Document:

LONG TERM INCENTIVE OPTION PLAN

                            PEASE OIL AND GAS COMPANY

         1. Purpose of Plan. The purpose of this Long Term Incentive Option Plan
("Plan") is to secure and retain the key  employees and  consultants  who are or
will be responsible for the success of Pease Oil and Gas Company ("Company"), to
motivate such persons to provide their best efforts on behalf of the Company, to
encourage   stock   ownership  and  to  provide  such  persons  with  additional
proprietary  interests  in, and a greater  concern  for,  the welfare of, and an
incentive to remain a full time employee of, the Company over a long term

         For  purposes of this Plan,  the term  "Company"  shall  include  where
appropriate  in  the  context  used  any  "parent  corporation"  or  "subsidiary
corporation"  of the Company,  as those terms are defined in Sections 424(e) and
(f) of the Code,  whether in  existence  on the date of  adoption of the Plan or
formed after the adoption of this Plan.

         Options issued pursuant to this Plan will constitute nonqualified stock
options  within the meaning of the  Internal  Revenue  Code of 1986,  as amended
("Nonstatutory  Stock  Options"),  and the term  "Option" in this Plan refers to
Nonstatutory Stock Options.

         2.  Stock  Subject to the Plan.  The number of shares of the  Company's
$0.10 par value  common  stock  ("Common  Stock")  which shall be  reserved  for
issuance  upon exercise of Options  issued under this Plan is 1,000,000  shares.
Such shares may  consist,  in whole or in part,  of unissued  shares or treasury
shares.  The maximum number of shares of Common Stock issuable  pursuant to this
Plan,  including  shares  subject to  outstanding  options,  shall be subject to
adjustment as provided in Section 6 of this Plan.

         For purposes of this Plan,  market value of shares subject to an option
shall be determined as follows:

                  (i) If the Common Stock is listed on a national stock exchange
         or another securities exchange designated by the Committee, or admitted
         to unlisted trading  privileges on any such exchange,  or if the Common
         Stock is quoted on a National  Association of Securities Dealers,  Inc.
         system that reports closing prices,  the fair market value shall be the
         closing  price of the Common Stock as reported by NASDAQ,  or if not so
         reported  then as reported by the Wall Street  Journal,  on the day the
         fair market value is to be determined,  or if no such price is reported
         for such day, then the  determination of such closing price shall be as
         of the last immediately  preceding day on which the closing price is so
         reported; or

                  (ii) If the  Common  Stock is not so  listed  or  admitted  to
         unlisted trading  privileges or so quoted,  the fair market value shall
         be the average of the last  reported  highest bid and the lowest  asked
         prices quoted on the NASDAQ or, if not so quoted,  then by the National
         Quotation Bureau,  Inc. on the day the fair market value is determined;
         or

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                  (iii) If the  Common  Stock is not so  listed or  admitted  to
         unlisted trading  privileges or so quoted, and bid and asked prices are
         not  reported,  the  fair  market  value  shall be  determined  in such
         reasonable manner as may be prescribed by the Committee.

         If any outstanding  Option under this Plan for any reason expires or is
terminated,  the shares of Common Stock allocable to the unexercised  portion of
such Option may again be optioned  under this Plan  subject to the  limitations,
terms and conditions of this Plan. The Company,  and the proper  officers of the
Company,  shall from time to time take appropriate  action required for delivery
of Common Stock, upon any exercise of Options under this Plan.

         3. Administration.  Administration of the Plan shall be administered by
the Compensation Committee of the Board of Directors of the Company, hereinafter
referred to as the  "Committee."  The  Committee  shall  consist of at least two
members of the Board of Directors  (hereafter  "Board")  appointed by the Board,
none of whom is or has been an employee of the Company during the one year prior
to acting under the Plan.

         Once  appointed,  the Committee shall continue to serve until otherwise
directed by the Board. From time to time, the Board may increase the size of the
Committee  and appoint  additional  members  thereof,  remove  members  (with or
without cause) and appoint new members in substitution therefor,  fill vacancies
however caused,  or remove all members of the Committee and thereafter  directly
administer the Plan.

         Members of the Board who are either  eligible  for  Options or who have
been granted Options may vote on any matters affecting the administration of the
Plan or the  grant of any  Options  pursuant  to the Plan,  except  that no such
member shall act upon the granting of an Option to himself,  but any such member
may be counted in  determining  the  existence of a quorum at any meeting of the
Board  during  which  action is taken with respect to the granting of Options to
such member.

         The  decision  of a majority  of those  present  at any  meeting of the
Committee  where a quorum  consisting  of a majority of the Committee is present
shall constitute the decision of the Committee.

         The  Committee  is  authorized  and  empowered to  administer  the Plan
insofar as it relates to Options and,  consistent with the terms of the Plan, to
(a) select the key  employees or  consultants  to whom Options are to be granted
and to fix the number of shares and other terms and conditions of the Options to
be  granted,  subject to the  requirements  and  limitations  of this Plan;  (b)
determine  the date  upon  which  Options  shall be  granted  and the  terms and
conditions of the granted Options in a manner  consistent  with the Plan,  which
terms need not be identical as between  Options or Optionees;  (c) interpret the
Plan and the Options granted under the Plan; (d) adopt,  amend and rescind rules
and  regulations  for the  administration  of the Plan  insofar as it relates to
Options;  (e)  determine  whether and the extent to which,  if at all,  exercise
price of outstanding  options  should be reduced;  and (f) direct the Company to
execute Stock Option agreements pursuant to the Plan.

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         The Committee  shall  determine in its  discretion  whether  applicable
laws,  regulations or  requirements  of securities  trading  exchanges where the
Company's  securities  are traded  make it  necessary  or  appropriate  that the
adoption of this Plan be approved by stockholders  of the Company.  In the event
that  stockholders  approval is sought,  options may be granted  subject to such
approval.

         All  such  actions  of  the   Committee   shall  be  binding  upon  all
participants in the Plan.

         4. Eligibility.  The persons who shall be eligible to receive grants of
Options under this Plan shall be those key employees  and  consultants,  who may
not be  employees,  who may be officers or directors of the Company,  who are or
who will be responsible for the  management,  growth and success of the business
of the Company over the long term and who shall be selected by the Committee.

         The persons to receive  Options  under the Plan shall be selected  from
time to time by the Committee, with the approval of the Board, and the Committee
shall determine,  in its sole discretion,  the number of shares to be covered by
the Options to be granted to each person  selected.  No person may be granted an
Option if such person, at the time the Option is granted,  owns shares of Common
Stock possessing more than 10% of the total combined voting power of all classes
of  stock  of the  Company  on a fully  diluted  basis  (i.e.,  considering  all
outstanding shares of Common Stock and all shares which the Company is obligated
to issue within three years at the time of action).  For purposes of calculating
such stock  ownership,  the beneficial  ownership  rules of stock  ownership set
forth in  regulations  adopted  under the  Securities  Exchange Act of 1934,  as
amended ("1934 Act") shall apply.

         5. Terms and  Conditions.  The Plan  shall  become  effective  upon the
approval and adoption by the Board of Directors. It shall continue in effect for
a period of ten years from the date of its effectiveness.

         All Options  granted  under this Plan shall be subject to the terms and
conditions of this Plan, including all of the following:

                  (a)  Option  Price.  The  Option  price  per  share  shall  be
         determined  by the Committee but shall not be less than 90% of the fair
         market value of such shares at the time the Option is granted.

                  (b)  Limitations  on  Grant of  Options.  No  Option  shall be
         granted  which may be  exercised  sooner than three years nor more than
         ten years after the date it was granted. Subject to Section 5(q) below,
         Options  may not  become  exercisable  (i.e.,  "vest")  as to more than
         one-third  of the total  shares  represented  by an Option grant in any
         year and no Option  shall  vest  before  three  years  from the date of
         grant.

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                  (c) Limitations on Exercise of Option.  No Optionee granted an
         Option  under  this Plan may  exercise  an  Option  unless at all times
         during the period  beginning  on the date of the granting of the Option
         and ending on the day three  months  before  the date of such  exercise
         such  Optionee  was  employed  by  the  Company  or  a  corporation  or
         subsidiary  thereof  issuing or  assuming  the Option in a  transaction
         referred to in Section 6 of this Plan,  provided  that if the  Optionee
         was an employee at the time of grant of the Option and  continues to be
         employed  through  the time that the Option is fully  vested,  then the
         Option may be exercised  for one year from  termination  of  employment
         unless the Optionee  takes action  which is  materially  adverse to the
         best  interests of the Company,  determined  in the  discretion  of the
         Committee, prior to exercise of the Option..

                  (d)  Payment for Shares.  Payment in full,  in cash,  shall be
         made for all  shares  issued  pursuant  to the  exercise  of an Option,
         provided that the  Committee may permit  payment to be made with shares
         of the Company's Common Stock owned by the Optionee to be valued at the
         fair  market  value  at the  date of  exercise.  All  Options  shall be
         exercised for 100 shares, or a multiple thereof, or for the full number
         of shares for which the Option is then  exercisable.  No Optionee shall
         have the  right to  dividends  or other  rights of a  stockholder  with
         respect to shares  subject to an Option  until the  Optionee  has given
         written  notice of exercise of the  Optionee's  Option and paid in full
         for such shares.

                  (e) Manner of Exercise.  Any Option  granted  pursuant to this
         Plan may be exercised at such time or times as set forth in the Option,
         by the delivery of written notice to any officer of the Company,  other
         than the  Optionee,  together  with payment in full,  for the number of
         shares to be purchased pursuant to such exercise. Such notice (i) shall
         state the election to exercise the Option,  (ii) shall state the number
         of shares in  respect  of which the  Option is being  exercised,  (iii)
         shall state the  Optionee's  address,  (iv) shall state the  Optionee's
         social  security  number,  (v) shall contain such  representations  and
         agreements concerning Optionee's investment intent with respect to such
         shares  of  Common  Stock  as shall be  satisfactory  to the  Company's
         counsel,  (vi) shall state that the  certificate  evidencing the shares
         may be stamped with a  restrictive  legend and the shares  evidenced by
         such certificate will constitute "restricted  securities" as defined in
         Rule 144 promulgated  under the Securities Act of 1933, as amended (the
         "Act") (unless the shares to be acquired are registered  under the Act)
         and (vii) shall be signed and dated by Optionee.

                  (f)  Conditions  of  Issuance of Shares.  Shares  shall not be
         issued  pursuant to the  exercise of an Option  unless the  exercise of
         such Option and the  issuance  and  delivery  of such  Shares  pursuant
         thereto shall comply with all relevant  provisions  of law,  including,
         without  limitation,  the Act, the 1934 Act, the rules and  regulations
         promulgated  thereunder,  applicable  state  securities  law,  and  the
         requirements of any stock exchange or automated  quotation  system upon
         which the Share may be listed or  quoted,  and shall be  subject to the
         approval  of  legal  counsel  for  the  Company  with  respect  to such
         compliance.

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                  (g)  Limitation  on Transfer of Shares.  Unless  shares issued
         upon exercise are at the time of exercise registered under the Act, all
         shares of Common  Stock  acquired  by an Optionee  upon  exercise of an
         Option  granted  under  this Plan  shall be  deemed  to be  "restricted
         securities"  as defined in Rule 144  promulgated  under the Act and the
         certificate evidencing such shares shall contain a legend as follows:

                  "The  securities  represented by this  certificate  may not be
                  offered  for  sale,  sold  or  otherwise   transferred  except
                  pursuant  to an  effective  registration  statement  under the
                  Securities Act of 1933 (the `Act') or pursuant to an exemption
                  from registration  under the Act, the availability of which is
                  to be established to the satisfaction of the Company."

                  (h)  Other   Representations  or  Warranties.   As  a  further
         condition to the exercise of any Option  granted  under this Plan,  the
         Company  may  require  each  Optionee  to make any  representation  and
         warranty to the Company as may be  required  by any  applicable  law or
         regulation,  including making arrangements,  approved by the Committee,
         for payment of any applicable withholding taxes.

                  (i) Death of Optionee.  If an Optionee (or a transferee of the
         Option) dies,  any Option  previously  granted to the Optionee shall be
         exercisable by the personal  representa  tive or  administrator  of the
         deceased  Optionee's  estate,  or by  any  trustee,  heir,  legatee  or
         beneficiary  (collectively  referred to for  convenience  as the "legal
         representative")  who shall have acquired the Option  directly from the
         Optionee by will or by the laws of descent and distribution at any time
         within one year after his death,  but not more than ten years after the
         date of granting of the Option,  provided  the  deceased  Optionee  was
         entitled to exercise such Option at the time of his death. Prior to the
         exercise of any such Option,  the legal  representative of the deceased
         Optionee shall furnish to the Company  written notice of such exercise,
         together with a certified copy of letters  testamentary  or other proof
         deemed   sufficient  by  the  Committee  of  the  right  of  the  legal
         representative   to  exercise  such  Option  in  accordance   with  the
         provisions of this Plan.

                  (j) Retirement.  If an Optionee's  employment with the Company
         terminates by reason of retirement,  any Option  previously  granted to
         him shall be  exercisable  as determined in the sole  discretion of the
         Committee  at any  time  within  three  months  after  the date of such
         termination,  but not more than ten years after the date of granting of
         the Option,  and then only to the extent to which it was exercisable at
         the time of such termination by retirement;  provided, however, that if
         the Optionee dies within three months after  termination by retirement,
         any  unexercised  Option,  to the extent to which it was exercisable at
         the time of his death,  shall  thereafter be  exercisable  for one year
         after the date of his death, but not more than ten years after the date
         of granting of the Option.

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                  (k)  Disability.  If an Optionee  becomes  disabled within the
         meaning  of  Section  22(e)(3)  of the  Code,  and at the  time of such
         disability the Optionee is entitled to exercise an Option, the Optionee
         shall have the right to exercise such Option within one year after such
         disability  provided that the Optionee  exercises the Option within ten
         years after the date of grant,  and then only to the extent to which it
         was exercisable at the time of such disability.

                  (l) Optionee's Termination.  If an Optionee ceases to serve an
         employee  of the Company or a  subsidiary,  as the case may be, for any
         reason  other  than  death,   retirement  or  disability,   any  Option
         previously granted to the Optionee which was exercisable at the time of
         termination  shall  terminate  three  months  after  the  date  of such
         termination  or at such  earlier  time as  provided in the terms of the
         Option  granted to the  Optionee.  To the extent  that an Option is not
         exercised within the time specified herein, the Option shall terminate.
         Options which were not  exercisable  on the date of  termination  shall
         terminate upon termination.

                  (m)  Leave of  Absence.  For the  purposes  of this Plan (i) a
         leave of  absence,  duly  authorized  in  writing  by the  Company  for
         military service or sickness,  or for any other purpose approved by the
         Board,  if the  period of such leave does not exceed 90 days and (ii) a
         leave of absence in excess of 90 days,  duly  authorized  in writing by
         the  Company   provided  the  Optionee's   right  to  re-employment  is
         guaranteed  either by  statute  or by  contract,  shall not be deemed a
         termination of employment.

                  (n) Option Agreement. Any Option granted under this Plan shall
         be in  accordance  with the Plan and  shall be in the form of the Stock
         Option Agreement attached as Exhibit A attached hereto.

                  (o) Transferability of Options.  Except by will or the laws of
         descent and distribution, an Option may not be sold, pledged, assigned,
         hypothecated,  transferred,  or  disposed  of in any manner  during the
         period  ending  two  years  from the date of  grant of the  Option  and
         thereafter  only (i)  after  written  notice to the Board and (ii) in a
         manner which is in  compliance  with all  applicable  provisions of the
         Act, as amended and the 1934 Act to the reasonable written satisfaction
         of the Company,  given before transfer is effected.  Upon any permitted
         sale or other  transfer,  the  transferee  shall remain  subject to all
         terms and conditions of the Plan and the Stock Option  Agreement.  Upon
         any permitted transfer of an Option, the written Stock Option Agreement
         shall be delivered to the Company for  registration  of the transfer to
         any transferee.

                  (p)  Exercisability of Options.  No Optionee granted an Option
         under this Plan shall be entitled  to exercise  such Option at any time
         after the  expiration  of such Option as  specified in the Stock Option
         Agreement evidencing the Option.

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                  (q) Vesting Upon Change of Control.  An Option  granted  under
         this Plan to an employee  shall become  exercisable  (i.e.,  "vest") in
         full if the employee to whom an Option has been granted is  terminated,
         has his or her salary involuntarily reduced by more than 10% or has his
         or her  duties,  authority  and  responsibility  materially  reduced or
         restricted  within  one year  following  a  change  of  control  of the
         Company.  For purposes of this Section  5(q), a change of control shall
         mean  any of the  following:  (i) at any time  the  Board of  Directors
         includes a majority of directors  who have served as directors for less
         than one year,  or (ii)  within  one year  following  a merger or other
         combination  of the  principal  business  of the Company  with  another
         entity,  one or more of the four most highly paid executive officers of
         the  Company is  discharged  or  reassigned  to  substantially  reduced
         responsibilities  with the surviving  entity,  or the Optionee's salary
         has been  voluntarily  reduced by 10% or more,  or  Optionee's  duties,
         authority  and   responsibilities   have  been  materially   reduce  or
         restricted..

         6. Adjustments Upon  Recapitalization,  Merger, Etc. If the outstanding
shares of Common Stock of the Company  shall at any time be changed or exchanged
by  declaration  of a stock  dividend,  split-up,  subdivision or combination of
shares,    recapitalization,    merger,   consolidation   or   other   corporate
reorganization   in  which  the   Company   (including   a  merger  or   similar
reorganization  which  effects a  reincorporation  of the Company in a different
county or province) is the surviving corporation,  the number and kind of shares
subject to this Plan or  subject  to any  Options  previously  granted,  and the
Option prices, shall be appropriately and equitably adjusted,  so as to maintain
the proportionate  number of shares without changing the aggregate Option price.
In the  event of a  dissolution  or  liquidation  of the  Company,  or a merger,
consolidation,  sale  of  all or  substantially  all of  its  assets,  or  other
corporate  reorganization in which the Company is not the surviving  corporation
and the holder of Common Stock receives securities of another corporation,  then
any  outstanding  Options  hereunder shall terminate as of the effective date of
such event;  provided that  immediately  prior to such event each Optionee shall
have the right to exercise any  unexpired  Option in whole or in part whether or
not the Option would  otherwise be  exercisable.  The Company  shall afford each
person who holds an Incentive Stock Option under this Plan with at least 30 days
advance  written  notice of such event.  The  existence of this Plan,  or of any
Options  hereunder,  shall not in any way prevent any  transaction  described in
this section, nor shall anything contained in this Plan prevent the substitution
of a new Option by a surviving corporation.

         7. Use of Proceeds. Proceeds from the sale of stock pursuant to Options
granted  under this Plan shall  constitute  general  funds of the Company may be
used for such general corporate purposes as the Board shall determine.

         8.  Reservation  of Issuance of Shares.  The Company shall at all times
during the  duration  of this Plan  reserve  and keep  available  such number of
shares of Common Stock as will be sufficient to satisfy the  requirements of all
Options  granted  pursuant to this Plan,  and shall pay all  original  issue and
transfer taxes with respect to the issuance of shares pursuant to the exercise

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of such Options, and shall pay all of the fees and expenses necessarily incurred
in connection with the exercise of such Options and the issuance of such shares.

         9. Amendments.  The Board of Directors may amend, alter, or discontinue
this Plan, but no amendment,  alteration or discontinuation  shall be made which
would impair the rights of any Optionee  under any Options  previously  granted,
without the Optionee's consent.

         Any such  amendment or termination of the Plan shall not affect Options
already granted and such Options shall remain in full force and effect as if the
Plan had not been  amended  or  terminated,  unless  mutually  agreed  otherwise
between the Optionee and the Company in a writing signed by both parties.

         10.   Indemnification.   In   addition   to  such   other   rights   of
indemnification as they may have as directors,  the members of the Committee and
the Board shall be  indemnified  by the  Company  against  reasonable  expenses,
including  attorneys'  fees actually  incurred in connection with the defense of
any action, suit or proceeding,  or in connection with any appeal therefrom,  to
which  they or any of them  may be a party  by  reason  of any  action  taken or
failure  to act under or in  connection  with this  Plan or any  Option  granted
hereunder,  or shares  purchased  pursuant to the exercise of Options under this
Plan, and against all amounts paid by them in settlement  thereof (provided such
settlement is approved by independent  legal counsel selected by the Company) or
paid by them in  satisfaction  of judgment in any  action,  suit or  proceeding,
except in relation  to matters as to which it shall be adjudged in such  action,
suit or  proceeding,  that such member of the Board of  Directors  is liable for
gross  negligence,  fraud  or  willful  misconduct  in  the  performance  of the
director's  duties  so long as  within  60 days  after  institution  of any such
action, suit or proceeding,  the director shall in writing offer the Company the
opportunity,  at its own  expense,  to handle and defend  such  action,  suit or
proceeding.

         11.  Miscellaneous.   Unless  the  context  requires  otherwise,  words
denoting  the  singular  may be  construed  as denoting  the  plural,  and words
denoting the plural may be construed as denoting the singular,  and words of one
gender may be construed as denoting such other gender

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as is appropriate. Paragraph headings are not to be considered part of this Plan
and are  included  solely for  convenience  and are not  intended  to be full or
accurate descriptions of the contents thereof.

Adopted by Directors:  November 7, 1997.

                                          PEASE OIL AND GAS COMPANY
                                          organized under the laws of Nevada
ATTEST:

                                          By  /s/ Willard H. Pease, Jr.
                                             ----------------------------------
                                              Willard H. Pease, Jr., Chairman

/s/ Patrick J. Duncan
---------------------------------------
Patrick J. Duncan, Secretary

S E A L

                                        9PREFERRED STOCK INVESTMENT AGREEMENT

     AGREEMENT  dated as of December 31, 1997 between Pease Oil and Gas Company,
(the  "Company")  and the several  investors  named in the  attached  Schedule 1
hereto (individually an "Investor" and collectively the "Investors").

     The parties hereto agree as follows:

                                    ARTICLE I

                  Purchase and Sale of Series B Preferred Stock
                  ---------------------------------------------

     Section  1.1  Purchase  and Sale of  Series  B  Preferred  Stock.  Upon the
following  terms  and  conditions,  the  Company  shall  issue  and sell to each
Investor,  and each  Investor  shall  purchase  from the Company,  the number of
shares set forth opposite the name of such Investor under the heading "Number of
Shares  to be  Purchased"  on  Schedule  1 of  the  Company's  Series  B 5%  PIK
Cumulative  Convertible Preferred Stock (collectively,  the "Shares") having the
rights, designations and preferences set forth in Schedule 2 hereto.

     Section  1.2  Purchase  Price.  The  purchase  price  for the  Shares  (the
"Purchase Price") shall be $50 per share. Each Investor shall pay the Company an
aggregate  purchase  price as set forth opposite the name of such Investor under
the heading Purchase Price on Schedule 1.

     Section 1.3 The Closing.

          (a) While the parties acknowledge that they intend that the closing of
the purchase and sale of the Shares (the "Closing")  shall occur on December 31,
1997, the Closing shall take place at the offices of the Company, at 10:00 a.m.,
local  time on the  later of the  following:  (i) the  date on which  all of the
conditions set forth in Article IV hereof and applicable to the Closing shall be
fulfilled or waived in  accordance  herewith,  or (ii) such other time and place
and/or on such other date as the Investors  and the Company may agree.  The date
on which the Closing occurs is referred to herein as the "Closing Date."

          (b) On the Closing  Date,  the Company  shall deliver to each Investor
certificates  representing  the number of shares set forth  opposite the name of
such Investor under the heading "Number of Shares to be Purchased" on Schedule 1
registered  in the name of such  Investor or deposit  such Shares into  accounts
designated by such Investor,  and each Investor shall deliver to the Company the
Purchase  Price  set  forth  opposite  such  Investor's  name on  Schedule  1 by
cashier's check or wire transfer in immediately  available funds to such account
as shall be designated in writing by the Company. In addition,  each party shall
deliver all documents, instruments and writings required to be delivered by such
party pursuant to this Agreement at or prior to the Closing.

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     Section 1.4  Covenant to Register.

          (a) For purposes of this Section 1.4, the following  definitions shall
apply:

               (i) The terms "register,"  "registered," and "registration" refer
to a  registration  under the  Securities  Act of 1933,  as amended (the "Act"),
effected by preparing and filing a registration statement or similar document in
compliance  with the Act, and the  declaration or ordering of  effectiveness  of
such registration statement, document or amendment thereto.

               (ii) The term  "Registrable  Securities" means the stock issuable
upon conversion of the Shares, or otherwise  issuable pursuant to this Agreement
or the provisions of Schedule 2, and any securities of the Company or securities
of any  successor  corporation  issued as, or issuable  upon the  conversion  or
exercise of any warrant, right or other security that is issued as a dividend or
other  distribution  with respect to, or in exchange for, or in replacement  of,
the Shares which (A) have not been resold pursuant to an effective  registration
statement  or  pursuant  to Rule  144  under  the  Act or (B) may not be  resold
pursuant to Rule 144(k) under the Act. For  purposes of this  Agreement,  Shares
will be considered  ineligible for resale  pursuant to Rule 144(k) under the Act
unless the Company's transfer agent has accepted an instruction from the Company
specifying that such Shares are eligible for sale pursuant to Rule 144(k).

               (iii) The term "holder of Registrable  Securities"  means each of
the Investors  and any permitted  assignee of  registration  rights  pursuant to
Section 1.4(h).

          (b) (i) The Company shall,  on or before  January 15, 1998,  file, and
shall use its best efforts to cause to become  effective as soon as practicable,
a  registration  statement  on Form S-3,  or if Form S-3 is not then  available,
another appropriate form, covering all the Registrable  Securities (the "Initial
Registration").  In the event such registration is not so declared  effective or
does not include all Registrable Securities,  a holder of Registrable Securities
shall have the right to require by notice in writing  that the Company  register
all or any part of the  Registrable  Securities  held by such  holder (a "Demand
Registration")  and the Company  shall  thereupon  effect such  registration  in
accordance  herewith  (which may include adding such shares to an existing shelf
registration).  The parties agree that if the holder of  Registrable  Securities
demands  registration  of  less  than  all of the  Registrable  Securities,  the
Company, at its option, may nevertheless file a registration  statement covering
all of the Registrable  Securities.  If such registration  statement is declared
effective  with  respect to all  Registrable  Securities  and the  Company is in
compliance with its obligations under Subsection  (d)(ii) through (v) hereof the
demand  registration  rights granted  pursuant to this  Subsection (b) (i) shall
cease. If such registration  statement is not declared effective with respect to
all Registrable Securities the demand registration rights described herein shall
remain in effect until all Registrable Securities have been registered under the
Act. The Company  shall provide  holders of  Registrable  Securities  reasonable
opportunity to review any such registration statement or amendment or supplement
thereto  prior to the filing  thereof,  but in no event shall such period exceed
seven (7) days. If the Registrable Securities are registered initially on a form
other than Form S-3, the Company shall  register the  Registrable  Securities on
Form S-3 as soon as use of such form is permissible.

                                        2

<PAGE>

               (ii)  The  Company  shall  not  be  obligated  to  effect  Demand
Registration  under Subsection (b)(i) if all of the Registrable  Securities held
by the holder of Registrable  Securities which are demanded to be covered by the
Demand  Registration  are, at the time of such demand,  included in an effective
registration  statement  and the Company is in compliance  with its  obligations
under Subsection (d) (ii) through (v) hereof.

               (iii) The  Company  may  suspend  the  effectiveness  of any such
registration effected pursuant to this Subsection (b) in the event, and for such
period of time as, such a suspension is required by the rules and regulations of
the Securities and Exchange  Commission  ("SEC").  The Company will use its best
efforts to cause such suspension to terminate at the earliest possible date.

               (iv)  If  a  registration   statement  covering  all  Registrable
Securities  is not  effective  by the  earlier of (A) thirty  (30) days from the
filing with the SEC of the Company's  Annual Report on Form 10-K or Form 10-KSB,
or (B) April 30,  1998,  then the  Company  shall pay each  Investor  in cash an
amount  equal to 3% of the Purchase  Price paid by that  Investor for Shares and
any  Registrable  Securities then held by that Investor for, and promptly after,
each thirty (30) day period  thereafter  until such  registration  statement  is
effective  (pro-rata as to a period of less than thirty (30) days), such payment
to be made promptly after each such 30 day (or shorter) period.  An amount equal
to 3% of the Purchase  Price paid by an Investor for Shares and any  Registrable
Securities  then held by such  Investor  shall also be paid to such  Investor in
cash for, and promptly after,  any one or more periods  aggregating in excess of
30 days that the effectiveness of the Registration Statement is suspended as set
forth in Section  1.4(b)(iii).  The "Purchase  Price" of Registrable  Securities
shall be (X) in the case of Registrable  Securities  derived from  conversion or
substitution of Shares,  the Purchase Price of such Shares,  and (Y) in the case
of Registrable  Securities derived from dividend  payments,  the original dollar
amount of such  dividends.  This  subsection is in addition to the provisions of
Section 7.2(a) hereof.

          (c) If the Company proposes to register  (including for this purpose a
registration  effected by the Company for shareholders other than the Investors)
any of its stock or other  securities  under the Act in connection with a public
offering of such securities  (other than a registration on Form S-4, Form S-8 or
other limited purpose form) and all Registrable  Securities have not theretofore
been included in a  registration  statement  under  Subsection (b) which remains
effective,  the  Company  shall,  at such  time,  promptly  give all  holders of
Registrable  Securities  written notice of such  registration.  Upon the written
request of any holder of  Registrable  Securities  given within twenty (20) days
after  receipt  of such  notice by the  holder of  Registrable  Securities,  the
Company shall use its best efforts to cause to be  registered  under the Act all
Registrable Securities that such holder of Registrable Securities requests to be
registered.  However, the Company shall have no obligation under this Subsection
(c) to the extent that, with respect to an  underwritten  public  offering,  the
managing  underwriter of such public offering reasonably notifies such holder(s)
in writing of its  determination  that the  Registrable  Securities or a portion
thereof  should be  excluded  therefrom;  provided,  however,  that no  holder's
Registrable  Securities  shall be excluded from an underwritten  public offering
other than pro rata with or after all like securities having registration rights
in connection with such underwritten public offering are so excluded.

                                        3

<PAGE>

          (d) Whenever required under this Section to effect the registration of
any  Registrable   Securities,   including  without   limitation,   the  Initial
Registration, the Company shall, as expeditiously as reasonably possible:

               (i) Prepare and file with the SEC a  registration  statement with
respect to such  Registrable  Securities  and use its best efforts to cause such
registration to become effective as provided in Section 1.4(b)(i),  and upon the
request of any holder of Registrable Securities keep such registration statement
effective for so long as any holder of Registrable Securities desires to dispose
of the securities covered by such registration statement,  or, if earlier, until
such  Registrable  Securities  may be sold under Rule 144(k)  (provided that the
Company's  transfer agent has accepted an  instruction  from the Company to such
effect).

               (ii)  Prepare  and  file  with  the  SEC  such   amendments   and
supplements to such registration statement and the prospectus used in connection
with  such  registration  statement  as may be  necessary  to  comply  with  the
provisions of the Act with respect to the disposition of all securities  covered
by such  registration  statement  and  notify  the  holders  of the  filing  and
effectiveness of such Registration Statement and any amendments or supplements.

               (iii)  Furnish  to each  holder of  Registrable  Securities  such
numbers of copies of a current  prospectus  conforming with the  requirements of
the Act,  copies of the  registration  statement,  any  amendment or  supplement
thereto  and any  documents  incorporated  by  reference  therein and such other
documents as such holder of Registrable  Securities  may  reasonably  require in
order to facilitate  the  disposition of  Registrable  Securities  owned by such
holder of Registrable Securities.

               (iv) Use its best efforts to register and qualify the  securities
covered by such registration statement under such other securities or "Blue Sky"
laws of such  jurisdictions  as shall be  reasonably  requested by the holder of
Registrable  Securities,  provided  that the  Company  shall not be  required in
connection  therewith or as a condition  thereto to qualify to do business or to
file  a  general   consent  to  service  of  process  in  any  such   states  or
jurisdictions.

               (v) Notify each holder of Registrable  Securities  immediately of
the happening of any event as a result of which the prospectus  included in such
registration  statement,  as then in effect,  includes  an untrue  statement  of
material fact or omits to state a material fact required to be stated therein or
necessary  to make  the  statements  therein  not  misleading  in  light  of the
circumstances then existing,  and use its best efforts to promptly update and/or
correct such prospectus.

               (vi)  Furnish,  at the  request  of  any  holder  of  Registrable
Securities,  (A) an opinion of counsel of the Company,  dated the effective date
of the registration  statement, in form and substance reasonably satisfactory to
the holder and its counsel and covering, without limitation, such matters as the
due authorization and issuance of the securities being registered and compliance
with  securities  laws by the  Company  in  connection  with the  authorization,
issuance and  registration  thereof and (B) a letter or letters of the Company's
independent public accountants in form and substance reasonably  satisfactory to
the holder and its counsel.

                                        4

<PAGE>

               (vii) Use its best  efforts  to list the  Registrable  Securities
covered  by  such  registration   statement  with  any  securities  exchange  or
inter-dealer  quotation  system on which the common  stock of the  Company  (the
"Common Stock") is then listed;

               (viii) Make available for inspection by the holder of Registrable
Securities,  upon request, all SEC Documents (as defined below) filed subsequent
to the Closing and require the  Company's  officers,  directors and employees to
supply  all  information  reasonably  requested  by any  holder  of  Registrable
Securities in connection with such registration statement.

          (e) Each holder of Registrable  Securities will furnish to the Company
in  connection  with any  registration  under this Section 1.4 such  information
regarding itself, the Registrable Securities and other securities of the Company
held by it, and the intended  method of disposition of such  securities as shall
be reasonably required to effect the registration of the Registrable  Securities
held by such holder of Registrable Securities.  The Investors shall provide such
data within three (3) business days of receipt of written request  therefor from
the Company.  The intended method of disposition  (Plan of Distribution) of such
securities as so provided by the Investors shall be included without  alteration
in the Registration  Statement covering the Registrable Securities and shall not
be changed without written consent of the Investors.

          (f) (i) The Company  shall  indemnify,  defend and hold  harmless each
holder of Registrable  Securities which are included in a registration statement
pursuant  to  the  provisions  of  Subsection  (b)  or  (c)  (each,  a  "Selling
Shareholder") and each of its officers,  directors,  employees, agents, partners
or controlling  persons  (within the meaning of the Act) (each,  an "indemnified
party")  from and  against,  and shall  reimburse  such  indemnified  party with
respect  to, any and all  claims,  suits,  demands,  causes of  action,  losses,
damages,   liabilities,   costs  or  expenses   ("Liabilities")  to  which  such
indemnified party may become subject under the Act or otherwise, arising from or
relating to (A) any untrue statement or alleged untrue statement of any material
fact contained in such registration statement,  any prospectus contained therein
or any amendment or supplement  thereto, or (B) the omission or alleged omission
to state therein a material  fact required to be stated  therein or necessary to
make the statements  therein,  in light of the  circumstances in which they were
made, not misleading; provided, however, that the Company shall not be liable to
any  such  indemnified  party  in any  such  case to the  extent  that  any such
liability arises out of or is based upon an untrue statement or omission so made
in strict  conformity with information  furnished by such  indemnified  party in
writing  specifically for use in the registration  statement;  provided further,
that the  Company  shall not be liable in any such case to the  extent  that any
such  Liability  arises out of or is based upon an untrue  statement  or alleged
untrue  statement  or  omission  or  alleged  omission  made in any  preliminary
prospectus if (X) a Selling Shareholder under an obligation to send or deliver a
copy of the prospectus with or prior to the delivery of written  confirmation of
the sale of  Registrable  Securities to the person  asserting such Liability who
purchased such  Registrable  Securities  which are the subject thereof from such
Selling Shareholder failed to do so and (Y) the prospectus would have completely
corrected such untrue  statement or omission;  and provided,  further,  that the
Company  shall not be liable in any such case to the extent  that any  Liability
arises out of or is based upon an untrue  statement or alleged untrue  statement
or omission or alleged  omission in the prospectus,  if such untrue statement or
alleged untrue statement,  omission or alleged omission is completely  corrected

                                        5

<PAGE>

in an amendment or supplement to the prospectus and if, having  previously  been
furnished  by or on behalf of the  Company  with copies of the  prospectuses  so
amended or supplemented and having been obligated to deliver such  prospectuses,
the Selling  Shareholder  thereafter  failed to deliver  such  prospectus  as so
amended or supplemented,  prior to or concurrently  with the sale of Registrable
Securities to the person asserting such Liability who purchased such Registrable
Securities which are the subject thereof from such Selling Shareholder.

               (ii)  In  the  event  of  any  registration   under  the  Act  of
Registrable  Securities  pursuant to Subsection  (b) or (c), each holder of such
Registrable  Securities  hereby severally  agrees to indemnify,  defend and hold
harmless the Company, and its officers, directors,  employees, agents, partners,
or controlling  persons  (within the meaning of the Act) (each,  an "indemnified
party")  from and  against,  and shall  reimburse  such  indemnified  party with
respect to, any and all Liabilities to which such  indemnified  party may become
subject under the Act or  otherwise,  arising from or relating to (A) any untrue
statement or alleged  untrue  statement of any material  fact  contained in such
registration  statement,  any prospectus  contained  therein or any amendment or
supplement  thereto,  or (B) the omission or alleged omission to state therein a
material fact required to be stated  therein or necessary to make the statements
therein,  in light of the circumstances in which they were made, not misleading;
provided,  that such holders will be liable in any such case to the extent,  and
only to the extent,  that any such  liability  arises out of or is based upon an
untrue  statement or alleged  untrue  statement or omission or alleged  omission
made in such  registration  statement,  prospectus  or amendment  or  supplement
thereto in reliance upon and in conformity with written information furnished in
an  instrument  duly  executed  by  such  holder  specifically  for  use  in the
preparation thereof.

               (iii) Promptly after receipt by any  indemnified  party of notice
of the commencement of any action,  such indemnified  party shall, if a claim in
respect thereof is to be made against the Company hereunder,  notify the Company
in writing  thereof but the omission so to notify the Company  shall not relieve
the Company from any Liability which it may have to the indemnified  party other
than under this Section 1.4 and shall only relieve it from any  Liability  which
it may have to the indemnified party under this Section 1.4 if and to the extent
the Company is actually  prejudiced  by such  omission.  In case any such action
shall be brought against any indemnified  party and such indemnified party shall
notify the Company of the commencement thereof, the Company shall be entitled to
participate  in and, to the extent it shall wish,  to assume and  undertake  the
defense thereof with counsel reasonably  satisfactory to such indemnified party,
and, after notice from the Company to the  indemnified  party of its election so
to assume and undertake  the defense  thereof the Company shall not be liable to
the  indemnified  party under this section for any legal  expenses  subsequently
incurred by the  indemnified  party in connection with the defense thereof other
than reasonable costs of investigation  and of liaison with counsel so selected;
provided,  however,  that if the  defendants in any such action include both the
Company  and  such  indemnified  party  and the  indemnified  party  shall  have
reasonably concluded that there may be reasonable defenses available to it which
are different  from or  additional  to those  available to the Company or if the
interests of the indemnified party reasonably may be deemed to conflict with the
interests of the Company, the indemnified party shall have the right to select a
separate  counsel and to assume such legal defenses and otherwise to participate
in the defense of such  action,  with the  reasonable  expenses and fees of such
separate counsel and other reasonable  expenses related to such participation to
be reimbursed by the Company as incurred. In clarification of the foregoing, the

                                        6

<PAGE>

Company shall pay the reasonable expenses and fees of one separate counsel whose
selection  is approved by the largest  group of similarly  situated  indemnified
parties as measured by the  aggregate par value of such  Registrable  Securities
owned by such group. Any indemnified  party who chooses not to be represented by
the  foregoing  separate  counsel shall be entitled,  at its own expense,  to be
represented by counsel of its own selection.

          (g) (i) With respect to the inclusion of  Registrable  Securities in a
registration  statement  pursuant to Subsection (b) or (c), all fees,  costs and
expenses of and incidental to such  registration,  inclusion and public offering
shall be borne by the Company,  provided,  however,  that any  security  holders
participating  in such  registration  shall  bear  their  pro-rata  share of the
underwriting  discounts and commissions,  if any, incurred by them in connection
with such registration.

               (ii) The fees,  costs and expenses of registration to be borne by
the  Company  as  provided  in  this  Subsection  (g)  shall  include,   without
limitation,  all  registration,  filing and National  Association  of Securities
Dealers,  Inc.  ("NASD") fees,  printing  expenses,  fees and  disbursements  of
counsel and  accountants for the Company,  and all legal fees and  disbursements
and other  expenses of complying  with state  securities or Blue Sky laws of any
jurisdiction  or  jurisdictions  in which  securities  to be  offered  are to be
registered   and   qualified.   Subject   to   appropriate   agreements   as  to
confidentiality,  the Company shall make available to counsel for the holders of
Registrable  Securities its documents and personnel for due diligence  purposes.
Except as  otherwise  provided  herein,  fees and  disbursements  of counsel and
accountants  for the selling  security  holders shall be borne by the respective
selling security holders.

          (h) The rights to cause the Company to register  all or any portion of
Registrable  Securities  pursuant  to this  Section  1.4 may be  assigned  by an
Investor to a transferee  or assignee of 20% or more, in the  aggregate,  of the
Shares or the  Registrable  Securities  derived  from such  Shares  held by such
person.  Within a reasonable  time after such transfer the Investor shall notify
the  Company of the name and  address of such  transferee  or  assignee  and the
securities  with respect to which such  registration  rights are being assigned.
Such assignment  shall be effective only if immediately  following such transfer
the further  deposition  of such  securities  by the  transferee  or assignee is
restricted under the Act. Any transferee asserting registration rights hereunder
shall be bound by the applicable provisions of this Agreement.

          (i) From and after the date of this  Agreement,  the Company shall not
agree to allow the  holders of any  securities  of the Company to include any of
their securities in any registration  statement filed by the Company pursuant to
Subsection  (b)  unless  such  inclusion  will  not  reduce  the  amount  of the
Registrable Securities included therein.

          (j) If the  Company  elects to  require  conversion  of the  Shares in
connection with a registered public offering of Common Stock by the Company, the
shares issued upon such conversion shall be included in such public offering (if
and to the extent that the holders so elect) and such shares shall have priority
over shares offered by the Company or by any other selling  shareholders  in the
event  that a  reduction  in the total  number of  shares  so  offered  shall be
required.

                                        7

<PAGE>

                                   ARTICLE II

                         Representations and Warranties
                         ------------------------------

     Section 2.1  Representations  and Warranties of the Company.  Except as set
forth on the Disclosure  Schedule attached hereto,  the Company hereby makes the
following representations and warranties to the Investors:

          (a) Organization and Qualification.  The Company is a corporation duly
incorporated and existing in good standing under the laws of the State of Nevada
and has the requisite  corporate power to own its properties and to carry on its
business as now being  conducted.  Except for wholly owned  subsidiaries  of the
Company,  the identity of which has been  disclosed to the Investors and are set
forth on Section 2.1(a) of the Disclosure Schedule, the Company does not (i) own
of record or  beneficially,  directly or  indirectly,  (A) any shares of capital
stock or securities  convertible into capital stock of any other  corporation or
(B) any  participating  interest  in any  partnership,  joint  venture  or other
non-corporate business enterprise or (ii) control,  directly or indirectly,  any
other entity. The Company and each such subsidiary, if any, is duly qualified as
a  foreign  corporation  to  do  business  and  is in  good  standing  in  every
jurisdiction in which the nature of the business  conducted or property owned by
it makes such  qualification  necessary other than those in which the failure so
to qualify would not have a Material Adverse Effect.  "Material  Adverse Effect"
means any adverse effect on the business, operations,  properties, prospects, or
financial  condition  of the entity with  respect to which such term is used and
which is material to such entity and other entities controlling or controlled by
such entity taken as a whole.

          (b)  Authorization;  Enforcement.  (i) The Company  has the  requisite
corporate  power and  authority to enter into and perform this  Agreement and to
issue the Shares in  accordance  with the terms  hereof,  (ii) the execution and
delivery of this  Agreement  by the Company  and the  consummation  by it of the
transactions  contemplated  hereby have been duly  authorized  by all  necessary
corporate action,  and no further consent or authorization of the Company or its
Board of  Directors  or  stockholders  is  required  except for any  stockholder
approval  required  by the terms of the  Company's  listing  agreement  with the
Nasdaq Stock Market,  (iii) this  Agreement has been duly executed and delivered
by the Company and (iv) this Agreement, including the Schedules attached hereto,
constitutes a valid and binding  obligation of the Company  enforceable  against
the Company in accordance with its terms,  except as such  enforceability may be
limited  by  applicable  bankruptcy,  insolvency,  reorganization,   moratorium,
liquidation or similar laws relating to, or affecting  generally the enforcement
of creditors'  rights and remedies or by other  equitable  principles of general
application.

          (c)  Capitalization.  As of December 19, 1997, the authorized  capital
stock of the Company  consists of 40,000,000  shares of Common Stock,  $0.10 per
value,  and  2,000,000  shares of  preferred  stock,  $0.10 par value,  of which
740,000  shares are  undesignated  and the balance have been retired;  there are
15,799,955  shares of Common Stock and no shares of  preferred  stock issued and
outstanding;  and,  upon  issuance  of the Shares in  accordance  with the terms
hereof,  there will be 15,799,955  shares of Common Stock and 113,333  shares of
preferred stock issued and  outstanding.  All of the  outstanding  shares of the

                                        8

<PAGE>

Company's  Common  Stock  have been  validly  issued  and are  validly  paid and
nonassessable.  Except as set forth in Section 2.1(c) of the Disclosure Schedule
and as described in the SEC  Documents,  no shares of capital stock are entitled
to  preemptive  rights or  registration  rights  and  there  are no  outstanding
options,  warrants,  scrip,  rights to subscribe to, calls or commitments of any
character  whatsoever relating to, or securities or rights convertible into, any
shares of capital  stock of the Company or any  subsidiary  of the  Company,  or
contracts,  commitments,  understandings or arrangements by which the Company or
any subsidiary of the Company is or may become bound to issue additional  shares
of capital  stock of the  Company or any  subsidiary  of the Company or options,
warrants,  scrip,  convertible  debt,  rights to subscribe to, or commitments to
purchase or acquire,  any  shares,  or  securities  or rights  convertible  into
shares,  of capital stock of the Company or any  subsidiary of the Company.  The
Company has furnished or made available to the Investors true and correct copies
of the Company's  Articles of Incorporation as in effect on the date hereof (the
"Charter"),  and the  Company's  By-Laws,  as in effect on the date  hereof (the
"By-Laws").  Except as  provided  for in the  Charter,  or as  disclosed  in the
Company's  Quarterly  Report on Form 10-QSB for the quarter ended  September 30,
1997 (the "Third Quarter Report"),  the Company has no obligation (contingent or
other) to purchase,  redeem or otherwise acquire any of its equity securities or
any  interest  therein,  to make any payment in  satisfaction  of any  appraisal
rights properly perfected, or to pay any dividend or make any other distribution
in respect thereof.  To the Company's  knowledge,  there are no voting trusts or
agreements,  stockholders  agreements,  pledge agreements,  buy-sell agreements,
rights of first refusal or preemptive  rights  relating to any securities of the
Company or any of its  subsidiaries  (whether  or not the  Company or any of its
subsidiaries  is a party  thereto).  All of the  outstanding  securities  of the
Company  were  issued  in  compliance  with all  applicable  federal  and  state
securities laws.

          (d)  Issuance  of  Shares.  The  issuance  of the Shares has been duly
authorized and, when paid for or issued in accordance with the terms hereof, the
Shares shall be validly issued,  fully paid and  non-assessable  and entitled to
the rights and  preferences  set forth in  Schedule  2. The  issuance,  sale and
delivery of the Shares is not subject to any preemptive right of stockholders of
the Company or any right of first refusal or other right in favor of any person.
The  shares of Common  Stock  issuable  upon  conversion  of the Shares are duly
authorized and reserved for issuance and, upon conversion in accordance with the
Certificate  of  Designation  to be filed by the Company to establish the rights
and  preferences  of  the  Shares,  will  be  validly  issued,  fully  paid  and
non-assessable  and the holders shall be entitled to all rights and  preferences
accorded to a holder of Common Stock.

          (e) No Conflicts.  The  execution,  delivery and  performance  of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated  hereby  do not and  will  not (A)  result  in a  violation  of the
Company's  Charter or By-Laws or (B) conflict  with, or constitute a default (or
an event  which  with  notice or lapse of time or both  would  become a default)
under, or give to others any rights of termination,  amendment,  acceleration or
cancellation  of any agreement,  indenture or instrument to which the Company or
any of its  subsidiaries  is a party,  or result in a violation  of any federal,
state,  local or  foreign  law,  rule,  regulation,  order,  judgment  or decree
(including federal and state securities laws and regulations)  applicable to the
Company  or any of its  subsidiaries  or by which any  property  or asset of the
Company  or any of its  subsidiaries  is  bound  or  affected  (except  for such

                                        9

<PAGE>

conflicts, defaults, terminations, amendments, accelerations,  cancellations and
violations  as would  not,  individually  or in the  aggregate,  have a Material
Adverse  Effect);  provided  that,  for  purposes of such  representation  as to
federal,  state, local or foreign law, rule or regulation,  no representation is
made herein with respect to any of the same applicable solely to an Investor and
not to the  Company.  The  business  of the  Company is not being  conducted  in
violation  of any law,  ordinance or  regulations  of any  governmental  entity,
except for  violations  which either  singly or in the aggregate do not and will
not have a Material  Adverse Effect.  The Company is not required under federal,
state or local  law,  rule or  regulation  in the  United  States to obtain  any
consent, authorization or order of, or make any filing (other than the filing of
the  Certificate  of  Designation   with  the  Nevada  Secretary  of  State)  or
registration with, any court or governmental  agency in order for it to execute,
deliver or perform any of its obligations under this Agreement or issue and sell
the Shares in  accordance  with the terms  hereof  (other than any SEC,  NASD or
state securities filings which may be required to be made by the Company and any
registration  statement which may be filed pursuant hereto);  provided that, for
purposes of the  representation  made in this sentence,  the Company is assuming
and relying upon the accuracy of the relevant  representations and agreements of
the Investors herein.

          (f) SEC  Documents,  Financial  Statements.  The  Common  Stock of the
Company is registered  pursuant to Section 12(g) of the Securities  Exchange Act
of 1934, as amended (the "Exchange Act"), and the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting  requirements  of the Exchange Act,  including
material  filed  pursuant to Section 13(a) or 15(d),  in addition to one or more
registration  statements and amendments  thereto heretofore filed by the Company
with the SEC (all of the foregoing  including filings  incorporated by reference
therein  being  referred  to herein as the "SEC  Documents").  The  Company  has
delivered or made  available to the  Investors  true and complete  copies of the
quarterly and annual  (including,  without  limitation,  proxy  information  and
solicitation  materials)  SEC  Documents  filed with the SEC since  December 31,
1996.  The Company has not  provided to the  Investors  any  information  which,
according to applicable  law,  rule or  regulation,  should have been  disclosed
publicly  by the Company  but which has not been so  disclosed,  other than with
respect to the  transactions  contemplated by this Agreement except as set forth
on Section 2.1(f) of the Disclosure Schedule.  As of their respective dates, the
SEC Documents  complied in all material  respects with the  requirements  of the
Exchange Act and the rules and  regulations  of the SEC  promulgated  thereunder
except  as set forth on  Section  2.1(f) of the  Disclosure  Schedule  and other
federal,  state and local laws,  rules and  regulations  applicable  to such SEC
Documents,  and none of the SEC Documents  contained  any untrue  statement of a
material fact or omitted to state a material fact required to be stated  therein
or  necessary  in  order  to  make  the  statements  therein,  in  light  of the
circumstances  under  which  they  were  made,  not  misleading.  The  financial
statements of the Company included in the SEC Documents comply as to form in all
material  respects with  applicable  accounting  requirements  and the published
rules and regulations of the SEC or other  applicable rules and regulations with
respect thereto. Such financial statements have been prepared in accordance with
generally  accepted  accounting  principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements  or the  notes  thereto  or (ii) in the  case  of  unaudited  interim
statements,  to the extent they may not include footnotes or may be condensed or
summary  statements)  and fairly present in all material  respects the financial

                                       10

<PAGE>

position  of the Company and its  subsidiaries  as of the dates  thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).

          (g) No Material  Adverse  Change.  Since  September 30, 1997, the date
through which the most recent Quarterly Report on Form 10-QSB of the Company has
been  prepared  and filed with the SEC, a copy of which is  included  in the SEC
Documents, no Material Adverse Effect has occurred or exists with respect to the
Company or its subsidiaries, except as otherwise disclosed or reflected in other
SEC Documents prepared through or as of a date subsequent to September 30, 1997.

          (h) No Undisclosed Liabilities.  The Company and its subsidiaries have
no  liabilities or  obligations  not disclosed in the SEC Documents,  other than
those  incurred in the ordinary  course of the  Company's  or its  subsidiaries'
respective businesses since September 30, 1997 or which,  individually or in the
aggregate,  do not or would not have a Material Adverse Effect on the Company or
its subsidiaries.

          (i) No Undisclosed Events or Circumstances.  Since September 30, 1997,
the  Company  has not (i)  issued any stock,  bond or other  corporate  security
except  upon  conversion  or  exercise  of  options,   warrants  or  convertible
debentures  which were  outstanding  on September  30, 1997,  (ii)  borrowed any
amount or  incurred or become  subject to any  liability  (absolute,  accrued or
contingent), except current liabilities incurred and liabilities under contracts
entered into in the ordinary course of business,  (iii)  discharged or satisfied
any  lien or  encumbrance  or  incurred  or paid  any  obligation  or  liability
(absolute,  accrued or contingent)  other than current  liabilities  shown since
September 30, 1997 and current liabilities incurred since September 30, 1997, in
the  ordinary  course  of  business,  (iv)  declared  or  made  any  payment  or
distribution  to  stockholders or purchased or redeemed any share of its capital
stock or other security, (v) mortgaged,  pledged or subjected to lien any of its
assets, tangible or intangible, other than liens for current real property taxes
not yet due and payable,  (vi) sold, assigned or transferred any of its tangible
assets except in the ordinary course of business, or canceled any debt or claim,
(vii)  suffered  any loss of property or waived any right of  substantial  value
whether or not in the  ordinary  course of  business,  (viii) made any change in
officer  compensation  except in the ordinary  course of business and consistent
with past practice,  (ix) made any material  change in the manner of business or
operations  of the  Company,  (x)  entered  into any  transaction  except in the
ordinary course of business or as otherwise contemplated hereby, or (xi) entered
into any commitment  (contingent  or otherwise) to do any of the  foregoing.  No
other event or  circumstance  has occurred or exists with respect to the Company
or its  subsidiaries  or their  respective  businesses,  properties,  prospects,
operations  or  financial  condition,  which,  under  applicable  law,  rule  or
regulation,  requires public disclosure or announcement by the Company but which
has not been so publicly announced or disclosed.

          (j) No  General  Solicitation.  Neither  the  Company,  nor any of its
affiliates,  or, to its knowledge, any person acting on its or their behalf, has
engaged in any form of general  solicitation or general  advertising (within the
meaning of Regulation D under the Act) in  connection  with the offer or sale of
the Shares.

                                       11

<PAGE>

          (k) No  Integrated  Offering.  Neither  the  Company,  nor  any of its
affiliates,  nor any  person  acting on its or their  behalf  has,  directly  or
indirectly,  made any offers or sales of any security or solicited any offers to
buy any security,  under  circumstances  that would require  registration of the
Shares under the Act.

          (l) Standoff Commitments.  The Company has received binding assurances
from each of its executive  officers and directors which owns at least 5% of the
issued and  outstanding  Common  Stock that none of them will sell any shares of
Common Stock during the thirteen (13) months following the Closing Date,  except
that with the approval of the Chairman of the Board of the Company, each of them
may sell up to ten percent (10%) of his or her present holdings of Common Stock,
and may sell amounts in excess of 10% with the approval of all of the Investors.

          (m) Litigation;  Compliance With Law. There is no material (i) action,
suit, claim, proceeding or investigation pending or, to the Company's knowledge,
threatened  against or affecting the Company,  at law or in equity, or before or
by any federal, state, municipal or other governmental  department,  commission,
board, bureau, agency or instrumentality,  domestic or foreign, (ii) arbitration
proceeding relating to the Company pending or (iii) governmental inquiry pending
or, to the  Company's  knowledge,  threatened  against or affecting  the Company
(including without limitation any inquiry as to the qualification of the Company
to hold or receive any license or  permit).  The Company is not in default  with
respect to any order,  writ,  injunction  or decree  known to or served upon the
Company of any court or of any federal,  state,  municipal or other governmental
department,  commission,  board, bureau, agency or instrumentality,  domestic or
foreign.  The Company has complied with all laws, rules,  regulations and orders
applicable  to  its  business,  operations,  properties,  assets,  products  and
services,  and the  Company  has  all  necessary  permits,  licenses  and  other
authorizations  required to conduct its business as conducted and as proposed to
be conducted except where the failure to comply or to have a license,  permit or
other authorization would not have, a Material Adverse Effect on the Company and
its subsidiaries taken as a whole.

          (n) Oil and Gas Properties.  Each of the Company and its  subsidiaries
has good and defensible title to all of its respective  interests in oil and gas
leases,  free and clear of any encumbrances,  subject only to liens for taxes or
charges of mechanics or materialmen  not yet due and to  encumbrances  under gas
sales contracts,  operating  agreements,  unitization and pooling agreements and
other similar  agreements as are customarily found in connection with comparable
exploration,  drilling and producing  operations  and to title defects and other
encumbrances that are,  singularly and in the aggregate,  not material in amount
and do not  interfere  with its use or enjoyment of its oil and gas  properties.
Each of the Company and its subsidiaries  has complied in all material  respects
with its  obligations  under  the  terms of the oil and gas  leases  in which it
purports to own an interest, and all of such leases are in full force and effect
(except  where the  failure so to comply or to be in full force and effect  will
not have a Material Adverse Effect) upon the Company and its subsidiaries  taken
as a whole.

          (o) Taxes.  The Company  has filed all tax  returns,  federal,  state,
county and local, required to be filed by it, and the Company has paid all taxes
shown to be due by such  returns  as well as all other  taxes,  assessments  and
governmental  charges  which  have  become  due or  payable  including,  without
limitation,  all taxes which the Company is obligated  to withhold  from amounts
owing to employees,  creditors and third parties. All such taxes with respect to

                                       12

<PAGE>

which the Company has become obligated pursuant to elections made by the Company
in  accordance  with  generally  accepted  practice  have been paid and adequate
reserves have been  established  for all taxes accrued but not yet payable.  The
federal  income tax  returns  of the  Company  have  never  been  audited by the
Internal Revenue Service.  No deficiency  assessment with respect to or proposed
adjustment of the Company's federal, state, county or local taxes is pending or,
to the Company's knowledge, threatened. There is no tax lien, whether imposed by
any federal,  state,  county or local taxing authority,  outstanding against the
assets, properties or business of the Company.

          (p) Other Agreements. The Company is not a party to or otherwise bound
by any  written  or oral  contract  or  instrument  or other  restriction  which
individually  or in the aggregate  could have a Material  Adverse  Effect on the
Company  and its  subsidiaries  taken as a  whole.  Except  as set  forth in the
Disclosure  Schedules,  neither the Company nor any  subsidiary is a party to or
otherwise bound by any written or oral:

               (i) contract  with any labor union (and,  to the knowledge of the
Company,  no  organizational  effort is being  made with  respect  to any of its
employees);

               (ii) contract for the future  purchase of fixed assets or for the
future  purchase of  materials,  supplies or  equipment  in excess of its normal
operating requirements;

               (iii)  contract for the  employment  of any officer,  employee or
other person  (whether of a legally  binding nature or in the nature of informal
understandings)  on a full-time or consulting  basis which is not  terminable on
notice without cost or other liability to the Company or any subsidiary,  except
as set forth in the SEC Documents and except for normal  severance  arrangements
and accrued vacation pay;

               (iv) bonus, pension, profit-sharing, retirement, hospitalization,
insurance, stock purchase, stock option or other plan, contract or understanding
pursuant to which  benefits  are  provided to any employee of the Company or any
subsidiary (other than group insurance plans applicable to employees generally);

               (v) any agreement or indenture relating to the borrowing of money
or to the  mortgaging  or pledging of, or  otherwise  placing a lien or security
interest on, any asset of the Company or any subsidiary,  except as set forth in
the SEC Documents;

               (vi) guaranty of any obligation for borrowed money or otherwise;

               (vii) voting trust or agreement,  stockholders agreement,  pledge
agreement,  buy-sell  agreement or first refusal or preemptive  rights agreement
relating to any securities of the Company or any subsidiary;

                                       13

<PAGE>

               (viii)  agreement,  or group of related  agreements with the same
party or any  group of  affiliated  parties,  under  which  the  Company  or any
subsidiary  has  advanced or agreed to advance  money or has agreed to lease any
property as lessee or lessor;

               (ix)  except for this  Agreement,  any  agreement  or  obligation
(contingent  or  otherwise)  to  issue,  sell  or  otherwise  distribute  or  to
repurchase or otherwise  acquire or retire any share of its capital stork or any
of its other equity securities; or

               (x) except for this Agreement,  any agreement or obligation under
which  it has  granted  any  person  any  registration  rights,  other  than the
Registration  Agreement and securities  being issued to San Jacinto  Securities,
Inc. in connection with this transaction.

The Company and, to the  Company's  knowledge,  each other party thereto have in
all material respects performed all the obligations  required to be performed by
them to date,  have  received no notice of default and are not in default  (with
due notice or lapse of time or both) under any lease,  agreement or contract now
in affect to which the  Company or any  subsidiary  is a party or by which it or
its  property  may be bound  which such  default  would have a Material  Adverse
Effect on the Company.

          (q) Loans and Advances. Neither the Company nor any subsidiary has any
outstanding  loans or  advances to any person and is not  obligated  to make any
such loans or advances,  except,  in each case, for advances to employees of the
Company in respect of reimbursable  business expenses anticipated to be incurred
by them in connection with their performance of services for the Company and its
subsidiaries taken as a whole.

          (r)  Assumptions,  Guaranties,  etc. of Indebtedness of Other Persons.
Neither the Company nor any  subsidiary  has  assumed,  guaranteed,  endorsed or
otherwise  become  directly or  contingently  liable on any  indebtedness of any
other person  (including,  without  limitation,  liability by way of  agreement,
contingent or otherwise,  to purchase,  to provide funds for payment,  to supply
funds to or otherwise invest in the debtor,  or otherwise to assure the creditor
against loss),  except for  obligations  to share  expenses or obligations  with
respect to oil and gas  operations  on  properties  in which the  Company has an
interest and guaranties by endorsement of negotiable  instruments for deposit or
collection in the ordinary course of business.

          (s) Significant Customers and Suppliers. No customer or supplier which
was  significant to the Company or any  subsidiary  during the period covered by
the Third  Quarter  Report or which has been  significant  to the Company or any
subsidiary thereafter,  has terminated,  materially reduced or, to the Company's
knowledge,  threatened to terminate or materially  reduce its purchases  from or
provision of products or services to the Company or any subsidiary,  as the case
may be.

          (t)   Government   Approvals.   Subject   to  the   accuracy   of  the
representations  and  warranties  of the  Investors set forth in Section 2.2, no
registration  or filing with,  or consent or approval of or other action by, any
federal,  state or other  governmental  agency or  instrumentality is or will be
necessary for the valid  execution,  delivery and  performance by the Company of
this  Agreement,  the  issuance,  sale and delivery of the Shares other than (i)

                                       14

<PAGE>

filings  pursuant to state  securities laws (all of which filings have been made
or will be made on a timely basis by the Company) in connection with the sale of
the Shares, and (ii) the filing of a Form D with the SEC.

          (u)  Compliance  With  Environmental  Laws.  To the  knowledge  of the
Company,  the business and properties of the Company and its  subsidiaries  have
been operated in compliance  with all applicable  federal,  state or local laws,
rules,  regulations or orders  (collectively,  "Environmental Laws") relating to
pollution or protection of the environment  including,  without limitation,  any
law, rule,  regulation or order relating to emissions,  discharges,  releases or
threatened releases ("Releases") of chemicals, pollutants, contaminants, wastes,
petroleum or  petroleum  products,  toxic  substances  or  hazardous  substances
("Pollutants") for which noncompliance would have a Material Adverse Effect upon
the Company and its subsidiaries  taken as a whole.  Neither the Company nor any
subsidiary has received any written  communication,  whether from a governmental
authority,  citizens'  group,  landowner,  employee  or  otherwise,  nor, to the
knowledge of the Company,  has the Company or any  subsidiary  received any oral
communication  from a governmental  authority,  alleging that (i) the Company or
any such subsidiary is not in compliance with any  Environmental  Law applicable
to it and its business and  properties,  or (ii) any employee or third party has
suffered bodily injury or property damage as a result of one or more Releases of
Pollutants  arising out of or resulting from the operations of the Company,  its
subsidiaries, or prior owners and operators of their business or property, which
allegation,  if true,  would have a Material Adverse Effect upon the Company and
its  subsidiaries  taken as a whole.  Except as disclosed in the SEC  Documents,
neither the Company nor any subsidiary has any material obligation to remediate,
repair or replace any property,  whether real or personal, owned by the Company,
its  subsidiaries  or any third  party,  as a result of one or more  Releases of
Pollutants  arising out of or resulting from the operations of the Company,  its
subsidiaries, or prior owners and operators of their business or properties.

          (v) Brokers.  Except for the letter agreement dated December 30, 1997,
with San Jacinto Securities, Inc. and the Consulting Agreement with Beta Capital
Group,  Inc.,  dated February 12, 1996,  both of whose fees shall be paid by the
Company,  the Company has no contract,  arrangement  or  understanding  with any
broker, finder or similar agent with respect to the transactions contemplated by
this Agreement.

          (w) Disclosure. Neither this Agreement, nor any Schedule or Exhibit to
this  Agreement,  contains  an untrue  statement  of a material  fact or omits a
material fact necessary to make the statements  contained  herein or therein not
misleading.  None of the  statements,  documents,  certificates  or other  items
prepared  or  supplied  by  the  Company  with   respect  to  the   transactions
contemplated  hereby contains an untrue  statement of a material fact or omits a
material fact necessary to make the statements contained therein not misleading.

     Section 2.2 Representations and Warranties of the Investors.  Each Investor
severally  and not  jointly  hereby  makes  the  following  representations  and
warranties to the Company:

          (a)  Authorization;  Enforcement.  (i) Such Investor has the requisite
power and authority to enter into and perform this Agreement and to purchase the
Shares being sold  hereunder,  (ii) the execution and delivery of this Agreement
by such Investor and the  consummation  by it of the  transactions  contemplated
hereby have been duly  authorized  by all  necessary  corporate  or  partnership

                                       15
<PAGE>

action,  and (iii) this Agreement  constitutes a valid and binding obligation of
such Investor  enforceable  against such Investor in accordance  with its terms,
except  as  such  enforceability  may  be  limited  by  applicable   bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting  generally the enforcement of creditors'  rights and remedies or by
other equitable principles of general application.

          (b) No Conflicts.  The  execution,  delivery and  performance  of this
Agreement and the consummation by such Investor of the transactions contemplated
hereby do not and will not (i) result in a violation of such Investor's  charter
documents  or  By-Laws  or  (ii)  conflict  with  any  agreement,  indenture  or
instrument to which such Investor is a party,  or (iii) result in a violation of
any law, rule or  regulation,  or any order,  judgment or decree of any court or
governmental  agency applicable to such Investor.  The business of such Investor
is not being conducted in violation of any law or regulation of any governmental
entity,  except for possible  violations which either singly or in the aggregate
do not and  will  not have a  Material  Adverse  Effect.  Such  Investor  is not
required to obtain any consent or authorization  of any  governmental  agency in
order for it to perform its  obligations  under this  Agreement.  The data to be
provided  by such  Investor  in  connection  with  registering  the  Registrable
Securities under the Act will be true and correct in all material respects.

          (c) Investment Representation.  Such Investor is purchasing the Shares
for its own account for  investment  and not with a view to  distribution.  Such
Investor has no present  intention  to sell the Shares and such  Investor has no
present  arrangement  (whether or not legally  binding) to sell the Shares to or
through  any  person  or  entity,   provided,   however,   that  by  making  the
representations  herein, such Investor does not agree to hold the Shares for any
minimum or other  specific  term and reserves the right to dispose of the Shares
at any time in accordance  with federal and state  securities laws applicable to
such disposition.

          (d) Accredited  Investor.  Such Investor is an accredited  investor as
defined in Rule 501 promulgated  under the Act. Such Investor has such knowledge
and experience in financial and business  matters in general and  investments in
particular, so that such Investor is able to evaluate the merits and risks of an
investment  in the Shares and to protect its own  interests in  connection  with
such  investment.  In addition (but without limiting the effect of the Company's
representations  and warranties  contained  herein),  such Investor has received
such  information as it considers  necessary or appropriate for deciding whether
to purchase the Shares pursuant hereto.

          (e) Rule  144.  Such  Investor  understands  that  there is no  public
trading  market for the Shares,  that none is expected to develop,  and that the
Shares must be held indefinitely unless such Shares or securities into which the
Shares  are  converted  are  registered  under  the  Act  or an  exemption  from
registration  is  available.  Such  Investor has been advised or is aware of the
provisions of Rule 144 promulgated under the Act.

                                       16

<PAGE>

                                   ARTICLE III

                                    Covenants
                                    ---------

     Section 3.1 Securities Compliance.

          (a) The Company  shall  notify the SEC and NASD,  in  accordance  with
their  requirements,  of the  transactions  contemplated by this Agreement,  and
shall take all other  necessary  action and  proceedings  as may be required and
permitted  by  applicable  law,  rule and  regulation,  for the  legal and valid
issuance of the Shares and Common Stock issuable upon conversion  thereof to the
Investors or subsequent holders.

          (b) The  Investors  understand  that the Shares are being  offered and
sold in reliance on a transactional exemption from the registration requirements
of federal and state  securities  laws and that the Company is relying  upon the
truth   and   accuracy   of   the   representations,   warranties,   agreements,
acknowledgments and understandings of each Investor set forth herein in order to
determine the  applicability  of such  exemptions  and the  suitability  of such
Investor to acquire the Shares.

     Section 3.2 Registration and Listing.  Until two (2) years after all Shares
have been converted  into Common Stock,  the Company will cause its Common Stock
to continue to be registered  under Sections 12(b) or 12(g) of the Exchange Act,
will comply in all respects with its reporting and filing obligations under said
act, will comply with all  requirements  related to any  registration  statement
filed  pursuant  to this  Agreement  and will not  take any  action  or file any
document  (whether or not  permitted by the Act or the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its  reporting  and filing  obligations  under said  Acts,  except as  permitted
herein.  Until two (2) years  after all Shares have been  converted  into Common
Stock the Company will take all action  within its power to continue the listing
or trading of its Common Stock on the Nasdaq  SmallCap Market and will comply in
all respects with the Company's  reporting,  filing and other  obligations under
the bylaws or rules of the NASD and the Nasdaq Stock Market.

     Section 3.3 Financial Statements,  Reports, Etc.. The Company shall furnish
to each Investor promptly upon sending, making available or filing the same, all
press releases, reports and financial statements that the Company sends or makes
available to its stockholders or directors or files with the SEC.

     Section 3.4 Reserve for Additional  Shares.  The Company shall at all times
reserve and keep available out of its  authorized but unissued  shares of Common
Stock, for the purpose of issuing the additional  shares pursuant to Schedule 2,
and otherwise  complying  with the terms of this  Agreement,  such number of its
duly authorized shares of Common Stock as shall be sufficient to comply with the
terms of this  Agreement.  If at any time the number of authorized  but unissued
shares of Common Stock shall not be  sufficient to comply with the terms of this
Agreement,  the Company  will  forthwith  take such  corporate  action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be  sufficient  for such  purposes.  The Company  will

                                       17

<PAGE>

obtain  any  authorization,  consent,  approval  or other  action by or make any
filing  with any  court  or  administrative  body  that  may be  required  under
applicable  state  securities  laws in connection with the issuance of shares of
Common Stock and the additional shares pursuant to Schedule 2.

     Section 3.5 Inspection,  Consultation and Advice.  The Company shall permit
and cause each of its  subsidiaries  to permit each Investor and such persons as
it may reasonably  designate,  at such Investor's  expense, to visit and inspect
any of the properties of the Company and its  subsidiaries,  examine their books
and take copies and  extracts  therefrom,  discuss  the  affairs,  finances  and
accounts of the Company and its subsidiaries with their officers,  employees and
public  accountants  (and the Company  hereby  authorizes  said  accountants  to
discuss  with such  Investor  and such  designees  such  affairs,  finances  and
accounts),  and consult  with and advise the  management  of the Company and its
subsidiaries as to their affairs, finances and accounts, all at reasonable times
and upon reasonable notice.

     Section  3.6 Keeping of Records  and Books of  Account.  The Company  shall
keep, and cause each subsidiary to keep,  adequate records and books of account,
in which complete  entries will be made in accordance  with  generally  accepted
accounting   principles   consistently   applied,   reflecting   all   financial
transactions of the Company and such  subsidiary,  and in which, for each fiscal
year,   all  proper   reserves  for   depreciation,   depletion,   obsolescence,
amortization,  taxes,  bad debts  and  other  purposes  in  connection  with its
business shall be made.

                                   ARTICLE IV

                                   Conditions
                                   ----------

     Section 4.1  Conditions  Precedent to the Obligation of the Company to Sell
the Shares.  The  obligation  hereunder  of the Company to issue and/or sell the
Shares to the  Investors  is  subject  to the  satisfaction,  at or  before  the
Closing, of each of the conditions set forth below. These conditions are for the
Company's  sole benefit and may be waived by the Company at any time in its sole
discretion.

          (a) Accuracy of the Investors'  Representations  and  Warranties.  The
representations and warranties of the Investors shall be true and correct in all
material respects.

          (b)  Performance by the Investors.  The Investors shall have performed
all  agreements  and  satisfied  all  conditions  required  to be  performed  or
satisfied by the Investors at or prior to the Closing.

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

     Section 4.2  Conditions  Precedent to the  Obligation  of the  Investors to
Purchase  the Shares.  The  obligation  hereunder  of each of the  Investors  to
acquire and pay for the Shares is subject to the satisfaction,  at or before the
Closing,  of each of the  conditions set forth below.  These  conditions are for
each  Investor's  sole benefit and may be waived by such Investor at any time in
its sole discretion.

                                       18

<PAGE>

          (a) Accuracy of the  Company's  Representations  and  Warranties.  The
representations  and  warranties of the Company shall be true and correct in all
material  respects as of the date when made and as of the Closing Date as though
made at that time (except for  representations and warranties that speak as of a
particular date).

          (b)  Performance by the Company.  The Company shall have performed all
agreements and satisfied all conditions required to be performed or satisfied by
the Company at or prior to the Closing.

          (c) Nasdaq.  From the date hereof to the Closing Date,  trading in the
Company's  Common  Stock shall not have been  suspended by the SEC or the Nasdaq
SmallCap Market (except for any suspension of trading of limited duration agreed
to  between  the  Company  and the  Nasdaq  SmallCap  Market  solely  to  permit
dissemination  of material  information  regarding the Company),  and trading in
securities  generally as reported by the Nasdaq Stock Market shall not have been
suspended  or limited  or  minimum  prices  shall not have been  established  on
securities whose trades are reported by the Nasdaq Stock Market.

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

          (e) Opinion of Counsel,  Etc. At the Closing, the Investors shall have
received an opinion of counsel to the Company, satisfactory to the Investors, in
the form  attached  hereto  and such other  certificates  and  documents  as the
Investors or their respective  counsel shall reasonably  require incident to the
Closing.

          (f) All  Proceedings  to be  Satisfactory.  All  corporate  and  other
proceedings  to be taken by the  Company  in  connection  with the  transactions
contemplated  hereby and all documents incident thereto shall be satisfactory in
form and  substance  to the  Investors  and their  respective  counsel,  and the
Investors and their respective  counsel shall have received all such counterpart
originals or certified or other copies of such documents as they  reasonably may
request.

          (g) Purchase of Shares by Other  Investors.  Each Investor  shall have
purchased and paid for the Shares being purchased by it on the Closing Date, and
the aggregate  purchase  price paid by all of the Investors for the Shares being
purchased by them on the Closing Date shall be at least $5,666,650.

          (h) Supporting  Documents.  The Investors and their respective counsel
shall have received  copies of the documents they shall have requested  prior to
Closing,  including such supporting documents and other information with respect
to  the  operations  and  affairs  of the  Company  as the  Investors  or  their
respective counsel reasonably may request.

                                       19

<PAGE>

                                    ARTICLE V

                                 Legend on Stock
                                 ---------------

     Each certificate  representing  the Shares and, if appropriate,  securities
issued upon conversion  thereof,  shall be stamped or otherwise imprinted with a
legend substantially in the following form:

          THESE   SECURITIES  HAVE  NOT  BEEN  REGISTERED   UNDER  THE
          SECURITIES ACT OF 1933 OR ANY STATE  SECURITIES  LAWS.  THEY
          MAY NOT BE SOLD OR OFFERED  FOR SALE  EXCEPT  PURSUANT TO AN
          EFFECTIVE  REGISTRATION  STATEMENT  UNDER  SAID  ACT AND ANY
          APPLICABLE STATE  SECURITIES LAW OR AN APPLICABLE  EXEMPTION
          FROM SUCH REGISTRATION REQUIREMENTS.

     The  Company  agrees to  reissue  or,  if  applicable,  issue  certificates
representing the Shares or, if applicable, the securities issued upon conversion
thereof  without  the  legend  set forth  above at such  time as (i) the  holder
thereof is  permitted  to dispose of such  Shares  (or  securities  issued  upon
conversion  thereof)  pursuant to Rule 144(k) under the Act, (ii) the securities
are sold to a  purchaser  or  purchasers  who (in the opinion of counsel to such
purchasers, in form and substance reasonably satisfactory to the Company and its
counsel) are able to dispose of such shares publicly without  registration under
the Act, or (iii) such securities are registered under the Act.

                                   ARTICLE VI

                                   Termination
                                   -----------

     Section 6.1 Termination by Mutual Consent. This Agreement may be terminated
at any time prior to the  Closing by the mutual  written  consent of the Company
and the Investor desiring to terminate this Agreement.

     Section 6.2 Other  Termination.  This Agreement may be terminated by action
of the Board of Directors or other  governing body of such Investor  desiring to
terminate  this  Agreement  or the Company at any time if the Closing  shall not
have been  consummated  by the fifth  business  day  following  the date of this
Agreement.

     Section 6.3  Automatic  Termination.  This  Agreement  shall  automatically
terminate without any further action of either party hereto if the Closing shall
not  have  occurred  by the  tenth  business  day  following  the  date  of this
Agreement.

                                       20

<PAGE>

                                   ARTICLE VII

                                  Miscellaneous
                                  -------------

     Section 7.1 Fees and Expenses. Except as otherwise set forth in Section 1.4
hereof,  each party shall pay the fees and  expenses of its  advisers,  counsel,
accountants and other experts,  if any, and all other expenses  incurred by such
party  incident  to  the  negotiation,   preparation,  execution,  delivery  and
performance  of this  Agreement,  provided  that the  Company  shall pay, at the
Closing,  all due diligence  fees and  attorneys'  fees and expenses  (including
those of in-house  counsel)  incurred by each Investor,  in connection  with the
preparation,  negotiation,  execution  and  delivery of this  Agreement  and the
transactions contemplated hereunder.

     Section 7.2 Specific Enforcement Consent to Jurisdiction.

          (a) The Company and each of the Investors  acknowledge  and agree that
irreparable  damage would occur in the event that any of the  provisions of this
Agreement  were not performed in accordance  with their  specific  terms or were
otherwise breached.  It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the provisions of
this Agreement and to enforce  specifically the terms and provisions hereof this
being in addition to any other remedy to which either of them may be entitled by
law or equity.

          (b) The  Company  and each of the  Investors  (i)  hereby  irrevocably
submits to the jurisdiction of the United States District Court and other courts
of the United States sitting in California for the purposes of any suit,  action
or  proceeding  arising  out of or relating  to this  Agreement  and (ii) hereby
waives,  and agrees not to assert in any such suit,  action or  proceeding,  any
claim that it is not personally  subject to the jurisdiction of such court, that
the suit,  action or proceeding is brought in an inconvenient  forum or that the
venue of the suit, action or proceeding is improper. The Company and each of the
Investors  consents  to  process  being  served  in any  such  suit,  action  or
proceeding  by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and  sufficient  service of process  and  notice  thereof.  Nothing in this
paragraph  shall affect or limit any right to serve  process in any other manner
permitted by law.

          Section 7.3 Entire Agreement;  Amendment.  This Agreement contains the
entire  understanding  of the parties with respect to the matters covered hereby
and, except as specifically set forth herein, neither the Company nor any of the
Investors  makes any  representation,  warranty,  covenant or  undertaking  with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written  instrument signed by the party against whom enforcement
of any such amendment or waiver is sought.

          Section 7.4  Notices.  Any notice or other  communication  required or
permitted to be given  hereunder  shall be in writing and shall be effective (a)
upon hand  delivery or delivery by telex (with  collect  answer back  received),
telecopy or facsimile at the address or number designated below (if delivered on
a  business  day  during  normal  business  hours  where  such  notice  is to be
received), or the first business day following such delivery (if delivered other

                                       21

<PAGE>

than on a business day during normal  business  hours where such notice is to be
received)  or (b) on the second  business day  following  the date of mailing by
express  courier  service,  fully  prepaid,  addressed to such address,  or upon
actual receipt of such mailing,  whichever shall first occur.  The addresses for
such communications shall be:

                  to the Company:   Pease Oil and Gas Company, Inc.
                                    751 Horizon Court, Suite 203
                                    P.O. Box 60219
                                    Grand Junction, Colorado  81506-8718
                                    Attn: Willard H. Pease, Jr.

                  with copies to:   Alan W. Peryam, Esq.
                                    Alan W. Peryam, LLC
                                    1120 Lincoln Street, Suite 1000
                                    Denver, Colorado 80203

                  to the Investor:  At the address for such  Investor  set forth
                                    below  the signature of such Investor on the
                                    execution page of this Agreement

                  with              copies to: To legal counsel of such Investor
                                    at the address set forth below the signature
                                    of such  Investor on the  execution  page of
                                    this Agreement.

Any party  hereto may from time to time change its address for notices by giving
at least ten (10)  days'  written  notice of such  changed  address to the other
party hereto.

     Section 7.5 Waivers.  No waiver by either party of any default with respect
to any provision,  condition or requirement of this Agreement shall be deemed to
be a  continuing  waiver  in the  future  or a waiver  of any  other  provision,
condition or requirement hereof, nor shall any delay or omission of either party
to exercise any right  hereunder  in any manner  impair the exercise of any such
right accruing to it thereafter.

     Section 7.6 Headings.  The headings herein are for convenience only, do not
constitute a part of this  Agreement  and shall not be deemed to limit or affect
any of the provisions hereof.

     Section 7.7 Successors and Assigns.  Except as otherwise  provided  herein,
this Agreement shall be binding upon and inure to the benefit of the parties and
their  successors  and  assigns.  The  parties  hereto may amend this  Agreement
without notice to or the consent of any third party.  Except as herein provided,
neither the Company nor any Investor  shall assign this  Agreement or any rights
or obligations  hereunder  without the prior written consent of the other (which
consent may be withheld for any reason in the sole  discretion of the party from
whom  consent is  sought);  provided,  however,  that the Company may assign its
rights and  obligations  hereunder to any acquiror of  substantially  all of the
assets or a  controlling  equity  interest of the Company.  The  assignment by a
party to this Agreement of any rights hereunder shall not affect the obligations
of such party under this Agreement.

                                       22

<PAGE>

     Section 7.8 No Third Party  Beneficiaries.  This  Agreement is intended for
the benefit of the parties hereto and their respective  permitted successors and
assigns and is not for the benefit of, nor may any provision  hereof be enforced
by, any other person, except as provided in Section 1.4(f).

     Section  7.9  Governing  Law.  This  Agreement  shall  be  governed  by and
construed  and  enforced in  accordance  with the  internal  laws of  California
without regard to such state's principles of conflict of laws.

     Section 7.10 Survival.  The  representations  and warranties of the Company
and the Investors  contained in Article II and the  agreements and covenants set
forth in Articles I, II and VII shall survive the Closing.

     Section  7.11  Execution.  This  Agreement  may be  executed in two or more
counterparts,  all of which shall be considered  one and the same  agreement and
shall  become  effective  when  counterparts  have been signed by each party and
delivered to the other  party,  it being  understood  that both parties need not
sign the same counterpart.  In the event any signature is delivered by facsimile
transmission,  the party using such means of delivery  shall cause the  manually
executed signature page(s) to be physically  delivered to the other party within
five (5) days of the execution hereof.

     Section 7.12 Publicity.  The Company agrees that it will not disclose,  and
will not include in any public  announcement,  the name of any Investor  without
its consent,  unless and until such  disclosure is required by law or applicable
regulation, and then only to the extent of such requirement.

                                       23

<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective authorized officers as of the date hereof.

                                        PEASE OIL AND GAS COMPANY

                                        By: /s/ Willard H. Pease, Jr.
                                            ------------------------------------
                                            Willard H. Pease, Jr.
                                            Chairman

                                        THE INVESTOR

                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        Name and Address of Investor:
                                        Offense Group Associates, L.P.
                                        1800 Avenue of the Stars, 2nd Floor
                                        Los Angeles, California  90067

                                        Name and Address of Legal Counsel:
                                        Milbank, Tweed, Hadley & McCloy
                                        601 South Figueroa Street, 30th Floor
                                        Los Angeles, California  90017
                                        Attn:  Neil J Wertlieb, Esq.

<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective authorized officers as of the date hereof.

                                        PEASE OIL AND GAS COMPANY

                                        By: /s/ Willard H. Pease, Jr.
                                            ------------------------------------
                                            Willard H. Pease, Jr.
                                            Chairman

                                        THE INVESTOR

                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        Name and Address of Investor:
                                        Arbco Associates, L.P.
                                        1800 Avenue of the Stars, 2nd Floor
                                        Los Angeles, California  90067

                                        Name and Address of Legal Counsel:
                                        Milbank, Tweed, Hadley & McCloy
                                        601 South Figueroa Street, 30th Floor
                                        Los Angeles, California  90017
                                        Attn:  Neil J Wertlieb, Esq.

<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective authorized officers as of the date hereof.

                                        PEASE OIL AND GAS COMPANY

                                        By: /s/ Willard H. Pease, Jr.
                                            ------------------------------------
                                            Willard H. Pease, Jr.
                                            Chairman

                                        THE INVESTOR

                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        Name and Address of Investor:
                                        Kayne Anderson Nontraditional
                                        Investments, L.P. ("KANTI")
                                        1800 Avenue of the Stars, 2nd Floor
                                        Los Angeles, California  90067

                                        Name and Address of Legal Counsel:
                                        Milbank, Tweed, Hadley & McCloy
                                        601 South Figueroa Street, 30th Floor
                                        Los Angeles, California  90017
                                        Attn:  Neil J Wertlieb, Esq.

<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective authorized officers as of the date hereof.

                                        PEASE OIL AND GAS COMPANY

                                        By: /s/ Willard H. Pease, Jr.
                                            ------------------------------------
                                            Willard H. Pease, Jr.
                                            Chairman

                                        THE INVESTOR

                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        Name and Address of Investor:
                                        Opportunity Associates, L.P.
                                        1800 Avenue of the Stars, 2nd Floor
                                        Los Angeles, California  90067

                                        Name and Address of Legal Counsel:
                                        Milbank, Tweed, Hadley & McCloy
                                        601 South Figueroa Street, 30th Floor
                                        Los Angeles, California  90017
                                        Attn:  Neil J Wertlieb, Esq.

<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective authorized officers as of the date hereof.

                                        PEASE OIL AND GAS COMPANY

                                        By: /s/ Willard H. Pease, Jr.
                                            ------------------------------------
                                            Willard H. Pease, Jr.
                                            Chairman

                                        THE INVESTOR

                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        Name and Address of Investor:
                                        The MADAV IX Foundation
                                        1750 Euclid Avenue
                                        Cleveland, Ohio  44115

                                        Name and Address of Legal Counsel:

                                        ----------------------------------------
                                        ----------------------------------------
                                        ----------------------------------------

<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective authorized officers as of the date hereof.

                                        PEASE OIL AND GAS COMPANY

                                        By: /s/ Willard H. Pease, Jr.
                                            ------------------------------------
                                            Willard H. Pease, Jr.
                                            Chairman

                                        THE INVESTOR

                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        Name and Address of Investor:
                                        Ramat Securities Ltd.
                                        23811 Chagrin Boulevard, Suite 200
                                        Beachwood, Ohio  44122

                                        Name and Address of Legal Counsel:

                                        ----------------------------------------
                                        ----------------------------------------
                                        ----------------------------------------

<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective authorized officers as of the date hereof.

                                        PEASE OIL AND GAS COMPANY

                                        By: /s/ Willard H. Pease, Jr.
                                            ------------------------------------
                                            Willard H. Pease, Jr.
                                            Chairman

                                        THE INVESTOR

                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        Name and Address of Investor:
                                        Everen Clearing Corp.
                                        FBO Howard Amster IRA
                                        111 East Kilborne Avenue
                                        Milwaukee, Wisconsin  53202

                                        Name and Address of Legal Counsel:

                                        ----------------------------------------
                                        ----------------------------------------
                                        ----------------------------------------

<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective authorized officers as of the date hereof.

                                        PEASE OIL AND GAS COMPANY

                                        By: /s/ Willard H. Pease, Jr.
                                            ------------------------------------
                                            Willard H. Pease, Jr.
                                            Chairman

                                        THE INVESTOR

                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        Name and Address of Investor:
                                        Metropolitan Life Insurance
                                         Company Separate Account EN
                                        ----------------------------------------
                                        ----------------------------------------
                                        ----------------------------------------

                                        Name and Address of Legal Counsel:

                                        ----------------------------------------
                                        ----------------------------------------
                                        ----------------------------------------

<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective authorized officers as of the date hereof.

                                        PEASE OIL AND GAS COMPANY

                                        By: /s/ Willard H. Pease, Jr.
                                            ------------------------------------
                                            Willard H. Pease, Jr.
                                            Chairman

                                        THE INVESTOR

                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        Name and Address of Investor:
                                        BellSouth Master Pension Trust
                                        ----------------------------------------
                                        ----------------------------------------
                                        ----------------------------------------

                                        Name and Address of Legal Counsel:

                                        ----------------------------------------
                                        ----------------------------------------
                                        ----------------------------------------

<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly executed by their respective authorized officers as of the date hereof.

                                        PEASE OIL AND GAS COMPANY

                                        By: /s/ Willard H. Pease, Jr.
                                            ------------------------------------
                                            Willard H. Pease, Jr.
                                            Chairman

                                        THE INVESTOR

                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        Name and Address of Investor:
                                        Tamar Securities Inc.
                                        23811 Chagrin Boulevard, Suite 200
                                        Beachwood, Ohio  44122

                                        Name and Address of Legal Counsel:

                                        ----------------------------------------
                                        ----------------------------------------
                                        ----------------------------------------

<PAGE>

<TABLE>
<CAPTION>
                                   SCHEDULE 1

                              Schedule of Investors
                              ---------------------

                                               Number of Shares
Name                                           to be Purchased                Purchase Price
- ----                                           ----------------               --------------

<S>                                                 <C>                         <C>
Offense Group Associates, L.P.                      20,000                      $1,000,000

Arbco Associates, L.P.                              16,000                        $800,000

Kayne Anderson
Non-Traditional Investments,
L.P. ("KANTI")                                      18,000                        $900,000

Opportunity Associates, L.P.                         6,000                        $300,000

Metropolitan Life Insurance
Company Separate Account EN                         26,000                      $1,300,000

BellSouth Master Pension Trust                      14,000                        $700,000

The MADAV IX Foundation                              2,000                        $100,000

Ramat Securities Ltd.                                1,333                         $66,650

Everen Clearing Corp. FBO
Howard Amster IRA                                    5,000                        $250,000

Tamar Securities Inc.                                5,000                        $250,000
                                                  --------                      ----------

         Total                                     113,300                      $5,666,650
                                                   =======                      ==========

</TABLE>

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