Document:

InfoTech USA, Inc. Exhibit 10.5 to Form 8K

     Exhibit 10.5

INTERCREDITOR AND
SUBORDINATION AGREEMENT 

             
        This  Intercreditor  and  Subordination  Agreement  (“Agreement”)  is made as of this 16th day of May, 2005, by and between Wells Fargo Business Credit,  Inc., a Minnesota  corporation (“Wells Fargo”), and Ingram Micro Inc., a
Delaware corporation (“Ingram”).

Background 

             
        A.    
          Wells Fargo, as lender, Infotech USA, Inc., a New Jersey corporation
          (“Infotech-NJ”), as borrower, and Infotech USA, Inc., a Delaware
          corporation (“Infotech-DE”), and Information Technology Services,
          Inc., a New York corporation (“ITS”), as guarantors (Infotech-NJ,
          Infotech-DE and ITS each an “Obligor” and collectively, the
          “Obligors”), are parties to that certain Credit and Security
          Agreement, dated as of June 29, 2004, (as the same may be amended, modified,
          supplemented or restated from time to time, the “Credit Agreement”),
          pursuant to which: (i) Wells Fargo has made loans and other credit
          accommodations to Infotech-NJ, and may, from time to time hereafter, make
          additional loans and credit accommodations to Infotech-NJ; and (ii) the Obligors
          have granted to Wells Fargo a security interest in the Wells Fargo Collateral
          (as defined below) as security for the Wells Fargo Indebtedness (as defined
          below). Capitalized terms not otherwise defined herein shall have the meanings
          ascribed to such terms in the Credit Agreement. 

             
        B.    
          Ingram (i) has entered or is about to enter into that certain Security Agreement
          between Ingram and Infotech-NJ, dated as of May 16, 2005 (the “Security
          Agreement”), pursuant to which Infotech-NJ has granted or will grant Ingram
          a security interest in and to all of Infotech-NJ’s presently owned and
          after acquired equipment, inventory, accounts and chattel paper and (ii) has
          received or is about to receive (x) that certain Guaranty, dated as of
          May 16, 2005, made by Infotech-DE in favor of Ingram and (y) that certain
          Guaranty, dated as of May 16, 2005, made by ITS in favor of Ingram
          (collectively, the “Guarantees”). The Security Agreement and the
          Guarantees and all other documents, agreements and instruments related thereto
          or to the Ingram Indebtedness, as each may be amended, modified, supplemented or
          restated from time to time, are collectively referred to herein as the
          “Ingram Documents.” 

             
        C.    
          Wells Fargo and Ingram desire to enter into this Agreement for the purpose of
          establishing their respective rights with respect to their liens upon and
          security interests in the assets of the Obligors and certain other rights,
          priorities and interests between them. 

        
        NOW,
THEREFORE, in consideration of the foregoing and the mutual covenants contained herein and
for good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Wells Fargo and Ingram hereby agree as follows: 

             
        1.    
          Definitions. All terms used in this Agreement (including the foregoing
          recitals, which are part of this Agreement) that are defined in the UCC (as
          hereinafter defined) as enacted shall have the meanings ascribed to them in the
          UCC, unless otherwise expressly defined herein. As used in this Agreement, the
          following terms shall have the meanings respectively set forth after each: 

             
            “Ingram
Documents” shall have the meaning ascribed to such term in the recitals to this Agreement. 

             
            “Ingram Indebtedness” shall mean any and all of the present and future obligations,  liabilities and indebtedness of the Obligors to
Ingram, whether now existing or hereafter arising, of every kind and character, whether
arising out of the purchase of Ingram Inventory or otherwise (including, without
limitation, interest or finance charges accruing after the commencement of a bankruptcy
proceeding by or against any Obligor, fees, collection costs and expenses and other
amounts), all whether direct or indirect, fixed or contingent, matured or unmatured,
liquidated or unliquidated, and whether arising under contract, in tort or otherwise. 

             
            “Ingram
Inventory” shall mean any and all presently owned and hereafter acquired
inventory sold by Ingram to Infotech-NJ for which payment has not been received by Ingram. 

             
            “Ingram  Inventory  Receivables”  shall  mean any and all  accounts  receivable  of  Infotech-NJ
arising from the sale of any Ingram
Inventory. 

             
            “Lien” shall mean any lien, security interest, charge, encumbrance,  mortgage or deed of trust, howsoever arising. 

             
            “Loan  Documents”  shall mean the  Credit  Agreement  and any other  documents,  instruments  or agreements executed or delivered in connection
therewith, as the same may be amended, modified, supplemented or restated from time to
time. 

             
            “Payment
in Full” or “Paid in Full” shall mean the indefeasible final
payment in full in cash and satisfaction of the Wells Fargo Indebtedness, in accordance
with the Credit Agreement and the other Loan Documents, and that such payment shall not be
subject to defeasance, disgorgement, repayment or return for any reason. 

             
            “UCC”
shall mean the Uniform Commercial Code as the same may be amended and in effect from time
to time in the State of New York. 

             
            “Wells Fargo  Collateral”  shall mean all of each  Obligor's  presently  existing and  hereafter acquired, created or arising personal
property (including, without limitation, all Ingram Inventory and Ingram Inventory
Receivables), wherever located, and all proceeds (including proceeds of insurance) and
products thereof. 

             
            “Wells
Fargo Indebtedness” shall mean any and all of the present and future Obligations
(as defined in the Credit Agreement) of the Obligors evidenced by, secured by, arising
under or related to the Credit Agreement and the other Loan Documents (including, without
limitation, interest accruing after the commencement of a bankruptcy proceeding by or
against any Obligor, fees, collection costs and expenses and other amounts), all whether
direct or indirect, fixed or contingent, matured or unmatured, liquidated or unliquidated,
joint or several and whether arising under contract, in tort or otherwise. 

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                     2.    
          Priority of Security Interests. 

                  
            (a)    
          Notwithstanding (i) any statement or term contained in the Credit Agreement or
          any of the other Loan Documents or the Ingram Documents or any other agreement
          with the Obligors to the contrary; (ii) the time, order or method of attachment
          or perfection of the security interests granted thereby or the time or order of
          filing or recording of any financing statements or other lien or security
          interests; or (iii) anything contained in any filing or agreement to which Wells
          Fargo or Ingram may now or hereafter be a party, until such time as all of the
          Wells Fargo Indebtedness shall have been Paid in Full and all financing
          arrangements among the Obligors and Wells Fargo shall have been terminated, the
          priority of any and all Liens, rights and interests of Ingram and Wells Fargo,
          whether now or hereafter arising and howsoever existing, is as follows: 

                  
            (A)    
          Except as otherwise expressly set forth herein, Wells Fargo shall have a first
          priority security interest in all Wells Fargo Collateral other than the Ingram
          Inventory and Ingram shall have a second priority security interest in all Wells
          Fargo Collateral other than the Ingram Inventory, which second priority security
          interest shall be subordinate and junior to the security interest of Wells
          Fargo; 

                  
            (B)    
          Ingram shall have a first priority security interest in the Ingram Inventory and
          Wells Fargo shall have a second priority security interest in the Ingram
          Inventory; 

For purposes of the foregoing, any
claim of a right of setoff, or lien of judgment, execution or levy, shall be treated in
all respects as a security interest and no claimed right of setoff, lien or judgment,
execution or levy shall be asserted to defeat or diminish the rights or priorities
provided for herein. 

                     3.    
          Subordination of Debt. Ingram hereby subordinates its right to payment
          under the Guarantees to the prior Payment in Full of the Wells Fargo
          Indebtedness, and Ingram’s receipt of any payment pursuant to any of the
          Guarantees is deferred until the Payment in Full of the Wells Fargo
          Indebtedness. During the term of this Agreement, Ingram will not ask for,
          demand, sue for, take or receive from Infotech-DE or ITS any payment in respect
          of the Ingram Indebtedness. In the event that Ingram shall receive any payment
          in respect of the Ingram Indebtedness in violation of this Section 3, it shall
          receive and hold same for the benefit of Wells Fargo and shall forthwith deliver
          the same to Wells Fargo in precisely the form received (except for the
          endorsement or assignment of Ingram where necessary) for application against the
          Wells Fargo Indebtedness, whether due or not due, and, until so delivered, the
          same shall be held in trust by Ingram as the property of Wells Fargo. 

                     4.    
          Limitation on Ingram Inventory and Wells Fargo Collateral. 

                  
            (a)    
          During the term of this Agreement, Ingram shall have no right to take any action
          with respect to the Wells Fargo Collateral (other than the Ingram Inventory),
          whether by judicial or non-judicial foreclosure, the seeking of the appointment
          of a receiver for any portion of any Obligor’s property or assets or
          otherwise, or to take possession of any of the Wells Fargo Collateral (other
          than the Ingram Inventory), and shall have no rights of notification to any
          obligor or account debtor of any Obligor for any purpose whatsoever. 

3

                  
            (b)    
          Unless and until all Ingram Indebtedness shall have been indefeasibly paid in
          full in cash, Wells Fargo shall have no right to take any action with respect to
          the Ingram Inventory, whether by judicial or non-judicial foreclosure, the
          seeking of the appointment of a receiver for the Ingram Inventory, or to take
          possession of any of the Ingram Inventory. 

                     5.    
          Distribution of Ingram Collateral and Wells Fargo Collateral. 

                  
            (a)    
          During the term of this Agreement, Ingram will not ask for, demand, sue for,
          take or receive from any Obligor or any successor or assign of any Obligor,
          including, without limitation, a receiver, trustee or debtor in possession,
          whether by setoff or in any other manner, the whole or any part of the Ingram
          Indebtedness from any of the Wells Fargo Collateral (other than the Ingram
          Inventory) or any income or proceeds thereof. Ingram acknowledges and agrees
          that the terms and provisions of this Agreement do not violate any term or
          provision of any of the Ingram Documents and to the extent any of the terms or
          provisions of this Agreement are inconsistent with any of the terms or
          provisions of the Ingram Documents, the provisions of the Ingram Documents shall
          be deemed to have been superseded and modified by this Agreement. 

                  
            (b)    
          During the term of this Agreement, until such time as the Ingram Indebtedness is
          indefeasibly paid in full in cash and all commitments between Infotech-NJ and
          Ingram shall have been terminated, Wells Fargo will not ask for, demand, sue
          for, take or receive from Inoftech-NJ or any successor or assign of Infotech-NJ,
          including, without limitation, a receiver, trustee or debtor in possession,
          whether by setoff or in any other manner, the whole or any part of the Wells
          Fargo Indebtedness from any of the Ingram Inventory. Wells Fargo acknowledges
          and agrees that the terms and provisions of this Agreement do not violate any
          term or provision of any of the Credit Agreement or other Loan Documents and to
          the extent any of the terms or provisions of this Agreement are inconsistent
          with any of the terms or provisions of the Credit Agreement or other Loan
          Documents, the provisions of the Credit Agreement or other Loan Documents shall
          be deemed to have been superseded and modified by this Agreement. 

                     6.    
          Security for Ingram Indebtedness. Ingram agrees not to ask for or receive
          from any Obligor, or otherwise obtain, whether by agreement, by operation of
          law, or otherwise, and Lien of any kind whatsoever on or against the Wells Fargo
          Collateral, or any portion thereof, or any other assets or properties, as
          security for the payment or performance of the Ingram Indebtedness, other than
          the security interests granted pursuant to the Security Agreement, as in effect
          on the date hereof, and hereby waives any such lien it may now or hereinafter
          have or obtain with respect to the Wells Fargo Collateral or such assets or
          properties, other than the security interests. 

                     7.    
          Turnover of Wells Fargo Collateral Received by Ingram. If, during the
          term of this Agreement, Ingram receives or takes possession of any of the Wells
          Fargo Collateral (other than the Ingram Inventory), or any cash or non-cash
          proceeds thereof, Ingram shall receive and hold the same for the benefit of
          Wells Fargo and shall forthwith deliver the same to Wells Fargo in precisely the
          form received (except for the endorsement or assignment of Ingram where
          necessary) for application against the Wells Fargo Indebtedness, whether due or
          not due, and, until so delivered, the same shall be held in trust by Ingram as
          the property of Wells Fargo. 

4

                     8.    
          Turnover of Ingram Inventory Received by Wells Fargo. If, during the term
          of this Agreement, Wells Fargo receives or takes possession of any of the Ingram
          Inventory, Wells Fargo shall receive and hold the same for the benefit of Ingram
          and shall forthwith deliver the same to Ingram in precisely the form received
          for application against the Ingram Indebtedness, whether due or not due, and,
          until so delivered, the same shall be held in trust by Wells Fargo as the
          property of Ingram. Nothing herein shall be construed as obligating Wells Fargo
          to hold any cash or non-cash proceeds of Ingram Inventory in trust for, or for
          the benefit of, Ingram, or requiring Wells Fargo to deliver such proceeds to
          Ingram (all of such proceeds being the property of Wells Fargo). 

                     9.    
          Effect of Bankruptcy of the Borrowers. This Agreement shall remain in
          full force and effect notwithstanding the filing of a petition for relief by or
          against any Obligor under the United States Bankruptcy Code, 11 U.S.C.S. 101
          et seq, as to any pre-petition or post-petition obligations under the
          Credit Agreement or other Loan Documents or the Ingram Documents. 

                     10.    
          Cooperation. Upon the occurrence and during the existence of any Event of
          Default as defined in either the Credit Agreement or other Loan Documents, or in
          the Ingram Documents, as the case may be, or in the event of commencement of
          foreclosure or comparable proceedings under either such agreements, Wells Fargo
          and Ingram agree to cooperate in the exercise of their respective remedies to
          maximize recovery on all Wells Fargo Collateral subject to the provisions of
          this Agreement: 

                  
            (a)    
          (i) Irrespective of whether any Event of Default (as such term is defined in the
          respective documents) shall have occurred under the terms of the Credit
          Agreement, the other Loan Documents or the Ingram Documents, and notwithstanding
          any provision of the UCC or in any security agreement executed by any Obligor in
          favor of Ingram, so long as the Wells Fargo Indebtedness shall not have been
          Paid in Full, Ingram shall not take any action to foreclose or realize upon or
          enforce any of its rights with respect to the Wells Fargo Collateral (other than
          the Ingram Inventory), including without limitation, by execution after
          obtaining a judgment against any Obligor. 

                  
                      (ii)    
          Irrespective of whether any Event of Default (as such term is defined in the
          respective documents) shall have occurred under the terms of the Credit
          Agreement, the other Loan Documents or the Ingram Documents, and notwithstanding
          any provision of the UCC or in any security agreement executed by any Obligor in
          favor of Wells Fargo, so long as any obligations of any Obligor to Ingram under
          the Ingram Documents remain unpaid, Wells Fargo shall not take any action to
          foreclose or realize upon or enforce any of its rights with respect to the
          Ingram Inventory, including without limitation, by execution after obtaining a
          judgment against any Obligors. 

                  
            (b)    
          (i) Wells Fargo shall have the exclusive right to collect, recover, demand,
          compromise, settle, release, adjust, discount, sell, transfer or otherwise
          realize on or dispose of the Wells Fargo Collateral (other than the Ingram
          Inventory) as provided in the Credit Agreement or other Loan Documents, and to
          foreclose its security interest in such Wells Fargo Collateral (other than the
          Ingram Inventory) in the manner deemed appropriate by Wells Fargo, and Ingram
          waives any objection or claim based on reasonableness of collection efforts or

5

     disposition. Ingram will execute any and all releases, termination statements,
          assignments and other documents as may be required to give effect to the
          provisions of this Paragraph. 

                  
                      (ii)    
          Ingram shall have the exclusive right to collect, recover, demand, compromise,
          settle, release, adjust, discount, sell, transfer or otherwise realize on or
          dispose of the Ingram Inventory as provided in the Ingram Documents, and to
          foreclose its security interest in such Ingram Inventory in the manner deemed
          appropriate by Ingram, and Wells Fargo waives any objection or claim based on
          reasonableness of collection efforts or disposition. Wells Fargo will execute
          any and all releases, termination statements, assignments and other documents as
          may be required to give effect to the provisions of this Paragraph. 

                      11.    
          Marshalling. Each of the parties hereto agrees that during the term
          hereof it will not exercise any rights it may have in law or equity to require
          the other party to marshal any of the Wells Fargo Collateral. 

                     12.    
          Term. This Agreement shall remain in full force and effect until all of
          the Wells Fargo Indebtedness shall have been Paid in Full and all financing
          arrangements and commitments between the Obligors and Wells Fargo shall have
          been terminated. This Agreement shall continue to be effective or be reinstated,
          as the case may be, if at any time any payment of any of the Wells Fargo
          Indebtedness is rescinded or must otherwise be returned by Wells Fargo upon the
          insolvency, bankruptcy or reorganization of any Obligor or otherwise, all as
          though such payment had not been made. This is a continuing agreement and Wells
          Fargo may, in its discretion, continue to extend credit or other financial
          accommodations and loan monies to or for the benefit of any Obligor, on the
          faith hereof, under the Credit Agreement or other Loan Documents, without notice
          to Ingram. Notwithstanding the foregoing, Ingram may terminate this Agreement
          upon notice to Wells Fargo so long as, at the time of such notice, all Ingram
          Indebtedness has been satisfied, all financing arrangements and commitments
          between Ingram and the Obligors have been terminated and Ingram’s Lien on
          the Wells Fargo Collateral (including, without limitation, all Ingram Inventory
          and all Ingram Inventory Receivables) has been released. 

                     13.    
          Relationship of Parties. This Agreement is entered into solely for the
          purposes set forth herein, and except as expressly provided herein, neither
          party assumes any other duties or responsibilities to the other regarding the
          financial condition of the Obligors or any other party, or regarding any of the
          Wells Fargo Collateral or regarding any other circumstance bearing upon the risk
          of nonpayment of the obligations of any Obligor under any of the agreements
          referred to herein. Each party shall be responsible for managing its financing
          relationships with the Obligors, and neither party shall be deemed to be the
          agent of the other for any purpose. Wells Fargo may alter, amend, supplement,
          release, discharge or otherwise modify any terms of the Credit Agreement or any
          of the other Loan Documents without notice to or consent of Ingram including,
          without limitation, increasing the indebtedness under any such agreements or
          extending the time for payment; provided, however, that any such
          alterations, amendments, supplements, releases, discharges or modifications
          shall not affect the priorities, the rights or the duties of the parties
          hereunder. Ingram may not alter, amend, supplement, release, discharge or
          otherwise modify any terms of the Ingram Documents in any manner which would
          have a material adverse effect on Wells Fargo without Wells Fargo’s prior
          written consent. 

6

                     14.    
          Notices. Except as otherwise herein provided, any notice or other
          communication required hereunder shall be in writing (messages sent by e-mail or
          other electronic transmission (other than by telecopier) shall not constitute a
          writing, however any signature on a document or other writing that is
          transmitted by e-mail or telecopier shall constitute a valid signature for
          purposes hereof), and shall be deemed to have been validly served, given or
          delivered when received by the recipient if hand delivered, sent by commercial
          overnight courier or sent by facsimile, or three (3) Business Days after deposit
          in the United States mail, with proper first class postage prepaid and addressed
          to the party to be notified as follows: 

             (i)    
          if to Wells Fargo, then to: 

	  	Wells Fargo Business Credit, Inc.

                  119 West 40th Street

                  New York, New York 10018

                  Attention:  Sal Mutone

                  Telecopier No.:  636-728-3279 

             (ii)    
          if to Ingram, then to: 

	  	Ingram Micro Inc.

                  1759 Wehrle Drive

                  Williamsville, New York 14221

                  Attention: Vice President - Credit

                  Telecopier No. 716-565-8021

                
15.    Contesting Liens or Security Interests. Neither Wells Fargo nor Ingram
          shall contest the validity, perfection, priority or enforceability of any Lien
          granted to or for the benefit of the other, and each hereby agrees to cooperate
          in the defense of any action contesting the validity, perfection, priority or
          enforceability of such Liens. 

                
16.    Modifications in Writing. No amendment, modification, supplement,
          termination, consent or waiver of or to any provision of this Agreement nor any
          consent to any departure therefrom shall in any event be effective unless the
          same shall be in writing and signed by or on behalf of each of Wells Fargo and
          Ingram. Any waiver of any provisions of this Agreement, and any consent to any
          departure from the terms of any provision of this Agreement, shall be effective
          only in the specific instance and for the specific purpose for which given. 

                
17.    No Benefit to Third Parties. The terms and provisions of this Agreement
          shall be for the sole benefit of Wells Fargo and Ingram and their respective
          successors and assigns, and no other person, firm, entity or corporation shall
          have any right, benefit, priority, or interest under, or because of this
          Agreement. 

                
18.    Severability. Whenever possible, each provision of this Agreement shall
          be interpreted in such manner as to be effective and valid under applicable law,
          but if any provision of this Agreement shall be prohibited by or invalid under
          applicable law, such 

7

provision shall be ineffective to the extent of such
          prohibition or invalidity, without invalidating the remainder of such provision
          or the remaining provisions of this Agreement. 

                
19.    Complete Agreement. This Agreement constitutes the complete agreement and
          understanding of each of Wells Fargo and Ingram with respect to the subject
          matter contained herein, and supersedes all prior or contemporaneous oral and
          written negotiations, agreements and understandings, express or implied, with
          respect to the subject matter contained herein. 

                
20.    No Joint Venture. Each of Wells Fargo and Ingram acknowledges and
          confirms that this Agreement shall not create a joint venture, agency or
          fiduciary relationship. 

                
21.    Successors and Assigns; etc. This Agreement shall be binding upon and
          shall inure to the benefit of the respective successors and assigns of Wells
          Fargo and Ingram, and shall be irrevocable. 

                
22.    WAIVER OF JURY TRIAL; SERVICE OF PROCESS. WELLS FARGO AND INGRAM HEREBY
          WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR
          RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREUNDER. EACH OF
          WELLS FARGO AND INGRAM HEREBY IRREVOCABLY WAIVE PERSONAL SERVICE OF PROCESS AND
          CONSENT TO SERVICE OF PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT
          REQUESTED AT THE ADDRESS SET FORTH IN SECTION 14. IN NO EVENT WILL WELLS FARGO
          OR INGRAM BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. 

                
23.    Choice of Law. The validity, interpretation and enforcement of this
          Agreement shall be governed by the laws of the State of New York. 

                
24.    Counterparts. This Agreement may be executed in any number of
          counterparts, each of which shall be deemed to be an original, submissible into
          evidence, and all of which together shall be deemed to be a single instrument. 

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK] 

8

        IN
WITNESS WHEREOF, this Agreement has been duly executed on the date first set forth above. 

	  	WELLS FARGO BUSINESS CREDIT, INC. 

	  	By: 	 /s/ Sal Mutone 
 
	  	Name: 	  Sal Mutone
 
	  	Title: 	  Vice President
 

	  	INGRAM MICRO INC.

	  	By: 	 /s/ Chris Sweeney 
 
	  	Name: 	  Chris Sweeney
 
	  	Title: 	  Director of Credit
 

Acknowledgment by
Obligors 

        Each
Obligor, although not a party to the foregoing Agreement, hereby acknowledges such
Agreement and agrees to be bound thereby to the extent the provisions thereof are
applicable to it. 

	  	INFOTECH USA, INC., a New Jersey Corporation

	  	By: 	 /s/ J. Robert Patterson 
 
	  	Name: 	  J. Robert Patterson
 
	  	Title: 	  Treas/Sec'y
 

	  	INFOTECH USA, INC., a Delaware corporation

	  	By: 	 /s/ J. Robert Patterson 
 
	  	Name: 	  J. Robert Patterson
 
	  	Title: 	 CFO
 

	  	INFORMATION TECHNOLOGY SERVICES, INC., a New York corporation

	  	By: 	 /s/ J. Robert Patterson 
 
	  	Name: 	  J. Robert Patterson
 
	  	Title: 	 Treas/Sec'y<PAGE>

                                                                   EXHIBIT 10.13

                             NOTE PURCHASE AGREEMENT

      THIS NOTE PURCHASE AGREEMENT is entered into as of November 30, 2004 among
NGAS RESOURCES, INC., a British Colombia corporation (the "Company"), and the
NOTE HOLDERS listed in Schedule 1.

      The Company agrees as follows for the ratable benefit of the holders of
its 7% Convertible Notes due March 31, 2010.

                                   ARTICLE ONE
                                   DEFINITIONS

      SECTION 1.01 CERTAIN TERMS DEFINED. Except as otherwise expressly provided
or unless the context otherwise requires, the following terms shall have the
respective meanings specified in this Section 1.01.

      "Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with a specified
Person, and "control" when used with respect to any specified Person means the
power to direct the management and policies of that Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise.

      "Agreement" means this Note Purchase Agreement as originally executed or,
if amended or supplemented as herein provided, as so amended or supplemented.

      The term "applicant" has the meaning set forth in Section 7.02(a).

      "Board of Directors" means the Board of Directors of the Company, any
authorized committee of the Board of Directors or any Person performing similar
functions for any successor of the Company lawfully empowered for that purpose.

      "Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in the City of New York are authorized or obligated
by law or executive order to be closed.

      "Capital Stock" means any and all shares of capital stock of a corporation
or any and all equivalent ownership interests in a Person other than a
corporation.

      "Commission" means the United States Securities and Exchange Commission.

      "Common Stock" means the Common Stock, no par value, of the Company.

      "Company" means NGAS Resources, Inc., a British Colombia corporation,
unless a successor replaces it in accordance with the terms of this Agreement,
and thereafter the successor.

      The term "conversion rate" has the meaning set forth in Section 4.01(b).

      "Conversion Shares" means the shares of Common Stock or other securities
issuable upon conversion of the Notes.

      "Current Market Price" means, on any particular date, the average of the
Quoted Prices of the Common Stock for 30 consecutive trading days commencing 45
trading days before the date in question. For purposes of this determination,
the term "Quoted Prices" means the closing sales price of the Common Stock (or
if no sale price is reported, the average of the high and low bid prices) as
reported by the principal national or regional stock exchange on which the
Common Stock is listed or, if the Common Stock is not listed on a national or
regional stock exchange, as reported by The Nasdaq Small Cap Market, the OTC
Bulletin Board or, if not so reported, then as reported by the National
Quotation Bureau Incorporated. In the absence of one or more quotations, the
Company shall determine

<PAGE>

the Current Market Price on a basis it considers appropriate. The Company's
determination of the Current Market Price shall be conclusive.

      "Event of Default" means any event specified in Section 8.01, continued
for the period of time, if any, and after the giving of notice, if any, therein
designated.

      "Exchange Act" means the United States Securities Exchange Act of 1934, as
amended.

      "Holder" means any Person who shall at the time be the registered holder
of any Note or Notes on the registry books of the Company kept for that purpose
in accordance with the provisions of this Agreement.

      "Holder List" has the meaning set forth in Section 7.01(a).

      "Holder Representative" has the meaning set forth in Section 8.02.

      "Note" or "Notes" means any Note or Notes executed and delivered under
this Agreement.

      "Note Issuance Date" means, with respect to each Note covered by this
Agreement, the date on which such Note was issued hereunder in accordance with
Section 2.01.

      The term "outstanding" when used with reference to Notes means, subject to
the provisions of Section 10.04, all Notes executed and delivered by the Company
under this Agreement as of any particular time, except: (a) Notes theretofore
canceled by the Company or delivered to the Company for cancellation and Notes
converted pursuant to Article Five; (b) Notes, or portions thereof, for the
payment or redemption of which moneys in the necessary amount shall have been
deposited in trust with the Company or with any paying agent (other than the
Company) or shall have been set aside and segregated in trust by the Company (if
the Company shall act as its own paying agent), provided that the Notes shall
have reached their stated maturity or, if the Notes are to be redeemed or
purchased prior to the maturity thereof, notice of the redemption or purchase
shall have been given as provided in Article Four, or provision shall have been
made for giving that notice; and (c) Notes in lieu of or in substitution for
which other Notes shall have been executed and delivered pursuant to the terms
of Section 2.07, unless proof satisfactory to the Company is presented that any
such Notes are held by bona fide holders in due course.

      "Officers' Certificate" means a certificate signed by the President or any
Vice President and by the Chief Financial Officer or Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Company, provided it
includes the statements required under Section 16.05.

      "Opinion of Counsel" means an opinion in writing signed by legal counsel,
who may be an employee of, or of counsel to, the Company. Each Opinion of
Counsel shall include the statements required under Section 16.05.

      "Periodic Reports" has the meaning set forth in Section 7.03.

      "Person" means an individual, any form of business enterprise, including a
corporation, limited liability company, partnership or limited partnership, and
any other juridical entity or its representative, including a trust, Company,
estate, custodian, administrator, personal representative, nominee or any other
entity acting on its own behalf or in a representative capacity.

      "Principal" or "principal amount" of a Note means the principal amount of
the Note as set forth on the face of the Note.

      The term "record date" has the meaning set forth in Section 2.03(a).

      "Registration Statement" means a registration statement under the
Securities Act of 1933 registering the Conversion Shares thereunder for resale
for resale by the Holders.

      "Responsible Officer" means, when used with respect to the Company, the
chairman of the board of directors, the president, every vice president, every
assistant vice president, the treasurer, every trust officer and

                                       2
<PAGE>

every other officer and assistant officer, in addition to those specifically
above mentioned, to whom any corporate trust matter is referred because of his
knowledge of and familiarity with the particular subject.

      "Securities Act of 1933" means the United States Securities Act of 1933,
as amended.

      "Subsidiary" means any corporation a majority of whose outstanding Capital
Stock with voting power, under ordinary circumstances, to elect directors is at
the time, directly or indirectly, owned by the Company.

      "Subscription Agreement" means the Subscription Agreement executed by each
Holder to evidence the Holder's Note subscription and the Company's undertaking
to register for resale under the Securities Act of 1933 all shares of Common
Stock issuable upon conversion thereof.

      SECTION 1.02 REFERENCES ARE TO AGREEMENT. Unless the context otherwise
requires, all references herein to "Articles," "Sections" and other subdivisions
refer to the corresponding Articles, Sections and other subdivisions of this
Agreement, and the words "herein," "hereof," hereby," "hereunder" and words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision hereof.

                                   ARTICLE TWO
             ISSUE, DESCRIPTION, EXECUTION AND REGISTRATION OF NOTES

      SECTION 2.01 DESIGNATION, AMOUNT, EXECUTION AND DELIVERY OF NOTES. The
Notes shall be designated as 7% Convertible Notes due March 31, 2010. Notes for
the aggregate principal amount of up to Eight-Million Dollars ($8,000,000), upon
the execution of this Agreement or from time to time thereafter, may be
executed, issued and delivered as herein provided.

      SECTION 2.02 FORM OF NOTES AND COMPANY'S CERTIFICATE. The Notes shall be
substantially in the form set forth in Exhibit A, and may have letters, numbers
or other marks of identification or designation and legends or endorsements
printed, lithographed or engraved thereon as the officers executing the same may
deem appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Notes may be listed, or to conform to usage.

      SECTION 2.03 (a) DATE OF NOTES AND DENOMINATIONS. Each Note shall mature
on March 31, 2010, shall bear interest from the Note Issuance Date thereof at
the rate per annum set forth therein, payable on the last day of each month,
commencing on December 31, 2004 or at the end of any subsequent month during
which the Note was issued hereunder, and at maturity, and shall be issuable as a
registered Note without coupons in a denomination of $1,000 and any integral
multiple thereof. The Person in whose name any Note is registered at the close
of business on any record date with respect to any interest payment date shall
be entitled to receive the interest payment on that interest payment date
notwithstanding the cancellation of the Note upon any registration of transfer,
conversion or exchange thereof subsequent to the record date and prior to the
interest payment date, unless the Note shall have been called for redemption on
a date fixed for redemption subsequent to the record date and prior to the
interest payment date, or unless an Event of Default shall have occurred and be
continuing as the result of a default in the payment of interest due on the
interest payment date on any Note, in which case the defaulted interest shall be
paid to the Person in whose name the Note (or any Notes issued upon registration
of transfer or exchange thereof) is registered on the record date for the
payment of the defaulted interest. The principal of and interest on the Notes
shall be payable at the office or agency to be maintained by the Company in
accordance with the provisions of Section 6.02; provided, however, that payment
of interest may be made at the option of the Company by check mailed by
first-class mail to the address of the Person entitled thereto as the address
appearing on the registry books of the Company. The term "record date" as used
in this Section 2.03 with respect to any interest payment date means the close
of business on 15th day of the month in which the interest payment date or
maturity date occurs, whether or not the record date is a Business Day, and that
term, as used in this Section 2.03, with respect to the payment of any defaulted
interest means the tenth day next preceding the date fixed by the Company for
the payment of defaulted interest, whether or not a Business Day, but in no case
shall that record date be less than ten days after notice thereof shall have
been mailed by or on behalf of the Company to all registered Holders of Notes at
their respective addresses.

                                       3
<PAGE>

            (b) Each Note shall be dated the date of its issuance hereunder.
Interest shall accrue on each Note from the most recent date to which interest
has been paid thereon or duly provided for or, if no interest has been paid or
duly provided for, from the Note Issuance Date thereof.

            (c) Interest on the Notes shall be computed on the basis of a
360-day year comprised of twelve 30-day months.

      SECTION 2.04 EXECUTION OF NOTES. The Notes shall be signed on behalf of
the Company, manually or in facsimile, by its President or a Vice President and
attested, manually or in facsimile, by the Secretary or an Assistant Secretary
of the Company. Only Notes so executed shall be entitled to the benefits of this
Agreement or be valid or obligatory for any purpose. The Company's execution and
delivery of any Note shall be conclusive evidence that the Note so executed and
delivered has been duly executed and delivered hereunder and that the Holder is
entitled to the benefits of this Agreement.

      SECTION 2.05 (a) EXCHANGE AND TRANSFER OF NOTES. Notes may be exchanged
for a like aggregate principal amount of Notes of other authorized
denominations. The Notes to be exchanged shall be surrendered at the office or
agency to be maintained by the Company in accordance with the provisions of
Section 6.02, and the Company shall execute and deliver in exchange therefor the
Note or Notes that the Holder making the exchange shall be entitled to receive.

            (b) The Company shall keep, at the office or agency to be maintained
by it in accordance with the provisions of Section 6.02, a register or registers
in which it shall register Notes and shall register the transfer of Notes as
provided in this Article Two. Upon surrender for registration of transfer of any
Note at that office or agency, the Company shall execute and deliver in the name
of the transferee or transferees a new Note or Notes for a like aggregate
principal amount.

            (c) All Notes presented or surrendered for exchange, redemption,
purchase or payment shall, if so required by the Company or any Note registrar,
be accompanied by a written instrument or instruments, in form satisfactory to
the Company or the Note registrar, duly executed by the registered Holder or by
his duly authorized attorney and, in every case, each Note presented or
surrendered for registration of transfer or for conversion shall be accompanied
by the assignment form and conversion notice attached to the Notes, duly
executed by the registered Holder or by his duly authorized attorney.

            (d) No service charge shall be made for any exchange or registration
of transfer of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in relation
thereto.

            (e) The Company shall not be required to issue, register the
transfer of or exchange any Notes for a period of fifteen days next preceding
any date for the selection of Notes to be redeemed, except in connection with a
conversion pursuant to Article Five. The Company shall not be required to
register the transfer of or exchange any Note called or being called for
redemption except, in the case of any Note to be redeemed in part, the portion
thereof not to be so redeemed.

      SECTION 2.06 (a) MUTILATED, DESTROYED, LOST OR STOLEN NOTES. In case any
Note shall become mutilated or be destroyed, lost or stolen, the Company, in the
case of any mutilated Note shall, and in the case of any destroyed, lost or
stolen Note in its discretion may, execute and deliver a new Note bearing a
number, letter or other distinguishing symbol not contemporaneously outstanding
in exchange and substitution for the mutilated Note, or in lieu of and in
substitution for the Note so destroyed, lost or stolen. In every case the
applicant for a substituted Note shall furnish to the Company such security or
indemnity as it may require to save it harmless and, in every case of
destruction, loss or theft, the applicant shall also furnish to the Company
evidence to its satisfaction of the destruction, loss or theft of the Note and
of the ownership thereof. Upon the issue of any substituted Note, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses connected therewith.

            (b) Every substituted Note issued pursuant to the provisions of this
Section 2.06 in substitution for any destroyed, lost or stolen Note shall
constitute an additional contractual obligation of the Company, whether or not
the destroyed, lost or stolen Note shall be found at any time, and shall be
entitled to all the benefits of this

                                       4
<PAGE>

Agreement equally and proportionately with any and all other Notes duly issued
hereunder.

            (c) All Notes shall be held and owned upon the express condition
that the foregoing provisions are exclusive with respect to the replacement of
mutilated, destroyed, lost or stolen Notes, and shall preclude (to the extent
lawful) any and all other rights or remedies, notwithstanding any law or statute
existing or hereafter enacted to the contrary with respect to the replacement of
negotiable instruments or other securities without their surrender.

      SECTION 2.07 CANCELLATION OF SURRENDERED NOTES. All Notes surrendered for
the purpose of payment, redemption, conversion, exchange, substitution or
registration of transfer shall, if surrendered to the Company or any paying
agent or conversion agent or registrar, be delivered to the Company and the
same, together with Notes surrendered to the Company for cancellation, shall be
canceled by it, and no Notes shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Agreement.

                                  ARTICLE THREE
                               REDEMPTION OF NOTES

      SECTION 3.01 REDEMPTION AT OPTION OF THE COMPANY. The Company may elect to
redeem the Notes at any time after the Registration Statement becomes effective
under the Securities Act of 1933 at a redemption price equal to 100% of the
principal amount of the Notes to be redeemed, plus accrued interest thereon
through the date fixed for redemption. To exercise its election, the Company
shall provide the notice specified in Section 3.03, accompanied by an Officers'
Certificate and an Opinion of Counsel to the effect that the redemption will
comply with the conditions contained herein, at least 60 days before the
redemption date. The Company may at any time or from time to time purchase Notes
directly from Holders, and any such purchases shall not be considered
redemptions for purposes hereof if the action of the seller is volitional and
not compelled.

      SECTION 3.02 SELECTION OF NOTES TO BE REDEEMED. If less than all the
outstanding Notes are to be redeemed, the Company shall select the Notes to be
redeemed pro rata or by lot or other method deemed fair and appropriate by the
Board of Directors. The Company shall make the selection not more than 75 days
before the redemption date from Notes outstanding not previously called for
redemption. The Company may select for redemption portions of the principal of
Notes that have denominations larger than $1,000. Notes and portions of them it
selects shall be in amounts of $1,000 or integral multiples of $1,000.
Provisions of this Agreement that apply to Notes called for redemption also
apply to portions of Notes called for redemption.

      SECTION 3.03 NOTICE OF REDEMPTION. At least 20 days but not more than 60
days before a redemption date, the Company shall cause to be mailed a notice of
redemption to each Holder whose Notes are to be redeemed. The notice shall
identify the Notes to be redeemed and shall state: (a) the redemption date; (b)
the redemption price; (c) the name and address of the paying agent; (d) if less
than all the outstanding Notes are to be redeemed, the identification (and in
the case of partial redemptions, principal amounts) of the particular Notes to
be redeemed as selected in accordance with Section 3.02; (e) that Notes called
for redemption may be converted at any time before the close of business on the
redemption date, specifying the conversion rate then in effect and the place
where Notes may be surrendered for conversion; (f) that Holders who want to
convert Notes must satisfy the requirements for conversion set forth in the
Notes; (g) that Notes called for redemption must be surrendered to the paying
agent to collect the redemption price; (h) that, unless the Company defaults in
making the redemption payment, interest on Notes called for redemption ceases to
accrue on and after the redemption date, and the only remaining right of the
Holder is to receive payment of the redemption price upon surrender of the
Notes; and (i) if any Note is being redeemed in part, the portion of the
principal amount of the Note to be redeemed and that, after the redemption date,
upon surrender of the Note, a new Note or Notes in principal amount equal to the
unredeemed portion thereof will be issued.

      SECTION 3.04 EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is
mailed, Notes called for redemption become due and payable on the redemption
date at the redemption price, unless previously converted. Upon surrender to the
paying agent, such Notes shall be redeemed at the redemption price stated in the
notice of reception, plus accrued interest to the redemption date.

      SECTION 3.05 DEPOSIT OF REDEMPTION PRICE; DEPOSIT RECEIPT. On or before
the redemption date, the Company shall deposit with any third-party paying agent
money sufficient to pay the redemption price of and accrued interest on all
Notes to be redeemed on that date, and the paying agent shall return to the
Company any money not

                                       5
<PAGE>

required for that purpose. Upon the deposit of a Note to be redeemed in
accordance with the provisions therefor in the Notes, the Holder of the Note
shall be entitled to receive a non-transferable receipt evidencing the deposit.

      SECTION 3.06 NOTES REDEEMED IN PART. Upon surrender of a Note that is
redeemed in part, the Company shall execute and deliver to the Holder a new Note
equal in principal amount to the unredeemed portion of the Note surrendered.

                                  ARTICLE FOUR
                               CONVERSION OF NOTES

      SECTION 4.01 CONVERSION PRIVILEGE. (a) A Note may be converted by the
Holder into Common Stock at any time prior to the close of business on March 31,
2010. If a Note is called for redemption by the Company, the Holder may convert
it at any time before the close of business on the Business Day immediately
preceding the redemption date.

            (b) The conversion rate (the "conversion rate") as of the date of
this Agreement is 166.6667 shares of Common Stock per each $1,000 principal
amount of the Notes. The conversion rate is subject to adjustment as provided in
this Article Four.

            (c) A Holder may convert a portion of a Note if the portion is
$1,000 or a whole multiple of $1,000. Provisions of this Agreement that apply to
a conversion of all of a Note also apply to conversion of a portion of it.

      SECTION 4.02 CONVERSION PROCEDURE. (a) To convert a Note, a Holder must
(i) complete and sign the conversion notice attached to the Note, (ii) surrender
the Note to the Company at the office or agency to be maintained by the Company
in accordance with the provisions of Section 6.02, (iii) furnish appropriate
endorsements and transfer documents if required by the Company and (iv) pay any
transfer or similar tax if required. The date on which the Holder satisfies all
those requirements is the conversion date. As soon as practical after the
conversion date, the Company shall cause its transfer agent to deliver a
certificate to the Holder for the number of full Conversion Shares issuable upon
the conversion of the Note or portion thereof so converted, together with a
check for any fractional share of Common Stock resulting from the conversion.
The Person in whose name the Conversion Shares are registered shall be treated
as a shareholder of record of the Company on and after the conversion date.

            (b) No payment or adjustment will be made for accrued interest on a
converted Note. If any Note is converted between a record date for the payment
of interest and the next succeeding interest payment date, the Note must be
accompanied by funds equal to the interest payable on the interest payment date
on the principal amount so converted (unless the Note shall have been called for
redemption, in which case no payment shall be required).

            (c) If a Holder converts more than one Note at the same time, the
number of full shares of Common Stock issuable upon the conversion shall be
based on the total principal amount of the Notes converted.

            (d) Upon surrender of a Note that is converted in part, the Company
upon Company Order shall issue to the Holder a new Note equal in principal
amount to the unconverted portion of the Note surrendered.

      SECTION 4.03 FRACTIONAL SHARES. (a) The Company will not issue a
fractional share upon conversion of a Note. Instead, in lieu of any fractional
share of Common Stock otherwise issuable, the Company will deliver its check for
the current market value of the fractional share of Common Stock, determined by
multiplying the Current Market Price of a full share of Common Stock by the
fraction and rounding the result to the nearest cent.

            (b) For purposes of this Section 4.03 but not any other provision of
this Agreement, the current market price of a share of Common Stock is the
Quoted Price of the Common Stock on the last trading day prior to the conversion
date. In the absence of a quotation, the Company shall determine the current
market price on the basis of such quotations as it considers appropriate.

      SECTION 4.04 TAXES ON CONVERSION. If a Holder of a Note converts it, the
Company shall pay any documentary, stamp or similar issue or transfer tax due on
the issue of the Conversion Shares, and the Holder shall pay any tax that is due
because the Conversion Shares are issued in a name other than the Holder's name.

                                       6
<PAGE>

      SECTION 4.05 COMPANY TO RESERVE SHARES. The Company shall reserve enough
shares of Common Stock to permit the conversion of all the Notes at the
applicable conversion rate. All shares of Common Stock that may be issued upon
conversion of the Notes shall be fully paid and nonassessable.

      SECTION 4.06 ADJUSTMENT FOR CHANGE IN COMPANY STRUCTURE. (a) If the
Company (i) makes a distribution on its Common Stock in shares of Common Stock;
(ii) subdivides its outstanding Common Stock into a greater number of shares of
Common Stock; (iii) combines its outstanding Common Stock into a smaller number
of shares of Common Stock, (iv) makes a distribution on its Common Stock of
equity interests in the Company other than shares of Common Stock (other than
rights or warrants referred to in Sections 4.07 and 4.08) or (v) issues by
reclassification of its Common Stock any equity interests in the Company, then
the conversion privilege and the conversion rate in effect immediately prior to
that action shall be adjusted so that the Holder of a Note thereafter converted
may receive the number of equity interests in the Company that he would have
owned immediately following the action if he had converted the Note immediately
prior to the action. The adjustment shall become effective immediately after the
record date in the case of a distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.

            (b) If after an adjustment a Holder of a Note would be entitled upon
its conversion to receive equity securities of two or more classes of securities
of the Company, the Company shall determine the allocation of the adjusted
conversion rate between the classes of securities. After the allocation, the
conversion privilege and the conversion rate of each class of security shall
thereafter be subject to adjustment on terms comparable to those applicable to
Common Stock in this Article Four.

      SECTION 4.07 ADJUSTMENT FOR RIGHTS ISSUE. If the Company distributes any
rights or warrants to all of its shareholders entitling them for a period
expiring within 60 days after the record date mentioned below to purchase Common
Stock at a price per share less than the Current Market Price on that record
date, the conversion rate shall be adjusted in accordance with the following
formula:

                  O + N
                 -------
                  N X P
      C' = C  x   -----
                    M

where:

      C' = the adjusted conversion rate

      C  = the current conversion rate

      O  = the number of shares of Common Stock outstanding on the record date

      N  = the number of additional shares of Common Stock offered

      P  = the offering price per additional share of Common Stock

      M  = the Current Market Price per share of Common Stock on the record
           date.

The adjustment shall become effect immediately after the record date for the
determination of shareholders entitled to receive the rights or warrants.

      SECTION 4.08 ADJUSTMENT FOR OTHER DISTRIBUTIONS. (a) If the Company
distributes to all shareholders any of its assets or debt securities or any
rights or warrants to purchase securities or other equity interests of the
Company, the conversion rate shall be adjusted in accordance with the following
formula:

                    M
      C' = C  x  -------
                  M - F

where:

      C' = the adjusted conversion rate

      C  = the current conversion rate

      M  = the Current Market Price per share of Common Stock on the record
           date.

      F  = the fair market value on the record date of the assets, securities,
           rights or warrants applicable to one share of Common Stock, to be
           determined by the Company

                                       7
<PAGE>

The adjustment shall become effective immediately after the record date for the
determination of shareholders entitled to receive the distribution.

            (b) This Section 4.08 does not apply to cash dividends payable on
the Common Stock, distributions of equity interests in the Company referred to
in Section 4.06 or distributions of rights or warrants referred to in Section
4.07.

      SECTION 4.09 CONSIDERATION RECEIVED. For purposes of any computation
respecting consideration received pursuant to Section 4.07, the following shall
apply:

            (a) In the case of issuance of Common Stock for cash, the
consideration shall be the amount of cash, provided that in no case shall any
deduction be made for commissions, discounts or other expenses incurred by the
Company for any underwriting of the issue or otherwise in connection therewith.

            (b) In the case of the issuance of Common Stock for a consideration
in whole or in part other than cash, the consideration other than cash shall be
deemed to be the fair market value thereof as determined in good faith by the
Board of Directors (irrespective of the accounting treatment thereof), whose
determination shall be conclusive, and described in a resolution of the Board of
Directors that shall be filed with the Company.

            (c) In the case of the issuance of securities convertible into or
exchangeable or exercisable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the consideration received
by the Company for the issuance of the securities plus the additional minimum
consideration, if any, to be received by the Company upon the conversion or
exchange thereof (the consideration in each case to be determined in the same
manner as provided in paragraphs (a) and (b) of this Section).

      SECTION 4.10 WHEN ADJUSTMENT MAY BE DEFERRED. No adjustment in a
conversion rate need be made unless the adjustment would require an increase or
a decrease (to the extent permitted by Section 4.12) of at least 1% in the
conversion rate. Any adjustments that are not made shall be carried forward and
taken into account in any subsequent adjustment. All calculations of the
conversion rates under this Article Four shall be made to the fourth decimal
place.

      SECTION 4.11 WHEN NO ADJUSTMENT REQUIRED. No adjustment need be made for a
transaction referred to in Section 4.06, 4.07 or 4.08 if all Note Holders are
entitled to participate in the transaction on the basis and with notice that the
Board of Directors determines to be fair and appropriate in light of the basis
and notice on which shareholders participate in the transaction. To the extent
the Notes become convertible into cash, no adjustment need be made thereafter as
to the cash. Interest will not accrue on the cash.

      SECTION 4.12 NOTICE OF ADJUSTMENT. Whenever a conversion rate is adjusted,
the Company shall promptly mail to Holders a notice of the adjustment,
accompanied by an Officers' Certificate briefly stating the facts requiring the
adjustment and the manner of computing it. The certificate shall be conclusive
evidence that the adjustment is correct.

      SECTION 4.13 VOLUNTARY INCREASE. The Company from time to time may, in its
sole discretion, increase the conversion rate by any amount for any period of
time if the period is at least 20 days and if the increase is irrevocable during
the period. Whenever the conversion rate is increased, the Company shall mail to
Holders a notice of the increase at least fifteen days before the date the
increased conversion rate takes effect. The notice shall state the increased
conversion rate and the period it will be in effect. An increase of the
conversion rate does not change or adjust the conversion rate otherwise in
effect for purposes of calculating the adjustments required by Section 4.06,
4.07 or 4.08.

      SECTION 4.14 NOTICE OF CERTAIN TRANSACTIONS. If: the Company takes any
action that would (a) require an adjustment in the conversion rate pursuant to
Section 4.06, 4.07 or 4.08, (b) require a supplement to this Agreement pursuant
to Section 4.15 or (c) result in its dissolution, the Company shall mail to
Holders a notice stating the proposed record date for a dividend or distribution
or the proposed effective date of a subdivision, combination, reclassification,
consolidation, merger, transfer, termination or dissolution. The Company shall
mail the notice at least fifteen days before that date. Failure to mail the
notice or any defect in it shall not affect the

                                       8
<PAGE>

validity of the transaction.

      SECTION 4.15 REORGANIZATION OF THE COMPANY. (a) If the Company is a party
to a transaction subject to Section 13.01 or a merger that reclassifies or
changes its outstanding shares of Common Stock, the Person obligated to deliver
securities, cash or other assets upon conversion of Notes shall enter into a
supplement to this Agreement. If the issuer of securities deliverable upon
conversion of Notes is an Affiliate of the surviving or transferee corporation,
that issuer shall join in the supplement to this Agreement.

            (b) The supplement to this Agreement shall provide that the Holder
of a Note may convert it into the kind and amount of securities, cash or other
assets that the Holder would have owned immediately after the consolidation,
merger or transfer if the Holder had converted the Note immediately before the
effective date of the transaction. The supplement shall also provide for
adjustments that shall be as nearly equivalent as may be practical to the
adjustments provided for in this Article Four. The successor company shall mail
to Holders a notice briefly describing the supplement.

            (c) If this Section 4.15 applies, then Section 4.06 shall not apply.

      SECTION 4.16 COMPANY DETERMINATION FINAL. Any determination that the
Company must make pursuant to Section 4.03, 4.06, 4.07, 4.08, 4.09 or 4.11 shall
be conclusive.

                                  ARTICLE FIVE
                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

      The Company hereby represents and warrants to the Holders as follows:

      SECTION 5.01 ORGANIZATION AND QUALIFICATION. The Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the province of British Columbia, Canada and has all requisite corporate
power and authority to conduct its business as presently conducted.

      SECTION 5.02 AUTHORIZATION. As of September 30, 2004, there were there
were 15,009,940 shares of Common Stock validly issued and outstanding, all of
which have been fully paid and are non-assessable. There were no shares of the
Company's preferred stock, no par value, issued or outstanding as of that date.
The Company has duly authorized the issuance and sale of the Notes and the
issuance of the Conversion Shares upon conversion thereof.

      SECTION 5.03 DUE EXECUTION, DELIVERY AND PERFORMANCE. The execution,
delivery and performance of this Agreement, the Subscription Agreements and the
Notes (a) have been duly authorized by all requisite action by the Company and
(b) will not violate any law or the charter documents of the Company or any
indenture, mortgage, agreement, contract or other material instrument to which
it is a party or by which it or any of its properties or assets is bound, or
result in a breach of or constitute (upon notice or lapse of time or both) a
default under any such indenture, mortgage, agreement, contact or other material
instrument or result in the creation or imposition of any lien, security
interest, mortgage, pledge, charge or other encumbrance, of any material nature
whatsoever, upon any properties or assets of the Company. Upon execution and
delivery, this Agreement, the Subscription Agreements and the Notes will
constitute valid and binding obligations of the Company, enforceable in
accordance with their respective terms.

      SECTION 5.04 SALE AND DELIVERY OF NOTES. The offer, sale and delivery of
the Notes to the Holders in accordance with this Agreement and the Subscription
Agreements have been duly authorized by Company. The Notes, as and when issued
and delivered to the Holders pursuant to this Agreement and the Subscription
Agreements, and upon payment by the Holders of the purchase price therefor, will
be validly issued and outstanding. Upon conversion of the Notes, the underlying
Conversion Shares will be validly issued and outstanding, fully paid and
nonassessable.

                                       9
<PAGE>

                                   ARTICLE SIX
                            COVENANTS OF THE COMPANY

      The Company covenants as follows:

      SECTION 6.01 PAYMENTS ON THE NOTES. The Company will duly and punctually
pay or cause to be paid the principal of and interest on each of the Notes at
the time and place due and payable and in the manner provided in the Notes and
this Agreement.

      SECTION 6.02 OFFICE OR AGENCY FOR TRANSFER, EXCHANGE, CONVERSION AND
PAYMENT OF NOTES. So long as any of the Notes shall remain outstanding, the
Company will maintain an office or agency at its principal corporate offices
where the Notes may be surrendered for exchange or registration of transfer as
provided in this Agreement, where notices and demands to or upon the Company in
respect to the Notes or of this Agreement may be served, where the Notes may be
presented or surrendered for redemption or purchase and where the Notes may be
presented for conversion. The Company may also from time to time designate one
or more other offices or agencies where the Notes may be presented or
surrendered for any or all such purposes and may from time to time rescind those
designations; provided, however, that no designation or rescission shall in any
manner relieve the Company of its obligation to maintain an office or agency at
its principal corporate offices for those purposes. The Company will give to the
Holders prompt notice of any change in the location of such office or agency.

      SECTION 6.03 PAYING AGENT. (a) If the Company appoints a paying agent, it
will cause the paying agent to execute and deliver to the Company an instrument
in which the agent shall agree with the Company that, subject to the provisions
of this Section 6.03, (i) it will hold all sums held by it as agent for the
payment of the principal of or interest on the Notes whether those sums have
been paid to it by the Company in trust for the benefit of the Holders or (ii)
it will give the Holders notice of any failure by the Company to make any
payment of the principal of or interest on the Notes when the same shall be due
and payable.

            (b) If the Company shall not act as its own paying agent, it will,
prior to each due date of the principal of or interest on any Notes, deposit
with the paying agent a sum sufficient to pay the principal or interest so
becoming due, to be held in trust for the benefit of the Holders entitled
thereto.

            (c) If the Company shall act as its own paying agent, it will, on or
before each due date of the principal of or interest on the Notes, set aside,
segregate and hold in trust for the benefit of the Holders entitled thereto, a
sum sufficient to pay the principal or interest so becoming due and will
promptly so notify the Company.

            (d) Anything in this Section 6.03 to the contrary notwithstanding,
the Company may, at any time, for the purpose of obtaining a satisfaction and
discharge of its obligations under this Agreement and the Notes, or for any
other reason, pay or cause to be paid to a paying agent appointed in accordance
with this Section 6.03 all sums held in trust by it, or as required by this
Section 6.03, such sums to be held by the paying agent upon the terms herein
contained.

      SECTION 6.04 LIMITATIONS ON PAYING AGENT. Anything in Section 6.03 to the
contrary notwithstanding, the agreement by a paying agent to hold sums in trust
as provided in Section 6.03 is subject to the provisions of Sections 14.03 and
14.04.

      SECTION 6.05 MAINTENANCE OF EXISTENCE. So long as any of the Notes shall
remain outstanding, the Company will at all times (except as otherwise provided
or permitted in this Agreement) do or cause to be done all things necessary to
preserve and keep in full force and effect its existence and franchises.

      SECTION 6.06 FURTHER ASSURANCE. From time to time whenever reasonably
demanded by the Holders of at least a majority in aggregate principal amount of
the Notes at the time outstanding, the Company will make, execute and deliver or
cause to be made, executed and delivered any and all further and other
instruments and assurances as may be reasonably necessary or proper to carry out
the intention of or to facilitate the performance of the terms of this Agreement
or to secure the rights and remedies hereunder of the Holders.

      SECTION 6.07 OFFICERS' CERTIFICATE OF DEFAULT. The Company will, so long
as any of the Notes are outstanding:

                                       10
<PAGE>

            (a) deliver to the Holders, forthwith upon becoming aware of any
default or defaults in the performance of any covenant, agreement or condition
contained in this Agreement, an Officers' Certificate specifying the default or
defaults; and

            (b) deliver to the Holders within five days after becoming aware of
the occurrence thereof written notice of any acceleration which, with the giving
of notice and the lapse of time, would be an Event of Default within the meaning
of Section 8.01(a).

      SECTION 6.08 USURY LAWS. The Company, to the extent it may lawfully do so,
will not voluntarily claim, and will actively resist any attempts to claim, the
benefit of any usury laws against any Holder of the Notes.

      SECTION 6.09 MAINTENANCE OF RECORDS. The Company shall keep true books and
records and accounts in which full and correct entries will be made of all its
business transactions, in accordance with sound business practices, and reflect
in its financial statements adequate accruals and appropriations to reserves,
all in accordance with generally accepted accounting principles.

      SECTION 6.10 PAYMENT OF TAXES AND OTHER CLAIMS. The Company shall pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (a) all taxes, assessments and governmental charges levied or
imposed upon the Company or upon the income, profits or property of the Company
and (b) all lawful claims for labor, materials and supplies which, if unpaid,
might by law become Liens upon the property of the Company; provided, however,
that the Company shall not be required to pay or discharge or cause to be paid
or discharged any tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings and for
which adequate provision has been made.

      SECTION 6.11 DISSOLUTION. So long as any of the Notes remain outstanding,
the Company shall not (a) sell, lease, convey, transfer or otherwise dispose of
all or substantially all of its assets otherwise than substantially as an
entirety or (b) distribute all or substantially all of the proceeds of such
sale, lease, conveyance, transfer or other disposition of its remaining assets
to its shareholders.

      SECTION 6.12 DISPOSITION OF ASSETS. Neither the Company nor any Subsidiary
shall, directly or indirectly, sell, lease, convey, transfer or otherwise
dispose of its assets or properties otherwise than in the ordinary course of
business unless the transaction is, in its judgment, desirable in the conduct of
its business and if the discontinuance or disposal is not disadvantageous in any
material respect to the Holders.

                                  ARTICLE SEVEN
                    HOLDERS' LISTS AND REPORTS BY THE COMPANY

      SECTION 7.01 COMPANY TO FURNISH INFORMATION ON NAMES AND ADDRESSES OF
HOLDERS. The Company will furnish or cause to be furnished to any paying agent
appointed under Section 6.03 and any Holder Representative appointed under
Section 8.02, not more than ten days after each record date for the payment of
interest, a list of the names and addresses of the Holders as of the record date
(a "Holder List") and (b) at such other times as the paying agent or Holder
Representative may request in writing, within 30 days after the receipt by the
Company of any such request, a Holder List as of a date not more than 15 days
prior to the time the Holder List is furnished.

      SECTION 7.02 DISCLOSURE OF LISTS. (a) If three or more Holders (for
purposes of this Section 7.02, "applicants") apply in writing to the Company for
a Holder List and the application includes reasonable proof that each applicant
has owned a Note for a period of at least six months preceding the date of the
application, a certification that they desire to communicate with other Holders
regarding their rights under this Agreement or under the Notes and a copy of the
form of proxy or other communication that the applicants propose to transmit,
then the Company shall, within 5 Business Days after the receipt of the
application, at its election either (i) provide the applicants with a Holder
List as of a date not more than 15 days prior to the date of the application or
(ii) disclose to the applicants (A) the approximate number of Holders whose
names and addresses appear on that Holder List and (B) the approximate cost of
mailing to the Holders the form of proxy or other communication, if any,
specified in the application.

                                       11
<PAGE>

            (b) If the Company elects not to afford the applicants access to the
Holder List, it shall, upon the written request of the applicants, mail to each
Holder whose name and address appears therein a copy of the form of proxy or
other communication specified in the applicants' request, with reasonable
promptness after a tender to the Company of the material to be mailed and of
payment of the reasonable expenses of mailing, unless within five days after the
tender, the Company shall mail to the applicants, together with a copy of the
material to be mailed, a written statement to the effect that, in the opinion of
the Company, the mailing would be contrary to the best interests of the Holders
or would be in violation of applicable law. The written statement shall specify
the basis of that opinion.

            (c) Each Holder, by receiving and holding a Note, agrees that
neither the Company nor any paying agent, Note registrar or Holder
Representative shall be held accountable by reason of the disclosure of a Holder
List in accordance with the provisions of this Section 7.02 and that the Company
shall not be held accountable by reason of mailing any material pursuant to a
request made under subsection (b) of this Section 7.02, nor shall any such
disclosure be deemed a violation of existing law or any law hereafter enacted
that does not specifically refer to section 312 of the Trust Agreement Act of
1939.

      SECTION 7.03 PERIODIC REPORTS BY THE COMPANY. Within 30 days after the
Company is required to file a periodic report with the Commission pursuant to
section 13 or section 15(d) of the Exchange Act (each, a "Periodic Report"), the
Company will deliver a copy of the Periodic Report to each Holder.

                                  ARTICLE EIGHT
                          REMEDIES ON EVENT OF DEFAULT

      SECTION 8.01 EVENTS OF DEFAULT DEFINED. (a) In case one or more of the
following Events of Default shall have occurred and be continuing:

               (i) default in the payment of any installment of interest upon
any of the Notes as and when the same shall become due and payable, and
continuance of such default for a period of 30 days; or

               (ii) default in the payment of the principal of any of the Notes
as and when the same shall become due and payable either at maturity, upon
redemption by the Company pursuant to Article Three, by declaration or
otherwise; or

               (iii) failure on the part of the Company to observe or perform in
any material respect any other of its covenants or agreements contained in the
Notes or in this Agreement for a period of 60 days after the date on which
written notice of the failure, requiring the same to be remedied, shall have
been given to the Company by the Holders of at least a majority in aggregate
principal amount of the Notes at the time outstanding; or

               (iv) a default not being contested by the Company in good faith
under any mortgage, agreement or instrument under which there may be issued or
by which there may be secured or evidenced any indebtedness for money borrowed
by the Company, whether the indebtedness now exists or shall hereafter be
created, which default shall have resulted in the indebtedness, in an aggregate
principal amount exceeding $1,000,000, becoming or being declared due and
payable prior to the date on which it would otherwise have become due and
payable, without (A) the indebtedness having been discharged, (B) the
acceleration having been rescinded or annulled or (C) there having been
deposited in trust a sum of money sufficient to discharge in full the
indebtedness, within a period of 30 days after there shall have been given, by
registered or certified mail, to the Company by the Holders of at least a
majority in aggregate principal amount of the Notes, a written notice specifying
the default and requiring the Company to cause the indebtedness to be
discharged, to cause there to be deposited in trust a sum sufficient to
discharge in full the indebtedness or to cause the acceleration to be rescinded
or annulled and stating that such notice is a "Notice of Default" hereunder; or

               (v) a court having jurisdiction in the premises shall have
entered a decree or order for relief in respect of the Company in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestration (or similar official) of the Company or for all or any
substantial part of its property, or ordering the winding-up or liquidation of
its affairs, and such decree or order shall have remained unstayed and in effect
for a period of 90 consecutive days; or

                                       12
<PAGE>

               (vi) the Company shall have commenced a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or shall have consented to the entry of an order for relief in an
involuntary case under any such law, or shall have consented to the appointment
of or taking possession by a receiver, liquidator, assignee, trustee, custodian,
sequestration (or similar official) of the Company or for all or any substantial
part of its property, or shall have made an assignment for the benefit of
creditors, or shall have failed generally to pay its debts as they become due or
shall have taken any corporate action in furtherance of any of the foregoing;

then and in each and every such case, unless the principal of all the Notes
shall have already become due and payable, the Holders of not less than a
majority in aggregate principal amount of the Notes then outstanding, by notice
in writing to the Company, may declare the principal and accrued interest to the
date of declaration of all the Notes to be due and payable immediately. Upon any
such declaration, the same shall become and shall be immediately due and
payable, anything contained in this Agreement or in the Notes to the contrary
notwithstanding; provided, however, that if, at any time after the principal and
accrued interest to the date of declaration of the Notes shall have been so
declared due and payable, and before any judgment or decree for the payment of
the moneys due shall have been obtained or entered as hereinafter provided, the
Company shall pay or shall deposit with a paying agent a sum sufficient to pay
all matured installments of interest upon all the Notes and the principal and
accrued interest to the date of declaration on all Notes that shall have become
due otherwise than by declaration, other than the nonpayment of principal to the
date of declaration and accrued interest on Notes that shall have become due by
declaration, shall have been remedied, then and in every such case the Holders
of a majority in aggregate principal amount of the Notes then outstanding may
waive all defaults and rescind and annul such declaration and its consequences;
but no such waiver or rescission and annulment shall extend to or shall affect
any subsequent default or shall impair any right consequent thereon.

            (b) In case the Holders shall have proceeded to enforce any right
under this Agreement and the proceedings shall have been discontinued or
abandoned because of a rescission or annulment or for any other reason or shall
have been determined adversely to the Holders, then and in every such case the
Company and the Holders shall be restored respectively to their former positions
and rights hereunder, and all rights, remedies and powers of the Company and the
Holders shall continue as though no proceedings had been taken.

      SECTION 8.02 APPOINTMENT OF HOLDER REPRESENTATIVE. At any time after an
Event of Default has occurred and is continuing, the Holders of a majority in
aggregate principal amount of the Notes then outstanding may appoint a Holder
Representative to exercise the rights of the Holders under this Agreement and
the Notes on behalf of all the Holders. Each Holder, by receiving and holding a
Note, agrees that any Holder Representative duly appointed under this Section
8.02 shall be authorized to exercise those rights on their behalf in accordance
with the provisions of this Agreement.

      SECTION 8.03 PAYMENT OF NOTES ON DEFAULT; SUIT THEREFOR. (a) In case the
Company shall fail forthwith to pay the Holders all amounts due and payable to
them following any Event of Default specified in clauses (i) or (ii) of Section
8.01(a) upon demand, the Holder Representative, in its own name and as trustee
of an express trust, shall be entitled and empowered to institute any actions or
proceedings at law or in equity for the collection of the sums so due and
unpaid, and may prosecute the action or proceeding to judgment or final decree,
enforce any judgment or final decree against the Company upon the Notes and
collect the moneys adjudged or decreed to be payable in the manner provided by
law.

            (b) In case there shall be pending proceedings for the bankruptcy or
for the reorganization of the Company under any applicable bankruptcy,
insolvency or similar law or in case a receiver or trustee shall have been
appointed for the property of the Company, irrespective of whether the principal
of the Notes shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether any demand shall have been
made pursuant to the provisions of this Section 8.03, the Holder Representative
shall be entitled and empowered, by intervention in the proceedings or
otherwise, to file and prove a claim or claims for the whole amount of principal
and interest owing and unpaid on the Notes, and to file such other papers or
documents as may be necessary or advisable in order to have the claims of the
Holder Representative on behalf of all Holders (including any claim for the
reasonable compensation, expenses and disbursements of the Holder
Representative, its agents, attorneys and counsel) and of the Holders allowed in
any judicial proceeding relative to the Company, to collect and receive any
moneys or other securities or property payable or deliverable upon the
conversion of the Notes or upon any such

                                       13
<PAGE>

claims and to distribute the same after the deduction of its reasonable charges
and expenses; and any receiver, assignee or trustee in bankruptcy or
reorganization is hereby authorized by each of the Holders to make such payments
to the Holder Representative on behalf of the Holders and, in the event that the
Company shall consent to the making of such payments directly to the Holders, to
pay to the Holder Representative any amount due it for compensation and
expenses, including reasonable counsel fees incurred by it up to the date of the
distribution.

            (c) All rights of action and of asserting claims under this
Agreement or the Notes may be enforced by the Holder Representative without the
possession of any of the Notes, or the production thereof on any trial or other
proceeding relative thereto, and any such suit or proceeding instituted by the
Company shall be brought in its own name as trustee of an express trust. Any
recovery of judgment, subject to the payment of the reasonable expenses,
disbursements and compensation of Holder Representative, its agents and
attorneys, shall be for the ratable benefit of the Holders.

      SECTION 8.04 APPLICATION OF MONEYS COLLECTED. Any moneys collected by the
Holder Representative pursuant to Section 8.03 shall be applied in the following
order at the date or dates fixed by the Holder Representative for the
distribution of those moneys, upon presentation of the Notes and stamping
thereon the payment, if only partially paid, and upon surrender thereof if fully
paid:

            FIRST: To the payment of all amounts due the Holder Representative
pursuant to Section 9.06;

            SECOND: In case no principal of the outstanding Notes shall have
become due and be unpaid, to the payment of interest on the Notes, in the order
of the maturity of the installments of interest, with interest upon the overdue
installments of interest (so far as permitted by law and to the extent collected
by the Holder Representative) at the rate of interest borne by the Notes, such
payments to be made ratably to the Persons entitled thereto, without
discrimination or preference;

            THIRD: In case any principal of the outstanding Notes shall have
become due, by declaration or otherwise, to the payment of the whole amount then
owing and unpaid upon the Notes for principal and interest, with interest on the
overdue principal and installments of interest (so far as permitted by law and
to the extent collected by the Holder Representative), at the rate of interest
borne by the Notes; and in case such moneys shall be insufficient to pay in full
the whole amount so due and unpaid upon the Notes, then to the payment of such
principal and interest, without preference or priority of one over another,
ratably to the aggregate of such principal and accrued and unpaid interest; and

            FOURTH: To the payment of the remainder, if any, to the Company, its
successors or assigns, or to whosoever may be lawfully entitled to receive the
same, or as a court of competent jurisdiction may direct.

      SECTION 8.05 LIMITATION ON SUITS BY HOLDERS OF NOTES. No Holder shall have
any right by virtue of or under any provision of this Agreement to institute any
suit, action or proceeding in equity or at law upon or under this Agreement or
for the appointment of a receiver or trustee, or for any other remedy hereunder,
unless the Holder previously shall have given to the Company written notice of
default and of the continuance thereof, as herein provided, and unless the
Holders of not less than a majority in principal amount of the Notes at the time
outstanding shall have made written request upon the Holder Representative to
institute the action, suit or proceeding in its own name as Holder
Representative hereunder and shall have offered to the Holder Representative any
reasonable indemnity it may require against the costs, expenses and liabilities
to be incurred therein or thereby, and for sixty days after its receipt of the
notice, request and offer of indemnity, the Holder Representative shall have
neglected or refused to institute the action, suit or proceeding and no
direction inconsistent with the written request shall have been given to the
Holder Representative pursuant to Section 8.07; it being understood and
intended, and being expressly covenanted by Holders and the Holder
Representative, that no one or more Holders shall have any right in any manner
whatever by virtue of or under any provision of this Agreement to affect,
disturb or prejudice the rights of any other Holder, to obtain or seek to obtain
priority over or preference to any other Holder or to enforce any right under
this Agreement, except in the manner herein provided and for the equal, ratable
and common benefit of all Holders.

      SECTION 8.06 PROCEEDINGS BY HOLDER REPRESENTATIVE; REMEDIES. Following an
Event of Default hereunder, the Holder Representative may in its discretion
proceed to protect and enforce the rights vested in it under this Agreement by
appropriate judicial proceedings as the Holder Representative shall deem most
effectual to

                                       14
<PAGE>

protect and enforce any of those rights, either by suit in equity or by action
at law or by proceeding in bankruptcy or otherwise, whether for the specific
enforcement of any covenant or agreement contained in this Agreement or in aid
of the exercise of any power granted therein, or to enforce any other legal or
equitable right vested in the Holder Representative by the Holders pursuant to
this Agreement or by law. All powers and remedies given by this Article Eight to
the Holder Representative or to the Holders shall, to the extent permitted by
law, be deemed cumulative and not exclusive of any thereof or of any other
powers and remedies available to the Holder Representative or the Holders, by
judicial proceedings or otherwise, to enforce the performance or observance of
the covenants and agreements contained in this Agreement, and no delay or
omission of the Holder Representative or of any Holder to exercise any right or
power accruing upon any default hereunder shall impair any such right or power,
or shall be construed to be a waiver of any default or an acquiescence therein.

      SECTION 8.07 RIGHTS OF HOLDERS TO DIRECT HOLDER REPRESENTATIVE AND TO
WAIVE DEFAULTS. The Holders of a majority in aggregate principal amount of the
Notes at the time outstanding or, if a record date is set in accordance with
Section 10.05, as of record date, shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Holder Representative, or exercising any trust or power conferred on the Holder
Representative; provided, however, that subject to the provisions of Section
9.01, the Holder Representative shall have the right to decline to follow any
such direction if the Holder Representative being advised by counsel shall
determine that the action so directed may be not lawfully taken, or if the
Holder Representative in good faith shall determine that the proceedings so
directed would be illegal or involve it in personal liability or be unjustly
prejudicial to the Holders not joining therein, and provided further that
nothing in this Agreement shall impair the right of the Holder Representative in
its discretion to take any action deemed proper by the Holder Representative and
not inconsistent with the direction by the Holders. Prior to the declaration of
the maturity of the Notes as provided in Section 8.01, the Holders of a majority
in aggregate principal amount of the Notes at the time outstanding may on behalf
of the Holders of all of the Notes waive any past default hereunder and its
consequences, except a default in the payment of principal of or interest on any
of the Notes, a default under Article Five or a default in respect of a covenant
or provision hereof that under Article Twelve cannot be modified or amended
without the consent of the Holder of each outstanding Note. In the case of any
such waiver the Company, the Holder Representative and the Holders shall be
restored to their former positions and rights hereunder, respectively; but no
such waiver shall extend to any subsequent or other default or impair any right
consequent thereon.

                                  ARTICLE NINE
                      CONCERNING THE HOLDER REPRESENTATIVE

      SECTION 9.01 DUTIES AND RESPONSIBILITIES OF HOLDER REPRESENTATIVE. (a) The
Holder Representative shall be entitled to perform only the duties specifically
set forth in this Agreement and to exercise only the rights and powers vested in
accordance herewith. By accepting its appointment, the Holder Representative
shall be deemed to undertake to use the same degree of care and skill in the
exercise of those rights and powers as a prudent man would exercise or use under
the circumstances in the conduct of his own affairs.

            (b) No provision of this Agreement shall be construed to relieve the
Holder Representative from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct; provided, however, that
(i) the Holder Representative shall not be liable for any error of judgment made
in good faith unless it shall be proved that the Holder Representative was
negligent in ascertaining the pertinent facts; and (ii) the Holder
Representative shall not be liable with respect to any action taken, suffered or
omitted to be taken by it in good faith in accordance with the direction of the
Holders of not less than a majority in principal amount of the Notes at the time
outstanding relating to the time, method and place of conducting any proceeding
for any remedy hereunder or exercising any trust or power conferred upon the
Holder Representative hereunder.

      SECTION 9.02 RIGHTS OF HOLDER REPRESENTATIVE. Subject to the provisions of
Section 10.01:

            (a) the Holder Representative may rely and shall be protected in
acting or refraining from acting upon any resolution, Officers' Certificate or
any other certificate, statement, instrument, opinion, report, notice, request,
consent, order, approval, bond, note or other paper or document believed by it
to be genuine and to have been signed or presented by the proper party or
parties;

                                       15
<PAGE>

            (b) the Holder Representative may consult with counsel, and the
advice of its counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in accordance with that advice or Opinion of
Counsel;

            (c) the Holder Representative shall be under no obligation to
exercise any of the rights or powers vested in it by this Agreement at the
request, order or direction of any of the Holders unless the Holders shall have
offered to the Holder Representative reasonable security or indemnity against
the costs, expenses and liabilities that may be incurred therein or thereby;

            (d) the Holder Representative shall not be liable for any action
taken, suffered or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon it by
this Agreement;

            (e) the Holder Representative shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent, order,
approval, bond, note or other paper or document, unless requested in writing so
to do by the Holders of not less than a majority in aggregate principal amount
of the Notes then outstanding;

            (f) the Holder Representative may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly or by or
through agents or attorneys, and the Holder Representative shall not be
responsible for any misconduct or negligence on the part of any agent or
attorney appointed with due care by it hereunder; and

            (g) whether or not therein expressly so provided, every provision of
this Agreement relating to the conduct or affecting the liability of or
affording protection to the Holder Representative shall be subject to the
provisions of this Section 9.02.

      SECTION 9.03 MONEYS RECEIVED BY HOLDER REPRESENTATIVE TO BE HELD IN TRUST
WITHOUT INTEREST. Subject to the provisions of Section 14.04, all moneys
received by the Holder Representative, until used or applied as herein provided,
shall be held in trust for the purposes for which they were received, but need
not be segregated from other funds except to the extent required by law. The
Holder Representative shall be under no liability for interest on any moneys
received by it hereunder except as it may agree with the Company or the Holders
to pay thereon.

      SECTION 9.04 EXPENSES OF HOLDER REPRESENTATIVE. The Company will reimburse
the Holder Representative upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Holder Representative in
connection with the exercise of its rights and the performance of its duties
hereunder, including the reasonable compensation and the expenses and
disbursements of its counsel); provided that the Company shall not be obligated
to reimburse any expense, disbursement or advance arising from the negligence or
bad faith of the Holder Representative. The Company also covenants to indemnify
the Holder Representative and its agents for, and to hold them harmless against,
any loss, liability or expense incurred without negligence or bad faith on the
part of the Holder Representative or its agents in accordance with the
provisions of this Agreement.

                                   ARTICLE TEN
                             CONCERNING THE HOLDERS

      SECTION 10.01 EVIDENCE OF ACTION BY HOLDERS. Whenever in this Agreement it
is provided that the Holders of a specified percentage in aggregate principal
amount of the Notes may take any action (including the making of any demand or
request, the giving of any notice, consent or waiver or the taking of any other
action), the fact that the Holders of the specified percentage, determined as of
the time the action was taken or, if a record date was set with respect thereto
pursuant to Section 10.05, as of the record date, have joined therein may be
evidenced (a) by any instrument or any number of instruments of similar tenor
executed by Holders in Person or by agent or proxy appointed in writing, (b) by
the record of the Holders voting in favor thereof at any meeting of Holders duly
called and held in accordance with the provisions of Article Eleven or (c) by a
combination of such instruments and any such record of a meeting of Holders.

                                       16
<PAGE>

      SECTION 10.02 PROOF OF EXECUTION OF INSTRUMENTS AND OF HOLDING OF NOTES.
(a) Subject to the provisions of Sections 9.01, 9.02 and 11.05, proof of the
execution of any instrument by a Holder or his agent or proxy shall be
sufficient for any purpose of this Agreement and (subject to Section 9.02)
conclusive in favor of the Company, its agents and the Holder Representative if
made in the manner provided in this Section 10.02.

            (b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of the
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing the
instrument or writing acknowledged to him the execution thereof. Where the
execution is by a signer acting in a capacity other than his individual
capacity, the certificate or affidavit shall also constitute sufficient proof of
his authority.

            (c) The ownership of Notes shall be proved by the register of the
Notes, or by a certificate of the registrar thereof.

            (d) The Company may accept other proof or require additional proof
of any matter referred to in this Section 10.02 as it shall deem reasonable.

            (e) The record of any Holders' meeting shall be proved in the manner
provided in Section 11.06.

      SECTION 10.03 WHO MAY BE DEEMED OWNERS OF NOTES. Prior to due presentation
for registration of transfer or of conversion, the Company, any paying agent,
any conversion agent, any Note registrar and any other agent of the Company or
the Holder Representative may deem and treat the Person in whose name any Note
shall be registered upon the books of the Company as the absolute owner of the
Note (whether or not the Note shall be overdue and notwithstanding any notation
of ownership or other writing thereon) for the purposes of receiving payment of
the principal of and interest on the Note, for purposes of conversion and for
all other purposes. Neither the Company, any paying agent, any conversion agent
nor any Note registrar or other agent of the Company or the Holder
Representative shall be affected by any notice to the contrary. All payments so
made to, or upon the order of, any such Holder, and all such conversions shall
be valid and, to the extent of the sum or sums so paid, effectual to satisfy and
discharge the liability for moneys payable upon the Note.

      SECTION 10.04 NOTES OWNED BY COMPANY OR CONTROLLING PERSONS. In
determining whether the Holders of the requisite aggregate principal amount of
Notes have concurred in any demand, direction, request, notice, consent, waiver
or other action under this Agreement, Notes owned by the Company or by any
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Company shall be disregarded and deemed not to
be outstanding for the purpose of the determination, provided that for the
purposes of determining whether the Company shall be protected in relying on a
demand, direction, request, notice, consent or waiver, only Notes that the
Company knows are so owned shall be so disregarded. Notes so owned that have
been pledged in good faith may be regarded as outstanding for the purposes of
this Section 10.04 if the pledgee shall establish to the satisfaction of the
Company the pledgee's right to vote the Notes and that the pledgee is not a
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Company. In case of a dispute as to that right,
any decision by the Company taken upon the advice of counsel shall be full
protection to the Company.

      SECTION 10.05 RECORD DATE FOR ACTION BY HOLDERS. Whenever in this
Agreement it is provided that Holders of a specified percentage in aggregate
principal amount of the Notes may take any action (including the making of any
demand or request, the giving of any direction, notice, consent or waiver or the
taking of any other action), other than any action taken at a meeting of Holders
called pursuant to Article Eleven, the Company, pursuant to a resolution of its
Board of Directors, or the Holders of at least 10% in aggregate principal amount
of the Notes then outstanding, may fix a record date for determining Holders
entitled to notice of and to take the action. In case the Company or the Holders
of Notes in the foregoing amount shall desire to request Holders to take an
action and shall request the Company to fix a record date with respect thereto
by written notice setting forth in reasonable detail the action to be requested,
the Company shall promptly (but in any event within five days of receipt of the
request) fix a record date which shall be a Business Day not less than 15 nor
more than 20 days after the date on which the Company receives the request. If
the Company shall fail to fix a record date as herein provided, then the Holder
Representative or the Holders of Notes in the foregoing amount may fix the same
by mailing notice thereof (the record date so fixed to be a Business Day not
less than 15 nor more than 20 days after the date on which the written notice
shall be given) to the Company. If a record date is fixed according to this

                                       17
<PAGE>

Section 10.05, only Persons shown as Holders on the registry books of the
Company at the close of business on the record date so fixed shall be entitled
to take the requested action, and the taking of the action by the Holders on the
record date of the required percentage of the aggregate principal amount of the
Notes shall be binding on all Holders, provided that the taking of the requested
action by the Holders on the record date of the percentage in aggregate
principal amount of the Notes specified in this Agreement in connection with the
action shall have been evidenced to the Company, as provided in Section 10.01,
not later than 180 days after the record date.

      SECTION 10.06 INSTRUMENTS EXECUTED BY HOLDERS BIND FUTURE HOLDERS. At any
time prior to (but not after) the evidencing to the Company, as provided in
Section 10.01, of the taking of any action by the Holders of the percentage in
aggregate principal amount of the Notes specified in this Agreement in
connection with the action, any Holder of a Note shown by the evidence to be
included in the Notes the Holders of which have consented to the action may, by
filing written notice with the Company at its principal office and upon proof of
holding as provided in Section 10.02, revoke the action so far as it concerns
that Note. Except as aforesaid, any such action taken by the Holder and any
direction, demand, request, waiver, consent, vote or other action of the Holder
that by any provisions of this Agreement is required or permitted to be given
shall be conclusive and binding upon the Holder and upon all future Holders and
owners of the Note, and of any Note issued in lieu thereof, irrespective of
whether any notation in regard thereto is made upon the Note. Any action taken
by the Holders of the percentage in aggregate principal amount of the Notes
specified in this Agreement in connection with the action shall be conclusively
binding upon the Holders of all the Notes.

                                 ARTICLE ELEVEN
                                HOLDERS' MEETINGS

      SECTION 11.01 PURPOSES FOR WHICH MEETINGS MAY BE CALLED. Meeting of
Holders may be called at any time and from time to time pursuant to the
provisions of this Article Eleven (a) to give any notice to the Company or to
the Holder Representative, (b) to appoint a Holder Representative, (c) to give
any directions to the Holder Representative, (d) to consent to the waiving of
any default hereunder and its consequences or to take any other action
authorized to be taken by Holders pursuant to any of the provisions of Article
Eight, (e) to consent to the execution of a supplement to this Agreement
pursuant to the provisions of Section 12.02 or (f) to take any other action
authorized to be taken by or on behalf of the Holders of any specified aggregate
principal amount of the Notes under any other provisions of this Agreement or
under applicable law.

      SECTION 11.02 MANNER OF CALLING MEETINGS; RECORD DATE. The Company may at
any time call a meeting of Holders to take any action specified in Section
11.01, to be held at a time and place as the Company shall determine. Notice of
every meeting of the Holders, setting forth the time and the place of the
meeting and in general terms the action proposed to be taken at the meeting
shall be mailed not less than 20 nor more than 60 days prior to the date fixed
for the meeting to Holders at their addresses as they appear on the registry
books of the Company. For the purpose of determining Holders entitled to notice
of any meeting of Holders, the Company shall fix in advance a date as the record
date for the determination, such date to be a Business Day not more than ten
days prior to the date of the mailing of the notice as herein provided. Only
Persons in whose name any Note shall be registered upon the registry books of
the Company at the close of business on a record date fixed by the Company as
aforesaid, or by the Company or the Holders as provided in Section 11.03, shall
be entitled to notice of the meeting of Holders with respect to which the record
date was so fixed.

      SECTION 11.03 CALL OF MEETING BY HOLDER REPRESENTATIVE OR HOLDERS. In case
at any time the Holder Representative or the Holders of at least 10% in
aggregate principal amount of the Notes then outstanding, shall have requested
the Company to call a meeting of Holders to take any action authorized in
Section 11.01 by written request setting forth in reasonable detail the action
proposed to be taken at the meeting, and the Company shall not have mailed
notice of the meeting within 20 days after receipt of the request, then the
Holder Representative or the Holders of Notes in the foregoing amount may fix
the record date with respect to, and determine the time and the place, in the
City of Lexington, Kentucky, for the meeting and may call the meeting to take
any action authorized in Section 11.01, by mailing notice thereof as provided in
Section 11.02. The record date fixed as provided in the preceding sentence shall
be set forth in a written notice to the Company and shall be a Business Day not
less than 15 nor more than 20 days after the date on which the notice is sent to
the Company.

      SECTION 11.04 WHO MAY ATTEND AND VOTE AT MEETINGS. Only Persons entitled
to receive notice of a meeting of Holders and their respective proxies duly
appointed by an instrument in writing shall be entitled to vote

                                       18
<PAGE>

at the meeting. The only Persons who shall be entitled to be present or to speak
at any meeting of Holders shall be the Persons entitled to vote at the meeting
and their counsel and any representatives of the Company and its counsel and any
representatives of the Holder Representative and its counsel. When a
determination of Holders entitled to vote at any meeting of Holders has been
made as provided in this Section 11.04, the determination shall apply to any
adjournment thereof.

      SECTION 11.05 REGULATIONS. (a) Notwithstanding any other provisions of
this Agreement, the Company may make reasonable regulations as it may deem
advisable for any meeting of Holders, in regard to proof of the holding of Notes
and of the appointment of proxies, and in regard to the appointment and duties
of inspectors of votes, the submission and examination of proxies, certificates
and other evidence of the right to vote, as well as other matters concerning the
conduct of the meeting as it shall deem appropriate. Except as otherwise
permitted or required by those regulations, the holding of Notes shall be proved
in the manner specified in Section 10.02.

            (b) The Company shall, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been called by
the Holder Representative or by Holders as provided in Section 11.03, in which
case the Holder Representative or the Holders calling the meeting, as the case
may be, shall in like manner appoint a temporary chairman. A permanent chairman
and a permanent secretary of the meeting shall be elected by a vote of the
Holders of a majority in principal amount of the Notes represented at the
meeting and entitled to vote.

            (c) Subject to the provisions of Section 10.04, at any meeting each
Holder or proxy entitled to vote thereat shall be entitled to one vote for each
$1,000 principal amount of Notes held or represented by him; provided, however,
that no vote shall be cast or counted at any meeting in respect of any Note
challenged as not outstanding and ruled by the chairman of the meeting to be not
outstanding. The chairman of the meeting shall have no right to vote other than
by virtue of Notes held by him or instruments in writing as aforesaid duly
designating him as the proxy to vote on behalf of other Holders. Any meeting of
Holders duly called pursuant to the provisions of Section 11.02 or 11.03 may be
adjourned from time to time, and the meeting may be held as so adjourned without
further notice.

            (d) At any meeting of Holders, the presence of Persons who held, or
who are acting as proxy for Persons who held, an aggregate principal amount of
Notes on the record date for the meeting sufficient to take action on the
business for the transaction of which the meeting was called shall constitute a
quorum, but if less than a quorum is present, the Persons holding or
representing a majority in aggregate principal amount of the Notes represented
at the meeting may adjourn the meeting with the same effect, for all intents and
purposes, as though a quorum had been present.

      SECTION 11.06 MANNER OF VOTING AT MEETINGS AND RECORD TO BE KEPT. The vote
upon any resolution submitted to any meeting of Holders shall be by written
ballots on each of which shall be subscribed the signature of the Holder or
proxy casting the ballot, the principal amount and, if practicable, the
identifying number or numbers of the Notes held or represented in respect of
which the ballot is cast. The permanent chairman of the meeting shall appoint
two inspectors of votes who shall count all votes cast at the meeting for or
against any resolution and who shall make and file with the secretary of the
meeting their verified written reports in duplicate of all votes cast at the
meeting. A record in duplicate of the proceedings of a meeting of Holders shall
be prepared by the secretary of the meeting and there shall be attached to the
record the original reports of the inspectors of votes on any vote by ballot
taken thereat and affidavits by one or more Persons having knowledge of the
facts setting forth a copy of the notice of the meeting and showing that the
notice was mailed as provided in Section 11.02. The record shall show the
aggregate principal amount and, if practicable, the identifying numbers of the
Notes voting in favor of or against any resolution. Each counterpart of the
record shall be signed and verified by the affidavits of the permanent chairman
and secretary of the meeting, and one of the counterparts shall be delivered to
the Company and the other to the Holder Representative to be preserved by the
Holder Representative. Any counterpart record so signed and verified shall be
conclusive evidence of the matters therein stated, and shall be the record
referred to in clause (b) of Section 10.01.

      SECTION 11.07 EXERCISE OF RIGHTS OF HOLDER REPRESENTATIVE AND HOLDERS NOT
TO BE HINDERED OR DELAYED. Nothing in this Article Eleven shall be deemed or
construed to authorize or permit, by reason of any call of a meeting of Holders
or any rights expressly or impliedly conferred hereunder to make the call, any
hindrance or delay in the exercise of any right or rights conferred upon or
reserved to the Holder Representative or to the Holders under any of the
provisions of this Agreement or of the Notes.

                                       19
<PAGE>

                                 ARTICLE TWELVE
                                   SUPPLEMENTS

      SECTION 12.01 SUPPLEMENTS TO THIS AGREEMENT MAY BE ENTERED INTO WITHOUT
CONSENT OF HOLDERS. The Company, when authorized by a resolution of the Board of
Directors, may from time to time and at any time enter into a supplement to this
Agreement to evidence the succession of another corporation to the Company and
the assumption by the successor corporation of the covenants, agreements and
obligations of the Company hereunder or to cure any ambiguity or to correct or
supplement any provision contained herein or in any supplement that may be
defective or inconsistent with any other provision contained herein or in any
supplement, or to make any other provisions in regard to matters or questions
arising under this Agreement or any supplement to this Agreement as shall not
adversely affect the interests of the Holders of the Notes. Any supplement to
this Agreement authorized by the provisions of this Section 12.01 may be
executed by the Company without the consent of the Holders of any of the Notes
at the time outstanding, notwithstanding any of the provisions of Section 12.02.

      SECTION 12.02 MODIFICATION OF AGREEMENT WITH CONSENT OF HOLDERS. With the
consent (evidenced as provided in Section 10.01) of the Holders of not less than
two-thirds in aggregate principal amount of the Notes at the time outstanding
or, if a record date is set with respect to the consent in accordance with
Section 10.05, as of the record date, the Company, when authorized by a
resolution of the Board of Directors may from time to time and at any time enter
into a supplement to this Agreement for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of this Agreement
or of any supplement hereto modifying in any manner the rights of the Holders;
provided, however, that without the consent of the Holder of each outstanding
Note, no such supplement shall (a) change the stated maturity of any Note,
reduce the rate or change the time or place of payment of interest thereon or
reduce the principal amount thereof or the amount payable thereon in the event
of acceleration or the amount in bankruptcy, or (b) reduce the aforesaid
percentage of aggregate principal amount of Notes, the consent of the Holders of
which is required for a supplement to this Agreement, or (c) make any change
that adversely affects the right to convert, or the conversion rate for, any
Note. It shall not be necessary for the consent of the Holders under this
Section 12.02 to approve the particular form of any proposed supplement, but it
shall be sufficient if the consent shall approve the substance thereof. Promptly
after the execution and delivery by the Company of any supplement to this
Agreement pursuant to the provisions of this Section 12.02, the Company shall
mail a notice to the Holders, setting forth in general terms the substance of
the supplement. Any failure of the Company to mail the notice, or any defect
therein, shall not in any way impair or affect the validity of the supplement.

      SECTION 12.03 EFFECT OF SUPPLEMENTS TO AGREEMENT. Upon the execution and
delivery of any supplement to this Agreement pursuant to the provisions of this
Article Twelve, this Agreement shall be and be deemed to be modified and amended
in accordance therewith and the respective rights, limitation of rights,
obligations, duties and immunities under this Agreement of the Company and the
Holders shall thereafter be determined, exercised and enforced hereunder subject
in all respects to those modifications and amendments, and all the terms and
conditions of the supplement shall be and be deemed to be part of the terms and
conditions of this Agreement for any and all purposes.

                                ARTICLE THIRTEEN
                         CONSOLIDATION, MERGER AND SALE

      SECTION 13.01 COMPANY MAY CONSOLIDATE, ETC., ON CERTAIN TERMS. Nothing
contained in this Agreement or in any of the Notes shall prevent any
consolidation or merger of the Company with or into any other corporation
(whether or not affiliated with the Company) or successive consolidations or
mergers in which the Company or its successor or successors shall be a party or
parties, or shall prevent any sale or conveyance of all or substantially all the
property of the Company to any other corporation (whether or not affiliated with
the Company) authorized to acquire and operate the same; provided, however, and
the Company hereby covenants and agrees that any such consolidation, merger,
sale or conveyance shall be upon the conditions that (a) immediately after the
consolidation, merger, sale or conveyance the entity (whether an Company or
another entity) formed by or surviving the consolidation or merger, or to which
the sale or conveyance shall have been made, shall not be in default in the
performance or observance of any of the terms, covenants and conditions of this
Agreement to be kept or performed by the Company, (b) the entity (if other than
the Company) formed by or surviving the consolidation or merger, or to which the
sale or conveyance shall have been made, shall be an entity organized under the
laws of the United

                                       20
<PAGE>

States of America or any State thereof and (c) the due and punctual payment of
the principal of and interest on all of the Notes, according to their tenor, and
the due and punctual performance and observance of all the covenants and
conditions of this Agreement to be performed or observed by the Company shall be
expressly assumed by supplement to this Agreement complying with the
requirements of Article Twelve, satisfactory in form to the Company, executed
and delivered to the Company by the entity formed by the consolidation, or into
which the Company shall have merged, or by the entity which shall have acquired
such property. If at any time there is a consolidation or merger or sale or
conveyance of property to which the covenant of this Section 13.01 is
applicable, then the successor corporation will promptly deliver to the Company
(i) an Officers' Certificate stating that as of the time immediately after the
effective date of the transaction the covenants of the Company contained in this
Section 13.01 have been complied with and the successor entity is not in default
under the provisions of the Agreement, and (ii) an Opinion of Counsel stating
that in its opinion those covenants have been complied with and that any
instrument or instruments executed in the performance thereof covenants comply
with the requirements thereof.

      SECTION 13.02 SUCCESSOR ENTITY TO BE SUBSTITUTED. In case of any
consolidation or merger of the Company or the sale or conveyance of its assets
contemplated by Section 13.01 and upon the assumption by the successor entity,
in the manner herein provided, of the due and punctual payment of the principal
of and interest on all of the Notes and the due and punctual performance and
observance of all of the covenants and conditions of this Agreement to be
performed or observed by the Company, the successor entity shall succeed to and
be substituted for the Company, with the same effect as if it had been named
herein as the issuer of the Notes.

      SECTION 13.03 OPINION OF COUNSEL. Subject to the provisions of Sections
9.01 and 9.02, the Company shall be entitled to receive and shall be fully
protected in relying on an Opinion of Counsel as conclusive evidence that any
consolidation, merger, sale or conveyance, and any assumption, complies with the
provisions of this Article Thirteen.

                                ARTICLE FOURTEEN
            SATISFACTION AND DISCHARGE OF AGREEMENT; UNCLAIMED MONEYS

      SECTION 14.01 SATISFACTION AND DISCHARGE OF AGREEMENT. If all the Notes
not theretofore canceled or delivered to the Company for cancellation shall have
become due and payable, or are by their terms to become due and payable within
one year or are to be called for redemption within one year and the Company
shall deposit with a paying agent, in trust, funds sufficient to pay at maturity
or upon redemption all of such Notes not theretofore canceled or delivered to
the Company for cancellation, including principal and interest due or to become
due to such date of maturity or date fixed for redemption, as the case may be,
and if in either case the Company shall also pay or cause to be paid all other
sums payable hereunder by the Company, then this Agreement shall cease to be of
further effect.

      SECTION 14.02 APPLICATION OF FUNDS DEPOSITED FOR PAYMENT OF NOTES. All
moneys deposited pursuant to Section 14.01 shall be held in trust and applied to
the payment, either directly or through any paying agent (including the Company
acting as its own paying agent), to the Holders of the particular Notes, for the
payment or redemption of which such moneys have been deposited, of all sums due
and to become due thereon for principal and interest, except that any moneys so
deposited that relate to Notes being converted into Common Stock after the
deposit shall be promptly returned to the Company.

      SECTION 14.03 REPAYMENT OF MONEYS HELD BY PAYING AGENT. In connection with
the satisfaction and discharge of this Agreement, all moneys then held by any
paying agent under the provisions of this Agreement shall, upon demand of the
Company, be paid to the Company, and thereupon the paying agent shall be
released from all further liability with respect thereto.

      SECTION 14.04 REPAYMENT OF MONEYS HELD BY HOLDER REPRESENTATIVE. A Holder
Representative holding funds deposited with it under the provisions of this
Agreement shall promptly pay to the Company upon written request any excess
money or securities held by it at any time. Any moneys deposited with the Holder
Representative or any paying agent for the payment of the principal of or
interest on any Notes and not applied but remaining unclaimed by the Holders for
four years after the date upon which the payment shall have become due, shall be
repaid to the Company by the Holder Representative or by the paying agent on
demand, and thereupon the Holder Representative or paying agent shall be
released from all further liability with respect thereto. The Holder of

                                       21
<PAGE>

any of the Notes entitled to receive the payment shall thereafter look only to
the Company for the payment thereof; provided, however, that the Holder
Representative or paying agent, before being required to make repayment, may, at
the expense of the Company, mail to the Holders at their last known address or
cause to be published once in a newspaper published in the English language,
customarily published on each Business Day and of general circulation in the
City of Lexington, Kentucky, a notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of the mailing or publication, any unclaimed balance then remaining
will be paid to the Company.

                                 ARTICLE FIFTEEN
                                    IMMUNITY

      No recourse under or upon any obligation, covenant or agreement of this
Agreement or any Agreement supplemental hereto or of any Note, or for any claim
based thereon or otherwise in respect thereof, shall be had against any
shareholder, officer or director, as such, past, present or future, of the
Company or of any successor entity, either directly or through the Company or
any successor entity, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise; it being
expressly understood that this Agreement and the obligations issued hereunder
are solely corporate obligations, and that no such personal liability whatever
shall attach to, or is or shall be incurred by, shareholders, officers or
directors, as such, of the Company or of any successor entity, or any of them,
because of the creation of the indebtedness hereby authorized, or under or by
reason of the obligations, covenants or agreements contained in this Agreement
or in any of the Notes or implied therefrom; and that any and all such personal
liability of every name and nature, either at common law or in equity or by
constitution or statute, of, and any and all such rights and claims against,
every such shareholder, officer or director, as such, because of the creation of
the indebtedness hereby authorized, or under or by reason of the obligations,
covenants or agreements contained in this Agreement or in any of the Notes or
implied therefrom are hereby expressly waived and released as a condition of,
and as a consideration for, the execution of this Agreement and the issue of the
Notes.

                                 ARTICLE SIXTEEN
                            MISCELLANEOUS PROVISIONS

      SECTION 16.01 SUCCESSORS AND ASSIGNS OF COMPANY BOUND BY AGREEMENT. All
the covenants, stipulations, promises and agreements in this Agreement contained
by or in behalf of the Company shall bind its successors and assigns, whether so
expressed or not.

      SECTION 16.02 ACTS OF BOARD, COMMITTEE OR OFFICER OF SUCCESSOR CORPORATION
VALID. Any act or proceeding authorized or required to be done or performed by
any board, committee or officer of the Company under any provision of this
Agreement shall and may be done and performed with like force and effect by the
like board, committee or officer of any entity that shall at the time be the
lawful sole successor of the Company.

      SECTION 16.03 REQUIRED NOTICES OR DEMANDS MAY BE SERVED BY MAIL; WAIVER.
(a) Any notice or demand that by any provisions of this Agreement is required or
permitted to be given or served by the Company or by the Holders to or on the
Company may be given or served by being deposited, postage prepaid, by first
class mail in a post office letter box addressed (until another address is filed
by the Company with the Company for that purpose), as follows: Daugherty
Resources, Inc., 120 Prosperous Place, Suite 201, Lexington, KY 40509,
Attention: President.

            (b) Any notice or communication to a Holder or Holder Representative
shall be mailed by first-class mail to his or its address shown on the Company's
registry. Failure to mail a notice or communication to a Holder or Holder
Representative or any defect in it shall not affect its sufficiency with respect
to other Holders. If a notice or communication is mailed in the manner so
provided within the time prescribed, it is duly given, whether or not the
addressee receives it.

            (c) Where this Agreement provides for notice in any manner, the
notice may be waived in writing by the Person entitled to receive the notice,
either before or after the event or action relating thereto, and the waiver
shall be equivalent of the notice. Waivers of notice by Holders shall be filed
with the Company, but the filing shall not be a condition precedent to the
validity of any action taken in reliance upon the waiver.

                                       22
<PAGE>

      SECTION 16.04 GOVERNING LAW. This Agreement and each Note shall be deemed
to be a contract made under the laws of the State of Delaware, and for all
purposes shall be governed by and construed in accordance with the laws of that
State without regard to the conflicts of laws provisions thereof.

      SECTION 16.05 EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT. (a) Upon
any request or application by a Holder Representative to the Company to take any
action under any of the provisions of this Agreement, the Company shall furnish
to the Holder Representative an Officers' Certificate stating that all
conditions precedent, if any, provided for in this Agreement relating to the
proposed action have been complied with and an Opinion of Counsel stating that
in its opinion all such conditions precedent have been complied with, except
that in the case of any application or demand such document is specifically
required by any provision of this Agreement relating to the particular
application or demand, no additional certificate or opinion need be furnished.

            (b) Each certificate or opinion provided for in this Agreement and
delivered to a Holder Representative with respect to compliance with a condition
or covenant provided for in this Agreement shall include (i) a statement that
the Person making the certificate or opinion has read such covenant or
condition, (ii) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in the
certificate or opinion are based, (iii) a statement that, in the opinion of that
Person, he has made such examination or investigation as is necessary to enable
him to express an informed opinion whether the covenant or condition has been
complied with and (iv) a statement whether or not, in the opinion of that
Person, the condition or covenant has been complied with.

            (c) Any certificate, statement or opinion of an officer of the
Company may be based, insofar as it relates to legal matters, upon a certificate
or opinion of or representations by counsel, unless the officer knows that the
certificate or opinion or representations with respect to the matters upon which
his certificate, statement or opinion may be based as aforesaid are erroneous,
or in the exercise of reasonable care should know that the same are erroneous.
Any certificate, statement or opinion of counsel may be based, insofar as it
relates to factual matters, information with respect to which is in the
possession of the Company, upon the certificate, statement or opinion of or
representations by an officer or officers of the Company, unless counsel knows
that the certificate, statement or opinion or representations with respect to
the matters upon which its certificate, statements or opinion may be based are
erroneous, or in the exercise of reasonable care should know that the same are
erroneous.

            (d) Any certificate, statement or opinion of an officer of the
Company or of counsel may be based, insofar as it relates to accounting matters,
upon a certificate or opinion of or representations by an accountant or firm of
accountants unless the officer or counsel, as the case may be, knows that the
certificate or opinion or representations with respect to the accounting matters
upon which his certificate, statement of opinion may be based are erroneous, or
in the exercise of reasonable care should know that the same are erroneous. Any
certificate or opinion of any independent firm of public accountants filed with
the Company shall contain a statement that the firm is independent.

      SECTION 16.06 PAYMENTS DUE ON SATURDAYS, SUNDAYS AND HOLIDAYS. In any case
where the date of payment of principal of or interest on the Notes or the date
fixed for redemption or purchase of any Note shall not be a Business Day, then
payment of principal, interest or redemption price need not be made on that
date, but may be made on the next succeeding Business Day with the same force
and effect as if made on the date fixed for payment or redemption, and no
interest shall accrue for the period after the original date fixed for payment
or redemption.

      SECTION 16.07 PROVISIONS OF THE AGREEMENT AND NOTES FOR THE SOLE BENEFIT
OF THE PARTIES AND HOLDERS. Nothing in this Agreement or in the Notes, expressed
or implied, shall give or be construed to give any Person, firm or corporation,
other than the parties hereto and the Holders, including any Holder
Representative, any legal or equitable right, remedy or claim under or in
respect of this Agreement, or under any covenant, condition or provision herein
contained; all its covenants, conditions and provisions being for the sole
benefit of the parties hereto and of the Holders.

      SECTION 16.08 SEVERABILITY. In case any one or more of the provisions
contained in this Agreement or in the Notes shall for any reason be held to be
invalid, illegal or unenforceable in any respect, the invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement or of
the Notes, but this Agreement and the Notes shall be construed as if the invalid
or illegal or unenforceable provision had never been contained herein or
therein.

                                       23
<PAGE>

      SECTION 16.09 AGREEMENT MAY BE EXECUTED IN COUNTERPARTS. This Agreement
may be executed in any number of counterparts, each of which shall be an
original; but the counterparts shall together constitute but one and the same
instrument.

      SECTION 16.10 ARTICLE AND SECTION HEADINGS. The Article and Section
references herein are for convenience of reference only and shall not affect the
construction hereof.

      IN WITNESS WHEREOF, NGAS RESOURCES, INC. has caused this Agreement to be
signed by its President and Chief Executive Officer and attested by one of its
Vice Presidents; and the Holders have authorized the Company to sign and
acknowledge this Agreement on their behalf as attorney-in-fact pursuant to their
Subscription Agreements as of the day and year first written above.

                                     NGAS RESOURCES, INC.

                                     By: /s/ William S. Daugherty
                                         --------------------------------------
                                         William S. Daugherty,
                                         President and Chief Executive Officer
Attest:

/s/ William G. Barr III
-------------------------
William G. Barr III,
Vice President

                                     HOLDERS:

                                     BY: NGAS RESOURCES, INC.,
                                         As Attorney-in-Fact for the Holders
                                         listed on Schedule 1

                                     By: /s/ William S. Daugherty
                                         --------------------------------------
                                         William S. Daugherty,
                                         President and Chief Executive Officer
Attest:

/s/ William G. Barr III
-------------------------
William G. Barr III,
Vice President

                                       24

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