Document:

THE EARTHGRAINS COMPANY
                         STOCK INCENTIVE PLAN
        (As Amended April 11, 1996, March 21, 1997, May 30, 1997,
             April 29, 1999 and July 14, 2000; Restated to
     reflect 2-for-1 Stock Splits on July 28, 1997 and July 20, 1998)

Section 1.   Purpose.

The purpose of the Plan is to attract, retain, motivate and reward employees of
the Company and its Subsidiaries and Affiliates with stock-related compensation
arrangements.

Section 2.   Maximum Number of Shares.

      (a)   The maximum number of shares of Stock which may be issued pursuant
to Awards under the Plan, and the maximum number of shares for which ISOs may be
granted under the Plan, shall be 7,834,850 shares, subject to adjustment as
provided in Section 11.  For this purpose:

            (i)   The number of shares underlying an Award shall be counted
      against the Plan maximum ("used") at the time of grant; shares
      underlying alternative Awards shall be counted only once.

            (ii)  When an Award is payable in cash and the amount of such
      cash is based on the value of a number of shares of Stock which is
      determinable at the time of grant, that determinable number of shares
      shall be deemed to underlie that Award for purposes of the Plan.  If
      the amount of such cash, including any cash provided pursuant to
      Section 15 below, in effect is calculated by applying a percentage
      to the Fair Market Value of a certain number of shares of Stock, if
      such percentage is determinable at the date of grant, and if
      such determinable percentage in effect exceeds 100%, the Committee
      shall determine at the time of grant the number of shares which is
      deemed to underlie such Award.

            (iii) If the number of shares underlying an Award is not
      determinable at the time of grant, the Committee shall determine at
      the time of grant a number of shares which is deemed to underlie
      such Award; that number may be adjusted after grant as the
      Committee deems appropriate.

            (iv)  Shares which underlie Awards that (in whole or part)
      expire, terminate, are forfeited, or otherwise become non-payable,
      or which are recaptured by the Company in connection with a
      forfeiture event, may be re-used in new grants to the extent of
      such expiration, termination, forfeiture, non-payability, or
      recapture.

      (b)   Notwithstanding any other provisions of the Plan, the maximum number
of shares underlying Awards that may be granted to any Eligible Employee during
any calendar year shall be 1,300,000, subject to adjustment as provided in
Section 11.

      (c)   No more than 911,524 shares of Restricted Stock shall be granted
under the Plan (not counting, for this purpose, Restricted Stock issuable upon
exercise of Options or SARs), subject to adjustment as provided in Section 11.

      (d)  In its discretion, the Company may issue treasury shares or
authorized but previously unissued shares.

Section 3.   Eligibility.

      Officers and management employees of the Company, Subsidiaries or
Affiliates shall be eligible to receive Awards under the Plan.  A Director of
the Company or a Subsidiary or an Affiliate shall be eligible only if he or she
also is an officer or employee of the Company, a Subsidiary or an Affiliate.
Notwithstanding the foregoing, persons employed only by Affiliates shall not be
eligible to receive ISOs.

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Section 4.  General Provisions Relating to Awards.

      (a)   Subject to the limitations in the Plan, the Committee may cause the
Company to grant Awards to such Eligible Employees, at such times, of such
types, in such amounts, for such periods, becoming exercisable at such times,
with such features, with such option prices, purchase prices or base prices, and
subject to such other terms, conditions, and restrictions as the Committee deems
appropriate.  Each Award shall be evidenced by a written Award Agreement between
the Company and the Recipient.  In granting an Award, the Committee may take
into account any factor it deems appropriate and consistent with the purpose of
the Plan.

      (b)   Except as otherwise provided in the Plan, one or more Awards may be
granted separately or as alternatives to each other.  If Awards are alternatives
to each other:

            (i)    the exercise of all or part of one automatically shall
      cause an immediate equal and corresponding termination of the other;
      and

            (ii)   unless the Award Agreement or the Committee expressly
      permit otherwise, alternative Awards which are transferable may be
      transferred only as a unit, and alternative Awards which are
      exercisable must be exercisable by the same person or persons.

      (c)   All or any portion of any payment to a Recipient, whether in cash or
shares of Stock, may be deferred to a later date if and as provided in the Award
Agreement.  Deferrals may be for such periods and upon such terms and conditions
(including the provision of interest, dividend equivalents, or other return on
such amounts) as the Committee may determine.  The Committee may structure Award
Agreements so that the imposition of income and other taxes on Recipients is
deferred in whole or part.

      (d)  Award Agreements may contain any provision approved by the Committee
relating to the period for exercise or vesting after termination of employment.
Except to the extent otherwise expressly provided in the Award Agreement,
termination of employment includes separation from the group of companies
comprised of the Company and its Subsidiaries and Affiliates for any reason,
including death, Disability, retirement, resignation, dismissal, disposition of
a Subsidiary or operation (whether by stock or asset sale or otherwise),
disposition of an interest in an Affiliate, spin-off, shutdown, or any other
event.

      (e)   Award Agreements may, in the discretion of the Committee, contain a
provision permitting a Recipient to designate the person who may exercise or
receive an Award upon the Recipient's death, either by will or by appropriate
notice to the Company.

      (f)   A Recipient shall have none of the rights of a shareholder with
respect to shares of Stock covered by his or her Award until shares are issued
in his or her name.

      (g)  The Committee may provide in Award Agreements that Awards, except for
ISOs and SARs which are alternatives to ISOs, are transferable.  Transferability
may be subject to such conditions and limitations as the Committee deems
appropriate.  Except to the extent otherwise expressly set forth in the Award
Agreement, Awards shall not be transferable other than by will or the laws of
descent and distribution, and (if exercise is required) shall be exercisable
during the Recipient's lifetime only by the Recipient or his or her guardian or
legal representative.  This paragraph shall not apply to Restricted Stock after
it vests.

Section 5.   Options and SARs.

      (a)   Except as provided in Section 11(b), the option price per share of
Options or the base price of SARs shall not be less than Fair Market Value per
share of Stock on the Options' or the SARs' grant date, nor less than the par
value of a share of Stock, except that SARs which are alternatives to Options
but which are granted at a later time may have a base price equal to the option
price even though the base price is less than Fair Market Value on the date the
SARs are granted.

      (b)  The grant of Options and their related Option Agreement must clearly
identify the Options as either ISOs or as NQSOs.

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      (c)   If Options, SARs, and/or Limited Rights are granted as alternatives
to each other:  (i) the option prices and the base prices (as applicable) shall
be equal, (ii) SARs and/or Limited Rights which are alternatives to ISOs may be
granted only at the same time the ISOs are granted, and (iii) SARs which are
alternatives to Options, and Limited Rights which are alternatives to Options or
SARs, shall expire or terminate at the same time as the Options or SARs to which
they are alternatives.

      (d)   In the case of SARs, the Award Agreement may specify the form of
payment or may provide that the form is to be determined at a later date, and
may require the satisfaction of any rules or conditions in connection with
receiving payment in any particular form.  If the Recipient is a Reporting
Person at the time of grant or during the SARs' term and is given an election to
receive cash in full or partial settlement of SARs, the Committee shall have
sole discretion to approve or disapprove such election at any time after it is
made.

      (e)   Notwithstanding any other provision of the Plan, no Options or SARs
shall contain a so-called "reload" feature under which Options or SARs are
automatically granted to Recipients upon exercise of Options or SARs.

Section 6.   Limited Rights.

      (a)   The Committee shall have authority to grant limited stock
appreciation rights ("Limited Rights") to any Recipient of any Options or SARs
granted under the Plan (the "Related Award") with respect to all or some of the
shares of Stock which underlie such Related Award.  Limited Rights shall not be
granted separately, but shall be granted only as alternatives to their Related
Award.  Limited Rights may be granted either at the time of grant of the Related
Award or (except in the case of ISOs) at any time thereafter during its term.
Limited Rights shall be exercisable or payable at such times, payable in such
amounts, and subject to such other terms, conditions, and restrictions as the
Committee deems appropriate.

      (b)   The Committee shall place on any Limited Rights granted to a
Reporting Person such restrictions as may be required by Rule 16b-3 at the time
of grant, and shall amend the Plan accordingly to the extent required by Rule
16b-3.  The Committee shall place on any Limited Rights for which the Related
Award is ISOs such restrictions as may be required by the Code at the time of
grant, and shall amend the Plan accordingly to the extent required by the Code.

Section 7.   Restricted Stock.

      (a)   "Restricted Stock" means Stock issued to a Recipient which is
subject to transfer restrictions prior to vesting and is subject to forfeiture
upon the happening of such events or such conditions or upon the failure to
satisfy such rules, requirements and conditions as the Committee specifies in
the Award Agreement.  Stock issued in connection with an Award Agreement is not
Restricted Stock unless so designated in the Award Agreement or in a rule or
resolution of the Committee.  When Restricted Stock vests, it ceases to be
Restricted Stock for purposes of the Plan.

      (b)   The certificate representing the shares of Restricted Stock issued
in the name of the Recipient may be held by the Company and/or may have a legend
placed upon it to the effect that the shares represented by it are subject to,
and may not be transferred except in accordance with the Plan and the Award
Agreement relating to such shares.  Dividends relating to shares of Restricted
Stock may be paid to the Recipient or held by the Company for the Recipient's
benefit, as the Committee may provide in the Award Agreement; if held by the
Company, the Committee may require that the Company pay interest or other return
to the Recipient on any cash dividends at such rate(s) and time(s) as the
Committee provides in the Award Agreement.

      (c)   If the Recipient of Restricted Stock is a Reporting Person on the
grant date, at least one of the following requirements shall be satisfied:

            (i)    the Award is a stock bonus granted for no consideration
      (other than services rendered or to be rendered);

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            (ii)  the Award is a stock bonus granted for the minimum amount
      of consideration (other then services) required by applicable
      corporate law, which amount in no event exceeds 10% of the Fair Market
      Value of a share of Stock on the payment date, and which amount is
      paid to the Company within 60 days after the grant date:

            (iii) the Award consists of Options which are payable in
      Restricted Stock; or

            (iv)  the Award is an Other Stock Interest which is payable
      in Restricted Stock and which either is granted in conformity with
      (i) or (ii) above, or constitutes an option or similar right
      (including a stock appreciation right) or any other type of
      derivative security for the purposes of Rule 16b-3.

This paragraph (c) shall apply to a grant only when required by Rule 16b-3 at
the time and under the circumstances of the grant.

Section 8.   Other Stock Interests.

"Other Stock Interest" means any compensatory arrangement not inconsistent with
the Plan which is established by the Committee and which might (a) involve the
issuance of Stock to an Eligible Employee or (b) involve or be treated as
involving the acquisition or disposition of an equity security of the Company
for purposes of Section 16 of the Act.  Other Stock Interests are not limited to
any specific form or structure.  Without limiting the above, Other Stock
Interests may include stock bonuses, deferred stock, variable priced stock
options, performance shares, phantom stock, and convertible securities, and may
be granted in connection with or apart from other compensation programs or plans
or other types of Awards under the Plan.  In connection with the grant of Other
Stock Interests, the Committee may provide for payment to the Recipient of
amounts equal to dividends which would have been paid had Stock actually been
issued to the Recipient.  In addition, Other Stock Interests may provide for
payment of cash or other property in lieu of Stock or other securities of the
Company.  The Committee shall place on any Other Stock Interest granted to a
Reporting Person such restrictions as may be required by Rule 16b-3 at the time
of grant, and shall amend the Plan accordingly to the extent required by Rule
16b-3.

Section 9.   Stock Issuance, Payment, and Withholding.

      (a)   If an Award contemplates the payment of a purchase price (including
the option price of Options), the Recipient may pay the purchase price in cash,
Stock (including shares of previously-owned Stock, or Stock issuable in
connection with the Award), or other property, to the extent permitted or
required by the Award Agreement or the Committee from time to time.  The
Committee may permit deemed or constructive transfers of shares in lieu of
actual transfer and physical delivery of certificates.  Except to the extent
prohibited by applicable law, the Committee or its delegate may take any
necessary or appropriate steps in order to facilitate the payment of any such
purchase price.  Without limiting the foregoing, the Committee may allow the
Recipient to defer payment of such purchase price, or may cause the Company to
loan the purchase price to the Recipient or to guaranty that any shares to be
issued will be delivered to a broker or lender in order to allow the Recipient
to borrow the purchase price.  The Committee may require satisfaction of any
rules or conditions in connection with paying the purchase price at any
particular time, in any particular form, or with the Company's assistance.

      (b)   If shares used to pay any such purchase price are subject to any
prior restrictions imposed in connection with any plan of the Company (including
the Plan), an equal number of the shares of Stock purchased shall be made
subject to such prior restrictions in addition to any further restrictions
imposed on such purchased shares by the terms of the Award Agreement or Plan.

      (c)   When the obligation arises to collect and pay Required Withholding
Taxes, the Recipient shall promptly reimburse the Company or Employer (as
required by the Committee or Company) for the amount of such Required
Withholding Taxes in cash, unless the Award Agreement or the Committee permits
or requires payment in another form.  In the discretion of the Committee or its
delegate and at the Recipient's request, the Committee or its delegate may cause
the Company or Employer to pay to the appropriate taxing authority Withholding
Taxes in excess of Required Withholding Taxes on behalf of a

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Recipient, which shall be reimbursed by the Recipient.  In the Award Agreement
or otherwise, the Committee may allow a Recipient to reimburse the Company or
Employer for payment of Withholding Taxes with shares of Stock or other
property.  The Committee may require the satisfaction of any rules or conditions
in connection with any non-cash payment of Withholding Taxes.  If a Recipient is
a Reporting Person at the time of grant or during the Award's term and is given
an election to pay any Withholding Taxes with Stock, the Committee shall have
sole discretion to approve or disapprove such election at any time after the
election is made.

      (d)   If provided in the Award Agreement relating to an ISO, the Committee
may prohibit the transfer by a Recipient of shares of Stock issued to him or her
upon exercise of an ISO into the name of a nominee, and the Committee may
require the placement of a legend on certificates for such shares reflecting
such prohibition.

Section 10.   Forfeitures.

      (a)   The Committee may include in any Award Agreement any provisions
relating to forfeitures of Awards that it deems appropriate.  Such forfeiture
provisions may include, among others, prohibitions on competing with the Company
and its Subsidiaries and Affiliates and other detrimental conduct.  Forfeiture
provisions for one Award type may differ from those for another type, and also
may differ among Awards of the same type.  As used in the Plan, a "forfeiture"
of an Award includes the recapture of economic benefits derived from an Award,
as well as the forfeiture of an Award itself; however, the Committee may define
the term more narrowly in specific Award Agreements or contexts.

      (b)   Award Agreements may provide for any forfeiture provision to
terminate or be waived upon an Acceleration Date.  In its discretion, the
Committee may provide in any Award Agreement for the termination of any
forfeiture provision upon the happening of any specified event, and may
terminate or waive any forfeiture provision by action taken after grant.

Section 11.   Adjustments and Acquisitions.

      (a)   In the event of (i) any change in the outstanding shares of Stock by
reason of any stock split, combination of shares, stock dividend,
reorganization, merger, consolidation, or other corporate change having a
similar effect, (ii) any separation of the Company including a spin-off or other
distribution of stock or property by the Company, or (iii) any distribution to
shareholders generally other than a normal dividend, the Committee shall make
such equitable adjustments to the Plan and to outstanding Awards as it shall
deem appropriate in order to prevent the dilution or enlargement of (A) the
Awards which may be granted, the shares of Stock which may be issued, or the
shares for which ISOs may be granted under the Plan, (B) the economic value of
outstanding Awards or (C) the limitations imposed by Section 2(b) of the Plan,
provided, however, that the Committee shall not make any adjustment which would
constitute or result in an increase in the aggregate number of Shares available
under the Plan, or the annual limit on the number of Awards which may be granted
to an Eligible Employee under Section 2(b) of the Plan, requiring shareholder
approval under Section 422 or Section 162(m) of the Code.  Any such
determination by the Committee shall be conclusive and binding on all concerned.

      (b)   In the event the Company or a Subsidiary enters into a transaction
described in Section 424(a) of the Code with any other corporation, the
Committee may grant Options, SARs or Limited Rights to employees or former
employees of such corporation in substitution of stock awards, stock
appreciation rights or limited stock appreciation rights (respectively)
previously granted to them by such corporation upon such terms and conditions as
shall be necessary to qualify such grant as a substitution described in Section
424(a) of the Code.

Section 12.   Acceleration.

      (a)   An "Acceleration Date" occurs when any of the following events
occur:

            (i)   any Person (as defined herein) becomes the beneficial owner
      directly or indirectly (within the meaning of Rule 13d-3 under the Act)
      of more than 30% of the Company's then

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      outstanding voting securities (measured on the basis of voting power),
      provided, however, that shares issued or distributed by the Company
      in connection with the acquisition of another company or business
      from such Person shall be counted as being outstanding, but otherwise
      shall be ignored in determining the percentage beneficially owned by
      such Person;

            (ii)  the shareholders of the Company approve a definitive
      agreement of merger or consolidation with any other corporation or
      business entity, other than (x) a merger or consolidation which
      would result in the voting securities of the Company outstanding
      immediately prior thereto continuing to represent (either by
      remaining outstanding or by being converted into voting securities
      of the surviving entity), in combination with the ownership of any
      trustee or other fiduciary holding securities under an employee
      benefit plan of the Company, at least 50% of the combined voting
      power of the voting securities of the Company or such surviving
      entity outstanding immediately after such merger or consolidation,
      or (y) a merger or consolidation effected to implement a
      recapitalization of the Company (or similar transaction) in which
      no Person acquires more than 50% of the combined voting power of
      the Company's then outstanding securities;

            (iii)  a change occurs in the composition of the Board of
      Directors during any period of twenty-four consecutive months such
      that individuals who at the beginning of such period were members
      of the Board of Directors cease for any reason to constitute at
      least a majority thereof, unless the election, or the nomination
      for election by the Company's shareholders, of each new director
      was approved by a vote of at least two-thirds of the directors
      still in office who either were directors at the beginning of the
      period or whose election or nomination for election was previously
      so approved; or

            (iv)  the shareholders of the Company approve a plan of
      complete liquidation or dissolution of the Company or an agreement
      for the sale or disposition by the Company of all or substantially
      all the Company's assets.

For purposes of this paragraph, "Person" shall have the meaning given in Section
3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d)
thereof; however, a Person shall not include (aa) the Company or any of its
subsidiaries, (bb) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its subsidiaries, (cc) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (dd) a corporation owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as their
ownership of Stock.

      (b)   If an Acceleration Date occurs while Awards remain outstanding under
the Plan, then all Awards shall "vest," which means:

            (i)   all Options and SARs shall become fully exercisable; and

            (ii)  all shares of Restricted Stock shall become nonforfeitable
      and freely transferable (except for such restrictions as may be
      imposed by the Securities Act of 1933, as amended, or applicable
      state securities laws), and all conditions to unrestricted ownership
      provided in their Award Agreements which have not previously been
      satisfied shall lapse.

In the case of Other Stock Interests, the term "vest" shall have that meaning
given it by the Committee at the time of grant.

      (c)   Except to the extent prohibited by Rule 16b-3 in the case of
Reporting Persons, the Committee may accelerate the date on which any Award or
Stock or property issued pursuant to an Award shall vest and may remove any
restrictions on such Award at any time after grant and for any reason the
Committee deems appropriate.

      (d)   All Awards, and all shares of Stock or property issued pursuant to
an Award, shall automatically vest upon a termination of employment caused by
the death, Disability, or (except for Restricted Stock and Other Stock
Interests) retirement of the Recipient.  The Committee may determine the
circumstances under which a Recipient is deemed to have retired.

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Section 13.  Administration.

      (a)   The Plan shall be administered by the Compensation and Human
Resources Committee of the Board, or another committee appointed by the Board
from time to time, consisting of three or more persons, each of whom at all
times shall be a member of the Board and none of whom shall be an officer or
employee of the Company or any of its subsidiaries at the time of service.
Committee members shall not be eligible for selection to receive Awards under
the Plan.

      (b)   During any time when one or more Committee members may not be
qualified to serve under Rule 16b-3 or Section 162(m) of the Code, the Committee
may form a sub-Committee from among its qualifying members to act, in lieu of
the full Committee, with respect to all or any specified category of Awards
granted to all or any specified group of Recipients, and may take other actions
deemed appropriate and convenient to prevent, control, minimize, or eliminate
any adverse effects of such potential disqualification.  At the Committee's
request or on its own motion, the Board may ratify or approve grants, or any
terms of any grants, made by the Committee or a sub-Committee during any time
that any member of the Committee may not be qualified to approve such grants or
terms under Rule 16b-3.

      (c)   A majority of the members of the Committee shall constitute a
quorum.  The acts of a majority of the members present at any meeting at which a
quorum is present, or acts approved in writing by a majority of the members of
the Committee, shall be the acts of the Committee.  The Committee may meet in
person, by telephone or television conference, or in any other manner permitted
by applicable law.  From time to time the Committee may adopt, amend, and
rescind such rules and regulations for carrying out the Plan and implementing
Award Agreements, and the Committee may take such action in the administration
of the Plan, as it deems proper.  The interpretation of any provisions of the
Plan by the Committee shall be final and conclusive unless otherwise determined
by the Board.

Section 14.  Amendment, Termination, Shareholder Approval.

      (a)   The Board may amend or terminate the Plan at any time, except that
without the approval of the Company's shareholders, no amendment shall (i)
increase the maximum number of shares issuable, or the maximum number of shares
for which ISOs may be granted, under the Plan, (ii) change the class of persons
eligible to be Recipients, (iii) change the annual limit on Awards which may be
granted to an Eligible Employee provided in Section 2(b), (iv) withdraw the
authority of the Committee to administer the Plan, or (v) change the provisions
of this Section 14(a).

      (b)   The Committee may amend the Plan from time to time to the extent
necessary to (i) comply with Rule 16b-3 and, to the extent it deems appropriate,
(ii) prevent benefits under the Plan from constituting "applicable employee
remuneration" within the meaning of Section 162(m) of the Code.

      (c)   No Awards may be granted under the Plan after February 21, 2006.

      (d)   The approval by shareholders described in this Section shall consist
of the approving vote of the holders of a majority of the outstanding shares of
Stock present (in person or by proxy) at a meeting of the shareholders at which
a quorum is present, unless a greater vote is required by the Company's charter
or by-laws, by the Board, by the Company's principal stock exchange, or by
applicable law (including Rule 16b-3 or Section 162(m) of the Code).

Section 15. Additional Payments.

The Committee may grant a Recipient the right to receive additional compensation
in cash or other property (in addition to any cash or other property payable
under the terms of the Award itself) upon the exercise of Options, SARs, or
exercisable Other Stock Interests, or the vesting of Restricted Stock or non-
exercisable Other Stock Interests, provided that (i) in the case of ISOs such
compensation is includible in income under Sections 61 and 83 of the Code at the
time of such exercise or vesting and (ii) no such right may be granted in
connection with any SARs or Limited Rights which are alternatives to ISOs.

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Section 16.  Definitions.

      (a)   "Acceleration Date" has the meaning given in Section 12(a).

      (b)   "Act" means the Securities Exchange Act of 1934, as amended from
time to time.

      (c)   "Affiliate" means any entity in which the Company has a substantial
direct or indirect equity interest (other than a Subsidiary), as determined by
the Committee.

      (d)   "Award" means a grant of ISOs, NQSOs, SARs, Limited Rights,
Restricted Stock or Other Stock Interests.

      (e)   "Award Agreement" means the written agreement referred to in Section
4(a) between the Company and the Recipient evidencing an Award.

      (f)   "Board" means the Board of Directors of the Company.

      (g)   Options "cease to qualify as ISOs" when they fail or cease to
qualify for the exclusion from income provided in Section 421 (or any successor
provision) of the Code.

      (h)   "Code" means the U.S. Internal Revenue Code as in effect from time
to time.

      (i)    "Committee" means the Compensation and Human Resources Committee
described in Section 13 hereof.

      (j)    "Company" means The Earthgrains Company and its successors.

      (k)   "Disability" means the condition of being "disabled" within the
meaning of Section 422(c)(6) of the Code or any successor provision.

      (l)    "Eligible Employee" means a person who is eligible to receive an
Award under Section 3 of the Plan.

      (m)  "Employer" means the Company, the Subsidiary, or the Affiliate which
employs the Recipient.

      (n)   "Fair Market Value" of Stock on a given date means (i) the average
of the highest and lowest selling prices per share of Stock reported on the New
York Stock Exchange Composite Tape or similar quotation service for such date,
(ii) if Stock is not listed on the New York Stock Exchange, the average of the
highest and lowest selling prices per share of Stock as reported for such date
on the principal stock exchange or quotation system in the U.S. on which Stock
is listed or quoted (as determined by the Committee), or (iii) if neither of the
preceding clauses is applicable, the value per share determined by the Committee
in a manner consistent with the Treasury Regulations under Section 2031 of the
Internal Revenue Code.  If no sale of Stock occurs on such date, but there were
sales reported within a reasonable period both before and after such date, the
weighted average of the means between the highest and lowest selling prices on
the nearest date before and the nearest date after such date shall be used, with
the average to be weighted inversely by the respective numbers of trading days
between the selling dates and such date.  "Fair Market Value" of Restricted
Stock is the same as the Fair Market Value of any other Stock.

      (o)   "Forfeiture" has the meaning given in Section 10(a).

      (p)   "ISO" or "Incentive Stock Option" means an option to purchase one
share of Stock for a specified option price which is designated by the Committee
as an "Incentive Stock Option" and which qualifies as an "incentive stock
option" under Section 422 (or any successor provision) of the Code.

      (q)   "Limited Right" has the meaning given in Section 6.

      (r)    "NQSO" or "Non-Qualified Stock Option" means an option to purchase
one share of Stock for a specified option price which is designated by the
Committee as a "Non-Qualified Stock Option," or which is designated by the
Committee as an ISO but which ceases to qualify as an ISO.

      (s)   "Option" means an ISO or an NQSO.

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      (t)    "Option Agreement" means an Award Agreement which evidences a grant
of Options.

      (u)   "Optionee" means a person to whom Options are granted pursuant to
the Plan.

      (v)   "Other Stock Interest" has the meaning given in Section 8.

      (w)   "Plan" means The Earthgrains Company 1996 Stock Incentive Plan, as
amended from time to time.

      (x)   "Recipient" means an Eligible Employee to whom an Award is granted
pursuant to the Plan.

      (y)   "Reporting Person," as of a given date, means a Recipient who would
be required to report a purchase or sale of Stock occurring on such date to the
Securities and Exchange Commission pursuant to Section 16(a) of the Act and the
rules and regulations thereunder.

      (z)   "Restricted Stock" has the meaning given in Section 7.

      (aa)  "Rule 16b-3" means Rule 16b-3 (as amended from time to time)
promulgated by the Securities and Exchange Commission under the Act, and any
successor thereto.

      (bb) "SAR" means a stock appreciation right, which is a right to receive
cash, Stock, or other property having a value on the date the SAR is exercised
equal to (i) the excess of the Fair Market Value of one share of Stock on the
exercise date over (ii) the base price of the SAR.  The term "SAR" does not
include a Limited Right.

      (cc) "Stock" means shares of the common stock of the Company, par value
$0.01 per share, or such other class or kind of shares or other securities as
may be applicable under Section 11.  The term "Stock" shall include shares of
Restricted Stock unless expressly provided otherwise in the Plan or an Award
Agreement.

      (dd) "Subsidiary" means a "subsidiary corporation" of the Company as
defined in Section 424(f) (or any successor provision) of the Code.

      (ee)  "Vest" has the meaning given in Section 12(b).

     (ff)   "Withholding Taxes" means, in connection with an Award, (i) the
total amount of Federal and state income taxes, social security taxes, and other
taxes which the Employer of the Recipient is required to withhold ("Required
Withholding Taxes") plus (ii) any other such taxes which the Employer, in its
sole discretion, withholds at the request of the Recipient.

Section 17.  Miscellaneous.

      (a)   Each provision of the Plan and Option Agreement relating to ISOs
shall be construed so that all ISOs shall be "incentive stock options" as
defined in Section 422 of the Code or any statutory provision that may replace
Section 422, and any provisions thereof which cannot be so construed shall be
disregarded.  Except as provided in Section 10, no discretion granted or allowed
to the Committee under the Plan shall apply to ISOs after their grant except to
the extent the related Option Agreement shall so provide.  Notwithstanding the
foregoing, nothing shall prohibit an amendment to or action regarding
outstanding ISOs which would cause them to cease to qualify as ISOs, so long as
the Company and the Optionee shall consent to such amendment or action.

      (b)   Without amending the Plan, Awards may be granted to Eligible
Employees who are foreign nationals or who are employed outside the United
States or both, on such terms and conditions different from those specified in
the Plan as may, in the judgment of the Committee, be necessary or desirable to
further the purposes of the Plan.  Such different terms and conditions may be
reflected in Addenda to the Plan.  However, in the case of ISOs, no such
different terms or conditions shall be employed if such term or condition
constitutes, or in effect results in, an increase in the aggregate number of
shares which may be issued under the Plan or a change in the definition of
Eligible Employee.

                                           9

<PAGE>

      (c)   Notwithstanding any other provision in the Plan, the Committee shall
not act with respect to any Reporting Person in a manner which would contravene
any requirement of Rule 16b-3 as in effect at the time of such action, without
the knowing consent of such Reporting Person.

      (d)   Nothing in the Plan or any Award Agreement shall confer on any
person or expectation to continue in the employ of his or her Employer, or shall
interfere in any manner with the absolute right of the Employer to change or
terminate such person's employment at any time for any reason or for no reason.

                                          10

<PAGE>EXHIBIT 4.1

                          SECURITIES PURCHASE AGREEMENT

                                   dated as of

                                  July 18, 2000

                                 by and between

                  American International Petroleum Corporation
                                 as the Issuer,

                                       and

                      GCA Strategic Investment Fund Limited

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                                <C>
ARTICLE I.  DEFINITIONS.............................................................................2
         Section 1.1  Definitions...................................................................2
         Section 1.2  Accounting Terms and Determinations..........................................10

ARTICLE II. PURCHASE AND SALE OF SECURITIES........................................................10
         Section 2.1  Purchase and Sale of Series A Preferred Shares...............................10
         Section 2.2  Purchase Price...............................................................10
         Section 2.3  Closing and Mechanics of Payment.............................................10
         Section 2.4  Terms of Commitment and Subsequent Takedowns.................................10

ARTICLE III.  CERTAIN OBLIGATIONS OF THE COMPANY...................................................12
         Section 3.1  Mandatory Payments...........................................................12
         Section 3.2  Payment of Certain Amounts...................................................13

ARTICLE IV.  REPRESENTATIONS AND WARRANTIES........................................................14
         Section 4.1  Organization and Qualification...............................................14
         Section 4.2  Authorization and Execution..................................................14
         Section 4.3  Capitalization ..............................................................15
         Section 4.4  Governmental Authorization...................................................15
         Section 4.5  Issuance of Shares...........................................................16
         Section 4.6  No Conflicts.................................................................16
         Section 4.7  Financial Information........................................................16
         Section 4.8  Litigation...................................................................17
         Section 4.9  Compliance with ERISA and other Benefit Plans................................17
         Section 4.10  Environmental Matters.......................................................18
         Section 4.11  Taxes.......................................................................18
         Section 4.12  Investments, Joint Ventures.................................................18
         Section 4.13  Not an Investment Company...................................................18
         Section 4.14  Full Disclosure.............................................................18
         Section 4.15  No Solicitation; No Integration with Other Offerings........................18
         Section 4.16  Permits.....................................................................19
         Section 4.17  Leases......................................................................19
         Section 4.18  Absence of Any Undisclosed Liabilities or Capital Calls.....................19
         Section 4.19  Public Utility Holding Company..............................................19
         Section 4.20  Intellectual Property Rights................................................19
         Section 4.21  Insurance...................................................................19
         Section 4.22  Title to Properties.........................................................20
         Section 4.23  Internal Accounting Controls................................................20
         Section 4.24  Year 2000 Compliance........................................................20
</TABLE>

                                        i

<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                                <C>
         Section 4.25  Foreign Practices...........................................................21

ARTICLE V.  REPRESENTATIONS AND WARRANTIES OF PURCHASER............................................21
         Section 5.1  Purchaser....................................................................21

ARTICLE VI.  CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES........................................22
         Section 6.1  Conditions Precedent to Purchaser's Obligations to Purchase..................22
         Section 6.2  Conditions to the Company's Obligations......................................24

ARTICLE VII.  AFFIRMATIVE COVENANTS................................................................25
         Section 7.1  Information..................................................................25
         Section 7.2  Payment of Obligations.......................................................26
         Section 7.3  Maintenance of Property; Insurance...........................................26
         Section 7.4  Maintenance of Existence.....................................................26
         Section 7.5  Compliance with Laws.........................................................26
         Section 7.6  Inspection of Property, Books and Records....................................26
         Section 7.7  Investment Company Act.......................................................26
         Section 7.8  Use of Proceeds..............................................................27
         Section 7.9  Compliance with Terms and Conditions of Material Contracts...................27
         Section 7.10 Reserved Shares and Listings.................................................27
         Section 7.11 Transfer Agent Instructions..................................................28
         Section 7.12 Maintenance of Reporting Status; Supplemental Information....................28
         Section 7.13 Form D; Blue Sky Laws........................................................28
         Section 7.14 Purchaser Acknowledgment.....................................................28

ARTICLE VIII.  NEGATIVE COVENANTS..................................................................29
         Section 8.1  Reserved.....................................................................29
         Section 8.2  Transactions with Affiliates.................................................29
         Section 8.3  Merger or Consolidation......................................................29
         Section 8.4  Limitation on Asset Sales....................................................29
         Section 8.5  Restrictions on Certain Amendments...........................................30
         Section 8.6  Prohibition on Discounted Equity Offerings; Registration Rights..............30
         Section 8.7  Limitation on Stock Repurchases..............................................31
         Section 8.8  Limitations on Financings Until Closing......................................31
         Section 8.9  Short Sales..................................................................31

ARTICLE IX.  RESTRICTIVE LEGENDS...................................................................31
         Section 9.1  Restrictions on Transfer.....................................................31
         Section 9.2  Notice of Proposed Transfers.................................................31

ARTICLE X.  ADDITIONAL AGREEMENTS AMONG THE PARTIES................................................32
         Section 10.1 Reserved.....................................................................32
</TABLE>

                                       ii
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                                <C>
         Section 10.2  Reserved....................................................................32
         Section 10.3  Reserved....................................................................32
         Section 10.4  Registration Rights.........................................................32
         Section 10.5  Restriction on Issuance of Securities.......................................33

ARTICLE XI.  CONVERSION PRICE ADJUSTMENTS..........................................................34
         Section 11.1  Preferred Shares............................................................34
         Section 11.2  Warrants....................................................................34

ARTICLE XII.  MISCELLANEOUS........................................................................34
         Section 12.1  Notices.....................................................................34
         Section 12.2  No Waivers; Amendments......................................................34
         Section 12.3  Indemnification.............................................................35
         Section 12.4  Expenses:  Documentary Taxes................................................37
         Section 12.5  Payment.....................................................................37
         Section 12.6  Successors and Assigns......................................................37
         Section 12.7  Brokers.....................................................................37
         Section 12.8  New York Law; Submission to Jurisdiction; Waiver of Jury Trial;
                   Appointment of Agent............................................................37
         Section 12.9  Entire Agreement............................................................38
         Section 12.10 Survival; Severability......................................................38
         Section 12.11 Title and Subtitles.........................................................38
         Section 12.12 Reporting Entity for the Common Stock.......................................38
         Section 12.13 Publicity...................................................................38
         Section 12.14 Powers and Remedies Cumulative..............................................39
</TABLE>

                                       iii
<PAGE>

                    LIST OF SCHEDULES

Schedule 4.3    Capitalization
Schedule 4.7    Financial Information
Schedule 4.8    Litigation
Schedule 4.12   Investments, Joint Ventures
Schedule 7.8    Use of Proceeds
Schedule 8.2    Transactions with Affiliates

                                       iv
<PAGE>

                                LIST OF EXHIBITS

Exhibit A          Certificate of Designations
Exhibit B          Form of Registration Rights Agreement
Exhibit C          Form of Solvency Certificate
Exhibit D          Form of Officer's Certificate
Exhibit E          Form of Escrow Agreement
Exhibit F          Form of Opinion

                                        v

<PAGE>

                          SECURITIES PURCHASE AGREEMENT

     AGREEMENT,  dated  as of July  18,  2000,  between  American  International
Petroleum  Corporation (the "Company") and GCA Strategic Investment Fund Limited
("Purchaser").

                                R E C I T A L S:

     WHEREAS, the Company desires to sell and issue to Purchaser,  and Purchaser
desires to  purchase  from the  Company,  up to the greater of (i) shares of the
Company's  Series A Convertible  Preferred  Stock,  .01 par value per share (the
"Series A  Preferred  Stock")  equal in value to  $10,000,000.00,  (the  "Dollar
Commitment  Amount") or (ii) the number of Series A Preferred  Shares into which
the total number of registered  common hares  represented in the Company's shelf
registration  statement  relating  to the  Company's  Series A  Preferred  Stock
required to be filed pursuant to this Agreement are convertible (the "Commitment
Amount"),  with terms and  conditions as set forth in the form of Certificate of
Designations for the Series A Preferred Stock attached hereto as Exhibit A;

     WHEREAS,  the Series A Preferred  Stock will be convertible  into shares of
the Company's common stock, $.08 par value per share (the "Common Stock");

     WHEREAS,  Purchaser will have certain  registration  rights with respect to
such shares of Common Stock  issuable upon  conversion of the Series A Preferred
Stock issued pursuant to this Agreement (the "Preferred  Conversion  Shares") as
set forth in the  Registration  Rights  Agreement in the form attached hereto as
Exhibit B;

     NOW,  THEREFORE,  in  consideration  of  the  foregoing  premises  and  the
covenants  contained  herein  and other  good and  valuable  consideration,  the
receipt and  sufficiency  of which are hereby  acknowledged,  the parties hereto
agree as follows:

                             ARTICLE I. DEFINITIONS

     Section 1.1  Definitions.  The following  terms,  as used herein,  have the
following meanings:

     "Affiliate" means, with respect to any Person (the "Subject  Person"),  (i)
any other Person (a "Controlling  Person") that directly,  or indirectly through
one or more intermediaries, Controls the Subject Person or (ii) any other Person
(other  than the  Subject  Person or a  Consolidated  Subsidiary  of the Subject
Person)  which is  Controlled  by or is under common  Control with a Controlling
Person.

     "Agreement"  means  this  Securities   Purchase   Agreement,   as  amended,
supplemented  or otherwise  modified  from time to time in  accordance  with its
terms.

     "Asset Sale" has the meaning set forth in Section 8.4.

                                        2
<PAGE>

     "Balance Sheet Date" has the meaning set forth in Section 4.7.

     "Benefit Arrangement" means at any time an employee benefit plan within the
meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and
which is maintained or otherwise contributed to by the Company.

     "Benefit Plans" has the meaning set forth in Section 4.9(b).

     "Business  Day"  means any day  except a  Saturday,  Sunday or other day on
which commercial banks in the City of New York are authorized or required by law
to close.

     "Change in Control" means (i) after the date of this Agreement,  any person
or group of persons  (within the  meaning of Sections 13 and 14 of the  Exchange
Act and the rules and  regulations of the Commission  relating to such sections)
other than  Purchaser  shall have  acquired  beneficial  ownership  (within  the
meaning of Rules 13d-3 and 13d-5  promulgated by the Commission  pursuant to the
Exchange Act) of 331/3% or more of the outstanding shares of Common Stock of the
Company;  (ii) any sale or other  disposition  (other than by reason of death or
disability) to any Person by any executive officers and/or employee directors of
the Company  within ten Trading  Days  following  the Closing or any  Subsequent
Takedown Closing;  (iii) individuals  constituting the Board of Directors of the
Company on the date hereof  (together  with any new Directors  whose election by
such Board of Directors or whose  nomination for election by the shareholders of
the Company was approved by a vote of at least 50.1% of the  Directors  still in
office who are  either  Directors  as of the date  hereof or whose  election  or
nomination  for election was  previously so  approved),  cease for any reason to
constitute at least  two-thirds of the Board of Directors of the Company then in
office.

     "Closing Bid Price" shall mean for any security as of any date,  the lowest
closing bid price as reported by Bloomberg,  L.P. ("Bloomberg") on the principal
securities  exchange or trading  market where such  security is listed or traded
or, if the  foregoing  does not  apply,  the  lowest  closing  bid price of such
security in the  over-the-counter  market on the  electronic  bulletin board for
such  security as  reported  by  Bloomberg,  or, if no lowest  trading  price is
reported for such security by  Bloomberg,  then the average of the bid prices of
any market  makers for such  securities  as reported in the "Pink Sheets" by the
National  Quotation  Bureau,  Inc.  If the lowest  closing  bid price  cannot be
calculated  for such  security on such date on any of the foregoing  bases,  the
lowest  closing bid price of such security on such date shall be the fair market
value as  mutually  determined  by  Purchaser  and the  Company  for  which  the
calculation of the closing bid price requires, and in the absence of such mutual
determination,  as  determined  by the Board of Directors of the Company in good
faith.

     "Closing  Date" means the date on which all of the  conditions set forth in
Sections  6.1 and 6.2 shall  have been  satisfied  and 1,250  shares of Series A
Preferred  Stock  and the  Commitment  Warrant  are  issued  by the  Company  to
Purchaser.

     "Code" means the Internal Revenue Code of 1986, as amended.

                                        3
<PAGE>

     "Commission"  means the  Securities  and Exchange  Commission or any entity
succeeding to all of its material functions.

     "Commitment Warrant" shall have the meaning set forth in Section 2.1.

     "Common  Stock"  means  common  stock,  $.08 par  value per  share,  of the
Company.

     "Company"  means American  International  Petroleum  Corporation,  a Nevada
corporation, and its successors.

     "Company  Corporate  Documents"  means the  articles of  incorporation  and
bylaws of the Company.

     "Consolidated Net Worth" means at any date the total  shareholder's  equity
which would appear on a consolidated balance sheet of the Company prepared as of
such date.

     "Consolidated  Subsidiary"  means at any date with respect to any Person or
Subsidiary or other  entity,  the accounts of which would be  consolidated  with
those of such Person in its consolidated financial statements if such statements
were prepared as of such date.

     "Control" (including,  with correlative meanings,  the terms "Controlling,"
"Controlled by" and under "common  Control  with"),  as used with respect to any
Person, means the possession,  directly or indirectly, of the power to direct or
cause the  direction of the  management  and  policies of that  Person,  whether
through the ownership of voting securities, by contract or otherwise.

     "Conversion Date" shall mean the date of delivery  (including  delivery via
telecopy) of a Notice of Conversion for all or a portion of the shares of Series
A Preferred Stock by the holder thereof to the Company.

     "Conversion  Price" has the  meaning set forth in the terms of the Series A
Preferred Stock.

     "Conversion  Shares" means the Preferred  Conversion Shares and the Warrant
Shares, collectively.

     "Debt"  of any  Person  means at any  date,  without  duplication,  (i) all
obligations  of such Person for borrowed  money,  (ii) all  obligations  of such
Person  evidenced by bonds,  debentures,  notes,  or other  similar  instruments
issued by such Person,  (iii) all obligations of such Person as lessee which (y)
are capitalized in accordance with GAAP or (z) arise pursuant to  sale-leaseback
transactions,  (iv) all  reimbursement  obligations of such Person in respect of
letters of credit or other similar  instruments,  (v) all Debt of others secured
by a Lien on any asset of such Person,  whether or not such Debt is otherwise an
obligation of such Person and (vi) all Debt of others Guaranteed by such Person.

                                        4
<PAGE>

     "Default"  means  any  event or  condition  which  constitutes  an Event of
Default  or which  with the  giving of  notice  or lapse of time or both  would,
unless cured or waived, become an Event of Default.

     "Default Fee" has the meaning set forth in Section 10.4.

     "Derivative Securities" has the meaning set forth in Section 8.6.

     "Discounted Equity Offerings" has the meaning set forth in Section 8.6.

     "Directors" means the individuals then serving on the Board of Directors or
similar such management council of the Company.

     "Environmental  Laws" means any and all federal,  state,  local and foreign
statutes,  laws, regulations,  ordinances,  rules,  judgments,  orders, decrees,
permits,  concessions,   grants,  franchises,   licenses,  agreements  or  other
governmental   restrictions   relating  to  the  environment  or  to  emissions,
discharges  or releases of  pollutants,  contaminants,  petroleum  or  petroleum
products,  chemicals or industrial, toxic or hazardous substances or wastes into
the  environment,  including,  without  limitation,  ambient air, surface water,
ground water,  or land, or otherwise  relating to the  manufacture,  processing,
distribution,  use,  treatment,  storage,  disposal,  transport  or  handling of
pollutants,   contaminants,   petroleum  or  petroleum  products,  chemicals  or
industrial,  toxic or  hazardous  substances  or wastes or the  cleanup or other
remediation thereof.

     "ERISA"  means the Employee  Retirement  Income  Security  Act of 1974,  as
amended, or any successor statute.

     "ERISA  Group" means the Company and each  Subsidiary  and all members of a
controlled  group of corporations  and all trades or businesses  (whether or not
incorporated)  under  common  control  which,  together  with the Company or any
Subsidiary, are treated as a single employer under the Code.

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

     "Expense Reimbursement Fee" has the meaning set forth in Section 13.4.

     "Financing"  means a  public  or  private  financing  consummated  (meaning
closing and  funding)  through the  issuance  of debt or equity  securities  (or
securities  convertible into or exchangeable  for debt or equity  securities) of
the Company, other than Permitted Financings.

     "GAAP" has the meaning set forth in Section 1.2.

     "Guarantee" by any Person means any obligation, contingent or otherwise, of
such  Person  directly  or  indirectly   guaranteeing   (whether  by  virtue  of
partnership arrangements, by agreement to

                                        5
<PAGE>

keep well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain a minimum net worth,  financial  ratio or similar  requirements,  or
otherwise) any Debt of any other Person and,  without limiting the generality of
the foregoing, any obligation,  direct or indirect,  contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply  funds for the purchase
or payment of) such Debt or (ii) entered into for the purpose of assuring in any
other  manner the holder of such Debt of the payment  thereof or to protect such
holder against loss in respect thereof (in whole or in part);  provided that the
term Guarantee shall not include  endorsements  for collection or deposit in the
ordinary  course  of  business.  The  term  Guarantee  used  as  a  verb  has  a
corresponding meaning.

     "Hazardous  Materials"  means any hazardous  materials,  hazardous  wastes,
hazardous  constituents,  hazardous or toxic  substances  or petroleum  products
(including  crude  oil  or any  derivative  or  fraction  thereof),  defined  or
regulated as such in or under any Environmental Laws.

     "Intellectual Property" has the meaning set forth in Section 4.20.

     "Investment" means any investment in any Person,  whether by means of share
purchase,  partnership  interest,  capital  contribution,  loan, time deposit or
otherwise.

     "Lien"  means  any  lien,  mechanic's  lien,   materialmen's  lien,  lease,
easement,  charge,  encumbrance,  mortgage,  conditional  sale agreement,  title
retention  agreement,   agreement  to  sell  or  convey,  option,  claim,  title
imperfection, encroachment or other survey defect, pledge, restriction, security
interest or other  adverse  claim,  whether  arising by contract or under law or
otherwise   (including,   without   limitation,   any  financing   lease  having
substantially  the same economic effect as any of the foregoing,  and the filing
of any financing  statement under the Uniform  Commercial Code or comparable law
of any jurisdiction in respect of any of the foregoing).

     "Listing Applications" has the meaning set forth in Section 4.4.

     "LKB Warrants" the aggregate number of warrants  issuable to LKB Financial,
LLC pursuant to Section 12.7 of this Agreement.

     "Majority Holders" means (i) as of the Closing Date,  Purchaser and (ii) at
any time  thereafter,  the holders of more than 50% of the outstanding  Series A
Preferred Stock at such time.

     "Market  Price"  shall  mean the  Closing  Bid  Price of the  Common  Stock
preceding the date of determination.

     "Maximum  Number of Shares"  shall mean that  percentage of the then issued
and outstanding  shares of Common Stock of the Company as of the applicable date
of determination that the Company may issue without  shareholder  approval under
the  applicable  rules of the  National  Market or  equivalent  entity,  or such
greater number of shares as the  shareholders of the Company may have previously
approved.

                                        6
<PAGE>

     "NASD" has the meaning set forth in Section 7.10.

     "Nasdaq  Stock  Market"  means the Nasdaq Stock  Market's  National  Market
System.

     "National  Market"  means the Nasdaq  Stock  Market,  the Nasdaq  Small Cap
Market, the New York Stock Exchange, Inc. or the American Stock Exchange, Inc..

     "Net Cash  Proceeds"  means,  with  respect to any  transaction,  the total
amount of cash  proceeds  received  by the  Company or any  Subsidiary  less (i)
reasonable  underwriters' fees, brokerage commissions,  reasonable  professional
fees and other customary  out-of-pocket expenses payable in connection with such
transaction, and (ii) in the case of dispositions of assets, (A) actual transfer
taxes (but not income taxes) payable with respect to such dispositions,  and (B)
the amount of Debt, if any, secured by a Lien on the asset or assets disposed of
and  required to be, and  actually  repaid by the Company or any  Subsidiary  in
connection therewith, and any trade payables specifically relating to such asset
or assets  sold by the  Company or any  Subsidiary  that are not  assumed by the
purchaser of such asset or assets.

     "Notice  of  Conversion"  means the notice to be  delivered  by a holder of
Series A Preferred  Shares upon  conversion  of all or a portion  thereof to the
Company.

     "Notice of  Exercise"  means the notice to be  delivered by a holder of the
LKB Warrants upon exercise of all or a portion thereof to the Company.

     "Officer's Certificate" shall mean a certificate executed by the President,
chief executive officer or chief financial officer of the Company in the form of
Exhibit D attached hereto.

     "OTC Bulletin Board" means the over-the-counter  bulletin board operated by
the NASD.

     "Other Taxes" has the meaning set forth in Section 3.6(b).

     "PBGC"  means  the  Pension  Benefit  Guaranty  Corporation  or any  entity
succeeding to any or all of its functions under ERISA.

     "Permits"  means all domestic  and foreign  licenses,  franchises,  grants,
authorizations,    permits,   easements,   variances,    exemptions,   consents,
certificates,  orders and  approvals  necessary  to own,  lease and  operate the
properties of, and to carry on the business of the Company and the Subsidiaries.

     "Permitted Financings" has the meaning set forth in Section 10.5.

     "Person" means an individual, corporation, partnership, trust, incorporated
or unincorporated  association,  joint venture, joint stock Company,  government
(or any agency or political subdivision thereof) or other entity of any kind.

                                        7
<PAGE>

     "Plan" means at any time an employee  pension benefit plan which is covered
by Title IV of ERISA or subject to the minimum funding  standards under the Code
and  either (i) is  maintained,  or  contributed  to, by any member of the ERISA
group for  employees  of any  member of the ERISA  group or (ii) has at any time
within the  preceding  five years been  maintained,  or  contributed  to, by any
Person  which was at such time a member of the ERISA group for  employees of the
Person which was at such time a member of the ERISA Group.

     "Purchase  Price" means the purchase  price for the Securities set forth in
Section 2.2 hereof.

     "Purchaser"  means the entity listed on the  signature  page hereto and its
successors  and  assigns,  including  holders  from time to time of the Series A
Preferred Shares.

     "Recourse  Financing" means Debt of the Company or any Subsidiary which, by
its terms,  does not bar the lender  thereof from action  against the Company or
any Subsidiary,  as borrower or guarantor,  if the security value of the project
or asset  pledged in respect  thereof  falls below the amount  required to repay
such Debt.

     "Registrable Securities" has the meaning set forth in Section 10.4(a).

     "Registration Default" has the meaning set forth in Section 10.4(d).

     "Registration Statement" has the meaning set forth in Section 10.4(b).

     "Registration Rights Agreement" means the agreement between the Company and
Purchaser dated the date hereof substantially in the form set forth in Exhibit B
attached hereto.

     "Required Effectiveness Date" has the meaning set forth in Section 10.4(b).

     "Reserved Amount" has the meaning set forth in Section 7.10(a).

     "Restricted Payment" means, with respect to any Person, (i) any dividend or
other  distribution  on any  shares  of  capital  stock of such  Person  (except
dividends  payable solely in shares of capital stock of the same or junior class
of such Person and dividends from a wholly-owned  direct or indirect  Subsidiary
of the  Company to its parent  corporation),  (ii) any payment on account of the
purchase,  redemption,  retirement  or  acquisition  of (a) any  shares  of such
Person's  capital  stock or (b) any  option,  warrant or other  right to acquire
shares of such  Person's  capital stock or (iii) any loan, or advance or capital
contribution  to any Person (a  "Stockholder")  owning any capital stock of such
Person other than relocation,  travel or like advances to officers and employees
in the ordinary course of business,  and other than  reasonable  compensation as
determined by the Board of Directors.

     "SEC Reports" has the meaning set forth in Section 7.1(a).

                                        8
<PAGE>

     "Securities" means the Series A Preferred Shares,  the Commitment  Warrant,
the LKB Warrants, the Preferred Conversion Shares and the Warrant Shares.

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

     "Series A Preferred  Shares" means the Company's  Series A Preferred  Stock
issuable pursuant to this Agreement.

     "Solvency  Certificate" shall mean a certificate  executed by the treasurer
of the Company as to the  solvency of the  Company,  the adequacy of its capital
and its ability to pay its debts,  all after  giving  effect to the issuance and
sale of the  Series  A  Preferred  Shares  and the  completion  of the  offering
(including  without limitation the payment of any fees or expenses in connection
therewith),  which such Solvency  Certificate  shall be in the form of Exhibit C
attached hereto.

     "Subsequent Takedown Closing" has the meaning set forth in Section 3.1.

     "Subsidiary"  means,  with respect to any Person,  any corporation or other
entity of which (x) a majority of the capital stock or other ownership interests
having  ordinary  voting  power to elect a majority of the Board of Directors or
other  persons  performing  similar  functions  are  at  the  time  directly  or
indirectly owned by such Person or (y) the results of operations, the assets and
the liabilities of which are consolidated with such Person under GAAP.

     "Subsidiary  Corporate  Documents"  means the certificates of incorporation
and bylaws of each Subsidiary.

     "Taxes" has the meaning set forth in Section 3.2.

     "Trading Day" shall mean any Business Day in which the OTC Bulletin  Board,
National  Market or other  automated  quotation  system or exchange on which the
Common Stock is then traded is open for trading for at least four (4) hours.

     "Transaction   Agreements"   means  this  Agreement,   the  Certificate  of
Designations,  the  Registration  Rights  Agreement,  and the  other  agreements
contemplated by this Agreement.

     "Transfer" means any disposition of Securities that would constitute a sale
thereof under the Securities Act.

     "Unfunded  Liabilities"  means,  with respect to any Plan at any time,  the
amount  (if any) by which  (i) the  present  value of all  benefits  under  Plan
exceeds (ii) the fair market value of all Plan assets allocable to such benefits
(excluding any accrued but unpaid contributions),  all determined as of the then
most  recent  valuation  date for such Plan,  but only to the  extent  that such
excess  represents  a potential  liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.

                                        9
<PAGE>

     Section 1.2 Accounting Terms and Determinations. Unless otherwise specified
herein,  all accounting  terms used herein shall be interpreted,  all accounting
determinations hereunder shall be made, and all financial statements required to
be delivered hereunder shall be prepared,  in accordance with generally accepted
accounting  principles  as in effect from time to time,  applied on a consistent
basis  (except for changes  concurred  in by the  Company's  independent  public
accountants)  ("GAAP").  All  references to  "dollars,"  "Dollars" or "$" are to
United States dollars unless otherwise indicated.

                   ARTICLE II. PURCHASE AND SALE OF SECURITIES

     Section 2.1 Purchase and Sale of Series A Preferred Shares.

          (a) Subject to the terms and conditions set forth herein,  the Company
     agrees to issue and sell to  Purchaser,  and  Purchaser  agrees to purchase
     from the Company,  Series A Preferred Shares up to the aggregate Commitment
     Amount.

          (b) Purchaser  shall acquire Series A Preferred  Shares on the Closing
     Date equal in value to One Million Two Hundred and Fifty  Thousand  Dollars
     ($1,250,000.00).

          (c) As an inducement to Purchaser for purchasing the Commitment Amount
     of the  Company's  Series A Preferred  Shares,  the Company  shall issue to
     Purchaser, on the Closing Date, a warrant to purchase 200,000 shares of the
     Company's Common Stock (the "Commitment  Warrant").  The Commitment Warrant
     shall  have a five year  term and an  exercise  price  equal to 105% of the
     Closing Bid Price of the Common Stock on the Closing Date.

     Section 2.2 Purchase  Price.  The purchase price for the Series A Preferred
Shares on the Closing Date and at any  Subsequent  Takedown (as defined  herein)
shall be  $1,000.00  per  share of  Series A  Preferred  Stock.  Therefore,  the
aggregate  consideration  payable by  Purchaser  to the Company for the Series A
Preferred  Shares on the Closing Date shall be One Million Two Hundred and Fifty
Thousand  Dollars  ($1,250,000.00)  (the  "Purchase  Price") in exchange for the
issuance of 1,250 shares of Series A Preferred Stock.

     Section 2.3 Closing and Mechanics of Payment.

          (a) The  Purchase  Price  shall  be paid on the  Closing  Date by wire
     transfer of immediately available funds on or before 5:00 p.m. (EST).

          (b) The Series A  Preferred  Shares,  the  Commitment  Warrant and LKB
     Warrants issued on the Closing Date shall be dated the Closing Date.

     Section 2.4 Terms of Commitment and Subsequent Takedowns.

                                       10
<PAGE>

          (a) Commitment Term. Purchaser's commitment to purchase the Commitment
     Amount of Series A Preferred  Stock from the Company,  subject to the terms
     and conditions set forth herein,  shall expire on the first  anniversary of
     the Closing Date (the "Commitment Term");  provided,  however,  the Company
     shall  have  the  option  to  extend  the  term  of the  commitment  for an
     additional 12 months by giving written notice to Purchaser of its intention
     to exercise  such option not less than 60 days prior to the  expiration  of
     the  Commitment  Term.  Upon the  exercise of such option,  the  Commitment
     Amount  for  such  additional  twelve-month  period  shall  be equal to the
     greater of (i) shares of the  Company's  Series A Preferred  stock equal in
     value to  $8,000,000.00 ( the "Renewed Dollar  Commitment  Amount") or (ii)
     the  number  of shares of Series A  Preferred  Stock  into  which the total
     number of registered  common  shares  represented  in the  Company's  shelf
     registration  statement required to be filed and effective pursuant to this
     Agreement are convertible (the "Renewed  Commitment  Amount").  The Company
     may,  at its  option,  terminate  the  Commitment,  including  the  Renewed
     Commitment Amount at any time;  provided,  however, the Company shall issue
     to Purchaser  upon  termination a warrant to purchase such number of shares
     of Common Stock equal to (x) .015  multiplied by (y) the Dollar  Commitment
     Amount plus the Renewed Dollar Commitment  Amount, if applicable,  less the
     sum of the Initial  Takedown  Amount plus all Subsequent  Takedown  Amounts
     paid by Purchaser prior to the date of such  termination,  as applicable on
     the date of termination, divided by $1.00 (the "Termination Warrants"). The
     Termination  Warrants  shall  have a five year term and an  exercise  price
     equal to 105% of the Closing  Bid Price of the Common  Stock on the date of
     such termination.

          (b) Subsequent  Takedown  Period.  Until the Commitment  Term expires,
     following the earlier of (i) the 20th Trading Day after the effective  date
     of the  Registration  Statement  (in  the  case  of the  first  draw on the
     Commitment  Amount by the Company following the Closing Date (a "Takedown")
     and the 20th Trading Day after the immediately  preceding  Takedown (in the
     case of all Subsequent Takedowns, together known as "Subsequent Takedowns")
     or (ii) conversion by Purchaser of the Series A Preferred  Shares purchased
     in the immediately preceding Takedown, the Company, at its sole option, may
     request Purchaser to purchase  additional  amounts of the unused Commitment
     Amount.

          (c) Subsequent Takedown Amounts.

               (i) The minimum  amount the Company may request in any Subsequent
          Takedown  shall be a dollar amount equal to the product of the formula
          of:

     Subsequent Takedown Amount = [(V multiplied by P) multiplied by 2.5%].

Where V is equal to the weighted  average trading volume of the Common Stock for
(A) the total of the 20 Trading  Days or (B) the total  number of  Trading  Days
elapsed  between  Subsequent  Takedowns,  as  applicable,  and P is equal to the
weighted  average  sale  price of the Common  Stock for (x) the 20  Trading  Day
period  or (y)  the  number  of  Trading  Days  elapsed  between  Takedowns,  as
applicable (the "Minimum Subsequent Takedown Amount").

                                       11
<PAGE>

               (ii) The maximum amount the Company may request in any Subsequent
          Takedown is  $1,250,000,  unless the Company  and  Purchaser  agree in
          writing to  increase  such amount (the  "Maximum  Subsequent  Takedown
          Amount").

               (iii)  The  Company  shall  provide  Purchaser  a  minimum  of 20
          business  days  prior  written  notice  of its  intention  to effect a
          Takedown.

          (e) Additional Takedown Limits.

               (i) In no event shall the  Purchaser (or any "group" as such term
          is defined in Rule 13d-3 of the Exchange Act of which Purchaser may be
          deemed as a member) receive  Conversion  Shares,  upon the issuance of
          any Common  Stock as a result of a  Takedown,  if,  immediately  after
          giving  effect  to such  issuance,  the  Purchaser  (or  group)  would
          beneficially  own  in  excess  of  4.99%  of  the  Common  Stock  then
          outstanding.  This provision will not be effective  following an Event
          of Default which remains uncured for a period of 10 days.

               (ii) In no event shall a  Subsequent  Takedown be effected if the
          issuance of the Series A Preferred  Shares pursuant to such Subsequent
          Takedown will cause the number of shares of Common Stock issuable upon
          conversion of the Series A Preferred Shares or issued pursuant to this
          Agreement  in  the  aggregate,  to  exceed  19.9%  of  the  number  of
          outstanding  shares of Common Stock on such date, unless the issuances
          have been approved by the shareholders of the Company.

          (f) Subsequent  Takedown Fees. In the event: a Subsequent  Takedown is
     not consummated within 33 calendar days following the immediately preceding
     Subsequent Takedown,  the Company shall pay a fee to the Purchaser equal to
     two percent (2%) of the Maximum  Subsequent  Takedown  Amount  ("Subsequent
     Takedown Fee"). The Company shall pay additional  Subsequent  Takedown Fees
     equal to the sum of the immediately  preceding Subsequent Takedown Fee plus
     $30,000  ("Additional  Takedown  Fee") for each  additional 30 calendar day
     period a Subsequent  Takedown Closing does not occur.  Notwithstanding  the
     foregoing,  the  Company  shall  not be  obligated  to pay  any  Subsequent
     Takedown  Fee upon the  occurrence  of any events  limiting  the  Company's
     ability  to  consummate  a  Subsequent  Takedown  as  described  in Section
     2.4(e)(ii) hereof.

                 ARTICLE III. CERTAIN OBLIGATIONS OF THE COMPANY

     Section 3.1  Mandatory  Payments.  Upon the Closing and at each  Subsequent
Takedown  closing (a "Subsequent  Takedown  Closing"),  the Company shall pay to
Purchaser an amount equal to 25% of the Takedown  Amount,  which  payment  shall
constitute a payment on the Company's $3,000,000 Principal Amount 7% Bridge Note
due November 28, 2000 held by Purchaser (the "7% Note"),  until all  outstanding
amounts of principal  and accrued  interest on the 7% Note have been paid by the
Company.

                                       12
<PAGE>

Section 3.2 Payment of Certain Amounts.

          (a) Any and all payments by the Company  hereunder or under the Series
     A Preferred Shares to Purchaser and each "qualified assignee" thereof shall
     be made free and clear of and without  deduction or withholding for any and
     all  present  or future  taxes,  levies,  imposts,  deductions,  charges or
     withholdings,  and all  liabilities  with respect  thereto (all such taxes,
     levies, imposts,  deductions,  charges,  withholdings and liabilities being
     hereinafter  referred to as "Taxes")  unless such Taxes are required by law
     or the  administration  thereof to be deducted or withheld.  If the Company
     shall  be  required  by law or the  administration  thereof  to  deduct  or
     withhold any Taxes from or in respect of any sum payable under the Series A
     Preferred  Shares (i) the holders of the Series A Preferred  Shares subject
     to such Taxes shall have the right, but not the obligation, for a period of
     thirty (30) days  commencing  upon the day it shall have  received  written
     notice from the Company  that it is required to withhold  Taxes to transfer
     all or any portion of the Series A Preferred Shares to a qualified assignee
     to the extent such  transfer can be effected in  accordance  with the other
     provisions  of this  Agreement and  applicable  law; (ii) the Company shall
     make  such  deductions  or  withholdings;  (iii) the sum  payable  shall be
     increased as may be necessary so that after making all required  deductions
     or  withholdings   (including  deductions  or  withholdings  applicable  to
     additional  amounts  paid under this  Section  3.6)  Purchaser  receives an
     amount  equal to the sum it would have  received  if no such  deduction  or
     withholding  had been made;  and (iv) the Company  shall  forthwith pay the
     full  amount  deducted  or  withheld  to the  relevant  taxation  or  other
     authority  in  accordance  with  applicable.  A  "qualified  assignee" of a
     Purchaser  is a Person that is  organized  under the laws of (i) the United
     States  or (II) any  jurisdiction  other  than  the  United  States  or any
     political  subdivision  thereof and that (y) represents and warrants to the
     Company  that  payments of the Company to such  assignee  under the laws in
     existence on the date of this  Agreement  would not be subject to any Taxes
     and (z) from time to time, as and when  requested by the Company,  executes
     and delivers to the Company and the Internal  Revenue  Service  forms,  and
     provides the Company  with any  information  necessary  to  establish  such
     assignee's continued exemption from Taxes under applicable law.

          (b) The Company  shall  forthwith  pay any present or future  stamp or
     documentary taxes or any other excise or property taxes, charges or similar
     levies  (all such  taxes,  charges  and levies  hereinafter  referred to as
     "Other  Taxes")  which  arise  from  any  payment  made  under  any  of the
     Transaction Agreements or from the execution,  delivery or registration of,
     or  otherwise  with  respect to, this  Agreement  other than Taxes  payable
     solely  as a result  of the  transfer  from  Purchaser  to a Person  of any
     Security.

          (c) The Company shall indemnify Purchaser,  or qualified assignee, for
     the full amount of Taxes or Other Taxes (including, without limitation, any
     Taxes or Other Taxes imposed by any  jurisdiction  on amounts payable under
     this  Section  3.2)  paid by  Purchaser,  or  qualified  assignee,  and any
     liability (including penalties, interest and expenses) arising therefrom or
     with  respect  thereto,  whether  or not such  Taxes or  Other  Taxes  were
     correctly

                                       13
<PAGE>

     or  legally  asserted.  Payment  under this  indemnification  shall be made
     within 30 days from the date  Purchaser or assignee  makes  written  demand
     therefor.  A  certificate  as to the  amount of such  Taxes or Other  Taxes
     submitted  to the  Company by  Purchaser  or assignee  shall be  conclusive
     evidence of the amount due from the Company to such party.

          (d) Within 30 days after the date of any payment of Taxes, the Company
     will  furnish to Purchaser  the  original or a certified  copy of a receipt
     evidencing payment thereof.

          (e) Purchaser shall provide to the Company a form W-8, stating that it
     is a non- U.S. person,  together with any additional tax forms which may be
     required  under the  Code,  as  amended  after  the date  hereof,  to allow
     interest payments to be made to it without deduction.

                   ARTICLE IV. REPRESENTATIONS AND WARRANTIES

     The Company  represents  and warrants to Purchaser,  as of the Closing Date
and again at the closing of each Subsequent Takedown, the following:

     Section 4.1 Organization and Qualification. The Company and each Subsidiary
is a corporation (or other legal entity) duly organized, validly existing and in
good standing under the laws of its  jurisdiction  of  incorporation,  with full
power and authority to own,  lease,  use and operate its properties and to carry
on its business as and where now owned,  leased,  used,  operated and conducted.
The Company is qualified to conduct business as a foreign  corporation and is in
good  standing  in  every  jurisdiction  in which  the  nature  of the  business
conducted by it makes such  qualification  necessary,  except where such failure
would not have a Material Adverse Effect. A "Material  Adverse Effect" means any
material  adverse effect on the operations,  results of operations,  properties,
assets or condition  (financial  or otherwise) of the Company or the Company and
its Subsidiaries,  taken as a whole, or on the transactions  contemplated hereby
or by the agreements or instruments to be entered into in connection herewith.

     Section 4.2 Authorization and Execution.

               (a) The Company has all requisite  corporate  power and authority
          to enter into and perform each Transaction Agreement and to consummate
          the  transactions  contemplated  hereby and  thereby  and to issue the
          Securities in accordance with the terms hereof and thereof.

               (b) The  execution,  delivery and  performance  by the Company of
          each  Transaction  Agreement  and the  issuance  by the Company of the
          Securities  have  been  duly and  validly  authorized  and no  further
          consent or authorization of the Company, its Board of Directors or its
          shareholders is required, except pursuant to the limitations set forth
          in Section 2.4(e)(ii).

                                       14
<PAGE>

               (c) This  Agreement  has been duly  executed and delivered by the
          Company.

               (d) This Agreement  constitutes,  and upon execution and delivery
          thereof  by the  Company,  each  of the  Transaction  Agreements  will
          constitute, a valid and binding agreement of the Company, in each case
          enforceable  against the  Company in  accordance  with its  respective
          terms.

     Section 4.3 Capitalization . As of the date hereof, the authorized,  issued
and  outstanding  capital  stock of the Company is as set forth on Schedule  4.3
hereto and except as set forth on Schedule 4.3 no other shares of capital  stock
of  the  Company  will  be  outstanding  as of the  Closing  Date.  All of  such
outstanding  shares  of  capital  stock  are,  or upon  issuance  will be,  duly
authorized,  validly issued, fully paid and nonassessable.  No shares of capital
stock of the Company are subject to preemptive  rights or similar  rights of the
shareholders  of the Company or any liens or  encumbrances  imposed  through the
actions or failure to act of the  Company.  Other than as set forth on  Schedule
4.3  hereto,  as of the date  hereof,  (i)  there  are no  outstanding  options,
warrants,  scrip, rights to subscribe for, puts, calls, rights of first refusal,
agreements,  understandings,  claims  or  other  commitments  or  rights  of any
character  whatsoever  relating to, or securities or rights  convertible into or
exchangeable  for any  shares  of  capital  stock of the  Company  or any of its
Subsidiaries, or arrangements by which the Company or any of its Subsidiaries is
or may become bound to issue  additional  shares of capital stock of the Company
or any of its  Subsidiaries,  and (ii) there are no agreements  or  arrangements
under which the Company or any of its Subsidiaries are obligated to register the
sale of any of its or their securities under the Securities Act (except pursuant
to the  Registration  Rights  Agreement) and (iii) there are no anti-dilution or
price adjustment  provisions contained in any security issued by the Company (or
in any agreement providing rights to security holders) that will be triggered by
the issuance of the Series A Preferred Shares or Conversion  Shares. The Company
has furnished to Purchaser  true and correct  copies of the Company's  Corporate
Documents,  and the terms of all securities  convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.

     Section 4.4 Governmental  Authorization.  The execution and delivery by the
Company of the  Transaction  Agreements  does not and will not, the issuance and
sale  by  the  Company  of the  Securities  does  not  and  will  not,  and  the
consummation  of  the  transactions   contemplated   hereby  and  by  the  other
Transaction  Agreements  will not,  require  any action by or in respect  of, or
filing with, any governmental  body, agency or governmental  official except (a)
such  actions or  filings  that have been  undertaken  or made prior to the date
hereof and that will be in full force and effect (or as to which all  applicable
waiting  periods  have  expired)  on and as of the date  hereof or which are not
required  to be filed  on or prior to the  Closing  Date,  (b) such  actions  or
filings that, if not obtained,  would not result in a Material  Adverse  Effect,
(c)  listing  applications  ("Listing  Applications")  to be filed  with the OTC
Bulletin  Board or the  National  Market  relating to the  Conversion  Shares of
Common Stock issuable upon conversion of the Series A Preferred  Shares and upon
exercise of the LKB Warrants  and  Commitment  Warrant,  and (d) the filing of a
"Form D" as described in Section 7.13 below.

                                       15
<PAGE>

     Section 4.5 Issuance of Shares.  Upon  conversion  in  accordance  with the
terms of the Series A Preferred  Shares and exercise of the  Commitment  Warrant
and the LKB Warrants, the Conversion Shares shall be duly and validly issued and
outstanding,  fully paid and  nonassessable,  free and clear of any Taxes, Liens
and  charges  with  respect to issuance  and shall not be subject to  preemptive
rights or similar rights of any other shareholders of the Company.  Assuming the
representations  and warranties of Purchaser  herein are true and correct in all
material  respects,  each of the  Securities  will have been  issued in material
compliance  with all  applicable  U.S.  federal and state  securities  laws. The
Company  understands  and  acknowledges  that,  in  certain  circumstances,  the
issuance of  Conversion  Shares  could dilute the  ownership  interests of other
shareholders  of  the  Company.   The  Company  further  acknowledges  that  its
obligation to issue Conversion  Shares upon conversion of the Series A Preferred
Shares and exercise of the  Commitment  Warrant and the LKB Warrants is absolute
and unconditional  regardless of the dilutive effect that such issuance may have
on the ownership interests of other shareholders of the Company, except pursuant
to the limitation in Section 2.4(e)(ii).

     Section 4.6 No Conflicts.  The execution and delivery by the Company of the
Transaction Agreements to which it is a party did not and will not, the issuance
and  sale  by the  Company  of the  Securities  did  not  and  will  not and the
consummation  of  the  transactions   contemplated   hereby  and  by  the  other
Transaction  Agreements  will not,  contravene  or constitute a default under or
violation of (i) any provision of applicable law or regulation, (ii) the Company
Corporate Documents, (iii) any agreement, judgment, injunction, order, decree or
other  instrument  binding  upon the Company or any  Subsidiary  or any of their
respective  assets,  or result in the creation or  imposition of any Lien on any
asset of the Company or any  Subsidiary.  The Company and each  Subsidiary is in
compliance  with  and  conforms  to  all  statutes,  laws,  ordinances,   rules,
regulations,  orders,  restrictions  and all  other  legal  requirements  of any
domestic  or  foreign   government  or  any   instrumentality   thereof   having
jurisdiction  over  the  conduct  of  its  businesses  or the  ownership  of its
properties, except where such failure would not have a Material Adverse Effect.

     Section 4.7 Financial Information. Since March 31, 2000 (the "Balance Sheet
Date"),  there  has  been  (x) no  material  adverse  change  in the  assets  or
liabilities, or in the business or condition,  financial or otherwise, or in the
results of operations or prospects, of the Company and its Subsidiaries, whether
as a result of any legislative or regulatory  change,  revocation of any license
or rights to do business,  fire, explosion,  accident,  casualty, labor trouble,
flood, drought, riot, storm, condemnation, act of God, public force or otherwise
and (y) no  material  adverse  change in the  assets or  liabilities,  or in the
business or condition,  financial or otherwise,  or in the results of operations
or prospects,  of the Company and its subsidiaries except in the ordinary course
of business;  and no fact or condition  exists or is  contemplated or threatened
which  might  cause  such a change in the  future.  The  audited  and  unaudited
consolidated  balance sheets of the Company and its Subsidiaries for the periods
ending  December 31, 1999,  and March 31,  2000,  respectively,  and the related
consolidated  statements of income,  changes in shareholders' equity and changes
in cash flows for the  periods  then ended,  including  the  footnotes  thereto,
except  as  indicated  therein,  (i)  complied  in all  material  respects  with
applicable  accounting  requirements  and (ii) have been  prepared in accordance
with GAAP consistently applied throughout the periods indicated, except that the

                                       16
<PAGE>

unaudited financial statements do not contain notes and may be subject to normal
audit  adjustments  and normal annual  adjustments.  Such  financial  statements
fairly present the financial  condition of the Company and its  Subsidiaries  at
the dates indicated and the  consolidated  results of their  operations and cash
flows for the periods then ended and, except as indicated  therein,  reflect all
claims   against  and  all  Debts  and   liabilities  of  the  Company  and  its
Subsidiaries, fixed or contingent.

     Section 4.8 Litigation. Except as set forth in the SEC Reports, there is no
action,  suit  or  proceeding  pending  or,  to the  knowledge  of the  Company,
threatened against the Company or any Subsidiary, before any court or arbitrator
or any  governmental  body,  agency or official  in which there is a  reasonable
possibility of an adverse decision which could  materially  adversely affect the
business,   condition   (financial  or  otherwise),   operations,   performance,
properties or prospects of the Company or which  challenges  the validity of any
Transaction Agreements.

     Section 4.9 Compliance with ERISA and other Benefit Plans.

     (a) Each member of the ERISA Group has fulfilled its obligations  under the
minimum funding standards of ERISA and the Code with respect to each Plan and is
in compliance in all material respects with the presently applicable  provisions
of ERISA and the Code with  respect to each Plan.  No member of the ERISA  Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Code in respect of any Plan,  (ii) failed to make any required  contribution  or
payment  to any  Plan  or  Multiemployer  Plan  or in  respect  of  any  Benefit
Arrangement, or made any amendment to any Plan or Benefit Arrangement,  which as
resulted or could result in the imposition of a Lien or the posting of a bond or
other  security  under ERISA or the Code or (iii)  incurred any liability  under
Title IV of ERISA other than a liability to the PBGC for premiums  under Section
4007 of ERISA.

     (b) The benefit plans not covered under clause (a) above (including  profit
sharing,  deferred compensation,  stock option, employee stock purchase,  bonus,
retirement,  health  or  insurance  plans,  collectively  the  "Benefit  Plans")
relating to the employees of the Company are duly registered  where required by,
and are in good standing in all material  respects under,  all applicable  laws.
All required employer and employee  contributions and premiums under the Benefit
Plans  to the  date  hereof  have  been  made,  the  respective  fund  or  funds
established  under the Benefit  Plans are funded in accordance  with  applicable
laws, and no past service funding liabilities exist thereunder.

     (c) No Benefit  Plans  have any  unfunded  liabilities,  either on a "going
concern" or "winding up" basis and determined in accordance  with all applicable
laws and actuarial  practices and using  actuarial  assumptions and methods that
are  reasonable  in the  circumstances.  No event has  occurred and no condition
exists with respect to any Benefit  Plans that has resulted or could  reasonably
be  expected to result in any pension  plan having its  registration  revoked or
wound up (in whole or in part) or refused  for the  purposes  of any  applicable
laws or being placed under the  administration  of any relevant pension benefits
regulatory  authority or being  required to pay any taxes or  penalties  (in any
material amounts) under any applicable laws.

                                       17
<PAGE>

     Section 4.10 Environmental  Matters.  The costs and liabilities  associated
with  Environmental  Laws  (including  the  cost of  compliance  therewith)  are
unlikely to have a material adverse effect on the business, condition (financial
or otherwise), operations,  performance,  properties or prospects of the Company
or any  Subsidiary.  Each of the  Company  and  the  Subsidiaries  conducts  its
businesses  in  compliance  in  all  material   respects  with  all   applicable
Environmental Laws.

     Section 4.11 Taxes. All United States federal, state, county, municipality,
local  or  foreign  income  tax  returns  and all  other  material  tax  returns
(including  foreign tax returns)  which are required to be filed by or on behalf
of the Company and each  Subsidiary  have been filed and all material  taxes due
pursuant to such returns or pursuant to any  assessment  received by the Company
and each Subsidiary have been paid except those being disputed in good faith and
for which adequate  reserves have been  established.  The charges,  accruals and
reserves on the books of the Company and each Subsidiary in respect of taxes and
other governmental charges have been established in accordance with GAAP.

     Section  4.12  Investments,  Joint  Ventures.  Other  than as set  forth in
Schedule  4.12,  the Company  has no  Subsidiaries  or other  direct or indirect
Investment  in any Person,  and the  Company is not a party to any  partnership,
management, shareholders' or joint venture or similar agreement.

     Section  4.13  Not an  Investment  Company.  Neither  the  Company  nor any
Subsidiary is an "Investment  Company" within the meaning of Investment  Company
Act of 1940, as amended.

     Section 4.14 Full Disclosure.  The information  heretofore furnished by the
Company to Purchaser for purposes of or in connection with this Agreement or any
transaction  contemplated  hereby does not, and all such  information  hereafter
furnished by the Company or any  Subsidiary to Purchaser  will not (in each case
taken  together  and on the date as of which  such  information  is  furnished),
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein, in the light of the
circumstances under which they are made, not misleading.

     Section 4.15 No Solicitation;  No Integration with Other Offerings. No form
of general  solicitation  or general  advertising was used by the Company or, to
the best of its  actual  knowledge,  any  other  Person  acting on behalf of the
Company,  in connection with the offer and sale of the  Securities.  Neither the
Company, nor, to its knowledge, any Person acting on behalf of the Company, has,
either  directly or  indirectly,  sold or offered for sale to any Person  (other
than  Purchaser  and the Halifax Fund,  which has a  contractual  right of first
refusal with respect to the Series A Preferred Stock and which has not exercised
such right) any of the  Securities  or,  within the six months prior to the date
hereof, any other similar security of the Company except as contemplated by this
Agreement,  and the  Company  represents  that  neither  itself  nor any  Person
authorized to act on its behalf (except that the Company makes no representation
as to  Purchaser  and  their  Affiliates)  will  sell or offer for sale any such
security to, or solicit any offers to buy any such  security  from, or otherwise
approach or negotiate in respect thereof with, any Person or Persons so

                                       18
<PAGE>

as  thereby  to cause the  issuance  or sale of any of the  Securities  to be in
violation of any of the provisions of Section 5 of the Securities Act.

     Section 4.16 Permits.  (a) Each of the Company and its Subsidiaries has all
material Permits; (b) all such Permits are in full force and effect, and each of
the Company and its  Subsidiaries  has  fulfilled  and  performed  all  material
obligations  with  respect  to such  Permits;  (c) no event has  occurred  which
allows, or after notice of lapse of time would allow,  revocation or termination
by the issuer thereof or which results in any other  material  impairment of the
rights of the holder of any such  Permit;  and (d) the  Company has no reason to
believe that any governmental body or agency is considering limiting, suspending
or revoking any such Permit.

     Section 4.17 Leases.  Neither the Company nor any  Subsidiary is a party to
any  capital  lease  obligation  with a value  greater  than  $250,000 or to any
operating lease with an aggregate annual rental greater than $250,000 during the
life of such lease.

     Section 4.18 Absence of Any Undisclosed Liabilities or Capital Calls. There
are no  liabilities  of the Company or any  Subsidiary  of any kind  whatsoever,
whether accrued, contingent,  absolute,  determined,  determinable or otherwise,
and there is no existing  condition,  situation  or set of  circumstances  which
would reasonably be expected to result in such a liability, other than (i) those
liabilities  provided  for in the  financial  statements  delivered  pursuant to
Section 4.7 and (ii) other undisclosed liabilities which, individually or in the
aggregate, would not have a Material Adverse Effect.

     Section 4.19 Public Utility  Holding  Company.  Neither the Company nor any
Subsidiary  is, or will be upon issuance and sale of the  Securities and the use
of the proceeds described herein, subject to regulation under the Public Utility
Holding  Company Act of 1935, as amended,  the Federal Power Act, the Interstate
Commerce  Act or to any  federal or state  statute or  regulation  limiting  its
ability to issue and perform its obligations under any Transaction Agreement.

     Section  4.20  Intellectual  Property  Rights.  Each of the Company and its
Subsidiaries owns, or is licensed under, and has the rights to use, all material
patents, trademarks, trade names, copyrights, technology, know-how and processes
(collectively, "Intellectual Property") used in, or necessary for the conduct of
its business;  no claims have been asserted by any Person to the use of any such
Intellectual   Property  or   challenging   or   questioning   the  validity  or
effectiveness  of any  license  or  agreement  related  thereto.  To the best of
Company's and its Subsidiaries' knowledge,  there is no valid basis for any such
claim  and  the  use of  such  Intellectual  Property  by the  Company  and  its
Subsidiaries will not infringe upon the rights of any Person.

     Section 4.21 Insurance.  The Company and its  Subsidiaries  maintain,  with
financially sound and reputable insurance companies,  insurance in at least such
amounts and  against  such risks such that any  uninsured  loss would not have a
Material  Adverse  Effect.  All  insurance  coverages  of the  Company  and  its
Subsidiaries  are in full force and effect and there are no past due premiums in
respect of any such insurance.

                                       19
<PAGE>

     Section 4.22 Title to  Properties.  The Company and its  Subsidiaries  have
good and marketable  title to all their respective  properties  reflected on the
financial statements referred to in Section 4.7, free and clear of all Liens.

     Section  4.23  Internal  Accounting  Controls.  The Company and each of its
Subsidiaries  maintain a system of internal accounting controls  sufficient,  in
the  judgment  of the  Company's  Board  of  Directors,  to  provide  reasonable
assurance that (i)  transactions  are executed in accordance  with  managements'
general or specific authorizations,  (ii) transactions are recorded as necessary
to permit  preparation  of financial  statements in conformity  with GAAP and to
maintain  asset  accountability,  (iii)  access to assets is  permitted  only in
accordance with  management's  general or specific  authorization,  and (iv) the
recorded  accountability  for assets is  compared  with the  existing  assets at
reasonable  intervals  and  appropriate  action  is taken  with  respect  to any
differences.

     Section 4.24 Year 2000 Compliance.

     (a) Computer  and Other  Systems.  (i) All  software  programs and computer
hardware that are owned,  leased or licensed by the Company and each Subsidiary,
or used by third parties on behalf of the Company and each Subsidiary ("Computer
Systems"),  are  designated  to be used prior to,  during and after the calendar
year 2000 A.D.,  including leap years; (ii) all other  operational  systems that
use software or equipment that are owned, leased, or licensed by the Company and
each  Subsidiary,  or used by third  parties on behalf of the  Company  and each
Subsidiary  ("Other  Systems"),  are  designated  to be used prior to, during or
after the  calendar  year 2000 A.D.,  including  leap years;  (iii) the Computer
systems and Other Systems will properly  operate during each such period without
error or degradation of performance  caused by a lack of Year 2000 Capabilities;
and (iv) the Computer  Systems and Other  Systems will properly  operate  during
each such period without requiring intervention or modification to Date Data.

     (b)  Capabilities of Suppliers,  Vendors and Landlords.  To the best of the
Company's  knowledge  after specific  inquiry of all of its material  suppliers,
vendors and landlords,  the Company and each  Subsidiary  will not suffer a loss
from interruption or cessation of business operations, in whole or in part, as a
result of such  suppliers,  vendors or landlords  failing to provide  materials,
labor,  supplies or access to leased space for the  operation of the Company and
each  Subsidiary  as a result of such  suppliers or vendors not having Year 2000
Capabilities.

     (c)  Capabilities.   For  purposes  of  this  Agreement,   (x)  "Year  2000
Capabilities"  means the ability to: (i) manage and  manipulate  data  involving
dates, including single century formulas and multi-century formulas, in a manner
that will not cause an abnormally  ending scenario or generate  incorrect values
or invalid results  involving such dates;  (ii) include the indication of proper
century dates in all date-related user interface  functions and date fields; and
(iii)  operate with proper  century dates in  date-related  software or hardware
interface  functions;  and (y) "Date Data" means any  existing  data or input of
date which includes an indication of or reference to date.

                                       20
<PAGE>

     Section  4.25  Foreign  Practices.  Neither  the  Company  nor  any  of its
Subsidiaries  nor,  to the  Company's  knowledge,  any  employee or agent of the
Company  or any  Subsidiary  has made any  payments  of funds of the  Company or
Subsidiary,  or received or retained any funds, in each case in violation of any
law, rule or regulation.

             ARTICLE V. REPRESENTATIONS AND WARRANTIES OF PURCHASER

     Section 5.1  Purchaser.  Purchaser  hereby  represents  and warrants to the
Company that:

          (a) Purchaser is an "accredited  investor"  within the meaning of Rule
     501(a) under the  Securities  Act and the  Securities  to be acquired by it
     pursuant to this  Agreement are being  acquired for its own account and, as
     of the date hereof, not with a view toward, or for sale in connection with,
     any distribution thereof except in compliance with applicable United States
     federal  and  state  securities  law;  provided  that  the  disposition  of
     Purchaser's property shall at all times be and remain within its control;

          (b) the execution,  delivery and performance of this Agreement and the
     purchase  of  the  Securities   pursuant  thereto  are  within  Purchaser's
     corporate or  partnership  powers,  as  applicable,  and have been duly and
     validly authorized by all requisite corporate or partnership action;

          (c) this Agreement has been duly executed and delivered by Purchaser;

          (d)  the  execution  and  delivery  by  Purchaser  of the  Transaction
     Agreements  to which it is a party does not,  and the  consummation  of the
     transactions  contemplated  hereby  and  thereby  will not,  contravene  or
     constitute a default  under or violation of (i) any provision of applicable
     law or regulation,  or (ii) any  agreement,  judgment,  injunction,  order,
     decree or other instrument binding upon Purchaser;

          (e) Purchaser understands that the Securities have not been registered
     under  the  Securities  Act and may not be  transferred  or sold  except as
     specified in this Agreement or the remaining Transaction Agreements;

          (f) this  Agreement  constitutes  a valid  and  binding  agreement  of
     Purchaser  enforceable  in  accordance  with  its  terms,  subject  to  (i)
     applicable   bankruptcy,   insolvency   or  similar  laws   affecting   the
     enforceability of creditors rights generally and (ii) equitable  principles
     of general applicability;

          (g)  Purchaser  has such  knowledge  and  experience  in financial and
     business  matters so as to be capable of evaluating the merits and risks of
     its  investment in the  Securities  and Purchaser is capable of bearing the
     economic risks of such investment;

                                       21
<PAGE>

          (h)  Purchaser is  knowledgeable,  sophisticated  and  experienced  in
     business  and  financial  matters;  Purchaser  has  previously  invested in
     securities  similar to the Securities and fully understands the limitations
     on  transfer  described  herein;  Purchaser  has been  afforded  access  to
     information  about the  Company  and the  financial  condition,  results of
     operations, property, management and prospects of the Company sufficient to
     enable it to evaluate its investment in the Securities;  Purchaser has been
     afforded the  opportunity to ask such questions as it has deemed  necessary
     of, and to receive answers from,  representatives of the Company concerning
     the terms and  conditions of the offering of the  Securities and the merits
     and the  risks of  investing  in the  Securities;  and  Purchaser  has been
     afforded the  opportunity to obtain such additional  information  which the
     Company  possesses  or can acquire that is necessary to verify the accuracy
     and  completeness  of the  information  given to Purchaser  concerning  the
     Company.  The  foregoing  does not in any way  relieve  the  Company of its
     representations  and  other  undertakings  hereunder,  and  shall not limit
     Purchaser's ability to rely thereon;

          (i) no part of the source of funds used by  Purchaser  to acquire  the
     Securities  constitutes assets allocated to any separate account maintained
     by Purchaser in which any employee  benefit plan (or its related trust) has
     any interest; and

          (j) Purchaser is a corporation organized under the laws of Bermuda.

           ARTICLE VI. CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES

     Section 6.1 Conditions  Precedent to  Purchaser's  Obligations to Purchase.
The obligation of Purchaser  hereunder to purchase the Series A Preferred Shares
at the  Closing  and at each  Subsequent  Takedown  Closing  is  subject  to the
satisfaction,  on or before  the  Closing  Date and the date of each  Subsequent
Takedown  Closing (each a "Subsequent  Takedown  Closing Date"),  of each of the
following  conditions,  provided that these  conditions are for Purchaser's sole
benefit and may be waived by Purchaser at any time in its sole discretion:

          (a)  The  Company  shall  have  duly  executed  this  Agreement,   the
     Commitment  Warrant  (upon the Closing  Date only),  the LKB  Warrant,  the
     Registration Rights Agreement, and delivered the same to Purchaser;

          (b) The  Company  shall have  delivered  to  Purchaser  duly  executed
     certificates  representing the Series A Preferred Shares in accordance with
     Section 2.3 hereof and the Commitment Warrant (upon the Closing Date only);

          (c) The Company shall have delivered the Solvency Certificate;

          (d) The  representations  and  warranties of the Company  contained in
     each  Transaction  Agreement  shall be true  and  correct  in all  material
     respects as of the date when

                                       22
<PAGE>

     made and as of the Closing Date and each Subsequent  Takedown  Closing Date
     as though made at such time (except for representations and warranties that
     speak  as of a  specified  date)  and the  Company  shall  have  performed,
     satisfied  and  complied  with all  covenants,  agreements  and  conditions
     required by such  Transaction  Agreements  to be  performed,  satisfied  or
     complied  with by it at or prior to the  Closing  Date and each  Subsequent
     Takedown   Closing  Date.   Purchaser  shall  have  received  an  Officer's
     Certificate  executed by the chief executive officer of the Company,  dated
     as of the Closing Date and each  Subsequent  Takedown  Closing Date, to the
     foregoing effect, including but not limited to certificates with respect to
     the Company Corporate  Documents,  resolutions relating to the transactions
     contemplated  hereby and the incumbencies of certain officers and Directors
     of the Company.  The form of such certificate is attached hereto as Exhibit
     D;

          (e) The  Company  shall  have  received  all  governmental,  Board  of
     Directors, shareholders and third party consents and approvals necessary or
     desirable in connection  with the issuance and sale of the  Securities  and
     the  consummation  of the  transactions  contemplated  by  the  Transaction
     Agreements;

          (f) All applicable waiting periods in respect to the issuance and sale
     of the Securities  shall have expired  without any action having been taken
     by any  competent  authority  that  could  restrain,  prevent or impose any
     materially adverse conditions thereon or that could seek or threaten any of
     the foregoing;

          (g) No law or regulation shall have been imposed or enacted that could
     adversely  affect  the  transactions  set  forth  herein  or in  the  other
     Transaction  Agreements,  and no law or regulation shall have been proposed
     could reasonably have any such effect;

          (h) Purchaser  shall have received an opinion,  dated the Closing Date
     and each Subsequent  Takedown  Closing Date, of counsel to the Company,  in
     substantially the form of Exhibit F;

          (i) All fees and  expenses  due and payable by the Company on or prior
     to the Closing Date and each  Subsequent  Takedown  Closing Date shall have
     been paid;

          (j) The  Company  Corporate  Documents  and the  Subsidiary  Corporate
     Documents,  if  any,  shall  be in full  force  and  effect  and no term or
     condition  thereof  shall have been amended,  waived or otherwise  modified
     without the prior  written  consent of Purchaser and the Company shall have
     delivered to Purchaser  the  Certificate  of  Designations  of the Series A
     Preferred Stock certified by the Secretary of State of Nevada;

          (k) There  shall  have  occurred  no  material  adverse  change in the
     business,  condition  (financial or  otherwise),  operations,  performance,
     properties  or prospects of the Company or any  Subsidiary  since March 31,
     2000;

                                       23
<PAGE>

          (l) There shall exist no action,  suit,  investigation,  litigation or
     proceeding  pending or threatened in any court or before any  arbitrator or
     governmental instrumentality that challenges the validity of this Agreement
     or any  other  Transaction  Agreement,  or other  transaction  contemplated
     hereby or thereby or that could  reasonably  be expected to have a Material
     Adverse Effect, or any material adverse effect on the enforceability of the
     Transaction  Agreements  or the  Securities or the rights of the holders of
     the Securities or Purchaser hereunder;

          (m) The Registration  Statement  relating to the Commitment  Amount or
     the Renewed  Commitment  Amount,  as  applicable,  shall have been declared
     effective by the Commission;

          (n) There shall not have occurred any  disruption or adverse change in
     the financial or capital  markets  generally,  which  Purchaser  reasonably
     deems material in connection with the purchase of the Securities;

          (o) LKB shall have confirmed receipt of the LKB Warrant;

          (p)  Receipt of an  accountant's  "comfort  letter"  or  "agreed  upon
     procedures letter" if applicable;

          (q)  Purchaser  shall have received all other  opinions,  resolutions,
     certificates, instruments, agreements or other documents as required by the
     Transaction Agreements;

          (r) An Escrow  Agreement,  substantially  in the form of Exhibit E, by
     and between the Company and  Purchaser,  and accepted by the Law Offices of
     Kim T. Stephens as escrow agent (the "Escrow Agent"),  shall have been duly
     executed by the said parties.

          (s) Company  shall have  delivered  to  Purchaser  the Use of Proceeds
     Schedule 7.8.

          (t) The  Company's  Common  Stock  shall be  listed  and  traded  on a
     National Market or the OTC Bulletin Board.

     Section 6.2 Conditions to the Company's Obligations. The obligations of the
Company to issue and sell the Securities to Purchaser pursuant to this Agreement
are subject to the  satisfaction,  at or prior to the  Closing  Date and at each
Subsequent Takedown Closing Date, of the following conditions:

          (a) The  representations  and warranties of Purchaser contained herein
     shall be true and correct in all material  respects on the Closing Date and
     Purchaser  shall have performed and complied in all material  respects with
     all agreements  required by this Agreement to be performed or complied with
     by Purchaser at or prior to the Closing Date;

                                       24
<PAGE>

          (b) The issue and sale of the  Securities  by the Company shall not be
     prohibited by any applicable law, court order or governmental regulation;

          (c) Upon  the  Closing  Date  only,  receipt  by the  Company  of duly
     executed  counterparts  of  this  Agreement  and  the  Registration  Rights
     Agreement signed by Purchaser;

          (d) The Company shall have received  payment of Purchase  Price,  less
     the Expense Reimbursement Fee.

                       ARTICLE VII. AFFIRMATIVE COVENANTS

     The Company and Purchaser, as applicable, hereby agree that, from and after
the date hereof for so long as any Series A Preferred Shares remain  outstanding
and for the benefit of each other;

     Section 7.1  Information.  The Company  will  deliver to each holder of the
Series A Preferred Shares:

          (a) promptly upon the filing thereof,  copies of (i) all  registration
     statements (other than the exhibits thereto and any registration statements
     on Form S-8 or its  equivalent),  and (ii) all reports of Forms 10-K,  10-Q
     and 8-K (or other  equivalents)  which the  Company or any  Subsidiary  has
     filed with the Commission (collectively, "SEC Reports");

          (b)  promptly  upon the  mailing  thereof to the  shareholders  of the
     Company generally,  copies of all financial  statements,  reports and proxy
     statements  so  mailed  and any other  document  generally  distributed  to
     shareholders;

          (c) at least two (2) Business  Days prior to the  consummation  of any
     Financing  or other event  requiring a repayment  of the Series A Preferred
     Shares under  Section 3.4,  notice  thereof  together with a summary of all
     material  terms  thereof  and  copies  of  all  documents  and  instruments
     associated therewith;

          (d)  notice  promptly  upon the  occurrence  of any event by which the
     Reserved  Amount  becomes less than the number of  Conversion  Shares to be
     registered   pursuant  to  the  Registration   Statement  relating  to  the
     Commitment Amount or the Renewed Commitment Amount, as applicable;

          (e)  promptly  following  the  commencement  thereof,   notice  and  a
     description  in reasonable  detail of any litigation or proceeding to which
     the Company or any  Subsidiary  is a party in which the amount  involved is
     $250,000 or more and not covered by  insurance  or in which  injunctive  or
     similar relief is sought.

                                       25
<PAGE>

     Section 7.2 Payment of  Obligations.  The Company will, and will cause each
Subsidiary to, pay and discharge,  at or before  maturity,  all their respective
material obligations,  including,  without limitation,  tax liabilities,  except
where the same may be contested  in good faith by  appropriate  proceedings  and
will maintain, in accordance with GAAP,  appropriate reserves for the accrual of
any of the same.

     Section 7.3 Maintenance of Property;  Insurance. The Company will, and will
cause each Subsidiary to, keep all property useful and necessary in its business
in good  working  order  and  condition,  ordinary  wear and tear  excepted.  In
addition,  the Company and each Subsidiary  will maintain  insurance in at least
such amounts and against such risks as it has insured  against as of the Closing
Date.

     Section 7.4 Maintenance of Existence. The Company will, and will cause each
Subsidiary  to,  continue to engage in business of the same  general type as now
conducted by the Company and such  Subsidiaries,  and will  preserve,  renew and
keep in full force and  effect  its  respective  corporate  existence  and their
respective material rights,  privileges and franchises necessary or desirable in
the normal conduct of business.

     Section 7.5  Compliance  with Laws.  The Company will,  and will cause each
Subsidiary  to,  comply,  in all material  respects,  with all  federal,  state,
municipal,  local or foreign applicable laws,  ordinances,  rules,  regulations,
municipal   by-laws,   codes  and   requirements  of  governmental   authorities
(including,  without limitation,  Environmental Laws and ERISA and the rules and
regulations  thereunder)  except (i) where compliance  therewith is contested in
good faith by  appropriate  proceedings or (ii) where  non-compliance  therewith
could not reasonably be expected,  in the aggregate,  to have a material adverse
effect  on  the  business,  condition  (financial  or  otherwise),   operations,
performance, properties or prospects of the Company or such Subsidiary.

     Section 7.6  Inspection of Property,  Books and Records.  The Company will,
and will cause each  Subsidiary  to, keep proper  books of record and account in
which  full,  true  and  correct  entries  shall  be  made of all  dealings  and
transactions in relation to their respective businesses and activities; and will
permit, during normal business hours, Purchaser'  Representative or an affiliate
thereof,  as  representatives  of  Purchaser,  to visit and inspect any of their
respective  properties,  upon  reasonable  prior  notice,  to  examine  and make
abstracts  from any of their  respective  books and records and to discuss their
respective  affairs,  finances  and  accounts  with their  respective  executive
officers and independent  public  accountants (and by this provision the Company
authorizes  its  independent  public  accountants  to disclose  and discuss with
Purchaser the affairs, finances and accounts of the Company and its Subsidiaries
in the presence of a representative of the Company; provided, however, that such
discussions will not result in any unreasonable expense to the Company,  without
Company consent), all at such reasonable times.

     Section 7.7  Investment  Company  Act. The Company will not be or become an
open-end  investment  trust,  unit investment  trust or face-amount  certificate
company  that  is or is  required  to  be  registered  under  Section  8 of  the
Investment Company Act of 1940, as amended.

                                       26
<PAGE>

     Section 7.8 Use of Proceeds. The proceeds from the issuance and sale of the
Series A  Preferred  Shares  by the  Company  shall be used in  accordance  with
Schedule 7.8 attached hereto. None of the proceeds from the issuance and sale of
the Series A Preferred  Shares by the Company pursuant to this Agreement will be
used directly or indirectly for the purpose,  whether  immediate,  incidental or
ultimate,  of  purchasing  or carrying any "margin  stock" within the meaning of
Regulation G of the Board of Governors of the Federal Reserve System.

     Section 7.9 Compliance with Terms and Conditions of Material Contracts. The
Company will, and will cause each Subsidiary to, comply,  in all respects,  with
all terms and conditions of all material contracts to which it is subject.

     Section 7.10 Reserved Shares and Listings.

     (a) The Company  shall at all times have  authorized,  and reserved for the
purpose of issuance,  a  sufficient  number of shares of Common Stock to provide
for the full  conversion  of the  outstanding  Series  A  Preferred  Shares  and
exercise of the Commitment Warrant and the LKB Warrants (based on the conversion
price of the  Series A  Preferred  Shares  in  effect  from time to time and the
exercise price of the Commitment Warrant and the LKB Warrants, respectively) and
the Company  shall reserve for issuance the number of shares to be registered on
the  Registration  Statement  relating to the  Conversion  Shares  issuable upon
conversion  of the  Commitment  Amount and the  Renewed  Commitment  Amount (the
"Reserved Amount"). The Company shall not reduce the Reserved Amount without the
prior  written  consent  of  Purchaser.  If at any time the  number of shares of
Common  Stock  authorized  and  reserved  for  issuance  is below the  number of
Conversion  Shares issued or issuable upon  conversion of the Series A Preferred
Shares and exercise of the Commitment Warrant and the LKB Warrants,  the Company
will  promptly take all  corporate  action  necessary to authorize and reserve a
sufficient number of shares, including, without limitation, either (x) calling a
special meeting of shareholders to authorize  additional  shares, in the case of
an insufficient number of authorized shares or (y) in lieu thereof, consummating
the  immediate  redemption of the Series A Preferred  Shares and the  Commitment
Warrant and the LKB Warrants in accordance with each such security's terms.

     (b) The Company shall promptly file the Listing Applications and secure the
listing of the  Conversion  Shares  upon each  national  securities  exchange or
automated  quotation  system, if any, upon which shares of Common Stock are then
listed (subject to official  notice of issuance) and shall maintain,  so long as
any  other  shares of Common  Stock  shall be so  listed,  such  listing  of all
Conversion  Shares from time to time  issuable  upon  conversion of the Series A
Preferred  Shares and  exercise of the  Commitment  Warrant and the LKB Warrants
(the "Warrant Shares"),  respectively. The Company will maintain the listing and
trading of its Common Stock on a National Market or the OTC Bulletin Board.  The
Company will comply in all respects  with the  Company's  reporting,  filing and
other  obligations  under the  bylaws or rules of the  National  Association  of
Securities  Dealers,  Inc. (the "NASD") and such exchanges,  as applicable.  The
Company shall  promptly  provide to Purchaser  copies of any notices it receives
regarding  the  continued  eligibility  of the Common  Stock for  listing on any
National Market or the OTC Bulletin Board.

                                       27
<PAGE>

     Section  7.11  Transfer  Agent  Instructions.  Upon  receipt of a Notice of
Conversion or Notice of Exercise,  as applicable,  the Company shall immediately
direct the Company's  transfer  agent to issue  certificates,  registered in the
name of Purchaser or its nominee,  for the Conversion Shares, in such amounts as
specified  from time to time by Purchaser to the Company upon proper  conversion
of the Series A Preferred  Shares or exercise of the Commitment  Warrant and the
LKB Warrants.  Upon  conversion  of any Series A Preferred  Shares in accordance
with their terms and/or  exercise of any  Commitment  Warrant or LKB Warrants in
accordance  with their  terms,  the Company  will,  and will use its best lawful
efforts  to  cause  its  transfer  agent  to,  issue  one or  more  certificates
representing  shares  of  Common  Stock  in  such  name  or  names  and in  such
denominations  specified by a Purchaser in a Notice of  Conversion  or Notice of
Exercise, as the case may be. As long as the Registration Statement contemplated
by the  Registration  Rights  Agreement  shall remain  effective,  the shares of
Common  Stock  issuable  upon  conversion  of any Series A  Preferred  Shares or
exercise of the  Commitment  Warrant and the LKB Warrants shall be issued to any
transferee of such shares from  Purchaser  without any  restrictive  legend upon
appropriate  evidence of transfer in compliance  with the Securities Act and the
rules  and  regulations  of the  Commission;  provided  that  for so long as the
Registration  Statement is effective,  no opinion of counsel will be required to
effect any such  transfer.  The  Company  further  warrants  and agrees  that no
instructions  other  than these  instructions  have been or will be given to its
transfer  agent.  Nothing  in  this  Section  7.11  shall  affect  in any  way a
Purchaser's  obligation  to  comply  with  all  securities  laws  applicable  to
Purchaser  upon resale of such shares of Common Stock,  including any prospectus
delivery requirements.

     Section 7.12 Maintenance of Reporting Status;  Supplemental Information. So
long as any of the Securities are outstanding, the Company shall timely file all
reports  required to be filed with the Commission  pursuant to the Exchange Act.
The Company shall not terminate its status as an issuer required to file reports
under the Exchange  Act,  even if the Exchange Act or the rules and  regulations
thereunder  would  permit  such  termination.  If at anytime  the Company is not
subject to the  requirements  of Section 13 or 15(d) of the  Exchange  Act,  the
Company will promptly furnish at its expense,  upon request,  for the benefit of
the holders  from time to time of  Securities,  and  prospective  purchasers  of
Securities,  information  satisfying the  information  requirements  of Rule 144
under the Securities Act.

     Section 7.13 Form D; Blue Sky Laws.  The Company  agrees to file a "Form D"
with respect to the Securities as required under  Regulation D of the Securities
Act and to provide a copy thereof to Purchaser  promptly after such filing.  The
Company  shall,  on or before the Closing Date,  take such action as the Company
shall  reasonably  determine is necessary to qualify the  Securities for sale to
Purchaser at the Closing pursuant to this Agreement under applicable  securities
or "blue sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to Purchaser on or prior to the Closing Date.

     Section 7.14 Purchaser  Acknowledgment.  Purchaser hereby acknowledges that
it will be named as a statutory  underwriter  in the  Registration  Statement as
required by the Commission.

                                       28
<PAGE>

                        ARTICLE VIII. NEGATIVE COVENANTS

     The  Company  hereby  agrees  that after the date hereof for so long as any
Series A Preferred Shares remain outstanding (or such shorter period time as set
forth below) and for the benefit of Purchaser:

     Section 8.1 Reserved.

     Section 8.2 Transactions  with Affiliates.  The Company and each Subsidiary
will not,  directly or indirectly,  pay any funds to or for the account of, make
any  investment  (whether  by  acquisition  or stock or  indebtedness,  by loan,
advance, transfer of property,  guarantee or other agreement to pay, purchase or
service,  directly or  indirectly,  and Debt,  or otherwise)  in,  lease,  sell,
transfer or  otherwise  dispose of any assets,  tangible or  intangible,  to, or
participate  in,  or  effect  any  transaction  in  connection  with  any  joint
enterprise or other joint arrangement with, any Affiliate,  except, (1) pursuant
to those  agreements  specifically  identified  on Schedule 8.2 attached  hereto
(with a copy of such  agreements  annexed to such Schedule 8.2) and (2) on terms
to the Company or such  Subsidiary  no less  favorable  than terms that could be
obtained  by the  Company  or  such  Subsidiary  from a  Person  that  is not an
Affiliate of the Company upon negotiation at arms' length, as determined in good
faith by the Board of Directors of the Company;  provided that no  determination
of  the  Board  of  Directors  shall  be  required  with  respect  to  any  such
transactions entered into in the ordinary course of business.

     Section  8.3 Merger or  Consolidation.  The  Company  will not, in a single
transaction or a series of related  transactions  (i) consolidate  with or merge
with or into any other  Person,  or (ii) permit any other Person to  consolidate
with or merge into it,  unless the Company  shall be the survivor of such merger
or consolidation  and (x) immediately  before and immediately after given effect
to such transaction  (including any  indebtedness  incurred or anticipated to be
incurred in  connection  with the  transaction),  no Default or Event of Default
shall have  occurred  and be  continuing;  and (y) the Company has  delivered to
Purchaser an Officer's  Certificate stating that such  consolidation,  merger or
transfer complies with this Agreement, and that all conditions precedent in this
Agreement relating to such transaction have been satisfied.

     Section  8.4  Limitation  on  Asset  Sales.  Neither  the  Company  nor any
Subsidiary  will  consummate an Asset Sale of material  assets of the Company or
any  Subsidiary  without the prior written  consent of Purchaser,  which consent
shall not be unreasonably withheld. As used herein, "Asset Sale" means any sale,
lease,  transfer  or other  disposition  (or  series of related  sales,  leases,
transfers or dispositions) or sales of capital stock of a Subsidiary (other than
directors'  qualifying  shares),  property or other assets (each referred to for
the purpose of this definition as a "disposition"), including any disposition by
means of a merger, consolidation or similar transaction other than a disposition
of property or assets at fair market value in the  ordinary  course of business;
provided,  however,  Asset Sale shall not  include  the sale of a portion of the
Company's  ownership  interest in License  1551 or License  953  relating to the
development of certain oil and gas fields in

                                       29
<PAGE>

Kazakstan and the sale of any oil or gas resulting from the  development of such
property under License 1551 or License 953 owned by the Company.

     Section 8.5 Restrictions on Certain Amendments. Neither the Company nor any
Subsidiary  will waive any  provision of,  amend,  or suffer to be amended,  any
provision of such entity's  existing  Debt,  except for the Company's 5% Secured
Convertible Debentures due February 18, 2004, any material contract or agreement
previously or hereafter  filed by the Company with the Commission as part of its
SEC Reports,  any Company Corporate Document or Subsidiary Corporate Document if
such amendment, in the Company's reasonable judgment, would materially adversely
affect  Purchaser  or the holders of the  Securities  without the prior  written
consent of Purchaser.

     Section  8.6  Prohibition  on  Discounted  Equity  Offerings;  Registration
Rights.

          (a) Except with respect to equity securities that may be issuable upon
     the exercise or  conversion  of Derivative  Securities  (as defined  below)
     outstanding  as of the date hereof,  until such time as all of the Series A
     Preferred  Shares have been either  redeemed or converted  into  Conversion
     Shares in full, the Company agrees that it will not issue any of its equity
     securities (or securities  convertible  into or exchangeable or exercisable
     for equity securities (the "Derivative  Securities")) on terms that allow a
     holder thereof to acquire such equity securities (or Derivative Securities)
     at a  discount  to the  Market  Price  of the  Common  Stock at the time of
     issuance or, in the case of  Derivative  Securities  at a conversion  price
     based on any formula (other than standard anti- dilution  provisions) based
     on the  Market  Price  on a date  later  than the  date of  issuance  which
     conversion  price is not below  the  Market  Price on the date of  issuance
     (each  such  event,  a  "Discounted  Equity  Offering").  As  used  herein,
     "discount" shall include, but not be limited to, (i) any warrant,  right or
     other security  granted or offered in connection  with such issuance which,
     on the applicable  date of grant, is offered with an exercise or conversion
     price,  as the case may be, at less than the then  current  Market Price of
     the Common Stock or, if such security has an exercise or  conversion  price
     based on any formula (other than standard  anti-dilution  provisions) based
     on the Market  Price on a date later than the date of  issuance,  then at a
     price below the Market Price on such date of exercise or conversion, as the
     case may be,  or (ii) any  commissions,  fees or other  allowances  paid in
     connection  with  such  issuances  (other  than  customary  underwriter  or
     placement  agent  commissions,  fees or  allowances).  For the  purposes of
     determining  the Market Price at which Common Stock is acquired  under this
     Section,  normal  underwriting  commissions  and placement fees  (including
     underwriters' warrants) shall be excluded.

          (b) Except with respect to equity securities that may be issuable upon
     the exercise or conversion of Derivative  Securities  outstanding as of the
     date hereof,  until such time as all of the Series A Preferred  Shares have
     been either  redeemed or  converted  into  Conversion  Shares in full,  the
     Company  agrees  it  will  not  issue  any of  its  equity  securities  (or
     Derivative Securities), unless such securities are junior in ranking to the
     Series A Preferred  Stock and any shares of Common Stock issued or issuable
     in  connection  therewith  are  "restricted  securities."  As  used  herein
     "restricted  securities"  shall mean securities which may not be sold prior
     to twelve (12) months following the date of issuance of such securities.

                                       30
<PAGE>

          (c) The restrictions  contained in this Section 8.6 shall not apply to
     the issuance by the Company of (or the  agreement to issue) Common Stock or
     Derivative Securities in connection with (i) the acquisition  (including by
     merger)  of  a  business  or  of  assets  otherwise  permitted  under  this
     Agreement, or (ii) stock option or other compensatory plans.

     Section 8.7 Limitation on Stock Repurchases.  Except as otherwise set forth
in the Series A Preferred Shares,  the Commitment  Warrant and the LKB Warrants,
the Company  shall not,  without the written  consent of the  Majority  Holders,
redeem,  repurchase  or otherwise  acquire  (whether for cash or in exchange for
property or other  securities or  otherwise)  any shares of capital stock of the
Company  or any  warrants,  rights or options to  purchase  or acquire  any such
shares.

     Section 8.8 Limitations on Financings  Until Closing.  Notwithstanding  any
provision of this  Article 8 to the  contrary,  the Company and each  Subsidiary
shall not, until the Closing, consummate any equity or debt financing except for
financings   pursuant  to  existing  credit   facilities  or  conventional  debt
financings.

     Section 8.9 Short Sales.  Purchaser shall not effect or cause any affiliate
of  Purchaser  to effect a short sale of Common  Stock of the Company so long as
Purchaser owns any shares of Series A Preferred Stock.

                         ARTICLE IX. RESTRICTIVE LEGENDS

     Section 9.1 Restrictions on Transfer. From and after their respective dates
of  issuance,  none of the  Securities  shall be  transferable  except  upon the
conditions specified in this Article IX, which conditions are intended to ensure
compliance  with the provisions of the Securities Act in respect of the Transfer
of any of such Securities or any interest  therein.  Each Purchaser will use its
best efforts to cause any proposed  transferee of any  Securities  held by it to
agree to take and hold such  Securities  subject to the  provisions and upon the
conditions specified in this Article IX and Section 8.9 of this Agreement.

     Section 9.2 Notice of Proposed Transfers. Prior to any proposed Transfer of
the Securities (other than a Transfer (i) registered or exempt from registration
under the  Securities  Act,  (ii) to an  affiliate  of a  Purchaser  which is an
"accredited  investor"  within the meaning of Rule 501(a)  under the  Securities
Act,  provided that any such transferee  shall agree to be bound by the terms of
this Agreement and the  Registration  Rights  Agreement,  or (iii) to be made in
reliance on Rule 144 under the  Securities  Act),  the holder thereof shall give
written  notice  to the  Company  of such  holder's  intention  to  effect  such
Transfer,  setting forth the manner and circumstances of the proposed  Transfer,
which shall be accompanied by (a) an opinion of counsel reasonably acceptable to
the Company,  confirming that such transfer does not give rise to a violation of
the Securities Act, (B) representation  letters in form and substance reasonably
satisfactory  to the Company to ensure  compliance  with the  provisions  of the
Securities Act and (C) letters in form and substance reasonably  satisfactory to
the Company from each such transferee stating such transferee's  agreement to be
bound by the terms of this Agreement and the Registration Rights Agreement. Such
proposed

                                       31
<PAGE>

Transfer may be effected  only if the Company shall have received such notice of
transfer, opinion of counsel,  representation letters and other letters referred
to  in  the  immediately  preceding  sentence,  whereupon  the  holder  of  such
Securities  shall be entitled to Transfer such Securities in accordance with the
terms of the notice delivered by the holder to the Company.

               ARTICLE X. ADDITIONAL AGREEMENTS AMONG THE PARTIES

     Section 10.1 Reserved.

     Section 10.2 Reserved.

     Section 10.3 Reserved.

     Section 10.4 Registration Rights.

          (a) The Company shall grant Purchaser registration rights covering the
     Conversion Shares (the "Registrable  Securities") on the terms set forth in
     the Registration Rights Agreement and herein.

          (b) If the registration  statement  required to be filed in accordance
     with the Registration  Rights Agreement  relating to the Conversion  Shares
     issuable upon conversion of the Commitment Amount or the Renewed Commitment
     Amount, as applicable (each a "Registration Statement") is not filed by the
     30th day  following  the date hereof or the 30th day following the exercise
     of the Company's option to renew the Commitment Amount,  respectively,  the
     Company will pay to the Purchaser  liquidated  damages in the amount of one
     percent of the aggregate Purchase Price of the Series A Preferred Shares to
     be  purchased by Purchaser on the Initial  Takedown  Closing  Date.  If the
     Registration  Statement is not declared  effective by the Commission by the
     60th day following the date of filing the applicable Registration Statement
     with the Commission  (each a "Filing  Date") (the  "Required  Effectiveness
     Date"),  the Company shall pay to Purchaser,  as liquidated damages and not
     as a penalty,  an amount  equal to two  percent of the  aggregate  Purchase
     Price for the Series A Preferred  Stock to be purchased by Purchaser on the
     Initial  Takedown  Closing  Date,  prorated,  for  each 30 day  period  the
     Registration  Statement is not declared effective by the Commission,  which
     percentage  will be  increased  to  three  percent  in the  event  that the
     Registration  Statement is not declared  effective by the Commission within
     90 days of the  applicable  Filing Date. In addition,  commencing  120 days
     following the applicable  Filing Date, the Conversion Price of the Series A
     Preferred  Shares will  decrease by 1% for each 30- day period in which the
     Registration Statement is not declared effective. Additionally, the Company
     will grant to Purchaser first priority piggyback registration rights in the
     event the Company proposes to effect a registered  offering of Common Stock
     or  warrants  or both  prior to the  filing of the  Registration  Statement
     referenced above.

                                       32
<PAGE>

          (c) Any such  liquidated  damages shall be paid in cash by the Company
     to Purchaser by wire transfer in  immediately  available  funds on the last
     day of each calendar week following the event requiring its payment.

          (d) If,  following the declaration of  effectiveness of a Registration
     Statement,  such registration  statement (or any prospectus or supplemental
     prospectus  contained  therein)  shall cease to be effective for any reason
     (including  but not limited to the  occurrence of any event that results in
     any prospectus or supplemental prospectus containing an untrue statement of
     a material fact or omitting 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 Company
     fails to file required  amendments to such registration  statement in order
     to allow the  Purchaser  to  exercise  its rights to receive  unrestricted,
     unlegended,  freely  tradeable shares of Common Stock, or if for any reason
     there are  insufficient  shares of such shares of Common  Stock  registered
     under the then current registration  statement to effect full conversion of
     the  Series  A  Preferred  Shares  or  exercise  of  the  LKB  Warrants  (a
     "Registration  Default"),  the Company shall immediately take all necessary
     steps to cause such registration statement to be amended or supplemented so
     as to cure  such  Registration  Default.  Failure  to  cure a  Registration
     Default within five (5) business days shall result in the Company paying to
     Purchaser liquidated damages at the rate of $1,000 per day from the date of
     such Registration Default until the Registration Default is cured.

     Section 10.5 Restriction on Issuance of Securities.  Except with respect to
equity securities issuable upon the exercise of or upon conversion of Derivative
Securities outstanding on the date hereof, for a period of 90 days following the
date the Commitment  expires,  is fully drawn upon or is terminated in full, the
Company  will not  sell,  or offer to sell,  any  securities  (including  credit
facilities  which  are  convertible  into  securities  which  may be issued at a
discount  to  the  then  current  Market  Price)  other  than  borrowings  under
conventional credit facilities  existing as of the date hereof,  stock issued or
credit  facilities to be established in connection with  acquisitions,  employee
and director stock options of the Company,  existing  rights and warrants of the
Company  and  securities  issued  under  the  Series A  Preferred  Shares or LKB
Warrants. In addition,  the Company shall not issue any securities in connection
with a strategic alliance entered into by the Company unless such securities are
the  subject  of a one year  statutory  or  contractual  hold  period or, if not
subject to such a hold period,  unless the  Purchaser  has fully  converted  all
outstanding  Series A Preferred Shares and all LKB Warrants have been exercised.
Notwithstanding the foregoing, the Company may enter into the following types of
transactions   (collectively  referred  to  as  "Permitted   Financings"):   (1)
"permanent  financing"  transactions,  which  would  include any form of debt or
equity financing (other than an underwritten  offering),  which is followed by a
reduction of the said  financing  commitment  to zero and payment of all related
fees and  expenses;  (2) "project  financing"  which provide for the issuance of
recourse  debt  instruments  in  connection  with the operation of the Company's
business  as  presently  conducted  or as  proposed  to  be  conducted;  (3)  an
underwritten  offering of Common  Stock,  provided  that all  Conversion  Shares
issuable pursuant to this Agreement

                                       33
<PAGE>

have been registered by the Company on the Registration Statement; and (4) other
financing transactions specifically consented to in writing by the Purchaser.

                    ARTICLE XI. CONVERSION PRICE ADJUSTMENTS

     Section 11.1 Preferred Shares.  Except as set forth in Section 10.4(b), the
Conversion   Price  shall  be  adjusted  as  provided  in  the   Certificate  of
Designations attached hereto as Exhibit A.

     Section 11.2 Warrants. The exercise price of the Commitment Warrant and the
LKB  Warrants  shall be adjusted  under the same  circumstances  and in the same
manner as the Series A Preferred  Stock pursuant to the terms and conditions set
forth in the Certificate of Designations attached as Exhibit A hereto.

                           ARTICLE XII. MISCELLANEOUS

     Section 12.1 Notices. All notices,  demands and other communications to any
party hereunder shall be in writing  (including  telecopier or similar  writing)
and shall be given to such party at its address set forth on the signature pages
hereof,  or such  other  address  as such party may  hereafter  specify  for the
purpose to the other parties.  Each such notice,  demand or other  communication
shall be effective (i) if given by telecopy,  when such telecopy is  transmitted
to the telecopy number specified on the signature page hereof,  (ii) if given by
mail,  four days after such  communication  is  deposited in the mail with first
class  postage  prepaid,  addressed  as aforesaid or (iii) if given by any other
means, when delivered at the address specified in or pursuant to this Section.

     Section 12.2 No Waivers; Amendments.

          (a) No  failure  or delay on the part of any party in  exercising  any
     right,  power or remedy  hereunder shall operate as a waiver  thereof,  nor
     shall any single or partial  exercise  of any such  right,  power or remedy
     preclude any other or further exercise thereof or the exercise of any other
     right, power or remedy.

          (b) Any provision of this  Agreement may be amended,  supplemented  or
     waived if, but only if, such amendment,  supplement or waiver is in writing
     and is signed by the  Company  and the  Majority  Holders.  In  determining
     whether the holders of the  requisite  number of Series A Preferred  Shares
     have  concurred  in any  direction,  consent,  or waiver as provided in any
     Transaction  Agreement,  Series A Preferred  Shares  which are owned by the
     Company or, or by any Person  Controlling,  Controlled  by, or under common
     Control  with  the  Company,  shall be  disregarded  and  deemed  not to be
     outstanding for the purpose of any such determination; and provided further
     that no such  amendment,  supplement  or waiver which affects the rights of
     Purchaser and their affiliates otherwise than solely in their

                                       34
<PAGE>

     capacities as holders of Series A Preferred  Shares shall be effective with
     respect to them without their prior written consent.

     Section 12.3 Indemnification.

          (a) The Company agrees to indemnify and hold harmless  Purchaser,  its
     Affiliates,  and each Person, if any, who controls Purchaser, or any of its
     Affiliates,  within the meaning of the  Securities  Act or the Exchange Act
     (each,  a  "Controlling  Person"),  and the  respective  partners,  agents,
     employees,  officers and Directors of Purchaser,  their  Affiliates and any
     such Controlling Person (each an "Indemnified Party") and collectively, the
     "Indemnified  Parties"),  from  and  against  any and all  losses,  claims,
     damages,  liabilities and expenses  (including,  without  limitation and as
     incurred,  reasonable  costs of  investigating,  preparing or defending any
     such claim or  action,  whether  or not such  Indemnified  Party is a party
     thereto,  provided  that the Company shall not be obligated to advance such
     costs to any Indemnified  Party other than Purchaser unless it has received
     from such  Indemnified  Party an  undertaking  to repay to the  Company the
     costs so advanced if it should be determined  by final  judgment of a court
     of competent  jurisdiction  that such Indemnified Party was not entitled to
     indemnification hereunder with respect to such costs) which may be incurred
     by  such   Indemnified   Party  in  connection   with  any   investigative,
     administrative or judicial proceeding brought or threatened that relates to
     or arises out of, or is in connection  with any activities  contemplated by
     any  Transaction  Agreement or any other  services  rendered in  connection
     herewith; provided that the Company will not be responsible for any claims,
     liabilities,  losses,  damages or  expenses  that are  determined  by final
     judgment  of  a  court  of  competent  jurisdiction  to  result  from  such
     Indemnified Party's gross negligence, willful misconduct or bad faith.

          (b) If any action shall be brought  against an Indemnified  Party with
     respect to which  indemnity  may be sought  against the Company  under this
     Agreement,  such  Indemnified  Party shall  promptly  notify the Company in
     writing and the Company,  at its option,  may, assume the defense  thereof,
     including  the  employment  of  counsel  reasonably  satisfactory  to  such
     Indemnified  Party and payment of all  reasonable  fees and  expenses.  The
     failure to so notify the  Company  shall not  affect  any  obligations  the
     Company  may  have  to such  Indemnified  Party  under  this  Agreement  or
     otherwise  unless the  Company is  materially  adversely  affected  by such
     failure.  Such  Indemnified  Party shall have the right to employ  separate
     counsel in such action and participate in the defense thereof, but the fees
     and  expenses of such counsel  shall be at the expense of such  Indemnified
     Party,  unless (i) the  Company has failed to assume the defense and employ
     counsel  or (ii) the  named  parties  to any  such  action  (including  any
     impleaded parties) include such Indemnified Party and the Company, and such
     Indemnified  Party shall have been advised by counsel that there may be one
     or  more  legal  defenses  available  to it  which  are  different  from or
     additional  to those  available  to the  Company,  in which  case,  if such
     Indemnified  Party notifies the Company in writing that it elects to employ
     separate counsel at the expense of the Company,  the Company shall not have
     the right to assume the defense of such action or proceeding on

                                       35
<PAGE>

     behalf of such Indemnified Party, provided, however, that the Company shall
     not, in  connection  with any one such action or proceeding or separate but
     substantially  similar  or  related  actions  or  proceedings  in the  same
     jurisdiction  arising out of the same general allegations or circumstances,
     be responsible  hereunder for the reasonable fees and expenses of more than
     one such firm of separate counsel, in addition to any local counsel,  which
     counsel shall be  designated by Purchaser.  The Company shall not be liable
     for any settlement of any such action effected  without the written consent
     of the Company (which shall not be  unreasonably  withheld) and the Company
     agrees to  indemnify  and hold  harmless  each  Indemnified  Party from and
     against  any loss or  liability  by  reason  of  settlement  of any  action
     effected  with the consent of the Company.  In  addition,  the Company will
     not,  without the prior written consent of Purchaser,  settle or compromise
     or consent to the entry of any judgment in or  otherwise  seek to terminate
     any pending or threatened  action,  claim, suit or proceeding in respect to
     which  indemnification  or contribution may be sought hereunder (whether or
     not any  Indemnified  Party is a party  thereto)  unless  such  settlement,
     compromise,  consent  or  termination  includes  an  express  unconditional
     release of Purchaser and the other  Indemnified  Parties,  satisfactory  in
     form and  substance to Purchaser,  from all  liability  arising out of such
     action, claim, suit or proceeding.

          (c)  If  for  any  reason  the  foregoing   indemnity  is  unavailable
     (otherwise  than  pursuant to the express  terms of such  indemnity)  to an
     Indemnified  Party or insufficient  to hold an Indemnified  Party harmless,
     then in lieu of  indemnifying  such  Indemnified  Party,  the Company shall
     contribute  to the amount  paid or payable by such  Indemnified  Party as a
     result of such claims,  liabilities,  losses,  damages,  or expenses (i) in
     such proportion as is appropriate to reflect the relative benefits received
     by the  Company  on the one hand and by  Purchaser  on the  other  from the
     transactions  contemplated  by this  Agreement  or  (ii) if the  allocation
     provided  by clause (i) is not  permitted  under  applicable  law,  in such
     proportion  as is  appropriate  to reflect not only the  relative  benefits
     received by the  Company on the one hand and  Purchaser  on the other,  but
     also the relative  fault of the Company and  Purchaser as well as any other
     relevant equitable  considerations.  Notwithstanding the provisions of this
     Section 12.3, the aggregate  contribution of all Indemnified  Parties shall
     not exceed the amount of interest and fees  actually  received by Purchaser
     pursuant to this  Agreement.  It is hereby further agreed that the relative
     benefits  to the  Company on the one hand and  Purchaser  on the other with
     respect to the  transactions  contemplated  hereby shall be  determined  by
     reference  to,  among other  things,  whether any untrue or alleged  untrue
     statement of material  fact or the omission or alleged  omission to state a
     material  fact  related  to  information  supplied  by  the  Company  or by
     Purchaser  and  the  parties'   relative  intent,   knowledge,   access  to
     information  and  opportunity  to  correct  or prevent  such  statement  or
     omission.  No Person  guilty of  fraudulent  misrepresentation  (within the
     meaning of  Section  11(f) of the  Securities  Act)  shall be  entitled  to
     contribution  from  any  Person  who was  not  guilty  of  such  fraudulent
     misrepresentation.

          (d)  The  indemnification,   contribution  and  expense  reimbursement
     obligations  set forth in this Section 12.3 (i) shall be in addition to any
     liability the Company may have to any

                                       36
<PAGE>

         Indemnified  Party at common law or  otherwise;  (ii) shall survive the
         termination of this Agreement and the other Transaction  Agreements and
         the  payment in full of the Series A  Preferred  Shares and (iii) shall
         remain  operative  and in  full  force  and  effect  regardless  of any
         investigation   made  by  or  on  behalf  of  Purchaser  or  any  other
         Indemnified Party.

     Section 12.4  Expenses:  Documentary  Taxes.  The Company  agrees to pay to
Purchaser  a  fee  of  $7,500.00  (the  "Expense  Reimbursement  Fee")  in  full
satisfaction  of all  obligations  of the Company to Purchaser and its agents in
connection with the  negotiation and preparation of the Transaction  Agreements,
relevant due diligence, and fees and disbursements of legal counsel. The Company
further  agrees to pay to  Purchaser  all  reasonable  and  actual out of pocket
expenses  for  legal  fees  and due  diligence  investigations  incurred  by the
Purchaser  in the event  the  Company  terminates  this  Agreement  prior to the
Initial  Takedown  Closing Date. In addition,  the Company agrees to pay any and
all stamp,  transfer and other similar taxes,  assessments or charges payable in
connection with the execution and delivery of any  Transaction  Agreement or the
issuance of the Securities to Purchaser, excluding their assigns.

     Section 12.5 Payment.  The Company agrees that, so long as Purchaser  shall
own any Series A Preferred  Shares  purchased by it from the Company  hereunder,
the Company will make payments to Purchaser of all amounts due hereunder by wire
transfer by 4:00 P.M. (E.S.T.).

     Section 12.6  Successors and Assigns.  This Agreement shall be binding upon
the  Company and upon  Purchaser  and its  respective  successors  and  assigns;
provided that the Company  shall not assign or otherwise  transfer its rights or
obligations  under this  Agreement to any other Person without the prior written
consent of the Majority  Holders.  All provisions  hereunder  purporting to give
rights to Purchaser and its  affiliates or to holders of Securities  are for the
express benefit of such Persons and their successors and assigns.

     Section 12.7 Brokers. Except for a fee payable to LKB Financial, LLC in the
form of (i) 5% of the aggregate  proceeds received by the Company on the closing
of each  Takedown,  (ii) warrants to purchase  75,000  shares of Company  Common
Stock on the closing of each Takedown,  the Company represents and warrants that
it has not employed any broker,  finder,  financial advisor or investment banker
who would be entitled  to any  brokerage,  finder's  or other fee or  commission
payable  by the  Company  or  Purchaser  in  connection  with  the  sale  of the
Securities.

     Section  12.8 New York  Law;  Submission  to  Jurisdiction;  Waiver of Jury
Trial;  Appointment of Agent.  THIS  AGREEMENT  SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HERETO HEREBY
SUBMITS TO THE EXCLUSIVE  JURISDICTION  OF THE UNITED STATES  DISTRICT COURT FOR
THE NORTHERN  DISTRICT OF NEW YORK AND OF ANY FEDERAL  DISTRICT COURT SITTING IN
NEW YORK,  NEW YORK FOR  PURPOSES  OF ALL LEGAL  PROCEEDINGS  ARISING  OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS  CONTEMPLATED  HEREBY. EACH PARTY
HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY

                                       37
<PAGE>

OBJECTION  WHICH IT MAY NOW OR HEREAFTER  HAVE TO THE LAYING OF THE VENUE OF ANY
SUCH  PROCEEDING  BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY TO
THIS  AGREEMENT  IRREVOCABLY  CONSENTS  TO THE  SERVICE  OF  PROCESS IN ANY SUCH
PROCEEDING BY THE MAILING OF COPIES  THEREOF BY  REGISTERED  OR CERTIFIED  MAIL,
POSTAGE PREPAID,  TO SUCH PARTY AT ITS ADDRESS SET FORTH HEREIN.  NOTHING HEREIN
SHALL  AFFECT  THE  RIGHT OF ANY  PARTY TO SERVE  PROCESS  IN ANY  OTHER  MANNER
PERMITTED BY LAW. EACH PARTY WAIVES ITS RIGHT TO A TRIAL BY JURY.

     Section 12.9 Entire  Agreement.  This Agreement,  the Exhibits or Schedules
hereto,  which include,  but are not limited to the  Certificate of Designations
and the  Registration  Rights  Agreement,  set forth the  entire  agreement  and
understanding  of  the  parties  relating  to  the  subject  matter  hereof  and
supercedes  all  prior  and   contemporaneous   agreements,   negotiations   and
understandings  between  the  parties,  both oral and  written  relating  to the
subject matter hereof. The terms and conditions of all Exhibits and Schedules to
this Agreement are  incorporated  herein by this reference and shall  constitute
part of this Agreement as is fully set forth herein.

     Section 12.10  Survival;  Severability.  The  representations,  warranties,
covenants  and  agreements  of the  parties  hereto  shall  survive  the Closing
hereunder.  In the event  that any  provision  of this  Agreement  becomes or is
declared by a court of competent  jurisdiction to be illegal,  unenforceable  or
void,  this  Agreement  shall  continue  in full force and effect  without  said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.

     Section 12.11 Title and  Subtitles.  The titles and subtitles  used in this
Agreement  are  used  for  convenience  only  and  are not to be  considered  in
construing or interpreting this Agreement.

     Section 12.12 Reporting  Entity for the Common Stock.  The reporting entity
relied upon for the  determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement and all
Exhibits shall be Bloomberg,  L.P. or any successor thereto.  The written mutual
consent of the  Purchaser  and the Company shall be required to employ any other
reporting entity.

     Section 12.13  Publicity.  The Company and the Purchaser shall consult with
each other in issuing any press releases or otherwise  making public  statements
with respect to the  transactions  contemplated  hereby and no party shall issue
any such press release or otherwise make any such public  statement  without the
prior  written  consent  of  the  other  parties,  which  consent  shall  not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such  disclosure is required by law, in which such case the disclosing  party
shall  provide the other  parties  with prior  notice of such public  statement.
Notwithstanding the foregoing,  the Company shall not publicly disclose the name
of  Purchaser  without the prior  written  consent of  Purchaser,  except to the
extent

                                       38
<PAGE>

required by law, in which case the Company  shall provide  Purchaser  with prior
written notice of such public disclosure.

     Section  12.14 Powers and Remedies  Cumulative.  No right or remedy  herein
conferred upon or reserved to Purchaser is intended to be exclusive of any other
right or remedy,  and every right and remedy shall,  to the extent  permitted by
law,  be  cumulative  and in  addition  to every  other  right and remedy  given
hereunder  or now  hereafter  existing  at law or in  equity or  otherwise.  The
assertion or employment of any right or remedy  hereunder,  or otherwise,  shall
not prevent the  concurrent  assertion or  employment  of any other  appropriate
right or remedy.  Every power and remedy given by the Series A Preferred  Shares
or by law may be  exercised  from time to time,  and as often as shall be deemed
expedient, by Purchaser.

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

                                        AMERICAN INTERNATIONAL
                                        PETROLEUM CORPORATION

                                        By:     __________________________
                                        Name:   Denis J. Fitzpatrick
                                        Title:  Chief Financial Officer

                                        Address:_________________________

                                                _________________________

                                                 Fax: ____________________

                                                 Tel.:____________________

                                        GCA STRATEGIC INVESTMENT FUND LIMITED

                                        By:     __________________________
                                        Name:   Lewis N. Lester
                                        Title:  President

                                        Address:  c/o Prime Management Limited

                                       39
<PAGE>

                                                  Mechanics Building
                                                  12 Church Street
                                                  Hamilton HM II, Bermuda

                                                  Fax:     441-295-3926
                                                  Tel.:    441-295-0329

                                                  Securities Purchase Agreement

                                       40

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