rules of the AAA, or by mutual agreement of the parties,
except that such arbitrator shall be an attorney admitted to practice law in the
Commonwealth of Massachusetts. No party to
this agreement will challenge the jurisdiction or venue provisions as provided
in this section.


25 





  (ii) Waiver of Jury Trial. 



AS A MATERIAL INDUCEMENT FOR EACH PARTY HERETO TO ENTER INTO
THIS AGREEMENT, THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN
ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND ALL OF
THE OTHER DOCUMENTS ASSOCIATED WITH THIS TRANSACTION. 

(B) LEGAL FEES; AND MISCELLANEOUS FEES. Except as otherwise
set forth in the Transaction Documents, each party shall pay the fees and
expenses of its advisers, counsel, the accountants and other experts, if any,
and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. Any
reasonable attorneys' fees and expenses incurred by either the Company or by the
Investor in connection with the preparation, negotiation, execution and delivery
of any amendments to this Agreement or relating to the enforcement of the rights
of any party, after the occurrence of any breach of the terms of this Agreement
by another party or any default by another party in respect of the transactions
contemplated hereunder, shall be paid on demand by the party which breached the
Agreement and/or defaulted, as the case may be. The Company shall pay all stamp
and other taxes and duties levied in connection with the issuance of any
Securities. 

(C) COUNTERPARTS. This Agreement may be executed in two or
more identical counterparts, all of which 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; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature. 

(D) HEADINGS; SINGULAR/PLURAL. The headings of this Agreement
are for convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement. Whenever required by the context of this
Agreement, the singular shall include the plural and masculine shall include the
feminine. 

(E) SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction. 

 


26 




(F) ENTIRE AGREEMENT;
AMENDMENTS. This Agreement supersedes all other prior oral or written agreements
between the Investor, the Company, their affiliates and persons acting on
their behalf with respect to the matters discussed herein, and this Agreement
and the instruments referenced herein (including the other Transaction
Documents) contain the entire understanding of the parties with respect to the
matters covered herein and therein and, except as specifically set forth herein
or therein, neither the Company nor the Investor makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and the Investor, and no provision hereof may be waived other than
by an instrument in writing signed by the party against whom enforcement is
sought. 

(G) NOTICES. Any notices or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered (I) upon receipt, when delivered
personally; (II) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (III) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be: 


If to the Company: 


Silver Dragon Resources, Inc. 

1121 Steeles Ave. West 

Suite 803 

Toronto, Ontario, L3T 7M8 

Telephone: (416) 661-4989 

Facsimile: (416) 661-9510 


If to the Investor: 


Dutchess Private Equities Fund, LP, 

50 Commonwealth Avenue, Suite 2 

Boston, MA 02116 

Telephone: 617-301-4700 

Facsimile: 617-249-0947 

Each party shall provide five (5) days' prior written notice to the other
party of any change in address or facsimile number. 

(H) NO ASSIGNMENT. This Agreement may not be assigned. 


27 




(I) NO THIRD PARTY BENEFICIARIES. This Agreement is intended
for the benefit of the parties hereto and is not for the benefit of, nor may any
provision hereof be enforced by, any other person. 

(J) SURVIVAL. The representations and warranties of the
Company and the Investor contained in Sections 2 and 3, the agreements and
covenants set forth in Sections 4 and 5, and the indemnification provisions set
forth in Section 10, shall survive each of the Closings and the termination of
this Agreement. 

(K) PUBLICITY. The Company and Investor shall consult with
each other in issuing any press releases or otherwise making public statements
with respect to the transactions contemplated hereby and no party shall issue
any such press release or otherwise make any such public statement without the
prior consent of the other parties, which consent shall not be unreasonably
withheld or delayed, except that no prior consent shall be required if such
disclosure is required by law, in which such case the disclosing party shall
provide the other parties with prior notice of such public statement.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of Investor without the prior consent of such Investor, except to the extent
required by law. Investor acknowledges that this Agreement and all or part of
the Transaction Documents may be deemed to be "material contracts" as that term
is defined by Item 601(b)(10) of Regulation S-B, and that the Company may
therefore be required to file such documents as exhibits to reports or
registration statements filed under the 1933 Act or the 1934 Act. Investor
further agrees that the status of such documents and materials as material
contracts shall be determined solely by the Company, in consultation with its
counsel. 

(L) FURTHER ASSURANCES. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby. 

(M) PLACEMENT AGENT. The Company agrees to pay _____________,
a registered broker dealer ____ percent (__%) of the Put Amount on each draw
toward the fee. The Investor shall have no obligation with respect to any fees
or with respect to any claims made by or on behalf of other persons or entities
for fees of a type contemplated in this Section that may be due in connection
with the transactions contemplated by the Transaction Documents. The Company
shall indemnify and hold harmless the Investor, their employees, officers,
directors, agents, and partners, and their respective affiliates, from and
against all claims, losses, damages, costs (including the costs of preparation
and attorney's fees) and expenses incurred in respect of any such claimed or
existing fees, as such fees and expenses are incurred. 


28 




(N) NO STRICT CONSTRUCTION. 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. 

(O) REMEDIES. The Investor and each holder of the Shares
shall have all rights and remedies set forth in this Agreement and the
Registration Rights Agreement and all rights and remedies which such holders
have been granted at any time under any other agreement or contract and all of
the rights which such holders have under any law. Any person having any rights
under any provision of this Agreement shall be entitled to enforce such rights
specifically (without posting a bond or other security), to recover damages by
reason of any default or breach of any provision of this Agreement, including
the recovery of reasonable attorneys fees and costs, and to exercise all other
rights granted by law. 

(P) PAYMENT SET ASIDE. To the extent that the Company makes a
payment or payments to the Investor hereunder or under the Registration Rights
Agreement or the Investor enforces or exercises its rights hereunder or
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. 

(Q) PRICING OF COMMON STOCK. For purposes of this Agreement, the bid price of
the Common Stock in this Agreement shall be as reported on Bloomberg. 

SECTION 13. Non-Disclosure of Non-Public Information. 

(a) The Company shall not disclose non-public information to
the Investor, its advisors, or its representatives, unless prior to disclosure
of such information the Company identifies such information, in writing, as
being non-public information and provides the Investor, such advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. The Company may, as a condition to disclosing
any non-public information hereunder, require the Investor's advisors and
representatives to enter into a confidentiality agreement in form reasonably
satisfactory to the Company and the Investor. 


29




(b) Nothing herein shall
require the Company to disclose non-public information to the Investor or its
advisors or representatives, and the Company represents that it does not
disseminate non-public information to any investors who purchase stock in the
Company in a public offering, to money managers or to securities analysts,
provided, however, that notwithstanding anything herein to the contrary,
the Company will, as hereinabove provided, immediately notify the advisors and
representatives of the Investor and, if any, underwriters, of any event or the
existence of any circumstance (without any obligation to disclose the specific
event or circumstance) of which it becomes aware, constituting nonpublic
information (whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the Registration Statement would cause
such prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements, therein, in light
of the circumstances in which they were made, not misleading. Nothing contained
in this Section 13 shall be construed to mean that such persons or entities
other than the Investor (without the written consent of the Investor prior to
disclosure of such information) may not obtain non-public information in the
course of conducting due diligence in accordance with the terms of this
Agreement and nothing herein shall prevent any such persons or entities from
notifying the Company of their opinion that based on such due diligence by such
persons or entities, that the Registration Statement contains an untrue
statement of material fact or omits a material fact required to be stated in the
Registration Statement or necessary to make the statements contained therein, in
light of the circumstances in which they were made, not misleading. 

* * * 

 


30 





SIGNATURE PAGE OF INVESTMENT AGREEMENT 


Your signature on this Signature Page evidences your
agreement to be bound by the terms and conditions of the Investment Agreement
and the Registration Rights Agreement as of the date first written above. 


The undersigned signatory hereby certifies that he has read
and understands the Investment Agreement, and the representations made by the
undersigned in this Investment Agreement are true and accurate, and agrees to be
bound by its terms. 


	DUTCHESS PRIVATE EQUITIES
    FUND, L.P.


  
  	BY ITS GENERAL PARTNER,
	DUTCHESS CAPITAL MANAGEMENT,
    LLC
	 
	
    By:	 
	 
	Douglas H. Leighton, Managing
    Member
	 
	 
	 


  	SILVER DRAGON RESOURCES, INC.
	 
	 
	 
	
    By:	 
	 
	Marc Hazout, Chief Executive
    Officer
	 



31 




LIST OF EXHIBITS 




	EXHIBIT A	Registration Rights Agreement
	EXHIBIT B	Opinion of Company's Counsel
	EXHIBIT C	Put Notice
	EXHIBIT D	Put Settlement Sheet


 

 

 


32 




LIST OF SCHEDULES 

Schedule 4(a) Subsidiaries 



 

 

 










 

                    
                  
                
              
            
          
        
      
    
  

 33




EXHIBIT A 


 



 

 

 

34




EXHIBIT B 

FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT 

Date: __________ 

[TRANSFER AGENT] 

Re: Silver Dragon Resources, Inc. 

Ladies and Gentlemen: 

We are counsel to Silver Dragon Resources, Inc. a
Delaware corporation (the "Company"), and have represented the Company in
connection with that certain Subscription Agreement (the "Subscription
Agreement") entered into by and among the Company and _________________________
(the "Holder") pursuant to which the Company has agreed to issue to the Holder
shares of the Company's common stock, $0.0001 per share (the "Common Stock") on
the terms and conditions set forth in the Subscription Agreement. Pursuant to
the Subscription Agreement, the Company also has entered into a Registration
Rights Agreement with the Holder (the "Registration Rights Agreement") pursuant
to which the Company agreed, among other things, to register the Registrable
Securities (as defined in the Registration Rights Agreement), including the
shares of Common Stock issued or issuable under the Subscription Agreement under
the Securities Act of 1933, as amended (the "1933 Act"). In connection with the
Company's obligations under the Registration Rights Agreement, on ____________
___, 2005, the Company filed a Registration Statement on Form S- ___ (File No.
333-________) (the "Registration Statement") with the Securities and Exchange
Commission (the "SEC") relating to the Registrable Securities which names the
Holder as a selling shareholder thereunder. 


In connection with the
foregoing, we advise you that [a member of the SEC's staff has advised us by
telephone that the SEC has entered an order declaring the Registration Statement
effective] [the Registration Statement has become effective] under the
1933 Act at [enter the time of effectiveness] on [enter the date of
effectiveness] and to the best of our knowledge, after telephonic inquiry of
a member of the SEC's staff, no stop order suspending its effectiveness has been
issued and no proceedings for that purpose are pending before, or threatened by,
the SEC and the Registrable Securities are available for resale under the 1933
Act pursuant to the Registration Statement. 

	 	Very truly yours, 
    
	 	 
	 	[Company Counsel] 
    



35




EXHIBIT C 


 

Date: 

RE: Put Notice Number __ 

Dear Mr. Leighton, 

This is to inform you that as of today, Silver Dragon
Resources, Inc., a Delaware corporation (the "Company"), hereby elects to
exercise its right pursuant to the Investment Agreement to require Dutchess
Private Equities Fund, LP to purchase shares of its common stock. The Company
hereby certifies that: 

The amount of this put is $__________. 

The Pricing Period runs from ________ until _______. 

The current number of shares issued and outstanding as of the Company are:


Regards, 

_____________ 

Marc Hazout 

CEO 

Silver Dragon Resources, Inc. 


 

36




EXHIBIT D 

PUT SETTLEMENT SHEET 


 

Date: 

Marc, 

Pursuant to the Put given by Silver Dragon Resources, Inc. to
Dutchess Private Equities Fund, L.P. on _________________ 200_, we are now
submitting the amount of common shares for you to issue to Dutchess. 

Please have a certificate bearing no restrictive legend
totaling __________ shares issued to Dutchess Private Equities Fund, LP
immediately and send via DWAC to the following account: 


XXXXXX 


If not DWAC eligible, please send FedEx Priority Overnight to: 


XXXXXX 


Once these shares are received by us, we will have the funds wired to the
Company. 

Regards, 

Douglas H. Leighton 


 

37



	DATE. . . . . . . . . . .
    . . . . . . . . . . PRICE
	 
	Date of Day 1 . . . . . .
    . . . . . . . . . . Closing Bid of Day 1
	Date of Day 2 . . . . . .
    . . . . . . . . . . Closing Bid of Day 2


	Date of Day 3 . . . . . .
    . . . . . . . . . . Closing Bid of Day 3
	Date of Day 4 . . . . . .
    . . . . . . . . . . Closing Bid of Day 4
	Date of Day 5 . . . . . .
    . . . . . . . . . . Closing Bid of Day 5



	 
	LOWEST 1 (ONE) CLOSING BID
    IN PRICING PERIOD
	 
	 
	PUT AMOUNT
    ____________________________
	 
	 
	AMOUNT WIRED TO COMPANY    
                               
    
	 
	 
	PURCHASE PRICE (95%
    (NINETY-FIVE PERCENT))
	 
	 
	AMOUNT OF SHARES DUE                                        
      
	 



The undersigned has completed this Put as of this ___th day of _________,
200_. 


Silver Dragon Resources, Inc.


______________________________ 

Marc Hazout, CEO 


38




SCHEDULE 4(c) CAPITALIZATION 


 

 

 

 

39




SCHEDULE 4(e) CONFLICTS 

 


 

 

40





SCHEDULE 4(g) MATERIAL CHANGES 


 

 

 

 


41




SCHEDULE 4(h) LITIGATION 


 


 

 

 

 


42




SCHEDULE 4(l) INTELLECTUAL PROPERTY 


 

 


 

 

 

 


43




SCHEDULE 4(n) LIENS 


 

 

 


 

 

 


44




SCHEDULE 4(t) CERTAIN TRANSACTIONS 


 

 

 

 


 

 


45