Document:

ex10-1.htm

     

    EXHIBIT
10.1

    

    SECURITIES
PURCHASE AGREEMENT

     

    Securities
Purchase Agreement dated as of May 9, 2008 (this “Agreement”) by and between
Tidelands Oil & Gas Corporation, a Nevada corporation, with principal
executive offices located at 1862 West Bitters Road, San Antonio, Texas (the
“Company”), and Golden
Gate Investors, Inc. (“Holder”).

     

    WHEREAS,
Holder desires to purchase from the Company, and the Company desires to issue
and sell to Holder, upon the terms and subject to the conditions of this
Agreement, a Convertible Debenture of the Company in the aggregate principal
amount of $1,000,000 (the “Debenture”); and

     

    WHEREAS,
upon the terms and subject to the conditions set forth in the Debenture the
Debenture is convertible into shares of the Company’s Common Stock (the “Common Stock”).

     

    NOW,
THEREFORE, in consideration of the premises and the mutual covenants contained
herein, the parties hereto, intending to be legally bound, hereby agree as
follows:

     

    
      I.  PURCHASE
AND SALE OF DEBENTURE

    

     

    A. Transaction.  Holder
hereby agrees to purchase from the Company, and the Company has offered and
hereby agrees to issue and sell to Holder in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act of 1933,
as amended (the “Securities
Act”), the Debenture.

     

    B. Purchase Price; Form of
Payment.  The purchase price for the Debenture to be purchased
by Holder hereunder shall be $1,000,000 (the “Purchase
Price”).  Simultaneously with the execution of this Agreement,
Holder shall pay the Purchase Price by wire transfer of $200,000 in immediately
available funds to the Company (of which $46,181 shall be wire transferred by
the Holder on behalf of the Company to RHP Master Fund, Ltd. pursuant to
instructions provided by the Company) and delivery to the Company of a Secured
Promissory Note in the principal amount of $800,000, in the form attached hereto
as Exhibit A
(the “Promissory
Note”).  Simultaneously with the execution of this Agreement,
the Company shall deliver the Debenture (which shall have been duly authorized,
issued and executed I/N/O Holder or, if the Company otherwise has been notified,
I/N/O Holder’s nominee) to the Holder.

     

    C. Second
Debenture.  Provided that no Event of Default (as defined in
the Debenture) has occurred under the Debenture (provided that Holder may, in
its sole and absolute discretion waive the occurrence of such Event of Default
with respect to this Section), Holder shall, in Holder’s sole and absolute
discretion, select a date during the Second Debenture Period (as defined below)
(with such date as selected by Holder referred to herein as the “Second Debenture Date”) at
which the Company shall sell and the Holder shall purchase a debenture in the
principal amount of $1,000,000 in exchange for a purchase price of $1,000,000
(the “Second
Debenture”), with such purchase price paid via a cash payment of $200,000
and the issuance of a promissory note in the principal amount of $800,000 (the
“Second Promissory
Note”), with the form of and terms of the Second Debenture and the Second
Promissory Note and payment of the purchase price subject to the same terms and
conditions of this Agreement, the Debenture and the Promissory Note, as
applicable, and when the Second Debenture is issued, the term “Debenture” as
used in this Agreement shall be deemed to include the Second Debenture in all
respects and when the Second Promissory Note is issued, the term “Promissory
Note” as used in this Agreement shall be deemed to include the Second Promissory
Note in all respects. The closing of the purchase and sale of the Second
Debenture and the issuance of the Second Promissory Note shall occur within
thirty days of the Second Debenture Date.  For the purposes of this
Agreement, the “Second Debenture Period” shall mean the period that commences on
the date hereof and terminates upon the date that the remaining Principal Amount
of the Debenture is equal to an amount not greater than $250,000.

     

    D. Third
Debenture.  Provided that no Event of Default (as defined in
the Debenture) has occurred under the Debenture (provided that Holder may, in
its sole and absolute discretion waive the occurrence of such Event of Default
with respect to this Section), Holder shall, in Holder’s sole and absolute
discretion, select a date during the Third Debenture Period (as defined below)
(with such date as selected by Holder referred to herein as the “Third Debenture Date”) at
which the Company shall sell and the Holder shall purchase a debenture in the
principal amount of $1,000,000 in exchange for a purchase price of $1,000,000
(the “Third Debenture”),
with such purchase price paid via a cash payment of $200,000 and the issuance of
a promissory note in the principal amount of $800,000 (the “Third Promissory Note”), with
the form of and terms of the Third Debenture and the Third Promissory Note and
payment of the purchase price subject to the same terms and conditions of this
Agreement, the Debenture and the Promissory Note, as applicable, and when the
Third Debenture is issued, the term “Debenture” as used in this Agreement shall
be deemed to include the Third Debenture in all respects and when the Third
Promissory Note is issued, the term “Promissory Note” as used in this Agreement
shall be deemed to include the Third Promissory Note in all respects. The
closing of the purchase and sale of the Third Debenture and the issuance of the
Third Promissory Note shall occur within thirty days of the Third Debenture
Date.  For the purposes of this Agreement, the “Third Debenture
Period” shall mean the period that commences on the date of the issuance of the
Second Debenture to Holder and terminates upon the date that the remaining
Principal Amount of the Second Debenture is equal to an amount not greater than
$250,000.

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    E. Non-Funding
Penalty.  Notwithstanding the foregoing requirements of Holder
to purchase each of the Second Debenture and Third Debenture (each, an “Additional Debenture” and
collectively, the “Additional
Debentures”), in the event that Holder does not purchase any or all of
the Additional Debentures within 10 business days of the date that the delivery
of funds associated with such purchase would otherwise be due, upon 20 days’
prior written notice from the Company of such failure to so purchase any or all
of the Additional Debentures, Holder shall pay an amount equal to $25,000 (the
“Non-Funding Penalty”)
to the Company, provided however that in the event that the Common Stock shall
trade on the Trading Market (as defined in the Debenture) at a price per share
that is $0.03 per share or lower at any time during the six month period
commencing on the date hereof and ending on the six month anniversary of the
date hereof (as adjusted for any stock splits, stock dividends, combinations,
subdivisions, recapitalizations or the like), then the Non-Funding Penalty shall
be reduced to equal $5,000.  The amount payable by the Holder to the
Company in connection with any damages, losses, claims or other amounts in
connection with the failure of the Holder to purchase any or all of the
Additional Debentures shall not exceed $25,000 (or $5,000, subject to the terms
of this Section) in the aggregate.  Upon the payment of the
Non-Funding Penalty to the Company, the Holder shall have no further obligations
or duties under this Agreement, the Debenture or any agreements or debentures
entered into in connection with any of the Additional Debentures, if any, with
respect to the purchase of any Additional Debenture or other duties to deliver
any additional funds to the Company, provided however, that other than with
respect to the removal of the requirement to purchase and enter into any
Additional Debenture, the Company and the Holder shall remain obligated and
bound by the remaining terms and conditions of this Agreement, the Debenture,
the Promissory Note and any agreements or debentures previously entered into in
connection with any Additional Debenture.  The Company’s sole and
exclusive remedy in the event that the Holder fails to purchase any or all of
the Additional Debentures shall be the right of the Company to receive the
Non-Funding Penalty from the Holder.

     

    F. Non-Funding
Election.  In the event that the Common Stock shall trade on
the Trading Market (as defined in the Debenture) at a price per share that is
$0.01 per share or lower at any time during the six month period commencing on
the date hereof and ending on the six month anniversary of the date hereof (as
adjusted for any stock splits, stock dividends, combinations, subdivisions,
recapitalizations or the like), the Holder shall have the right, in the Holder’s
sole and absolute discretion, during the time period commencing on the date
hereof and ending on the six month anniversary of the date hereof, to terminate
the right and obligation of the Holder to purchase any or all of the Additional
Debentures through the delivery of written notice to the Company of such
termination in the manner provided in Section XVII hereof.  In the
event that Holder so terminates Holder’s right and obligation to purchase any or
all of the Additional Debentures under the terms of this Section I.F., the
Holder shall have no obligation to pay any of the Non-Funding Penalty and shall
have no further obligations or duties under this Agreement, the Debenture or any
agreements or debentures entered into in connection with any of the Additional
Debentures, if any, with respect to the purchase of any Additional Debenture or
other duties to deliver any additional funds to the Company, provided however,
that other than with respect to the removal of the requirement to purchase and
enter into any Additional Debenture and pay any of the Non-Funding Penalty, the
Company and the Holder shall remain obligated and bound by the remaining terms
and conditions of this Agreement, the Debenture, the Promissory Note and any
agreements or debentures previously entered into in connection with any
Additional Debenture.

     

    G. Company Redemption of Debenture and
Termination of Additional Debenture Purchases.  Provided that
no Event of Default has occurred under the Debenture, the Company shall have the
right, in the Company’s sole and absolute discretion, during the time period
commencing on the date hereof and terminating on the 90th day
following the date hereof (such period referred to herein as the “Redemption Period”), to (i)
redeem the Debenture for a redemption price equal to one hundred percent (100%)
of the outstanding principal amount of the Debenture, plus any accrued and
unpaid interest thereon (such aggregate amount referred to herein as the “Redemption Amount”), and (ii)
terminate the right and obligation of the Holder to purchase all Additional
Debentures through (x) the delivery of written notice to the Holder of such
termination in the manner provided in Section XVII hereof and (y) the delivery
to the Holder of a payment in cash equal to the Redemption Amount within 3
business days of the delivery of such notice.  Notwithstanding the
foregoing, the payment of the Redemption Amount shall first be satisfied by and
offset against any amounts due to the Company under the Promissory Note and such
amounts of the Promissory Note so applied against the Redemption Amount that the
Company is required or permitted to redeem shall reduce the amount outstanding
under the Promissory Note by a like amount.  After the application of
the amount owed under the Promissory Note, if any, to the Redemption Amount, the
Company shall immediately pay in cash to the Holder any remaining amount owed by
the Company to the Holder in connection with the payment of the Redemption
Amount.

     

    
      II.  HOLDER’S
REPRESENTATIONS AND WARRANTIES

    

     

    Holder
represents and warrants to and covenants and agrees with the Company as
follows:

     

    1. Holder is
purchasing the Debenture and the Common Stock issuable upon conversion or
redemption of the Debenture (the “Conversion Shares” and,
collectively with the Debenture, the “Securities”) for its own
account, for investment purposes only and not with a view towards or in
connection with the public sale or distribution thereof in violation of the
Securities Act.  Holder has read and understood the Company’s Exchange
Act filings with the Commission up through the date hereof.

     

    2. Holder is
(i) an “accredited investor” within the meaning of Rule 501 of Regulation D
under the Securities Act, (ii) experienced in making investments of the kind
contemplated by this Agreement, (iii) capable, by reason of its business and
financial experience, of evaluating the relative merits and risks of an
investment in the Securities, and (iv) able to afford the loss of its investment
in the Securities.

     

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

     

    3. Holder
understands that the Securities are being offered and sold by the Company in
reliance on an exemption from the registration requirements of the Securities
Act and equivalent state securities and “blue sky” laws, and that the Company is
relying upon the accuracy of, and Holder’s compliance with, Holder’s
representations, warranties and covenants set forth in this Agreement to
determine the availability of such exemption and the eligibility of Holder to
purchase the Securities;

     

    4. Holder
understands that the Securities have not been approved or disapproved by the
Securities and Exchange Commission (the “Commission”) or any state or
provincial securities commission.

     

    5. This
Agreement has been duly and validly authorized, executed and delivered by Holder
and is a valid and binding agreement of Holder enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors’ rights and remedies generally and except as rights to indemnity and
contribution may be limited by federal or state securities laws or the public
policy underlying such laws.

     

    
      III.  THE
COMPANY’S REPRESENTATIONS

    

     

    The
Company represents and warrants as of the date hereof to the Holder that, except
as set forth on Schedule III attached hereto, the statements contained in this
Section 3 are complete and accurate as of the date of this
Agreement.  As used in this Section 3, the term “Knowledge” shall mean
the knowledge of the members of the board of directors of the Company and/or the
officers or employees of the Company after reasonable
investigation.

     

    A. Capitalization.

     

    1. The
authorized capital stock of the Company consists of 250,000,000 shares of Common
Stock, of which 179,808,334 shares are issued and outstanding as of the date
hereof and are fully paid and nonassessable, excluding 230,905 shares being
issued at closing to RHP Master Fund, Ltd.  The amount, exercise,
conversion or subscription price and expiration date for each outstanding option
and other security or agreement to purchase shares of Common Stock is accurately
set forth on Schedule
III.A.1.

     

    2. The
Conversion Shares have been duly and validly authorized and reserved for
issuance by the Company, and, when issued by the Company upon conversion of the
Debenture, will be duly and validly issued, fully paid and nonassessable and
will not subject the holder thereof to personal liability by reason of being
such holder.

     

    3. There are
no preemptive, subscription, “call,” right of first refusal or other similar
rights to acquire any capital stock of the Company or other voting securities of
the Company that have been issued or granted to any person and no other
obligations of the Company to issue, grant, extend or enter into any security,
option, warrant, “call,” right, commitment, agreement, arrangement or
undertaking with respect to any of their respective capital stock.

     

    B. Organization;
Reporting Company Status.

     

    1. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the state or jurisdiction in which it is incorporated and is
duly qualified as a foreign corporation in all jurisdictions in which the
failure so to qualify would reasonably be expected to have a material adverse
effect on the business, properties, prospects, condition (financial or
otherwise) or results of operations of the Company or on the consummation of any
of the transactions contemplated by this Agreement (a “Material Adverse
Effect”).

     

    2. The
Company is subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”).  The
Common Stock is traded on the OTC Bulletin Board service of the National
Association of Securities Dealers, Inc. (“OTCBB”) and the Company has
not received any notice regarding, and to its Knowledge there is no threat of,
the termination or discontinuance of the eligibility of the Common Stock for
such trading.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    C. Authorization.  The
Company (i) has duly and validly authorized and reserved for issuance shares of
Common Stock, which is a number sufficient for the conversion of the Debenture
in full and (ii) at all times from and after the date hereof shall have a
sufficient number of shares of Common Stock duly and validly authorized and
reserved for issuance to satisfy the conversion of the Debenture in
full.  The Company understands and acknowledges the potentially
dilutive effect on the Common Stock of the issuance of the Conversion
Shares.  The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Debenture in accordance with this
Agreement is absolute and unconditional regardless of the dilutive effect that
such issuance may have on the ownership interests of other stockholders of the
Company and notwithstanding the commencement of any case under 11 U.S.C.
§ 101 et
seq. (the “Bankruptcy
Code”).  In the event the Company is a debtor under the
Bankruptcy Code, the Company hereby waives to the fullest extent permitted any
rights to relief it may have under 11 U.S.C. § 362 in respect of the
conversion of the Debenture.  The Company agrees, without cost or
expense to Holder, to take or consent to any and all action necessary to
effectuate relief under 11 U.S.C. § 362.

     

    D. Authority; Validity and
Enforceability.  The Company has the requisite corporate power
and authority to enter into the Documents (as such term is hereinafter defined)
and to perform all of its obligations hereunder and thereunder (including the
issuance, sale and delivery to Holder of the Securities).  The
execution, delivery and performance by the Company of the Documents and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Debenture and the issuance
and reservation for issuance of the Conversion Shares) have been duly and
validly authorized by all necessary corporate action on the part of the Company
and no further filing, consent, or authorization is required by the Company, its
board of directors, or its stockholders.  Each of the Documents has
been duly and validly executed and delivered by the Company and each Document
constitutes a valid and binding obligation of the Company enforceable against it
in accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting
creditors’ rights and remedies generally and except as rights to indemnity and
contribution may be limited by federal or state securities laws or the public
policy underlying such laws.  The Securities have been duly and
validly authorized for issuance by the Company and, when executed and delivered
by the Company, will be valid and binding obligations of the Company enforceable
against it in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors’ rights and remedies generally.  For
purposes of this Agreement, the term “Documents” means (i) this
Agreement; (ii) the Debenture; and (iii) the Promissory Note.

     

    E. Validity of Issuance of the
Securities.  The Debenture and the Conversion Shares upon their
issuance in accordance with the Debenture, will be validly issued and
outstanding, fully paid and nonassessable, and not subject to any preemptive
rights, rights of first refusal, tag-along rights, drag-along rights or other
similar rights.

     

    F. Non-contravention.  The
execution and delivery by the Company of the Documents, the issuance of the
Securities, and the consummation by the Company of the other transactions
contemplated hereby and thereby do not, and compliance with the provisions of
this Agreement and other Documents will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of a material benefit under, or result in the creation of
any Lien (as such term is hereinafter defined) upon any of the properties or
assets of the Company or any of its Subsidiaries under, or result in the
termination of, or require that any consent be obtained or any notice be given
with respect to (i) the Articles or Certificate of Incorporation or By-Laws of
the Company or the comparable charter or organizational documents of any of its
Subsidiaries, in each case as amended to the date of this Agreement, (ii) any
loan or credit agreement, debenture, bond, mortgage, indenture, lease, contract
or other agreement, instrument or permit applicable to the Company or any of its
Subsidiaries or their respective properties or assets or (iii) any statute, law,
rule or regulation applicable to, or any judgment, decree or order of any court
or government body having jurisdiction over, the Company or any of its
Subsidiaries or any of their respective properties or assets, except as
disclosed on Schedule III.F.  A
“Lien” means any
assignment, transfer, pledge, mortgage, security interest or other encumbrance
of any nature, or an agreement to do so, or the ownership or acquisition or
agreement to acquire any asset or property of any character subject to any of
the foregoing encumbrances (including any conditional sale contract or other
title retention agreement).

     

    G. Approvals.  No
authorization, approval or consent of any court or public or governmental
authority is required to be obtained by the Company for the issuance and sale of
the Securities to Holder as contemplated by this Agreement, except such
authorizations, approvals and consents as have been obtained by the Company
prior to the date hereof.

     

    H. Commission
Filings.  The Company is subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act.  The Company has properly
and timely filed with the Commission all reports, proxy statements, forms and
other documents required to be filed with the Commission under the Securities
Act and the Exchange Act since becoming subject to such Acts (the “Commission Filings”),
including without limitation the timely filing of all required reports under
Section 13 or 15(d) of the Exchange Act during the 12 months prior to the date
hereof (or for such shorter period that the Company was required to file such
reports).  As of their respective dates, (i) the Commission Filings
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and the rules and regulations of the
Commission promulgated thereunder applicable to such Commission Filings and (ii)
none of the Commission Filings contained at the time of its filing any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.  The
financial statements of the Company included in the Commission Filings, as of
the dates of such documents, were true and complete in all material respects and
complied with applicable accounting requirements and the published rules and
regulations of the Commission with respect thereto, were prepared in accordance
with generally accepted accounting principles in the United States (“GAAP”) (except in the case of
unaudited statements permitted by Form 10-QSB under the Exchange Act) applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly presented the consolidated financial position of
the Company and its Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments that
in the aggregate are not material and to any other adjustment described
therein).

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    I. Full
Disclosure.  There is no fact known to the Company (other than
general economic or industry conditions known to the public generally) that has
not been fully disclosed in the Commission Filings that (i) reasonably could be
expected to have a Material Adverse Effect or (ii) reasonably could be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to the Documents, except as set forth in
Schedule III.I.

     

    J. Absence of Events of
Default.  No “Event of Default” (as defined
in any agreement or instrument to which the Company is a party) and no event
which, with notice, lapse of time or both, would constitute an Event of Default
(as so defined), has occurred and is continuing.

     

    K. Securities Law
Matters.  Assuming the accuracy of the representations and
warranties of Holder set forth in Article II, the offer and sale by the Company
of the Securities is exempt from (i) the registration and prospectus delivery
requirements of the Securities Act and the rules and regulations of the
Commission thereunder and (ii) the registration and/or qualification provisions
of all applicable state and provincial securities and “blue sky”
laws.  The Company shall not directly or indirectly take, and shall
not permit any of its directors, officers or Affiliates directly or indirectly
to take, any action (including, without limitation, any offering or sale to any
person or entity of any security similar to the Debenture) which will make
unavailable the exemption from Securities Act registration being relied upon by
the Company for the offer and sale to Holder of the Debenture and the Conversion
Shares, as contemplated by this Agreement.  No form of general
solicitation or advertising has been used or authorized by the Company or any of
its officers, directors or Affiliates in connection with the offer or sale of
the Debenture (and the Conversion Shares), as contemplated by this Agreement or
any other agreement to which the Company is a party.  As used in the
Documents, “Affiliate”
has the meaning ascribed to such term in Rule 12b-2 under the Exchange
Act.

     

    L. Registration
Rights.  Except as set forth on Schedule III.L.,
no Person has, and as of the Closing (as such term is hereinafter defined), no
Person shall have, any demand, “piggy-back” or other rights to cause the Company
to file any registration statement under the Securities Act relating to any of
its securities or to participate in any such registration
statement.

     

    M. Interest.  The
timely payment of interest on the Debenture is not prohibited by the Articles or
Certificate of Incorporation or By-Laws of the Company, in each case as amended
to the date of this Agreement, or any agreement, contract, document or other
undertaking to which the Company is a party.

     

    N. No
Misrepresentation.  No representation or warranty of the
Company contained in this Agreement or any of the other Documents, any schedule,
annex or exhibit hereto or thereto or any agreement, instrument or certificate
furnished by the Company to Holder pursuant to this Agreement contains any
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading.

     

    O. Finder’s Fee.  There
is no finder’s fee, brokerage commission or like payment in connection with the
transactions contemplated by this Agreement for which Holder is liable or
responsible.

     

    P. Subsidiaries.  Other than the
Subsidiaries, the Company does not presently own or control, directly or
indirectly, any interest in any other corporation, association, or other
business entity.  The Company is not a participant in any joint
venture, partnership, or similar arrangement.

     

    Q. Litigation.  Other than as
disclosed in the Commission Filings, there is no action, suit, proceeding or
investigation pending or, to the Company’s knowledge, currently threatened
against the Company or its Subsidiaries that questions the validity of this
Agreement, the Documents, or the right of the Company to enter into such
agreements, or to consummate the transactions contemplated hereby or thereby, or
that might result, either individually or in the aggregate, in any material
adverse changes in the business, assets or condition of the Company and its
Subsidiaries, taken as a whole, financially or otherwise, or any change in the
current equity ownership of the Company or its Subsidiaries.  Neither
the Company nor its Subsidiaries are parties or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality.  There is no action, suit, proceeding or
investigation by the Company or its Subsidiaries currently pending or that the
Company or its Subsidiaries intends to initiate.

     

    R. Agreements.  Except
for agreements explicitly contemplated hereby, or disclosed in the Commission
Filings, there are no agreements, understandings or proposed transactions
between the Company and any of its officers, directors, Affiliates, or any
affiliate thereof.

     

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

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    T. Acknowledgment Regarding Holder’s
Purchase of Securities.  The Company acknowledges and agrees
that the Holder is acting solely in the capacity of an arm's length purchaser
with respect to this Agreement and the transactions contemplated
hereby.  The Company further acknowledges that Holder is not acting as
a financial advisor or fiduciary of the Company (or in any similar capacity)
with respect to this Agreement and the transactions contemplated hereby and any
statement made by Holder or any of its representatives or agents in connection
with this Agreement and the transactions contemplated hereby is not advice or a
recommendation and is merely incidental to the Holder’s purchase of the
Securities.  The Company further represents to Holder that the
Company's decision to enter into this Agreement has been based solely on the
independent evaluation of the Company and its representatives.

     

    U. No Integrated
Offering.  Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf, has directly or indirectly made any
offers or sales in any security or solicited any offers to buy any security
under circumstances that would require registration under the Securities Act of
the issuance of the Securities to the Holder.  The issuance of the
Securities to the Holder will not be integrated with any other issuance of the
Company's securities (past, current or future) for purposes of any shareholder
approval provisions applicable to the Company or its securities.

     

    V. 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 management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles 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.

     

    W. Foreign Corrupt
Practices.  Neither the Company, nor any of its Subsidiaries,
nor any director, officer, agent, employee or other person acting on behalf of
the Company or any Subsidiary has, in the course of his actions for, or on
behalf of, the Company, used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expenses relating to political activity;
made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; violated or is in
violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as
amended; or made any bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or
employee.

     

    X. Solvency.  The
Company (after giving effect to the transactions contemplated by this Agreement)
is solvent (i.e., its assets have a fair market value in excess of the amount
required to pay its probable liabilities on its existing debts as they become
absolute and matured) and currently the Company has no information that would
lead it to reasonably conclude that the Company would not, after giving effect
to the transaction contemplated by this Agreement, have the ability to, nor does
it intend to take any action that would impair its ability to, pay its debts
from time to time incurred in connection therewith as such debts
mature.  The Company did not receive a qualified opinion from its
auditors with respect to its most recent fiscal year end and, after giving
effect to the transactions contemplated by this Agreement, does not anticipate
or know of any basis upon which its auditors might issue a qualified opinion in
respect of its current fiscal year.

     

    Y. No Shell
Company.  The Company is not, nor at any time during the twelve
month period immediately preceding the date hereof has the Company been a “shell
company,” as such term is defined in Rule 405 promulgated under the Securities
Act.

     

    Z. No Investment
Company.  The Company is not, and upon the issuance and sale of
the Securities as contemplated by this Agreement will not be an "investment
company" required to be registered under the Investment Company Act of 1940 (an
"Investment Company").  The Company is not controlled by an Investment
Company.

     

    
      IV.  CERTAIN
COVENANTS AND ACKNOWLEDGMENTS

    

     

    A. Filings.  The
Company shall take all actions and make all necessary Commission Filings and
“blue sky” filings required to be made by the Company in connection with the
sale of the Securities to Holder as required by all applicable laws, including
without limitation such action as the Company shall reasonably determine is
necessary to qualify the Securities, or obtain an exemption for the Securities
for sale to the Holder at the Closing pursuant to this Agreement under all
applicable laws, and shall provide a copy thereof to Holder promptly after such
filing.

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    B. Reporting
Status.  With a view to making available to the Holder the
benefits of Rule 144 promulgated under the Securities Act or any similar rule or
regulation of the Commission that may at any time permit Holder to sell
securities of the Company to the public without registration (“Rule 144”), and
as a material inducement to the Holder’s purchase of the Securities, the Company
represents, warrants, and covenants to the following:

     

    1. The
Company's Common Stock is registered under Section 12(g) of the Exchange
Act;

     

    2. The
Company is not and for at least the last 12 months prior to the date hereof has
not been a "shell company," as defined in paragraph (i)(1)(i) of Rule 144 or
Rule 12b-2 of the Exchange Act;

     

    3. The
Company is subject to the reporting requirements of section 13 or 15(d) of the
Exchange Act and has filed all required reports under section 13 or 15(d) of the
Exchange Act during the 12 months prior to the date hereof (or for such shorter
period that the issuer was required to file such reports), other than Form 8-K
reports;

     

    4. from the
date hereof until all the Securities either have been sold by the Holder, or may
permanently be sold by the Holder without any restrictions pursuant to Rule 144,
(the "Registration
Period") the Company shall file with the SEC in a timely manner all
required reports under section 13 or 15(d) of the Exchange Act and such reports
shall conform to the requirements of the Exchange Act and the SEC for filing
thereunder;

     

    5. During
the Registration Period the Company shall not become a "shell company," as
defined in paragraph (i)(1)(i) of Rule 144 or Rule 12b-2 of the Exchange
Act;

     

    6. The
Company shall furnish to the Holder so long as the Holder owns Securities,
promptly upon request, (i) a written statement by the Company that it has
complied with the reporting requirements of Rule 144, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested to permit the Holders to sell such securities pursuant to
Rule 144 without registration; and

     

    7. During
the Registration Period 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 otherwise permit such
termination.

     

    C. 8-K Filing.  On or
before the fourth Business Day following the date hereof, the Company shall file
a Current Report on Form 8-K describing the terms of the transactions
contemplated by the Documents in the form required by the Exchange Act and
attaching the material Documents (including, without limitation, this Agreement
and the Debenture) as exhibits to such filing (the “8-K Filing”).  In
the event that the Company does not file the 8-K Filing within four Business
Days following the date hereof, the Discount Multiplier (as defined in the
Debenture) under the Debenture shall decrease by one percentage point (1%) for
each period of five Business Days that the 8-K Filing is not filed by the
Company following the date hereof for all conversions of the Debenture
thereafter.

     

    D. Listing.  Except to
the extent the Company lists its Common Stock on The New York Stock Exchange,
The American Stock Exchange or The Nasdaq Stock Market, the Company shall use
its best efforts to maintain its listing of the Common Stock on
OTCBB.  If the Common Stock is delisted from OTCBB, the Company will
use its best efforts to list the Common Stock on the most liquid national
securities exchange or quotation system that the Common Stock is qualified to be
listed on.

     

    E. Reserved Conversion Common
Stock.  The Company at all times from and after the date hereof
shall have such number of shares of Common Stock duly and validly authorized and
reserved for issuance as shall be sufficient for the conversion in full of the
Debenture.  The Company shall take all action reasonably necessary to
at all times have authorized, and reserved for the purpose of issuance, such
number of shares of Common Stock as shall be necessary to effect the full
conversion of the Debenture and the Additional Debentures outstanding, if
any.  If at any time the number of authorized shares of Common Stock
of the Company is insufficient to effect the full conversion of the Debenture
and the Additional Debentures outstanding, if any, the Company shall call and
hold a special meeting of the shareholders of the Company within thirty (30)
days of such occurrence, for the sole purpose of increasing the number of
authorized shares of the Common Stock. The Company's management shall recommend
to the shareholders to vote in favor of increasing the number of shares of
authorized Common Stock.  Management shall also vote all of its shares
in favor of increasing the number of authorized shares of Common
Stock.  Notwithstanding the foregoing, during the Redemption Period
the Company shall not be required to reserve more than 35,000,000 shares of
Common Stock for issuance upon the conversion of the Debenture.

     

    F. Information.  Each
of the parties hereto acknowledges and agrees that Holder shall not be provided
with, nor be given access to, any material non-public information relating to
the Company.

     

    G. Accounting and
Reserves.  The Company shall maintain a standard and uniform
system of accounting and shall keep proper books and records and accounts in
which full, true, and correct entries shall be made of its transactions, all in
accordance with GAAP applied on consistent basis through all periods, and shall
set aside on such books for each fiscal year all such reserves for depreciation,
obsolescence, amortization, bad debts and other purposes in connection with its
operations as are required by such principles so applied.

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    H. Transactions with
Affiliates.  So long as the Debenture is outstanding, neither
the Company nor any of its Subsidiaries shall, directly or indirectly, enter
into any material transaction or agreement with any stockholder, officer,
director or Affiliate of the Company or family member of any officer, director
or Affiliate of the Company, unless the transaction or agreement is
(i) reviewed and approved by a majority of Disinterested Directors (as such
term is hereinafter defined), (ii) on terms no less favorable to the
Company or the applicable Subsidiary than those obtainable from a nonaffiliated
person, or (iii) disclosed herein or in Commission Filings made prior to the
date hereto.  A “Subsidiary” means any entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are owned directly or indirectly by the Company.  A “Disinterested Director” shall
mean a director of the Company who is not and has not been an officer or
employee of the Company and who is not a member of the family of, controlled by
or under common control with, any such officer or employee.

     

    I. Certain
Restrictions.  So long as the Debenture is outstanding, no
dividends shall be declared or paid or set apart for payment nor shall any other
distribution be declared or made upon any capital stock of the Company, nor
shall any capital stock of the Company be redeemed, purchased or otherwise
acquired (other than a redemption, purchase or other acquisition of shares of
Common Stock made for purposes of an employee incentive or benefit plan
(including a stock option plan) of the Company or pursuant to any of the
security agreements listed on Schedule IV.I) for
any consideration by the Company, directly or indirectly, nor shall any moneys
be paid to or made available for a sinking fund for the redemption of any Common
Stock.

     

    J.           Short
Selling.   So long as the Debenture is outstanding, Holder
agrees and covenants on its behalf and on behalf of its affiliates that neither
Holder nor its affiliates shall at any time engage in any short sales with
respect to the Company’s Common Stock, or sell put options or similar
instruments with respect to the Company’s Common Stock. The parties acknowledge
that Holder shall be entitled to sell the Common Stock from each Debenture
conversion immediately upon submission of the applicable Debenture Conversion
Notice, and payment of the purchase price, to the Company for such Common
Stock.

     

    
      V.  ISSUANCE
OF COMMON STOCK

    

     

    A. The
Company undertakes and agrees that no instruction other than the instructions
referred to in this Article V shall be given to its transfer agent for the
Conversion Shares and that the Conversion Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement and applicable law, subject to restrictions against
transferability imposed by federal and applicable state securities
laws.  Nothing contained in this Section V.A. shall affect in any way
Holder’s obligations and agreement to comply with all applicable securities laws
upon resale of such Common Stock.  Notwithstanding anything to the
contrary herein, the Holder understands and acknowledges that neither the
issuance or resale of the Conversion Shares will be registered under the
Securities Act, and such Conversion Shares will be issued with a restrictive
legend that will preclude resale unless such resale is effected pursuant to an
effective registration statement or pursuant to Rule 144.

     

    B. Holder
shall have the right to convert the Debenture by telecopying an executed and
completed Conversion Notice (as such term is defined in the Debenture) to the
Company.  Each date on which a Conversion Notice is telecopied to and
received by the Company in accordance with the provisions hereof shall be deemed
a Conversion Date (as such term is defined in the Debenture).  The
Company shall cause the transfer agent to transmit the certificates evidencing
the Common Stock issuable upon conversion of the Debenture (together with a new
debenture, if any, representing the principal amount of the Debenture not being
so converted) to Holder via express courier, or if a Registration Statement
covering the Common Stock has been declared effective by the SEC by electronic
transfer, within two (2) business days after receipt by the Company of the
Conversion Notice, as applicable (the “Delivery Date”).

     

    C. Upon the
conversion of the Debenture or respective part thereof, the Company shall, at
its own cost and expense, take all necessary action (including the issuance of
an opinion of counsel) to assure that the Company's transfer agent shall issue
stock certificates in the name of Holder (or its nominee) or such other persons
as designated by Holder and in such denominations to be specified at conversion
or exercise representing the number of shares of common stock issuable upon such
conversion or exercise. The Company warrants that the Conversion Shares will be
restricted securities, and will contain a legend restricting the resale or
transferability of the Company Common Stock unless such transaction is made
pursuant to an effective registration statement covering the Common Stock to be
sold or is otherwise exempt from registration when sold.

     

    D. The
Company understands that a delay in the delivery of the Common Stock in the form
required pursuant to this section, or the Mandatory Redemption Amount described
in Section E hereof, beyond the Delivery Date or Mandatory Redemption Payment
Date (as hereinafter defined) could result in economic loss to the Holder. As
compensation to the Holder for such loss, the Company agrees to pay late
payments to the Holder for late issuance of Common Stock in the form required
pursuant to Section E hereof upon Conversion of the Debenture or late payment of
the Mandatory Redemption Amount, in the amount of $100 per business day after
the Delivery Date or Mandatory Redemption Payment Date, as the case may be, for
each $10,000 of Debenture principal amount being converted or redeemed. The
Company shall pay any payments incurred under this Section in immediately
available funds upon demand. Furthermore, in addition to any other remedies
which may be available to the Holder, in the event that the Company fails for
any reason to effect delivery of the Common Stock by the Delivery Date or make
payment by the Mandatory Redemption Payment Date, the Holder will be entitled to
revoke all or part of the relevant Notice of Conversion or rescind all or part
of the notice of Mandatory Redemption by delivery of a notice to such effect to
the Company whereupon the Company and the Holder shall each be restored to their
respective positions immediately prior to the delivery of such notice, except
that late payment charges described above shall be payable through the date
notice of revocation or rescission is given to the Company.

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    E. Mandatory Redemption. In the
event the Company is prohibited from issuing Common Stock, or fails to timely
deliver Common Stock on a Delivery Date, or upon the occurrence of an Event of
Default (as defined in the Debenture) or for any reason other than pursuant to
the limitations set forth herein, then at the Holder's election, the Company
must pay to the Holder ten (10) business days after request by the Holder or on
the Delivery Date (if requested by the Holder) a sum of money determined by
multiplying up to the outstanding Principal Amount (as defined in the Debenture)
of the Debenture designated by the Holder by 100%, together with accrued but
unpaid interest thereon ("Mandatory Redemption
Payment"). The Mandatory Redemption Payment must be received by the
Holder on the same date as the Company Common Stock otherwise deliverable or
within ten (10) business days after request, whichever is sooner ("Mandatory Redemption Payment
Date"). Upon receipt of the Mandatory Redemption Payment, the
corresponding Debenture principal and interest will be deemed paid and no longer
outstanding.

     

    F.           Buy-In. In addition to any
other rights available to the Holder, if the Company fails to deliver to the
Holder such Common Stock issuable upon conversion of a Debenture by the Delivery
Date and if ten (10) days after the Delivery Date the Holder purchases (in an
open market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by the Holder of the Common Stock which the Holder
anticipated receiving upon such conversion (a "Buy-In"), then the Company
shall pay in cash to the Holder (in addition to any remedies available to or
elected by the Holder) the amount by which (A) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (B) the aggregate principal and/or interest amount of the
Debenture for which such conversion was not timely honored, together with
interest thereon at a rate of 15% per annum, accruing until such amount and any
accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). For example, if the Holder purchases
shares of Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted conversion of $10,000 of Debenture
principal, the Company shall be required to pay the Holder $1,000, plus
interest. The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In.

     

    G. The
Securities shall be delivered by the Company to the Holder pursuant to Section
I.B. hereof on a “delivery-against-payment basis” at the Closing.

     

    
      VI.  CLOSING
DATE

    

     

    The
“Closing” shall occur by
the delivery: (i) to the Holder of the documents evidencing the Debenture and
all other Documents, and (ii) to the Company the Purchase Price, including the
Promissory Note, and the date on which the Closing occurs shall be referred to
herein as the “Closing
Date”.

     

    
      VII.  CONDITIONS
TO THE COMPANY’S OBLIGATIONS

    

     

    Holder
understands that the Company’s obligation to sell the Debenture on the Closing
Date to Holder pursuant to this Agreement is conditioned upon:

     

    A. Delivery
by Holder to the Company of the Purchase Price, including the Promissory Note
evidencing such applicable portion of the Purchase Price;

     

    B. The
accuracy on the Closing Date of the representations and warranties of Holder
contained in this Agreement as if made on the Closing Date (except for
representations and warranties which, by their express terms, speak as of and
relate to a specified date, in which case such accuracy shall be measured as of
such specified date) and the performance by Holder in all material respects on
or before the Closing Date of all covenants and agreements of Holder required to
be performed by it pursuant to this Agreement on or before the Closing Date;
and

     

    C. There
shall not be in effect any law or order, ruling, judgment or writ of any court
or public or governmental authority restraining, enjoining or otherwise
prohibiting any of the transactions contemplated by this Agreement.

     

    
      VIII.  CONDITIONS
TO HOLDER’S OBLIGATIONS

    

     

    The
Company understands that Holder’s obligation to purchase the Securities on the
Closing Date pursuant to this Agreement is conditioned upon:

     

    A. Delivery
by the Company of the Debenture (I/N/O Holder or I/N/O Holder’s nominee) to
Holder;

     

    B. The
accuracy on the Closing Date of the representations and warranties of the
Company contained in this Agreement as if made on the Closing Date (except for
representations and warranties which, by their express terms, speak as of and
relate to a specified date, in which case such accuracy shall be measured as of
such specified date) and the performance by the Company in all respects on or
before the Closing Date of all covenants and agreements of the Company required
to be performed by it pursuant to this Agreement on or before the Closing Date,
all of which shall be confirmed to Holder by delivery of the certificate of the
chief executive officer of the Company to that effect;

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    C. The
Company shall have delivered to the Holder a certificate of the Company executed
by an officer of the Company, dated as of the Closing, certifying
the resolutions adopted by the Company’s board of directors authorizing the
execution of the Documents, the issuance of the Securities, and the transactions
contemplated hereby, and copies of any required third party consents, approvals
and filings required in connection with the consummation of the transactions
contemplated by this Agreement;

     

    D. There not
having occurred (i) any general suspension of trading in, or limitation on
prices listed for, the Common Stock on the OTCBB/Pink Sheet, (ii) the
declaration of a banking moratorium or any suspension of payments in respect of
banks in the United States, (iii) the commencement of a war, armed hostilities
or other international or national calamity directly or indirectly involving the
United States or any of its territories, protectorates or possessions or
(iv) in the case of the foregoing existing at the date of this Agreement, a
material acceleration or worsening thereof;

     

    E. There not
having occurred any event or development, and there being in existence no
condition, having or which reasonably and foreseeably could have a Material
Adverse Effect;

     

    F. There
shall not be in effect any law, order, ruling, judgment or writ of any court or
public or governmental authority restraining, enjoining or otherwise prohibiting
any of the transactions contemplated by this Agreement;

     

    G. The
Company shall have obtained all consents, approvals or waivers from governmental
authorities and third persons necessary for the execution, delivery and
performance of the Documents and the transactions contemplated thereby, all
without material cost to the Company;

     

    H. Holder
shall have received such additional documents, certificates, payment,
assignments, transfers and other deliveries as it or its legal counsel may
reasonably request and as are customary to effect a closing of the matters
herein contemplated;

     

    I. Delivery
by the Company of an enforceability opinion with respect to this Agreement and
the transactions contemplated hereunder from its outside counsel in form and
substance satisfactory to Holder;

     

    J. Delivery
by the Company of the Irrevocable Transfer Agent Instructions attached hereto as
Exhibit B
executed by the Company and the Company’s transfer agent; and

     

    K. Delivery
by the Company of a valid waiver of any preemptive rights held by the
individuals and/or parties listed on Schedule III.A.3 hereto in form and
substance satisfactory to Holder.

     

    
      IX.  SURVIVAL;
INDEMNIFICATION

    

     

    A. The
representations, warranties and covenants made by each of the Company and Holder
in this Agreement, the annexes, schedules and exhibits hereto and in each
instrument, agreement and certificate entered into and delivered by them
pursuant to this Agreement shall survive the Closing and the consummation of the
transactions contemplated hereby.  In the event of a breach or
violation of any of such representations, warranties or covenants, the party to
whom such representations, warranties or covenants have been made shall have all
rights and remedies for such breach or violation available to it under the
provisions of this Agreement or otherwise, whether at law or in equity,
irrespective of any investigation made by or on behalf of such party on or prior
to the Closing Date.

     

    B. The
Company hereby agrees to indemnify and hold harmless Holder, its affiliates and
their respective officers, directors, employees, consultants, partners, members
and attorneys (collectively, the “Holder Indemnitees”) from and
against any and all losses, claims, damages, judgments, penalties, liabilities
and deficiencies (collectively, “Losses”) and agrees to
reimburse Holder Indemnitees for all reasonable out-of-pocket expenses
(including the reasonable fees and expenses of legal counsel), in each case
promptly as incurred by Holder Indemnitees and to the extent arising out of or
in connection with:

     

    1. any
misrepresentation, omission of fact or breach of any of the Company’s
representations or warranties contained in this Agreement or the other
Documents, or the annexes, schedules or exhibits hereto or thereto or any
instrument, agreement or certificate entered into or delivered by the Company
pursuant to this Agreement or the other Documents;

     

    2. any
failure by the Company to perform any of its covenants, agreements, undertakings
or obligations set forth in this Agreement or the other Documents or any
instrument, certificate or agreement entered into or delivered by the Company
pursuant to this Agreement or the other Documents;

     

    3. the
purchase of the Debenture, the conversion of the Debenture, the payment of
interest on the Debenture, the consummation of the transactions contemplated by
this Agreement and the other Documents, the use of any of the proceeds of the
Purchase Price by the Company, the purchase or ownership of any or all of the
Securities, the performance by the parties hereto of their respective
obligations hereunder and under the Documents or any claim, litigation,
investigation, proceedings or governmental action relating to any of the
foregoing, whether or not Holder is a party thereto; and/or

     

    4. resales
of the Common Stock by Holder in the manner and as contemplated by this
Agreement and the Documents.

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    C. Promptly
after receipt by a party seeking indemnification pursuant to this
Article IX (an “Indemnified Party”) of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a “Claim”), the Indemnified Party
promptly shall notify the Company against whom indemnification pursuant to this
Article IX is being sought (the “Indemnifying Party”) of the
commencement thereof, but the omission so to notify the Indemnifying Party shall
not relieve it from any liability that it otherwise may have to the Indemnified
Party except to the extent that the Indemnifying Party is materially prejudiced
and forfeits substantive rights or defenses by reason of such
failure.  In connection with any Claim as to which both the
Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party
shall be entitled to assume the defense thereof.  Notwithstanding the
assumption of the defense of any Claim by the Indemnifying Party, the
Indemnified Party shall have the right to employ separate legal counsel and to
participate in the defense of such Claim, and the Indemnifying Party shall bear
the reasonable fees, out-of-pocket costs and expenses of such separate legal
counsel to the Indemnified Party if (and only if): (x) the Indemnifying
Party shall have agreed to pay such fees, out-of-pocket costs and expenses,
(y) the Indemnified Party and the Indemnifying Party reasonably shall have
concluded that representation of the Indemnified Party and the Indemnifying
Party by the same legal counsel would not be appropriate due to actual or, as
reasonably determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense of such
Claim, or if there may be legal defenses available to the Indemnified Party that
are in addition to or disparate from those available to the Indemnifying Party
or (z) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim.  If the
Indemnified Party employs separate legal counsel in circumstances other than as
described in clauses (x), (y) or (z) above, the fees, costs and expenses of such
legal counsel shall be borne exclusively by the Indemnified
Party.  Except as provided above, the Indemnifying Party shall not, in
connection with any Claim in the same jurisdiction, be liable for the fees and
expenses of more than one firm of legal counsel for the Indemnified Party
(together with appropriate local counsel).  The Indemnifying Party
shall not, without the prior written consent of the Indemnified Party (which
consent shall not unreasonably be withheld), settle or compromise any Claim or
consent to the entry of any judgment that does not include an unconditional
release of the Indemnified Party from all liabilities with respect to such Claim
or judgment.

     

    D. In the
event one party hereunder should have a claim for indemnification that does not
involve a claim or demand being asserted by a third party, the Indemnified Party
promptly shall deliver notice of such claim to the Indemnifying
Party.  If the Indemnified Party disputes the claim, such dispute
shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration
Association.  Judgment upon any award rendered by any arbitrators may
be entered in any court having competent jurisdiction thereof.

     

    
      X.  GOVERNING
LAW

    

     

    This
Agreement shall be governed by and interpreted in accordance with the laws of
the State of California, without regard to the conflicts of law principles of
such state.

     

    
      XI.  SUBMISSION
TO JURISDICTION

    

     

    Each of
the parties hereto consents to the exclusive jurisdiction of the federal courts
whose districts encompass any part of the City of San Diego or the state courts
of the State of California sitting in the City of San Diego in connection with
any dispute arising under this Agreement and the other
Documents.  Each party hereto hereby irrevocably and unconditionally
waives, to the fullest extent it may effectively do so, any defense of an
inconvenient forum or improper venue to the maintenance of such action or
proceeding in any such court and any right of jurisdiction on account of its
place of residence or domicile.  Each party hereto irrevocably and
unconditionally consents to the service of any and all process in any such
action or proceeding in such courts by the mailing of copies of such process by
registered or certified mail (return receipt requested), postage prepaid, at its
address specified in Article XVII.  Each party hereto agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.

     

    
      XII.  COUNTERPARTS;
EXECUTION

    

     

    This
Agreement may be executed in counterparts, each of which when so executed and
delivered shall be an original, but both of which counterparts shall together
constitute one and the same instrument.  A facsimile transmission of
this signed Agreement shall be legal and binding on both parties
hereto.

     

    
      XIII.  HEADINGS

    

     

    The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.

     

    
      XIV.  SEVERABILITY

    

     

    In the
event any one or more of the provisions contained in this Agreement or in the
other Documents should be held invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein or therein shall not in any way be affected or impaired
thereby.  The parties shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions,
the economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    
      XV.  ENTIRE
AGREEMENT; REMEDIES, AMENDMENTS AND WAIVERS

    

     

    This
Agreement and the Documents constitute the entire agreement between the parties
hereto pertaining to the subject matter hereof and supersede all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of such parties.  No supplement, modification or waiver of
this Agreement shall be binding unless executed in writing by both
parties.  No waiver of any of the provisions of this Agreement shall
be deemed or shall constitute a waiver of any other provision hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided.

     

    
      XVI.  NOTICES

    

     

    Any
notices, consents, waivers, or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered (i) upon receipt, when delivered personally; (ii) upon
confirmation of receipt, when sent by facsimile; (iii) three (3) days after
being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:

     

    A. If to the
Company, to:

    

    Tidelands Oil & Gas
Corporation

    1862 West Bitters Road

    San Antonio, Texas 78248

    Telephone: 210-764-8642

    Facsimile:    210-764-2930

    

     

    B. If to
Holder, to:

     

    Golden
Gate Investors, Inc.

    1150
Silverado Street, Suite 220

    La Jolla,
California 92037

    Telephone: 858-551-8789

    Facsimile:
858-551-8779

     

    The
Company or Holder may change the foregoing address by notice given pursuant to
this Article XVI.

     

    
      XVII.  CONFIDENTIALITY

    

     

    Each of
the Company and Holder agrees to keep confidential and not to disclose to or use
for the benefit of any third party the terms of this Agreement or any other
information which at any time is communicated by the other party as being
confidential without the prior written approval of the other party; provided,
however, that this provision shall not apply to information which, at the time
of disclosure, is already part of the public domain (except by breach of this
Agreement) and information which is required to be disclosed by law (including,
without limitation, pursuant to Item 601(b)(10) of Regulation S-K under the
Securities Act and the Exchange Act).

     

    
      XVIII.  MAXIMUM
INTEREST RATE

    

     

    Notwithstanding
anything herein to the contrary, if at any time the applicable interest rate as
provided for herein shall exceed the maximum lawful rate which may be contracted
for, charged, taken or received by the Holder in accordance with any applicable
law (the “Maximum
Rate”), the rate of interest applicable to this Agreement shall be
limited to the Maximum Rate.  To the greatest extent permitted under
applicable law, the Company hereby waives and agrees not to allege or claim that
any provisions of this Agreement could give rise to or result in any actual or
potential violation of any applicable usury laws.

     

    
      XIX.  ASSIGNMENT

    

     

    This
Agreement shall not be assignable by the Company without the prior written
consent of the Holder.  The Holder may assign this Agreement upon 10
days prior written notice to the Company.

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
 

    IN WITNESS WHEREOF, the parties hereto have
duly caused this Agreement to be executed and delivered on the date first above
written.

    

    

    GOLDEN
GATE INVESTORS, INC.

    

    By: /s/ Travis W.
Huff                                                                                                           

    Name: Travis W.
Huff                                                                                                            

    Title:
Vice
President                                   
                                                                          

    

    

    TIDELANDS
OIL & GAS CORPORATION

    

    By: /s/ James B.
Smith                                                                                                           

    Name: James B.
Smith                                
                                                                           

    Title:
Chief Executive
Officerex10-2.htm

    EXHIBIT
10.2

    

    THIS NOTE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.  IT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED,
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL
SATISFACTORY TO THE LENDER THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR
UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT.

    

    SECURED PROMISSORY
NOTE

    

    
      	 
      	 
      	
              Date
      of Issuance

            
	
              $800,000

            	 
      	
              May
      9, 2008

            

    

    

    FOR VALUE
RECEIVED, Golden Gate Investors, Inc., a California corporation (the “Company”),
hereby promises to pay Tidelands Oil & Gas Corporation (the “Lender”), the
principal sum of Eight Hundred Thousand Dollars ($800,000) (the “Principal
Amount”), plus interest calculated pursuant to Section 1
below.  Unless earlier paid under the terms hereof, the principal and
accrued interest shall be due and payable by the Company on demand by the Lender
at any time after May 31, 2011 (the “Maturity Date”).

     

    This
Secured Promissory Note (the “Note”) is issued in connection with that certain
Securities Purchase Agreement between the parties hereto, dated as of the date
hereof (the “Purchase Agreement”), and capitalized terms not defined herein
shall have the meaning set forth in the Purchase Agreement.

     

    1. Interest.  The
Company promises to pay interest to Lender at the rate of Six and One-Quarter
Percent (6 1⁄4 %) per annum, simple interest (subject to adjustment as provided
below) (the “Interest Rate”), on the outstanding principal amount of this Note,
which interest shall be calculated from the date of this Note, until the date on
which all amounts due and payable on this Note are paid in full or this Note is
otherwise cancelled, (the “Payoff Date”).  Interest hereunder shall be
paid on a monthly basis, commencing on the 15th day of
the month following the month of issuance of this Note.  All accrued
and unpaid interest shall be due and payable on the Payoff Date.  All
computations of interest shall be made on the basis of a year of 365 or 366
days, as the case may be, for the actual number of days (including the first day
but excluding the last day) occurring in the period for which such interest is
payable.  Nothing contained in this Note shall require the Company at
any time to pay interest at a rate exceeding the maximum rate allowable under
California law and any payments in excess of such maximum shall be refunded to
the Company or credited to reduce the principal amount
hereunder.  Notwithstanding the foregoing, in the event that the
Lender’s Common Stock (the “Common Stock”) shall trade on the Trading Market (as
defined in the Debenture) or the over the counter market via the “pink sheets”
at a price per share that is $0.01 per share or lower at any time during the six
month period commencing on the date hereof and ending on the six month
anniversary of the date hereof (as adjusted for any stock splits, stock
dividends, combinations, subdivisions, recapitalizations or the like), then the
Interest Rate shall immediately be decreased to Four and Three-Quarters Percent
(4 3⁄4 %) and shall remain at such level for the duration of this
Note.

     

    2. Payment.  All
payments shall be made in lawful money of the United States of America at the
principal office of the Company, or at such other place as the holder hereof may
from time to time designate in writing to the Company.  Payment shall
be credited first to Costs (as defined below), if any, then to accrued interest
due and payable and any remainder applied to principal.  Prepayment of
principal, in part or in full, together with accrued interest, may be made from
time to time in the sole discretion of the Company without the Lender’s
consent.

     

    3. Prepayment
Obligation.  Notwithstanding the option of the Company to
prepay any portion of this Note, as set forth in Section 2 hereof, the Company
shall prepay, on a monthly basis, on any date(s) of such month during which this
Note remains outstanding (each date referred to herein as the “Periodic
Prepayment Date”), an amount equal to not less than Two Hundred Thousand Dollars
($200,000) (or such lesser amount that equals the remaining outstanding
principal and accrued and unpaid interest under this Note), with the amount, if
any, in excess of such sum to be determined by and in the sole and absolute
discretion of the Company, until all principal and accrued and unpaid interest
under this Note has been paid, subject to the satisfaction of each of the
following conditions on each Periodic Prepayment Date:

     

    3.1 The
Company may immediately sell all of the Common Stock Issued at Conversion (as
defined in the Debenture) pursuant to Rule 144 promulgated by the SEC (as
defined in the Debenture) pursuant to the Securities Act, as such Rule may be
amended from time to time, or any similar rule or regulation hereafter adopted
by the SEC having substantially the same effect as such Rule;

     

    3.2 No Event
of Default (as defined in the Debenture) has occurred under the
Debenture;

     

    3.3 The
average Volume Weighted Average Price (as defined in the Debenture) per share of
the Lender’s Common Stock for every period of ten consecutive Trading Days (as
defined in the Debenture) during the term of this Note shall not be less than
$0.038 per share (as adjusted for any stock splits, stock dividends,
combinations, subdivisions, recapitalizations or the like); and

     

    3.4 The
Lender shall have honored all Conversion Notices (as defined in the Debenture)
submitted by the Holder (as defined in the Debenture) within the applicable time
period set forth in the Debenture.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    The
amount of any such prepayment made by the Company under the terms of this
Section 3 (each such prepayment referred to herein as a “Periodic Prepayment”)
shall be credited first to Costs, if any, then to accrued interest due and
payable under this Note and the remainder applied to principal.  Any
prepayment made by the Company under this Note in excess of any otherwise
required Periodic Prepayment may be applied to any future required Periodic
Prepayment at the option of the Company, subject to the sole and absolute
discretion of the Company.  In the event that the Company fails to
deliver any Periodic Prepayment that is otherwise required under the terms of
this Section 3, the Lender’s sole and exclusive remedy shall be limited to the
Interest Rate being increased by 0.25 percentage points per Periodic Prepayment
required under this Section 3 that is not paid by the Company to the Lender,
provided however, that in no event shall the Interest Rate exceed an amount
equal to twelve and one-half percent (12.5%).  In no event shall any
failure by the Company to pay any Periodic Prepayment required hereunder give
any right to the Lender to collect upon the Collateral or otherwise collect any
outstanding sums under this Note.

     

    4. Recourse.  Each
party hereto accepts and agrees that this Note is a full recourse promissory
note and that subject to the terms of this Note, Lender may exercise any and all
remedies available to it under law.

     

    5. Security
Interest.

     

    5.1 To secure
the payment and performance of the Company’s obligations under this Note,
provided however that any obligations of the Company to prepay any amounts under
this Note pursuant to Section 3 are not so secured, the Company hereby grants to
Lender a security interest in the Company’s entire right, title, and interest in
and to all of the following, wherever located and whether now existing or owned
or hereafter acquired or arising (collectively, the “Collateral”):

     

    (a) all
accounts, accounts receivable, contract rights, rights to payment, letters of
credit, documents, securities, promissory notes, debentures, money, and
investment property, whether held directly or through a securities intermediary,
and other obligations of any kind owed to the Company, however
evidenced;

     

    (b) all
inventory, including, without limitation, all materials, components, work in
progress, finished goods, merchandise, and all other goods which are held for
sale, lease or other disposition or furnished under contracts of service or
consumed in the Company’s business;

     

    (c) all
equipment, including, without limitation, all machinery, furniture, furnishings,
fixtures, tools, parts, automobiles, trucks, and other vehicles, appliances,
computer and other electronic data processing equipment and other office
equipment, computer programs and related data processing software, and all
additions, substitutions, replacements, parts, accessories, and accessions to
and for the foregoing;

     

    (d) all
books, records and other written, electronic or other documentation in whatever
form maintained by or for the Company in connection with the ownership of its
assets or the conduct of its business; and

     

    (e) all
products and proceeds, including insurance proceeds, of any and all of the
foregoing.

     

    Notwithstanding
the foregoing, no security interest is granted in any contract rights if such
grant causes a default enforceable under applicable law or if a third party has
the right enforceable under applicable law to terminate the Company’s rights
under or with respect to any such contract and such third party has exercised
such right of termination.

     

    5.2 The
security interest on the Collateral granted by this Note shall continue and
remain in effect until terminated pursuant to subsection 5.4 below.

     

    5.3 The
Company shall execute any further documents reasonably requested by Lender,
which are necessary or appropriate to perfect Lender’s security interest in the
Collateral.

     

    5.4 Upon the
Payoff Date, the security interest granted pursuant to this Section 5 shall
terminate, and Lender shall promptly execute and deliver to the Company such
documents and instruments reasonably requested by the Company as shall be
necessary to evidence termination of all security interests given by the Company
to Lender hereunder.

     

    5.5 So long
as an Event of Default does not exist, the Company shall have the right to
possess the Collateral, manage its property and sell its inventory in the
ordinary course of business.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    6. Event of
Default.  An “Event of Default” shall exist under this Note
upon the happening of a failure of the Company to pay the outstanding Principal
Amount and all other outstanding sums under this Note, including accrued and
unpaid interest thereon, on the Maturity Date, provided that such sums have not
previously been paid, at the Company’s sole option, prior to the Maturity Date,
which failure is not cured within 30 days after the Company’s receipt of written
notice thereof sent by Lender to the Company.  Any failure by the
Company to pay any Periodic Prepayment that may otherwise be due under this Note
shall not be an Event of Default under this Note.  Upon the occurrence
of an Event of Default, Lender shall have all of the rights and remedies
afforded by the Uniform Commercial Code as from time to time in effect in the
State of California or afforded by other applicable law.

     

    7. Subordination.  The
indebtedness evidenced by this Note shall be subordinated to any Senior
Indebtedness of the Company.  For the purposes of this Note, “Senior
Indebtedness” shall mean the principal of (and premium, if any) and unpaid
interest on, indebtedness of the Company, or with respect to which the Company
is a guarantor, to banks, insurance companies, lease financing institutions or
other lending or financial institutions regularly engaged in the business of
lending money, which is for money borrowed (or purchase or lease of equipment in
the case of lease financing) by the Company, and which is approved by the Board
of Directors of the Company, whether or not secured, and whether or not
previously incurred or incurred in the future.  Senior Indebtedness
shall include all obligations of the Company pursuant to any modifications,
renewals and extensions of such Senior Indebtedness.  Lender
acknowledges that the Company may incur additional Senior Indebtedness and that
such Senior Indebtedness shall be senior in repayment preference to the
Note.  Upon written request of the Company, Lender agrees to execute a
subordination agreement from any lender of Senior Indebtedness in order to give
effect to this Section 7.

     

    8. Amendments and Waivers; Cure
Period.  This Note may not be amended without the prior written
consent of each of the Company and the Lender.  Any waiver by the
Company or the Lender of a breach of any provision of this Note shall not
operate as or be construed to be a waiver of any other breach of such provision
or of any breach of any other provision of this Note.  The failure of
the Company or the Lender to insist upon strict adherence to any term of this
Note on one or more occasions shall not be considered a waiver or deprive that
party of the right thereafter to insist upon strict adherence to that term or
any other term of this Note.  Any waiver by the Company or the Lender
must be in writing.  Any amendment or waiver effected in accordance
with this Section 8 shall be binding upon Lender and Lender’s successors and
assigns.  Any party to this Note shall have a cure period of not less
than thirty (30) days after receipt of written notice of any alleged breach or
default under the terms of this Note to cure such alleged breach or
default.

     

    9. Transmittal of
Notices.  Except as may be otherwise provided herein, any
notice or other communication or delivery required or permitted hereunder shall
be in writing and shall be delivered personally, or sent by telecopier machine
or by a nationally recognized overnight courier service, and shall be deemed
given when so delivered personally, or by telecopier machine or overnight
courier service as follows:

     

     

    (1)           If
to the Lender, to:

    

    Tidelands
Oil & Gas Corporation

    1862 West
Bitters Road

    San
Antonio, Texas 78248

    Telephone:  210-764-8642

    Facsimile:     210-764-2930

    

    (2)           If
to the Company, to:

    Golden
Gate Investors, Inc.

    7817
Herschel Avenue, Suite 200

    La Jolla,
California 92037

    Telephone:  858-551-8789

    Facsimile:     858-551-8779

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    Each of
the Lender or the Company may change the foregoing address by notice given
pursuant to this Section 9.

     

    10. Successors and
Assigns.  This Note applies to, inures to the benefit of, and
binds the successors and assigns of the parties hereto.  Neither the
Lender nor the Company may assign its rights under this Note without the written
consent of the other party to this Note, provided, however, that the Company may
assign its obligations under this Note to any Affiliate of the Company in the
sole and absolute discretion of the Company, without any prior consent by the
Lender, provided that such transferee or assignee agrees in writing to be bound
by and subject to the terms and conditions of this Note.  Upon any
such transfer of this Note by the Company or the Lender, the Lender shall, upon
notice, surrender this Note to the Company for reissuance of a new note to the
transferee.  Any transfer of this Note may be effected only pursuant
to the terms hereof and by surrender of this Note to the Company and reissuance
of a new note to the transferee.  The Lender and any subsequent holder
of this Note receives this Note subject to the foregoing terms and conditions,
and agrees to comply with the foregoing terms and conditions for the benefit of
the Company and any other Lenders.

     

    11. Officers and Directors Not
Liable.  In no event shall any officer or director of the
Company be liable for any amounts due and payable pursuant to this
Note.

     

    12. Expenses.  Should
any party hereto employ an attorney for the purpose of enforcing or construing
this Note, or any judgment based on this Note, in any legal proceeding
whatsoever, including insolvency, bankruptcy, arbitration, declaratory relief or
other litigation, the prevailing party shall be entitled to receive from the
other party or parties thereto reimbursement for all reasonable attorneys' fees
and all reasonable costs, including but not limited to service of process,
filing fees, court and court reporter costs, investigative costs, expert witness
fees, and the cost of any bonds, whether taxable or not (collectively, “Costs”),
and that such reimbursement shall be included in any judgment or final order
issued in that proceeding.  The "prevailing party" means the party
determined by the court to most nearly prevail and not necessarily the one in
whose favor a judgment is rendered.

     

    13. Remedies Not
Waived.  No course of dealing between the parties hereto or any
delay in exercising any rights hereunder shall operate as a waiver by such
party.

     

    14. Governing
Law.  This Note shall be governed by and construed under the
laws of the State of California as applied to other instruments made by
California residents to be performed entirely within the State of
California.  With respect to any suit, action or proceedings relating
to this Note, each of the Lender and the Company irrevocably submits to the
exclusive jurisdiction of the courts of the State of California sitting in San
Diego and the United States District Court located in the City of San Diego and
hereby waives, to the fullest extent permitted by applicable law, any claim that
any such suit, action or proceeding has been brought in an inconvenient
forum.  Subject to applicable law, each of the Company and the Lender
agrees that final judgment against it in any legal action or proceeding arising
out of or relating to this Note shall be conclusive and may be enforced in any
other jurisdiction within or outside the United States by suit on the judgment,
a certified copy of which judgment shall be conclusive evidence thereof and the
amount of the indebtedness, or by such other means provided by law.

     

    15. Counterparts.  This
Note may be executed in two or more counterparts, each of which shall be deemed
an original, but all of which together shall constitute one and the same
instrument.  Facsimile executions of this Note shall be deemed
original.

     

    IN WITNESS WHEREOF, the parties hereto have
duly caused this Note to be executed and delivered on the date first above
written.

     

    

     

    GOLDEN
GATE INVESTORS, INC.

    

    By: /s/ Travis W.
Huff                                                                                                  

    Name: Travis W.
Huff                      
                                                                           

    Title:
Vice
President                         
                                                                           

    

    

    TIDELANDS
OIL & GAS CORPORATION

    

    By: /s/ James B.
Smith                                                                                                   

    Name: James B.
Smith                                                                                                   

    Title:
Chief Executive
Officer

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