Document:

Exhibit 10.46

                    EMPLOYMENT AND NON-COMPETITION AGREEMENT

      Agreement  made this 28th day of April,  2004,  by and  between  MARY WEST
YOUNG, an individual residing at 2175 Wyndtree Lane, Malvern, Pennsylvania 19355
("Young"), and USA TECHNOLOGIES,  INC., a Pennsylvania corporation ("USA"), with
a place of business at 100  Deerfield  Lane,  Suite 140,  Malvern,  Pennsylvania
19355.

                                   BACKGROUND

      USA  desires  to engage  Young and Young  desires  to be engaged by USA as
Chief Financial  Officer of USA. Because of, among other matters,  the decreased
value of the business of USA that will result if Young would compete with USA or
use or divulge certain confidential  information,  Young has further agreed that
she will be  subject  to  certain  restrictions  during  and  after her being an
employee of USA.

                                    AGREEMENT

      NOW,  THEREFORE,  in consideration of the covenants set forth herein,  and
intending to be legally bound hereby, the parties agree as follows:

      SECTION 1. EMPLOYMENT.

            (a) USA  shall  employ  Young  for a period  commencing  on the date
hereof and  continuing  through April 30, 2005 (the  "Employment  Period"),  and
Young hereby  accepts  such  employment.  Commencing  on and after May 17, 2004,
Young shall be the Chief Financial  Officer of USA. Unless  terminated by either
party  hereto  upon  at  least  30-days  notice  prior  to end  of the  original
Employment  Period  ending April 30,  2005,  or prior to the end of any one year
extension  of  the  Employment  Period,  the  Employment  Period  shall  not  be
terminated  and  shall  automatically  continue  in full  force and  effect  for
consecutive one year periods.

<PAGE>

            (b) During the Employment Period,  Young shall devote her full time,
energy,  skills,  and attention to the business of USA, and shall not be engaged
or  employed  in any other  business  activity  whatsoever,  whether or not such
activity is pursued for gain,  profit or other pecuniary  advantage.  During the
Employment  Period,  Young shall perform and discharge well and faithfully  such
executive  management  duties for USA as shall be necessary and as otherwise may
be directed by the President or Board of Directors of USA.

      SECTION 2. COMPENSATION AND BENEFITS

            (a) In  consideration  of her  services  rendered,  USA shall pay to
Young a base salary of $165,000 per year during the Employment  Period,  subject
to any  withholding  required by law.  Young's base salary may be increased from
time to time in the discretion of the Board of Directors.

            (b) In addition to the base salary provided for in subparagraph (a),
Young  shall be  eligible  to  receive  such  bonus or  bonuses  as the Board of
Directors of USA may, in their discretion, pay to Young from time to time, in an
amount per year of up to  thirty-five  percent  (35%) of her annual base salary,
based upon the performance of USA and/or Young.

            (c)  Young  shall  be  entitled  to be  reimbursed  by USA  for  all
reasonable  expenses  reasonably  incurred  by  Young  in  connection  with  her
employment duties  hereunder.  Such expenses shall include but not be limited to
all reasonable  business  travel  expenses such as tolls,  gasoline and mileage.
Young shall reasonably document all requests for expense reimbursements.

                                       2
<PAGE>

            (d) At the commencement of the Employment  Period, USA shall deliver
to Young a payroll  check in the net  amount of  $30,000,  already  reduced  for
applicable  withholding taxes such as FICA, medicare,  and state tax (other than
for federal  income  taxes).  The funds shall be used by Young to subscribe  for
200,000  shares of restricted  Common Stock of USA ("Common  Stock") at $.15 per
share as part of the pending 2004-A private placement  offering.  As provided in
the subscription  agreement for the 2004-A offering,  USA shall prepare and file
(expected to be on or before June 30, 2004) a  registration  statement  covering
the resale of the shares under the Securities Act of 1933, as amended ("Act").

            (e) At the commencement of the Employment Period, USA shall issue to
Young  nonvested  options to acquire up to 300,000 shares of Common Stock for an
exercise price of $.30 per share.  The vesting  schedule of such options as well
as all the  other  terms and  conditions  thereof  are set  forth in the  Option
Certificate  evidencing  such options which will be delivered to Young by USA at
the commencement of the Employment  Period.  The form of such Option Certificate
is attached hereto as Exhibit "A".

      Young  acknowledges  that such options are not incentive  stock options as
such term is defined in Section 422 of the  Internal  Revenue  Code of 1986,  as
amended,  or part of an employee  stock  purchase plan as defined in Section 423
thereunder.  As a result, among other things, taxable income will be realized by
Young at the time of the exercise of any such options.

                                       3
<PAGE>

      Young also  acknowledges  that  neither the  options nor the Common  Stock
underlying  the options have been  registered  under the Act, or under any state
securities  laws,  and neither the options nor the Common Stock  underlying  the
options can be sold or transferred unless such options or Common Stock have been
registered  under the Act or such  state  securities  laws,  or  unless  USA has
received an opinion of counsel that such  registration  is not  required.  Young
understands  that except as provided  below,  USA has not agreed to register the
options or the  underlying  Common  Stock under the Act or any state  securities
laws.

      USA shall at its sole cost and  expense  use its best  efforts to register
under the Act the Common Stock  underlying the options for resale by Young for a
period of two years from the date of vesting of such option.

      SECTION 3.  TERMINATION.  Notwithstanding  anything else contained herein,
USA may terminate the  employment of Young at any time upon notice  delivered to
Young in the event that (i) Young  commits any  criminal or  fraudulent  act; or
(ii) Young  breaches  any term or condition  of this  Agreement;  or (iii) Young
willfully  abandons her duties  hereunder.  Upon such termination  neither party
hereto  shall  have any  further  duties or  obligations  hereunder  whatsoever;
provided,  however, that Young's obligations under Sections 5 and 6 hereof shall
survive any such termination.

                                       4
<PAGE>

      SECTION 4. DEATH AND DISABILITY.

            (a) If Young shall die during the Employment Period,  this Agreement
shall  terminate  as of the date of such death and except for any base salary or
bonuses  accrued as of such date USA shall have no further duties or obligations
hereunder whatsoever.

            (b) If USA determines in good faith that Young is  incapacitated  by
accident,  sickness or  otherwise  so as to render her  mentally  or  physically
incapable of performing the services  required of her hereunder for an aggregate
of ninety (90)  consecutive  days,  upon the expiration of such period or at any
time  thereafter,  by  action  of  USA,  Young's  employment  hereunder  may  be
terminated  immediately,  upon giving her notice to that  effect,  and upon such
termination  except  for any base  salary  or  bonuses  accrued  as of such date
neither  party hereto shall have any further  duties or  obligations  hereunder;
provided,  however, that Young's obligations under Sections 5 and 6 hereof shall
survive any such termination.  USA shall be entitled to rely upon the advice and
opinion  of any  physician  of its  choosing  in making any  determination  with
respect to any such disability.

      SECTION 5. BUSINESS SECRETS.

            (a) Except in connection with her duties hereunder, Young shall not,
directly or indirectly,  at any time from and after the date hereof, and whether
or not  the  Employment  Period  has  terminated,  or  whether  or  not  Young's
employment has terminated for any reason  whatsoever,  make any use of, exploit,
disclose,  or divulge to any other  person,  firm or  corporation,  any trade or
business secret, customer or supplier information,  documents,  know-how,  data,
marketing  information,  method or means,  or any other  confidential  (i.e. not
already  otherwise  disseminated  to or  available  to the  public)  information
concerning  the business or policies of USA,  that Young learned as a result of,
in connection with, through her employment with, or through her affiliation with
USA, whether or not pursuant to this Agreement.

                                       5
<PAGE>

            (b) From and after the date hereof,  except in  connection  with her
duties hereunder, and for a one (1) year period following the termination of the
Employment  Period,  or for a one (1) year period  following the  termination of
Young's  employment  hereunder if earlier,  Young shall not  solicit,  or divert
business  from,  or serve,  or sell to, any  customer or account of USA of which
Young is or becomes  aware,  or with which Young has had  personal  contact as a
result of, in  connection  with,  through her  employment  with,  or through her
affiliation with USA, whether or not pursuant to this Agreement.

            (c) All  documents,  data,  know-how,  designs,  inventions,  names,
marketing information,  method or means, materials, software programs, hardware,
configurations,  information, data processing reports, lists and sales analyses,
price lists or information, or any other materials or data of any kind furnished
to Young by USA, or developed by Young on behalf of USA or at USA's direction or
for USA's  use,  or  otherwise  devised,  developed,  created,  or  invented  in
connection with Young's  employment  hereunder or her affiliation  with USA, are
and shall remain the sole and exclusive property of USA, and Young shall have no
right or interest whatsoever thereto, including but not limited to any copyright
or patent  interest  whatsoever.  If USA  requests  the return of any such items
(including all copies) at any time whatsoever,  Young shall immediately  deliver
the same to USA.

                                       6
<PAGE>

      SECTION 6. RESTRICTIVE COVENANT. From and after the date hereof, and for a
one (1) year period following the termination of the Employment Period, or for a
one (1) year period following the termination of Young's employment hereunder if
earlier,  Young shall be prohibited from competing in the United States with the
business of USA as  presently or as  hereinafter  conducted,  including  but not
limited to the ownership and licensing of credit card activated  control systems
in the vending,  copying,  debit card, or personal computer industries.  For the
purposes hereof, the term "competing" shall mean acting, directly or indirectly,
as a partner, principal,  stockholder,  joint venturer,  associate,  independent
contractor,  creditor of, consultant, trustee, lessor to, sublessor to, employee
or  agent  of,  or to  have  any  other  involvement  with,  any  person,  firm,
corporation,  or other business  organization which is engaged in the businesses
described in this Section.

      SECTION  7.  REMEDIES.  Young  acknowledges  that any breach by her of the
obligations  set  forth  in  Sections  5 or 6  hereof  would  substantially  and
materially  impair and irreparably  harm USA's business and goodwill;  that such
impairment  and harm  would be  difficult  to  measure;  and,  therefore,  total
compensation in solely monetary terms would be inadequate.  Consequently,  Young
agrees that in the event of any breach or any threatened  breach by Young of any
of the provisions of Section 5 or 6 hereof, USA shall be entitled in addition to
monetary damages or other remedies,  to equitable relief,  including  injunctive
relief, and to the payment by Young of all costs and expenses incurred by USA in
enforcing  the  provisions  thereof,  including  attorneys'  fees.  The remedies
granted to USA in this  Agreement are cumulative and are in addition to remedies
otherwise available to USA at law or in equity.

                                       7
<PAGE>

      SECTION  8.  WAIVER  OF  BREACH.  The  waiver  by USA of a  breach  of any
provision  of this  Agreement  by Young shall not operate or be  construed  as a
waiver  of any  other  or  subsequent  breach  by  Young  of such  or any  other
provision.

      SECTION 9. NOTICES.  All notices required or permitted  hereunder shall be
in writing and shall be sent by certified or  registered  mail,  return  receipt
requested, postage prepaid, as follows:

                  To USA:

                           USA Technologies, Inc.
                           100 Deerfield Lane, Suite 140
                           Malvern, Pennsylvania 19355
                           Attn:  George R. Jensen, Jr., Chairman

                  To Young:

                           Ms. Mary West Young
                           2175 Wyndtree Lane
                           Malvern, Pennsylvania 19355

or to such other address as either of them may designate in a written notice
served upon the other party in the manner provided herein. All notices required
or permitted hereunder shall be deemed duly given and received on the second day
next succeeding the date of mailing.

                                       8
<PAGE>

      SECTION 10.  SEVERABILITY.  If any term or provision of this  Agreement or
the application thereof to any person or circumstances  shall, to any extent, be
invalid or unenforceable,  the remainder of this Agreement or the application of
any such term or  provision to persons or  circumstances  other than those as to
which it is held invalid or unenforceable,  shall not be affected  thereby,  and
each term and provision of this Agreement  shall be valid and enforceable to the
fullest  extent  permitted  by law. If any of the  provisions  contained in this
Agreement  shall for any reason be held to be excessively  broad as to duration,
scope,  activity or subject,  it shall be construed by limiting and reducing it,
so as to be valid and  enforceable to the extent  compatible with the applicable
law.

      SECTION 11. GOVERNING LAW. The  implementation  and interpretation of this
Agreement  shall be governed by and enforced in accordance  with the laws of the
Commonwealth of Pennsylvania without regard to its conflict of laws rules.

      SECTION 12. BINDING EFFECT AND  ASSIGNABILITY.  The rights and obligations
of both parties under this Agreement  shall inure to the benefit of and shall be
binding upon their personal representatives, heirs, successors and assigns. This
Agreement, or any part thereof, may not be assigned by Young.

                                       9
<PAGE>

      SECTION  13.  ENTIRE  AGREEMENT.  This  Agreement  constitutes  the entire
agreement  with respect to the subject  matter hereof between the parties hereto
and except as provided herein there are no other agreements  between the parties
relating to the subject matter hereof. This Agreement may only be modified by an
agreement in writing executed by both USA and Young.

      IN WITNESS WHEREOF,  the parties hereto have executed this Agreement as of
the day and year first above written.

                                        USA TECHNOLOGIES, INC.

                                       By: /s/ George R. Jensen
                                           -------------------------------------
                                           George R. Jensen, Jr., Chairman
                                           and Chief Executive Officer

                                           /s/ Mary West Young
                                           -------------------------------------
                                           MARY WEST YOUNG

                                       10EXHIBIT 10.3

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

                              AMENDED AND RESTATED

                         COMMON STOCK PURCHASE AGREEMENT

                                 BY AND BETWEEN

                           KINGSBRIDGE CAPITAL LIMITED

                                       AND

                                TEGAL CORPORATION

                            DATED AS OF MAY 19, 2004

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

<PAGE>

                                                 TABLE OF CONTENTS

                                                                           PAGE

ARTICLE I             DEFINITIONS............................................2

         Section 1.01.     "Blackout Shares".................................2

         Section 1.02.     "Certificate".....................................2

         Section 1.03.     "Closing Date"....................................2

         Section 1.04.     "Commission"......................................2

         Section 1.05.     "Commission Documents"............................2

         Section 1.06.     "Commitment Period"...............................2

         Section 1.07.     "Common Stock"....................................2

         Section 1.08.     "Condition Satisfaction Date".....................2

         Section 1.09.     "Damages".........................................2

         Section 1.10.     "Draw Down".......................................2

         Section 1.11.     "Draw Down Amount"................................2

         Section 1.12.     "Draw Down Notice"................................2

         Section 1.13.     "Draw Down Price".................................2

         Section 1.14.     "Draw Down Pricing Period"........................2

         Section 1.15.     "DTC".............................................3

         Section 1.16.     "Effective Date"..................................3

         Section 1.17.     "Exchange Act"....................................3

         Section 1.18.     "Knowledge".......................................3

         Section 1.19.     "Legend"..........................................3

         Section 1.20.     "Make Whole Amount"...............................3

         Section 1.21.     "Material Adverse Effect".........................3

         Section 1.22.     "Maximum Commitment Amount".......................3

         Section 1.23.     "Maximum Draw Down Amount"........................3

         Section 1.24.     "NASD"............................................3

         Section 1.25.     "Other Financing".................................3

         Section 1.26.     "Permitted Transaction"...........................3

         Section 1.27.     "Person"..........................................3

         Section 1.28.     "Principal Market"................................4

         Section 1.29.     "Prohibited Transaction"..........................4

         Section 1.30.     "Prospectus"......................................4

         Section 1.31.     "Registrable Securities"..........................4

                                       i
<PAGE>

                                TABLE OF CONTENTS
                                   (CONTINUED)
                                                                           PAGE

         Section 1.32.     "Registration Rights Agreement"...................4

         Section 1.33.     "Registration Statement"..........................4

         Section 1.34.     "Regulation D"....................................4

         Section 1.35.     "Section 4(2)"....................................4

         Section 1.36.     "Securities Act"..................................4

         Section 1.37.     "Settlement Date".................................4

         Section 1.38.     "Shares"..........................................4

         Section 1.39.     "Threshold Price".................................4

         Section 1.40.     "Trading Day".....................................5

         Section 1.41.     "Underwriter".....................................5

         Section 1.42.     "VWAP"............................................5

         Section 1.43.     "Warrant".........................................5

         Section 1.44.     "Warrant Shares"..................................5

ARTICLE II            PURCHASE AND SALE OF COMMON STOCK......................5

         Section 2.01.     Purchase and Sale of Stock........................5

         Section 2.02.     Closing...........................................5

         Section 2.03.     Registration Statement and Prospectus.............5

         Section 2.04.     Warrant...........................................5

         Section 2.05.     Blackout Shares...................................5

ARTICLE III           DRAW DOWN TERMS........................................6

         Section 3.01.     Draw Down Notice..................................6

         Section 3.02.     Number of Shares..................................6

         Section 3.03.     Limitation on Draw Downs..........................6

         Section 3.04.     Trading Cushion...................................6

         Section 3.05.     Expiration of Draw Downs..........................6

         Section 3.06.     Settlement........................................6

         Section 3.07.     Delivery of Shares; Payment of Draw Down Amount...6

         Section 3.08.     Threshold Price...................................7

         Section 3.09.     Other Issuances...................................7

         Section 3.10.     Failure to Deliver Shares.........................7

ARTICLE IV            REPRESENTATIONS AND WARRANTIES OF THE COMPANY..........8

         Section 4.01.     Organization, Good Standing and Power.............8

         Section 4.02.     Authorization; Enforcement........................8

                                       ii

<PAGE>

                                TABLE OF CONTENTS
                                   (CONTINUED)
                                                                           PAGE

         Section 4.03.     Capitalization....................................8

         Section 4.04.     Issuance of Shares................................9

         Section 4.05.     No Conflicts......................................9

         Section 4.06.     Commission Documents, Financial Statements.......10

         Section 4.07.     No Material Adverse Change.......................10

         Section 4.08.     No Undisclosed Liabilities.......................10

         Section 4.09.     No Undisclosed Events or Circumstances...........10

         Section 4.10.     Actions Pending..................................11

         Section 4.11.     Compliance with Law..............................11

         Section 4.12.     Certain Fees.....................................11

         Section 4.13.     Disclosure.......................................11

         Section 4.14.     Material Non-Public Information..................11

         Section 4.15.     Exemption from Registration; Valid Issuances.....11

         Section 4.16.     No General Solicitation or Advertising
                            in Regard to this Transaction...................12

         Section 4.17.     No Integrated Offering...........................12

         Section 4.18.     Acknowledgment Regarding
                            Investor's Purchase of Shares...................12

ARTICLE V  REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR........12

         Section 5.01.     Organization and Standing of the Investor........12

         Section 5.02.     Authorization and Power..........................12

         Section 5.03.     No Conflicts.....................................13

         Section 5.05.     Information......................................13

         Section 5.06.     Selling Restrictions.............................13

ARTICLE VI  COVENANTS OF THE COMPANY........................................14

         Section 6.01.     Securities.......................................14

         Section 6.02.     Reservation of Common Stock......................14

         Section 6.03.     Registration and Listing.........................14

         Section 6.04.     Registration Statement...........................14

         Section 6.05.     Compliance with Laws.............................14

         Section 6.06.     Reporting Requirements...........................15

         Section 6.07.     Other Financing..................................15

                                      iii

<PAGE>

                                TABLE OF CONTENTS
                                   (CONTINUED)
                                                                           PAGE

         Section 6.08.     Prohibited Transactions..........................15

         Section 6.09.     Corporate Existence..............................15

         Section 6.10.     Non-Disclosure of Non-Public Information.........16

         Section 6.11.     Notice of Certain Events Affecting Registration;
                            Suspension of Right to Request a Draw Down.......16

         Section 6.12.     Amendments to the Registration Statement.........16

         Section 6.13.     Prospectus Delivery..............................16

         Section 6.14.     Expectations Regarding Draw Downs................16

ARTICLE VII  CONDITIONS TO THE OBLIGATION
              OF THE INVESTOR TO ACCEPT A DRAW DOWN.........................17

         Section 7.01.     Accuracy of the Company's
                            Representations and Warranties..................17

         Section 7.02.     Performance by the Company.......................17

         Section 7.03.     Compliance with Law..............................17

         Section 7.04.     Effective Registration Statement.................17

         Section 7.05.     No Knowledge.....................................17

         Section 7.06.     No Suspension....................................17

         Section 7.07.     No Injunction....................................17

         Section 7.08.     No Proceedings or Litigation.....................18

         Section 7.09.     Section 16 Limitation............................18

         Section 7.10.     Sufficient Shares Registered for Resale..........18

         Section 7.11.     Warrant..........................................18

         Section 7.12.     Opinion of Counsel...............................18

CONDITIONS TO THE OBLIGATIONS OF THE COMPANY TO SELL,
 ISSUE AND DELIVER THE SHARES TO THE INVESTOR...............................18

         Section 8.01.     Accuracy of the Investor's
                             Representations and Warranties.................18

         Section 8.02.     Performance by the Investor......................19

         Section 8.03.     Compliance with Law..............................19

         Section 8.04.     Effective Registration Statement.................19

         Section 8.05.     No Knowledge.....................................19

         Section 8.06.     No Suspension....................................19

         Section 8.07.     No Injunction....................................19

         Section 8.08.     No Proceedings or Litigation.....................19

ARTICLE IX            LEGENDS...............................................19

         Section 9.01.     Legends..........................................19

                                       iv

<PAGE>

                                TABLE OF CONTENTS
                                   (CONTINUED)
                                                                           PAGE

         Section 9.02.     No Other Legend or Stock Transfer Restrictions...21

ARTICLE X             TERMINATION...........................................21

         Section 10.01.    Term.............................................21

         Section 10.02.    Other Termination................................21

         Section 10.03.    Effect of Termination............................22

ARTICLE XI            INDEMNIFICATION.......................................22

         Section 11.01.    Indemnification..................................22

         Section 11.02.    Notification of Claims for Indemnification.......23

         Section 11.03.    Dispute Resolution...............................24

ARTICLE XII           MISCELLANEOUS.........................................25

         Section 12.01.    Fees and Expenses................................25

         Section 12.02.    Reporting Entity for the Common Stock............25

         Section 12.03.    Brokerage........................................26

         Section 12.04.    Notices..........................................26

         Section 12.05.    Assignment.......................................27

         Section 12.06.    Amendment; No Waiver.............................27

         Section 12.07.    Entire Agreement.................................27

         Section 12.08.    Severability.....................................27

         Section 12.09.    Title and Subtitles..............................27

         Section 12.10.    Counterparts.....................................27

         Section 12.11.    Choice of Law....................................28

         Section 12.12.    Specific Enforcement, Consent to Jurisdiction....28

         Section 12.13.    Survival.........................................28

         Section 12.14.    Publicity........................................28

         Section 12.15.    Further Assurances...............................28

                                        v

<PAGE>

                              AMENDED AND RESTATED

                         COMMON STOCK PURCHASE AGREEMENT

                                 BY AND BETWEEN

                           KINGSBRIDGE CAPITAL LIMITED

                                       AND

                                TEGAL CORPORATION

                            dated as of May 19, 2004

      This AMENDED AND RESTATED COMMON STOCK PURCHASE  AGREEMENT is entered into
as of the 19th day of May, 2004 (this  "Agreement"),  by and between Kingsbridge
Capital Limited,  a company organized and existing under the laws of the British
Virgin Islands (the "Investor") and TEGAL CORPORATION,  a corporation  organized
and existing under the laws of the State of Delaware (the "Company").

      WHEREAS,  the  parties  desire  that,  upon the terms and  subject  to the
conditions  set forth  herein,  the Company may issue and sell to the  Investor,
from time to time as provided  herein,  and the Investor shall purchase from the
Company,  Common Stock (as defined below) for an aggregate of up to $25 million;
and

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

      WHEREAS,  the parties hereto have  previously  entered into a Common Stock
Purchase  Agreement  dated  February  11, 2004,  which the parties  intend to be
superceded in its entirety by this Agreement; and

      WHEREAS,  the parties have entered into a Registration Rights Agreement in
the form of Exhibit A hereto (the "Registration  Rights Agreement")  pursuant to
which the  Company  shall  register  the  Common  Stock  issued  and sold to the
Investor under this Agreement and under the Warrant (as defined below), upon the
terms and subject to the conditions set forth therein; and

      WHEREAS,  in consideration  for the Investor's  execution and delivery of,
and its performance of its obligations  under,  this Agreement,  the Company has
issued to the Investor a Warrant in the form of Exhibit B hereto (the "Warrant")
pursuant  to which the  Investor  may  purchase  from the  Company up to 300,000
shares of Common Stock,  upon the terms and subject to the  conditions set forth
therein;

                                       1
<PAGE>

      NOW, THEREFORE, the parties hereto agree as follows:

                                   ARTICLE I

                                   DEFINITIONS

      Section 1.01"Blackout Shares" shall have the meaning assigned to such term
in the Registration Rights Agreement.

      Section 1.02 "Certificate" shall have the meaning assigned to such term in
Section 4.03 hereof.

      Section  1.03  "Closing  Date" means the date on which this  Agreement  is
executed and delivered by the Company and the Investor.

      Section 1.04  "Commission"  means the United  States  Securities  Exchange
Commission.

      Section 1.05  "Commission  Documents"  shall have the meaning  assigned to
such term in Section 4.06 hereof.

      Section  1.06  "Commitment  Period"  means the  period  commencing  on the
Effective  Date and  expiring on the  earliest to occur of (x) the date on which
the Investor  shall have  purchased  Shares  pursuant to this  Agreement  for an
aggregate  purchase price equal to the Maximum  Commitment  Amount, (y) the date
this  Agreement is  terminated  pursuant to Article IX hereof,  and (z) the date
occurring 24 months from the Effective Date.

      Section 1.07 "Common  Stock" means the common stock of the Company,  $0.01
par value per share.

      Section 1.08 "Condition Satisfaction Date" shall have the meaning assigned
to such term in Article VII hereof.

      Section 1.09 "Damages" means any loss, claim, damage, liability, costs and
expenses (including, without limitation, reasonable attorneys' fees and expenses
and costs and reasonable expenses of expert witnesses and investigation).

      Section  1.10 "Draw Down" shall have the meaning  assigned to such term in
Section 3.01 hereof.

      Section  1.11 "Draw Down  Amount"  means the actual  amount of a Draw Down
paid to the Company.

      Section  1.12 "Draw Down Notice"  shall have the meaning  assigned to such
term in Section 3.01 hereof.

      Section  1.13 "Draw Down  Price"  means 90% of the VWAP on any Trading Day
during the Draw Down Pricing Period when the VWAP equals to or exceeds $1.00.

                                       2
<PAGE>

      Section 1.14 "Draw Down Pricing  Period" shall mean,  with respect to each
Draw Down, a period of fifteen (15)  consecutive  Trading Days  beginning on the
first Trading Day specified in a Draw Down Notice.

      Section  1.15  "DTC"  means  the  Depository  Trust  Corporation,  or  any
successor thereto.

      Section  1.16  "Effective  Date" means the first  Trading Day  immediately
following the date on which the Registration  Statement is declared effective by
the Commission.

      Section  1.17  "Exchange  Act" means the U.S.  Securities  Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.

      Section 1.18 "Knowledge" means the actual knowledge of the Chief Executive
Officer,  Chief  Financial  Officer  or any  Executive  Vice  President  or Vice
President of the Company.

      Section 1.19 "Legend" shall have the meaning specified in Section 8.1.

      Section  1.20 "Make  Whole  Amount"  shall have the meaning  specified  in
Section 3.10.

      Section 1.21 "Material  Adverse  Effect" means any effect on the business,
operations,   properties   or  financial   condition  of  the  Company  and  its
consolidated  subsidiaries  that is material and adverse to the Company and such
subsidiaries, taken as a whole, and/or any condition, circumstance, or situation
that would  prohibit or otherwise  interfere  with the ability of the Company to
perform any of its obligations  under this Agreement,  the  Registration  Rights
Agreement or the Warrant in any  material  respect;  provided,  that none of the
following  shall  constitute  a "Material  Adverse  Effect":  (i) the effects of
conditions  or events that are generally  applicable to the capital,  financial,
banking or currency  markets and (ii) any changes or effects  resulting from the
announcement or consummation of the transactions contemplated by this Agreement,
including,  without  limitation,  any  changes  or effects  associated  with any
particular Draw Down.

      Section 1.22  "Maximum  Commitment  Amount" means $25 million in aggregate
Draw Down  Amounts;  provided,  however,  that in no event shall the Investor be
obligated to purchase,  nor shall the Company  issue and/or sell,  Common Stock,
including  any  Blackout   Shares,   in  the  aggregate   under  this  Agreement
representing  twenty  percent  (20%) or more of the voting  power in the Company
outstanding.

      Section 1.23 "Maximum Draw Down Amount" means 4.5% of the Company's Market
Capitalization  (as defined and  calculated in  accordance  with Annex A) at the
time of the Draw Down; provided, however, that such amount shall not exceed $7.5
million in respect of any Draw Down.

      Section 1.24 "NASD" means the National  Association of Securities Dealers,
Inc.

      Section  1.25 "Other  Financing"  shall have the meaning  assigned to such
term in Section 6.07 hereof.

      Section 1.26 "Permitted  Transaction"  shall have the meaning  assigned to
such term in Section 6.07 hereof.

                                       3
<PAGE>

      Section 1.27  "Person"  means any  individual,  corporation,  partnership,
limited liability company,  association,  trust or other entity or organization,
including   any   government   or   political   subdivision   or  an  agency  or
instrumentality thereof.

      Section 1.28  "Principal  Market" means the Nasdaq  National  Market,  the
Nasdaq  SmallCap  Market,  the  American  Stock  Exchange  or the New York Stock
Exchange,  whichever is at the time the principal trading exchange or market for
the Common Stock.

      Section 1.29 "Prohibited  Transaction"  shall have the meaning assigned to
such term in Section 6.08 hereof.

      Section 1.30  "Prospectus"  as used in this Agreement means the prospectus
in the form included in the Registration Statement, as supplemented from time to
time pursuant to Rule 424(b) of the Securities Act.

      Section  1.31  "Registrable  Securities"  means (i) the  Shares,  (ii) the
Warrant Shares,  and (iii) any securities issued or issuable with respect to any
of the  foregoing  by way of  exchange,  stock  dividend  or  stock  split or in
connection with a combination of shares, recapitalization, merger, consolidation
or  other  reorganization  or  otherwise.   As  to  any  particular  Registrable
Securities, once issued such securities shall cease to be Registrable Securities
when (w) the Registration  Statement has been declared  effective by the SEC and
such  Registrable  Securities have been disposed of pursuant to the Registration
Statement,  (x) such Registrable  Securities have been sold under  circumstances
under  which  all of the  applicable  conditions  of Rule  144  (or any  similar
provision then in force) under the Securities Act ("Rule 144") are met, (y) such
time as such Registrable  Securities have been otherwise  transferred to holders
who may trade such shares without  restriction under the Securities Act, and the
Company has delivered a new  certificate or other evidence of ownership for such
securities not bearing a restrictive  legend or (z) in the opinion of counsel to
the Company such  Registrable  Securities may be sold without  registration  and
without any time, volume or manner  limitations  pursuant to Rule 144(k) (or any
similar provision then in effect) under the Securities Act.

      Section 1.32  "Registration  Rights  Agreement" shall have the meaning set
forth in the recitals of this Agreement.

      Section 1.33  "Registration  Statement" shall have the meaning assigned to
such term in the Registration Rights Agreement.

      Section  1.34  "Regulation  D" shall  have the  meaning  set  forth in the
recitals of this Agreement.

      Section  1.35  "Section  4(2)"  shall  have the  meaning  set forth in the
recitals of this Agreement.

      Section  1.36  "Securities  Act" shall have the  meaning  set forth in the
recitals of this Agreement..

      Section  1.37  "Settlement  Date" shall have the meaning  assigned to such
term in Section 3.06 hereof.

      Section 1.38 "Shares" means the shares of Common Stock of the Company that
are and/or may be purchased hereunder.

                                       4
<PAGE>

      Section  1.39  "Threshold  Price"  means the lowest  "Draw Down Price" (as
specified  in a Draw Down Notice) at which the Company will agree to sell Shares
during the applicable  Draw Down Pricing  Period,  which price shall not be less
than $1.00 per share.

      Section 1.40 "Trading Day" means any day other than a Saturday or a Sunday
on which the Principal Market is open for trading in equity securities.

      Section 1.41 "Underwriter" shall mean any underwriter participating in any
disposition of the Registrable  Securities on behalf of the Investor pursuant to
the Registration Statement.

      Section  1.42 "VWAP" means the daily volume  weighted  average  price (the
aggregate  sales price of all trades of Common  Stock  during  each  Trading Day
divided by the total number of shares of Common Stock traded during such Trading
Day) of the Common Stock during any Trading Day as reported by  Bloomberg,  L.P.
using the AQR function.

      Section 1.43 "Warrant" shall have the meaning set forth in the recitals of
this Agreement.  Section  1.44......"Warrant  Shares" means the shares of Common
Stock issuable to the Investor upon exercise of the Warrant.

                                   ARTICLE II

                        PURCHASE AND SALE OF COMMON STOCK

      Section 2.01 Purchase and Sale of Stock. Upon the terms and subject to the
conditions set forth in this Agreement,  the Company shall issue and sell to the
Investor and the Investor  shall  purchase from the Company  Common Stock for an
aggregate  (in  Draw  Down  Amounts)  of up to the  Maximum  Commitment  Amount,
consisting  of  purchases  based on Draw Downs in  accordance  with  Article III
hereof.

      Section 2.02 Closing. In consideration of and in express reliance upon the
representations,  warranties, covenants, terms and conditions of this Agreement,
the Company agrees to issue and sell to the Investor, and the Investor agrees to
purchase from the Company,  that number of the Shares to be issued in connection
with each Draw Down. The closing of the execution and delivery of this Agreement
(the  "Closing")  shall take place at the offices of Clifford Chance US LLP, 200
Park Avenue,  New York, NY 10166 at 11:00 a.m. local time on May 19, 2004, or at
such other time and place or on such date as the  Investor  and the  Company may
agree  upon (the  "Closing  Date").  Each party  shall  deliver  all  documents,
instruments and writings required to be delivered by such party pursuant to this
Agreement at or prior to the Closing.

      Section 2.03  Registration  Statement and  Prospectus.  Promptly after the
Closing, the Company shall prepare and file with the Commission the Registration
Statement  (including the  Prospectus) in accordance  with the provisions of the
Securities Act and the Registration Rights Agreement.

      Section 2.04  Warrant.  On the Closing  Date,  the Company shall issue and
deliver the Warrant to the Investor.

                                       5
<PAGE>

      Section  2.05  Blackout  Shares.  The Company  shall issue and deliver any
Blackout Shares,  if any, to the Investor in accordance with Section 1(e) of the
Registration Rights Agreement and Section 1.22 hereof.

                                  ARTICLE III

                                 DRAW DOWN TERMS

      Subject to the  satisfaction  of the conditions  hereinafter  set forth in
this Agreement, the parties agree as follows:

      Section 3.01 Draw Down Notice.  The Company,  may, in its sole discretion,
issue a Draw Down  Notice  with  respect to a Draw Down up to a Draw Down Amount
equal  to the  Maximum  Draw  Down  Amount  (each,  a "Draw  Down")  during  the
Commitment Period, which Draw Down the Investor will be obligated to accept. The
Company shall inform the Investor via facsimile transmission, with a copy to the
Investor's  counsel,  as to the Draw Down Amount the Company  wishes to exercise
before commencement of trading on the first Trading Day of any Draw Down Pricing
Period (the "Draw Down Notice").  In addition to the Draw Down Amount, each Draw
Down Notice shall specify the Threshold  Price in respect of the applicable Draw
Down and shall  designate the first Trading Day of the Draw Down Pricing Period.
In no event  shall any Draw Down Amount  exceed the Maximum  Draw Down Amount or
shall the  aggregate  of all Draw Down  Amounts  exceed the  Maximum  Commitment
Amount.  Each Draw Down Notice shall be accompanied by a certificate,  signed by
the Chief Executive  Officer or Chief Financial Officer dated, as of the date of
such Draw Down Notice, in the form of Exhibit C hereof.

      Section  3.02  Number  of  Shares.  The  number  of Shares to be issued in
connection  with each Draw Down shall be equal to the sum of the quotients  (for
each Trading Day of the Draw Down  Pricing  Period for which the Draw Down Price
equals or exceeds the  Threshold  Price) of one  fifteenth  (1/15th) of the Draw
Down Amount divided by the applicable Draw Down Price.

      Section  3.03  Limitation  on Draw  Downs.  Only  one Draw  Down  shall be
permitted for each Draw Down Pricing Period.

      Section  3.04  Trading  Cushion.  Unless  the  parties  agree  in  writing
otherwise,  there  shall be a  minimum  of five (5)  Trading  Days  between  the
expiration  of any  Draw  Down  Pricing  Period  and the  beginning  of the next
succeeding Draw Down Pricing Period.

      Section 3.05  Expiration of Draw Downs.  Each Draw Down will expire on the
last Trading Day of each Draw Down Pricing Period.

      Section 3.06  Settlement.  The number of Shares  purchased by the Investor
with  respect to each Draw Down shall be  determined  and  settled on a periodic
basis in respect of the  applicable  Draw Down  Pricing  Period.  Settlement  in
respect of each determination  shall be made no later than the third Trading Day
after  the  fifth,  tenth and  fifteenth  Trading  Day of the Draw Down  Pricing
Period.  Each date on which settlement of the purchase and sale of Shares occurs
hereunder  shall be  referred  to as a  "Settlement  Date." The  Investor  shall
provide the Company with  delivery  instructions  for the Shares to be issued at
each  Settlement  Date at least two Trading  Days in advance of such  Settlement
Date (except to the extent previously  provided).  The number of Shares actually
issued shall be rounded to the nearest whole number of Shares.

                                       6
<PAGE>

      Section  3.07  Delivery of Shares;  Payment of Draw Down  Amount.  On each
Settlement  Date, the Company shall deliver the Shares purchased by the Investor
to the Investor or its designees via  book-entry  through the  Depositary  Trust
Company  to an  account  designated  by the  Investor,  and upon  receipt of the
Shares,  the Investor  shall cause payment  therefor to be made to the Company's
designated  account by wire  transfer of  immediately  available  funds,  if the
Shares are received by the Investor no later than 1:00 p.m.  (Eastern  Time), or
next day available funds, if the Shares are received thereafter.

      Section  3.08  Threshold  Price.  For each  Trading Day during a Draw Down
Pricing  Period that the Draw Down Price is less than the  Threshold  Price,  no
Shares  shall be  purchased  or sold on such Trading Day and the total amount of
the Draw Down  Amount in  respect  of such Draw  Down  Pricing  Period  shall be
reduced by one fifteenth  (1/15th).  At no time shall the Threshold Price be set
below $1.00.  If trading in the  Company's  Common  Stock is  suspended  for any
reason for more than three (3) consecutive or  non-consecutive  hours during any
Trading  Day during a Draw Down  Pricing  Period,  the Draw Down Price  shall be
deemed to be less than the Threshold Price for that Trading Day.

      Section 3.09 Other  Issuances.  If during any Draw Down Pricing Period the
Company shall (with the consent of the Investor pursuant to Section 6.07 or 6.08
hereof, if applicable) issue any shares of Common Stock to any Person other than
the  Investor  (other than shares of Common Stock  issued in  connection  with a
Permitted  Transaction),  that the  applicable  Draw Down Notice shall be deemed
null and void and the Investor shall promptly  return to the Company any and all
Shares  transferred to the Investor in respect of any Settlement  Date(s) during
such Draw Down Pricing Period and the Company shall  promptly  thereafter pay to
the  Investor by wire  transfer  of  immediately  available  funds to an account
designated by the Investor that portion of the applicable  Draw Down Amount paid
to the Company in respect of such Settlement Date(s).

      Section 3.10 Failure to Deliver  Shares.  If on any  Settlement  Date, the
Company  fails to deliver the Shares to be purchased by the  Investor,  and such
failure is not cured within ten (10) Trading  Days  following  the date on which
the Investor  delivered  payment for such Shares,  the Company  shall pay to the
Investor on demand in cash by wire transfer of immediately available funds to an
account designated by the Investor the "Make Whole Amount;"  provided,  however,
that in the event  that the  Company  is  prevented  from  delivering  Shares in
respect  of  any  such  Settlement  Date  in a  timely  manner  by any  fact  or
circumstance that is reasonably within the control of, or directly  attributable
to, the Investor,  then such ten (10) Trading Day period shall be  automatically
extended until such time as such fact or  circumstance is cured. As used herein,
the Make Whole  Amount  shall be an amount equal to the sum of (i) the Draw Down
Amount  actually  paid by the  Investor  in respect of such  Shares plus (ii) an
amount equal to actual loss suffered by the Investor in respect of sales of such
Shares  to  subsequent  purchasers,  which  shall  be based  upon  documentation
reasonably  satisfactory to the Company demonstrating the difference (if greater
than zero) between (A) the price per share paid by the Investor to purchase such
number of shares of Common  Stock  necessary  for the Investor to meet its share
delivery  obligations to such subsequent  purchasers  minus (B) the average Draw
Down Price during the applicable Draw Down Pricing Period. In the event that the
Make Whole  Amount is not paid  within two (2) Trading  Days  following a demand
therefor  from the  Investor,  the  Make  Whole  Amount  shall  accrue  interest
compounded  daily at a rate of five percent  (5%) per annum up to and  including
the date on which  the Make  Whole  Amount  is  actually  paid.  Notwithstanding
anything  to the  contrary  set forth in this  Agreement,  in the event that the
Company pays the Make Whole Amount (plus interest,  if applicable) in respect of
any Settlement  Date in accordance with this Section 3.10, such payment shall be
the Investor's sole remedy in respect of the Company's failure to deliver Shares
in respect of such Settlement Date.

                                       7
<PAGE>

                                   ARTICLE IV

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

      The Company hereby makes the following  representations  and warranties to
the Investor:

      Section  4.01  Organization,  Good  Standing  and Power.  The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite power and authority to own, lease
and operate its properties and to carry on its business as now being  conducted.
Except as set forth in the Commission  Documents (as defined below), the Company
does not own more than fifty percent (50%) of the  outstanding  capital stock of
or control any other business  entity,  other than any  wholly-owned  subsidiary
that is not  "significant"  within the meaning of Regulation S-X  promulgated by
the  Commission.  The Company is duly  qualified as a foreign  corporation to do
business and is in good  standing in every  jurisdiction  in which the nature of
the  business  conducted  or  property  owned  by it  makes  such  qualification
necessary,  other  than  those in which the  failure so to qualify or be in good
standing would not have a Material Adverse Effect.

      Section 4.02 Authorization; Enforcement. (i) The Company has the requisite
corporate  power and authority to enter into and perform its  obligations  under
this Agreement,  the Registration  Rights Agreement and the Warrant and to issue
the Shares,  the Warrant,  the Warrant Shares and any Blackout Shares (except to
the extent that the number of Blackout  Shares required to be issued exceeds the
number of  authorized  shares of Common Stock under the  Certificate);  (ii) the
execution and delivery of this Agreement and the Registration  Rights Agreement,
and the execution,  issuance and delivery of the Warrant, by the Company and the
consummation by it of the transactions contemplated hereby and thereby have been
duly  authorized by all  necessary  corporate  action and no further  consent or
authorization  of the  Company  or its Board of  Directors  or  stockholders  is
required (other than as  contemplated  by Section 6.05);  and (iii) each of this
Agreement  and the  Registration  Rights  Agreement  has been duly  executed and
delivered, and the Warrant has been duly executed,  issued and delivered, by the
Company  and  constitute  the  valid  and  binding  obligations  of the  Company
enforceable  against  the Company in  accordance  with their  respective  terms,
except  as  such  enforceability  may  be  limited  by  applicable   bankruptcy,
insolvency,  reorganization,  moratorium, liquidation,  receivership, or similar
laws relating to, or affecting  generally the enforcement of,  creditors' rights
and remedies or by other equitable principles of general application.

      Section 4.03  Capitalization.  The authorized capital stock of the Company
and the shares thereof  issued and  outstanding as of May 19, 2004 are set forth
on Schedule 4.03 attached  hereto.  All of the outstanding  shares of the Common
Stock have been duly and validly  authorized and issued,  and are fully paid and
non-assessable.  Except  as set  forth in this  Agreement  or on  Schedule  4.03
attached hereto, as of the date hereof no shares of Common Stock are entitled to
preemptive rights or registration  rights and there are no outstanding  options,
warrants,  scrip,  rights to subscribe to, call or  commitments of any character
whatsoever relating to, or securities or rights convertible into or exchangeable
for or giving any right to  subscribe  for,  any shares of capital  stock of the
Company.  Except as set forth in this  Agreement or on Schedule  4.03, as of the
date  hereof,   there  are  no  contracts,   commitments,   understandings,   or
arrangements  by which the  Company is or may become  bound to issue  additional
shares of the  capital  stock of the Company or  options,  securities  or rights
convertible  into or  exchangeable  for or giving any right to subscribe for any
shares of capital stock of the Company. Except as set forth on Schedule 4.03, as
of the  date  hereof  the  Company  is not a  party  to any  agreement  granting
registration  rights to any  Person  with  respect  to any of its equity or debt
securities.  Except as set forth on  Schedule  4.03,  as of the date  hereof the
Company is not a party to, and it has no Knowledge of, any agreement restricting
the voting or transfer of any shares of the capital  stock of the  Company.  The

                                       8
<PAGE>

offer and sale of all capital stock,  convertible securities,  rights, warrants,
or options of the Company issued during the twenty-four month period immediately
prior to the Closing  complied with all applicable  federal and state securities
laws,  and no  stockholder  has a right of  rescission  or damages  with respect
thereto that could reasonably be expected to have a Material Adverse Effect. The
Company has furnished or made  available to the Investor true and correct copies
of the Company's  Certificate of Incorporation,  as amended and in effect on the
date hereof (the  "Certificate"),  and the Company's  Bylaws,  as amended and in
effect on the date hereof (the "Bylaws").

      Section 4.04 Issuance of Shares.  The Shares,  the Warrant and the Warrant
Shares  have been,  and any  Blackout  Shares will be,  duly  authorized  by all
necessary  corporate  action  (except to the extent  that the number of Blackout
Shares  required to be issued exceeds the number of authorized  shares of Common
Stock under the  Certificate)  and, when issued and paid for in accordance  with
the terms of this Agreement,  the Registration Rights Agreement and the Warrant,
the Shares and the Warrant Shares shall be validly issued and outstanding, fully
paid and  non-assessable,  and the  Investor  shall be  entitled  to all  rights
accorded to a holder of shares of Common Stock.

      Section 4.05 No Conflicts. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement, the Warrant and any other document
or  instrument   contemplated   hereby  or  thereby,  by  the  Company  and  the
consummation by the Company of the transactions  contemplated hereby and thereby
do not: (i) violate any provision of the  Certificate  or Bylaws,  (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment,  acceleration or cancellation of, any material  agreement,  mortgage,
deed of trust,  indenture,  note, bond, license, lease agreement,  instrument or
obligation  to which  the  Company  is a party,  (iii)  create or impose a lien,
charge or  encumbrance on any property of the Company under any agreement or any
commitment  to which the  Company is a party or by which the Company is bound or
by which any of its respective properties or assets are bound, or (iv) result in
a violation of any federal,  state, local or foreign statute,  rule, regulation,
order,  judgment  or decree  (including  federal and state  securities  laws and
regulations)  applicable to the Company or any of its  subsidiaries  or by which
any  property  or asset of the Company or any of its  subsidiaries  are bound or
affected,  except,  in all cases,  for such conflicts,  defaults,  terminations,
amendments,   accelerations,   cancellations   and   violations  as  would  not,
individually or in the aggregate, have a Material Adverse Effect. The Company is
not required under federal, state or local law, rule or regulation to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute,  deliver or perform any
of its obligations  under this Agreement,  the Registration  Rights Agreement or
the Warrant,  or issue and sell the Shares,  the Warrant  Shares or the Blackout
Shares (except to the extent that the number of Blackout  Shares  required to be
issued  exceeds  the  number of  authorized  shares of  Common  Stock  under the
Certificate)  in  accordance  with the terms hereof and thereof  (other than any
filings that may be required to be made by the Company with the Commission,  the
NASD/Nasdaq or state securities  commissions subsequent to the Closing, and, any
registration statement (including any amendment or supplement thereto) which may
be filed pursuant  hereto);  provided  that, for purposes of the  representation
made in this sentence,  the Company is assuming and relying upon the accuracy of
the relevant representations, warranties and agreements of the Investor herein.

                                       9
<PAGE>

      Section 4.06 Commission Documents,  Financial Statements. The Common Stock
is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and, except
as  disclosed  in the  Commission  Documents,  the Company has timely  filed all
reports,  schedules,  forms, statements and other documents required to be filed
by it with the Commission pursuant to the reporting requirements of the Exchange
Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange
Act (all of the foregoing,  including filings incorporated by reference therein,
being  referred  to herein  as the  "Commission  Documents").  The  Company  has
maintained all requirements for the continued listing or quotation of its Common
Stock,  and such  Common  Stock is  currently  listed or  quoted  on the  Nasdaq
SmallCap  Market.  The  Company  has made  available  to the  Investor  true and
complete  copies of the Commission  Documents  filed with the  Commission  since
December 31, 2003 and prior to the Closing Date. The Company has not provided to
the  Investor  any  information  which,  according to  applicable  law,  rule or
regulation, should have been disclosed publicly by the Company but which has not
been so disclosed,  other than with respect to the transactions  contemplated by
this  Agreement.  As of its date,  the  Company's  Form 10-K for the fiscal year
ended March 31, 2003 complied in all material  respects with the requirements of
the Exchange Act and the rules and  regulations  of the  Commission  promulgated
thereunder applicable to such document, and, as of its date, after giving effect
to the information  disclosed and incorporated by reference  therein,  such Form
10-K did not contain any untrue  statement of a material fact or omit 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.  As of their respective  dates, the financial  statements of the
Company  included in the Commission  Documents  filed with the Commission  since
December 31, 2002  complied as to form and  substance  in all material  respects
with applicable accounting  requirements and the published rules and regulations
of the  Commission  or other  applicable  rules  and  regulations  with  respect
thereto.  Such  financial  statements  have been  prepared  in  accordance  with
generally accepted accounting  principles ("GAAP") applied on a consistent basis
during the periods  involved  (except (i) as may be otherwise  indicated in such
financial  statements  or the  notes  thereto  or (ii) in the case of  unaudited
interim  statements,  to the extent  they may not  include  footnotes  or may be
condensed or summary  statements),  and fairly present in all material  respects
the  financial  position  of the Company  and its  subsidiaries  as of the dates
thereof and the results of operations  and cash flows for the periods then ended
(subject,  in the  case  of  unaudited  statements,  to  normal  year-end  audit
adjustments).

      Section  4.07 No  Material  Adverse  Change.  Except as  disclosed  in the
Commission  Documents and for continued  losses from  operations in the ordinary
course of the Company's business,  since December 31, 2003 no event or series of
events has or have occurred that would, individually or in the aggregate, have a
Material Adverse Effect on the Company.

      Section 4.08 No  Undisclosed  Liabilities.  Neither the Company nor any of
its  subsidiaries has any  liabilities,  obligations,  claims or losses (whether
liquidated or unliquidated,  secured or unsecured, absolute, accrued, contingent
or  otherwise)  that would be required to be disclosed on a balance sheet of the
Company or any subsidiary  (including the notes thereto) in conformity with GAAP
and are not disclosed in the Commission Documents,  other than those incurred in
the ordinary course of the Company's or its subsidiaries  respective  businesses
since December 31, 2003 and which,  individually or in the aggregate,  do not or
would not have a Material Adverse Effect on the Company.

      Section  4.09  No  Undisclosed  Events  or  Circumstances.   No  event  or
circumstance  has  occurred  or  exists  with  respect  to  the  Company  or its
subsidiaries or their respective businesses, properties, operations or financial
condition,  which,  under  applicable  law, rule or regulation,  requires public
disclosure  or  announcement  by the  Company but which has not been so publicly
announced or disclosed and which,  individually  or in the aggregate,  do not or
would not have a Material Adverse Effect on the Company.

                                       10
<PAGE>

      Section  4.10  Actions  Pending.   There  is  no  action,   suit,   claim,
investigation  or  proceeding  pending  or,  to the  Knowledge  of the  Company,
threatened against the Company or any subsidiary which questions the validity of
this Agreement or the transactions contemplated hereby or any action taken or to
be taken  pursuant  hereto or  thereto.  Except  as set forth in the  Commission
Documents or on Schedule 4.10, there is no action, suit, claim, investigation or
proceeding pending or, to the Knowledge of the Company,  threatened,  against or
involving the Company,  any subsidiary or any of their respective  properties or
assets that could be reasonably  expected to have a Material  Adverse  Effect on
the  Company.  Except as set forth in the  Commission  Documents  or on Schedule
4.10, no judgment, order, writ, injunction or decree or award has been issued by
or, so far as is known by the  Company,  requested of any court,  arbitrator  or
governmental agency which might result in a Material Adverse Effect.

      Section 4.11  Compliance  with Law. The  businesses of the Company and its
subsidiaries  have been and are presently being conducted in accordance with all
applicable  federal,  state and local governmental laws, rules,  regulations and
ordinances,  except as set forth in the Commission  Documents or such that would
not reasonably be expected to cause a Material  Adverse Effect.  The Company and
each of its subsidiaries have all franchises,  permits,  licenses,  consents and
other governmental or regulatory  authorizations and approvals necessary for the
conduct  of  its  business  as  now  being  conducted  by it,  except  for  such
franchises,  permits,  licenses,  consents and other  governmental or regulatory
authorizations and approvals,  the failure to possess which,  individually or in
the  aggregate,  could not  reasonably  be expected  to have a Material  Adverse
Effect.

      Section  4.12  Certain  Fees.  Except as set forth on  Schedule  4.12,  no
brokers,  finders or financial  advisory fees or commissions  will be payable by
the  Company  or  any  of  its  subsidiaries  in  respect  of  the  transactions
contemplated by this Agreement.

      Section 4.13 Disclosure.  To the best of the Company's Knowledge,  neither
this Agreement nor the Schedules hereto nor any other documents, certificates or
instruments  furnished  to the  Investor  by or on behalf of the  Company or any
subsidiary in connection  with the  transactions  contemplated by this Agreement
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements  made herein or therein,  in the light
of the  circumstances  under  which  they  were  made  herein  or  therein,  not
misleading.

      Section 4.14 Material  Non-Public  Information.  Except for this Agreement
and the  transactions  contemplated  hereby,  neither the Company nor its agents
have  disclosed to the  Investor,  any  material  non-public  information  that,
according to applicable  law,  rule or  regulation,  should have been  disclosed
publicly  by the  Company  prior to the date  hereof  but  which has not been so
disclosed.

      Section 4.15 Exemption from  Registration;  Valid Issuances.  The issuance
and sale of the Shares, the Warrant,  the Warrant Shares and any Blackout Shares
in  accordance  with  the  terms  and on the  bases of the  representations  and
warranties  set  forth  in this  Agreement,  may and  shall be  properly  issued
pursuant to Section 4(2),  Regulation D and/or any other applicable  federal and
state securities laws. Neither the sales of the Shares, the Warrant, the Warrant
Shares or any Blackout Shares pursuant to, nor the Company's  performance of its
obligations  under, this Agreement,  the Registration  Rights Agreement,  or the
Warrant shall (i) result in the creation or  imposition  of any liens,  charges,
claims or other  encumbrances upon the Shares,  the Warrant Shares, any Blackout
Shares or any of the assets of the  Company,  or (ii) entitle the holders of any
outstanding shares of capital stock of the Company to preemptive or other rights
to subscribe to or acquire the shares of Common Stock or other securities of the
Company.  The  Shares,  the Warrant  Shares and any  Blackout  Shares  shall not
subject the Investor to personal liability by reason of the ownership thereof.

                                       11
<PAGE>

      Section  4.16 No General  Solicitation  or  Advertising  in Regard to this
Transaction.  Neither the Company nor any of its affiliates or any person acting
on its or their behalf (i) has conducted any general  solicitation (as that term
is used in Rule 502(c) of Regulation D) or general  advertising  with respect to
any of the Shares,  the Warrant,  the Warrant  Shares or any Blackout  Shares or
(ii) has made any offers or sales of any security or solicited any offers to buy
any security  under any  circumstances  that would require  registration  of the
Shares under the Securities Act.

      Section 4.17 No Integrated  Offering.  Neither the Company, nor any of its
affiliates,  nor any  person  acting on its or their  behalf  has,  directly  or
indirectly,  made any offers or sales of any security or solicited any offers to
buy any  security,  other than pursuant to this  Agreement and employee  benefit
plans, under circumstances that would require  registration under the Securities
Act of shares of the Common Stock  issuable  hereunder  with any other offers or
sales of securities of the Company.

      Section 4.18 Acknowledgment  Regarding  Investor's Purchase of Shares. The
Company  acknowledges  and  agrees  that the  Investor  is acting  solely in the
capacity of an arm's  length  Investor  with respect to this  Agreement  and the
transactions  contemplated hereunder.  The Company further acknowledges that the
Investor is not acting as a financial advisor or fiduciary of the Company (or in
any  similar  capacity)  with  respect to this  Agreement  and the  transactions
contemplated  hereunder  and any  advice  given  by the  Investor  or any of its
representatives or agents in connection with this Agreement and the transactions
contemplated  hereunder is merely  incidental to the Investor's  purchase of the
Shares.

                                   ARTICLE V
            REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR

      The Investor  hereby makes the following  representations,  warranties and
covenants to the Company:

      Section 5.01 Organization and Standing of the Investor.  The Investor is a
company duly organized,  validly existing and in good standing under the laws of
the British Virgin Islands.

      Section 5.02 Authorization and Power. The Investor has the requisite power
and authority to enter into and perform its  obligations  under this  Agreement,
the Registration  Rights Agreement and the Warrant and to purchase the Shares in
accordance  with the terms hereof.  The execution,  delivery and  performance of
this  Agreement  by  Investor  and the  consummation  by it of the  transactions
contemplated hereby have been duly authorized by all necessary corporate action,
and no further consent or authorization of the Investor,  its Board of Directors
or stockholders is required. This Agreement has been duly executed and delivered
by the Investor and  constitutes a valid and binding  obligation of the Investor
enforceable  against the Investor in accordance  with its terms,  except as such
enforceability   may  be   limited   by   applicable   bankruptcy,   insolvency,
reorganization,  moratorium,  liquidation,  conservatorship,   receivership,  or
similar laws relating to, or affecting  generally the  enforcement of creditor's
rights and remedies or by other equitable principles of general application.

                                       12
<PAGE>

      Section 5.03 No Conflicts. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement, the Warrant and any other document
or instrument  contemplated  hereby, by the Investor and the consummation of the
transactions  contemplated  thereby  do not (i)  violate  any  provision  of the
Investor's  charter  documents or bylaws,  (ii)  conflict  with, or constitute a
default (or an event  which with notice or lapse of time or both would  become a
default)  under,  or  give to  others  any  rights  of  termination,  amendment,
acceleration  or  cancellation  of, any material  agreement,  mortgage,  deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the  Investor  is a party,  (iii)  create  or impose a lien,  charge or
encumbrance  on  any  property  of  the  Investor  under  any  agreement  or any
commitment to which the Investor is a party or by which the Investor is bound or
by which any of its respective  properties or assets are bound or (iv) result in
a violation of any federal,  state, local or foreign statute,  rule, regulation,
order,  judgment  or decree  (including  federal and state  securities  laws and
regulations) applicable to the Investor or by which any property or asset of the
Investor  are  bound or  affected,  except  in all  cases,  for such  conflicts,
defaults, terminations, amendments, accelerations,  cancellations and violations
as would not, individually or in the aggregate,  prohibit or otherwise interfere
with the ability of the Investor to enter into and perform its obligations under
this  Agreement in any  material  respect.  The  Investor is not required  under
federal,  state  or  local  law,  rule or  regulation  to  obtain  any  consent,
authorization or order of, or make any filing or registration with, any court or
governmental  agency in order for it to  execute,  deliver or perform any of its
obligations  under this  Agreement or to purchase the Shares in accordance  with
the terms hereof, provided that, for purposes of the representation made in this
sentence, the Investor is assuming and relying upon the accuracy of the relevant
representations and agreements of the Company herein.

      Section  5.04   Financial   Capability  The  Investor  has  the  financial
capability to perform all of its obligations under this Agreement, including the
capability to purchase the Shares in accordance with the terms hereof.

      Section 5.05 Information. The Investor and its advisors, if any, have been
furnished with all materials  relating to the business,  finances and operations
of the Company and materials  relating to the offer and sale of the Shares which
have been requested by the Investor. The Investor and its advisors, if any, have
been afforded the opportunity to ask questions of the Company.  The Investor has
sought such accounting,  legal and tax advice as it has considered  necessary to
make an informed  investment  decision  with respect to its  acquisition  of the
Shares.  The  Investor  understands  that it  (and  not the  Company)  shall  be
responsible  for its own tax  liabilities  that may  arise  as a result  of this
investment or the transactions contemplated by this Agreement.

      Section 5.06 Selling Restrictions.  The Investor covenants that during the
Commitment Period, neither the Investor nor any of its affiliates nor any entity
managed by the  Investor  will ever (i) be in a short  position  with respect to
shares of the Common Stock in any accounts directly or indirectly managed by the
Investor or any affiliate of the Investor or any entity  managed by the Investor
or (ii)  engage in any  transaction  intended  to reduce  the  economic  risk of
ownership of shares of Common Stock (including, without limitation, the purchase
of any option or contract to sell) that would,  directly or indirectly,  have an
effect  substantially  equivalent  to selling  short such shares of Common Stock
that are subject to,  underlie or may be  deliverable  in  satisfaction  of such
transaction  or otherwise may be reasonably be expected to adversely  affect the
market price of the Common Stock.  Notwithstanding  the foregoing,  the Investor
shall have the right during any Draw Down  Pricing  Period to sell shares of the
Company's  Common Stock equal in number to the aggregate number of the Shares to
be purchased pursuant to the applicable Draw Down Notice.

                                       13
<PAGE>

                                   ARTICLE VI

                            COVENANTS OF THE COMPANY

      The Company  covenants with the Investor as follows,  which  covenants are
for the benefit of the Investor and its permitted assignees (as defined herein):

      Section 6.01  Securities.  The Company shall notify the Commission and the
Principal  Market,  if and as  applicable,  in  accordance  with their rules and
regulations,  of the transactions  contemplated by this Agreement, and shall use
commercially   reasonable  efforts  to  take  all  other  necessary  action  and
proceedings  as may be  required  and  permitted  by  applicable  law,  rule and
regulation,  for the legal and valid issuance of the Shares,  the Warrant Shares
and the Blackout Shares, if any, to the Investor.

      Section 6.02  Reservation  of Common  Stock.  As of the date  hereof,  the
Company has available  and the Company  shall reserve and keep  available at all
times,  free of  preemptive  rights  and  other  similar  contractual  rights of
stockholders,  shares of Common Stock for the purpose of enabling the Company to
satisfy any  obligation  to issue the Shares in  connection  with all Draw Downs
contemplated  hereunder and the Warrant Shares. The number of shares so reserved
from time to time, as theretofore  increased or reduced as hereinafter provided,
may be reduced by the number of shares actually delivered hereunder.

      Section 6.03 Registration and Listing.  During the Commitment  Period, the
Company  shall  use  commercially  reasonable  efforts:  (i) to take all  action
necessary to cause its Common Stock to continue to be  registered  under Section
12(b) or 12(g) of the  Exchange  Act,  (ii) to comply in all  respects  with its
reporting and filing  obligations  under the Exchange Act,  (iii) to prevent the
termination or suspension such registration, or the termination or suspension of
its reporting and filing  obligations  under the Exchange Act or Securities  Act
(except as  expressly  permitted  herein).  The Company  shall use  commercially
reasonable  efforts  necessary to maintain the listing and trading of its Common
Stock and the  listing of the Shares  purchased  by  Investor  hereunder  on the
Principal Market  (including,  without  limitation,  maintaining  sufficient net
tangible  assets) and will comply in all material  respects  with the  Company's
reporting,  filing and other  obligations  under the bylaws or rules of the NASD
and the Principal Market.

      Section 6.04 Registration Statement.  Without the prior written consent of
the Investor, the Registration Statement shall be used solely in connection with
the transactions between the Company and the Investor contemplated hereby.

      Section 6.05 Compliance with Laws.

            (a) The Company shall comply,  and cause each  subsidiary to comply,
with all applicable  laws,  rules,  regulations and orders,  noncompliance  with
which could reasonably be expected to have a Material Adverse Effect.

            (b) Without the consent of its  stockholders in accordance with NASD
rules,  the Company will not be obligated to issue, and the Investor will not be
obligated to purchase,  any Shares which would result in the issuance under this
Agreement of Shares  representing more than the applicable  percentage under the
rules of the NASD  that  would  require  stockholder  approval  of the  issuance
thereof.

                                       14
<PAGE>

      Section 6.06 Reporting  Requirements.  Upon reasonable  written request of
the Investor during the Commitment  Period,  the Company shall furnish copies of
the following to the Investor within three Trading Days of such request (but not
sooner than filed with or submitted to the Commission):

            (a) Quarterly Reports on Form 10-Q;

            (b) Annual Reports on Form 10-K;

            (c) Periodic Reports on Form 8-K; and

            (d) any other  documents  publicly  furnished  or  submitted  to the
Commission.

      Section  6.07  Other  Financing.  During the term of this  Agreement,  the
Company  shall not enter into any other  financing  agreement  for the issuance,
sale or other  disposition  of equity or  equity-linked  securities,  including,
without  limitation,  any securities or other  instruments  that are convertible
into or  exchangeable  for Common Stock or Preferred  Stock ("Other  Financing")
without the prior  written  consent of the  Investor,  which consent will not be
unreasonably withheld,  conditioned or delayed; provided,  however, that without
the prior written  consent of the Investor the Company may (i)  establish  stock
option or award  plans or  agreements  (for  directors,  employees,  consultants
and/or  advisors) and amend such plans or agreements,  including  increasing the
number of shares available thereunder, (ii) use equity securities to finance the
acquisition of other  companies,  equipment,  technologies or lines of business,
(iii) issue shares of Common Stock and/or Preferred Stock in connection with the
Company's option or award plans, stock purchase plans, rights plans, warrants or
options,  (iv) issue shares of Common Stock and/or Preferred Stock in connection
with the  acquisition  of  products,  licenses,  equipment  or other  assets and
strategic partnerships or joint ventures (the primary purpose of which is not to
raise equity  capital);  (v) issue shares of Common  and/or  Preferred  Stock to
consultants and/or advisors as consideration for services  rendered,  (vi) issue
and sell shares in an underwritten  public  offering of Common Stock,  and (vii)
issue shares of Common Stock to the Investor under any other  agreement  entered
into between the Investor and the Company (each a "Permitted Transaction").

      Section 6.08 Prohibited  Transactions.  During the term of this Agreement,
the Company shall not enter into any  Prohibited  Transaction  without the prior
written  consent of the  Investor,  which  consent  may be  withheld at the sole
discretion  of the  Investor.  For the  purposes  of this  Agreement,  the  term
"Prohibited  Transaction"  shall  refer to the  issuance  by the  Company of any
"future priced securities," which shall be deemed to mean the issuance of shares
of Common Stock or  securities of any type  whatsoever  that are, or may become,
convertible  or  exchangeable  into shares of Common  Stock where the  purchase,
conversion  or exchange  price for such  Common  Stock is  determined  using any
floating or otherwise  adjustable  discount to the market price of Common Stock,
including,  without  limitation,  pursuant to any equity line or other financing
that  is  substantially  similar  to  the  financing  provided  for  under  this
Agreement.

      Section  6.09  Corporate  Existence.  The  Company  shall  take all  steps
necessary to preserve and continue the corporate existence of the Company.

                                       15
<PAGE>

      Section  6.10  Non-Disclosure  of  Non-Public  Information.  None  of  the
Company, its officers,  directors,  employees nor agents shall disclose material
non-public information to the Investor, its advisors or representatives.

      Section 6.11 Notice of Certain Events Affecting  Registration;  Suspension
of Right to Request a Draw Down. Notwithstanding the provisions of Section 6.10,
the Company shall immediately  notify the Investor upon the occurrence of any of
the following events in respect of the Registration  Statement or the Prospectus
related to the offer,  issuance  and sale of the Shares and the  Warrant  Shares
hereunder:  (i)  receipt  of  any  request  for  additional  information  by the
Commission  or any other  federal  or state  governmental  authority  during the
period  of  effectiveness  of  the  Registration  Statement  for  amendments  or
supplements to the Registration  Statement or the Prospectus;  (ii) the issuance
by the  Commission or any other federal or state  governmental  authority of any
stop order suspending the  effectiveness  of the  Registration  Statement or the
initiation  of any  proceedings  for that  purpose;  and  (iii)  receipt  of any
notification  with respect to the suspension of the  qualification  or exemption
from  qualification  of  any of  the  Registrable  Securities  for  sale  in any
jurisdiction  or the  initiation  or  threatening  of any  proceeding  for  such
purpose.  The Company shall not request a Draw Down during the  continuation  of
any of the foregoing events.

      Section  6.12  Amendments  to  the   Registration   Statement.   When  the
Registration  Statement  is declared  effective by the  Commission,  the Company
shall  not (i) file any  amendment  to the  Registration  Statement  or make any
amendment  or  supplement  to the  Prospectus  of which the  Investor  shall not
previously  have been advised or to which the Investor shall  reasonably  object
after being so advised or (ii) so long as, in the reasonable  opinion of counsel
for the Investor,  a Prospectus  is required to be delivered in connection  with
sales of the Shares by the Investor, file any information,  documents or reports
pursuant to the  Exchange  Act without  delivering  a copy of such  information,
documents or reports to the Investor promptly following such filing.

      Section 6.13 Prospectus Delivery.  From time to time for such period as in
the  opinion of  counsel  for the  Investor  a  prospectus  is  required  by the
Securities  Act to be delivered in connection  with sales by the  Investor,  the
Company will  expeditiously  deliver to the Investor,  without  charge,  as many
copies of the  Prospectus  (and of any amendment or  supplement  thereto) as the
Investor  may  reasonably  request.  The  Company  consents  to  the  use of the
Prospectus  (and of any amendment or supplement  thereto) in accordance with the
provisions of the Securities Act and state  securities  laws in connection  with
the offering  and sale of the Shares and the Warrant  Shares and for such period
of time  thereafter as the  Prospectus is required by the  Securities  Act to be
delivered in connection with sales of the Shares and the Warrant Shares.

      Section 6.14 Expectations  Regarding Draw Downs.  Within ten (10) calendar
days after the commencement of each calendar quarter occurring subsequent to the
date  hereof,  the  Company  shall  notify  the  Investor  as to its  reasonable
expectations  as to the dollar  amount it intends to raise during such  calendar
quarter,  if any, through the issuance of Draw Down Notices.  Such  notification
shall  constitute  only the Company's  good faith  estimate with respect to such
calendar  quarter and shall in no way  obligate the Company to raise such amount
during such calendar quarter or otherwise limit its ability to deliver Draw Down
Notices during such calendar quarter.  The failure by the Company to comply with
this provision can be cured by the Company's  notifying the Investor at any time
as to its reasonable expectations with respect to the current calendar quarter.

                                       16
<PAGE>

                                  ARTICLE VII

       CONDITIONS TO THE OBLIGATION OF THE INVESTOR TO ACCEPT A DRAW DOWN

The  obligation  of the  Investor  hereunder to accept a Draw Down Notice and to
acquire  and pay for the  Shares  in  accordance  therewith  is  subject  to the
satisfaction  or waiver,  at each  Condition  Satisfaction  Date, of each of the
conditions set forth below.  The conditions are for the Investor's  sole benefit
and may be waived by the Investor at any time in its sole discretion. As used in
this Agreement,  the term "Condition Satisfaction Date" shall mean, with respect
to each  Draw  Down,  the date on which  the  applicable  Draw  Down  Notice  is
delivered to the Investor and each  Settlement Date in respect of the applicable
Draw Down Pricing Period.

      Section 7.01 Accuracy of the  Company's  Representations  and  Warranties.
Each of the  representations  and  warranties  of the Company  shall be true and
correct in all material respects as of the date when made as though made at that
time, except for  representations and warranties that are expressly made as of a
particular date.

      Section 7.02 Performance by the Company. The Company shall have performed,
satisfied and complied in all material  respects with all covenants,  agreements
and conditions required by this Agreement, the Registration Rights Agreement and
the Warrant to be performed, satisfied or complied with by the Company.

      Section 7.03  Compliance  with Law. The Company shall have complied in all
material  respects with all  applicable  federal,  state and local  governmental
laws,  rules,  regulations  and  ordinances  in connection  with the  execution,
delivery  and  performance  of  this  Agreement  and  the  consummation  of  the
transactions contemplated hereby.

      Section 7.04 Effective Registration Statement.  Upon the terms and subject
to the  conditions  as set  forth  in the  Registration  Rights  Agreement,  the
Registration  Statement shall have previously  become effective and shall remain
effective  and (i)  neither the Company  nor the  Investor  shall have  received
notice  that the  Commission  has  issued or  intends to issue a stop order with
respect to the  Registration  Statement  or that the  Commission  otherwise  has
suspended or withdrawn the effectiveness of the Registration  Statement,  either
temporarily  or  permanently,  or intends or has threatened to do so (unless the
Commission's  concerns  have  been  addressed  and the  Investor  is  reasonably
satisfied  that the  Commission no longer is considering or intends to take such
action),  and  (ii)  no  other  suspension  of  the  use  or  withdrawal  of the
effectiveness of the Registration Statement or the Prospectus shall exist.

      Section  7.05 No  Knowledge.  The Company  shall have no  Knowledge of any
event  more  likely  than not to have the  effect of  causing  the  Registration
Statement  with  respect  to the  resale of the  Registrable  Securities  by the
Investor to be suspended or  otherwise  ineffective  (which event is more likely
than not to occur within fifteen Trading Days following the Trading Day on which
a Draw Down Notice is delivered).

      Section 7.06 No  Suspension.  Trading in the Company's  Common Stock shall
not have been suspended by the Commission,  the Principal Market or the NASD and
trading in securities  generally as reported on the  Principal  Market shall not
have been suspended or limited.

      Section 7.07 No Injunction. No statute, rule, regulation, executive order,
decree,  ruling or injunction shall have been enacted,  entered,  promulgated or
endorsed by any court or governmental  authority of competent jurisdiction which
prohibits  the  consummation  of any of the  transactions  contemplated  by this
Agreement.

                                       17
<PAGE>

      Section 7.08 No Proceedings or Litigation.  No action,  suit or proceeding
before any arbitrator or any  governmental  authority shall have been commenced,
and no investigation  by any governmental  authority shall have been threatened,
against the Company or any  subsidiary,  or any of the  officers,  directors  or
affiliates of the Company or any subsidiary seeking to enjoin, prevent or change
the transactions contemplated by this Agreement.

      Section 7.09 Section 16 Limitation. On each Settlement Date, the number of
Shares then to be purchased by the Investor  shall not exceed the number of such
shares that, when aggregated with all other Registrable Securities then owned by
the Investor  beneficially or deemed  beneficially owned by the Investor,  would
result in the  Investor  owning  more than 9.9% of all of such  Common  Stock as
would be outstanding on such  Settlement  Date, as determined in accordance with
Section 16 of the Exchange  Act. For purposes of this Section 7.09, in the event
that the amount of Common Stock  outstanding  as determined  in accordance  with
Section 16 of the Exchange Act and the  regulations  promulgated  thereunder  is
greater on a  Settlement  Date than on the date upon which the Draw Down  Notice
associated  with such  Settlement  Date is  given,  the  amount of Common  Stock
outstanding  on such  Settlement  Date shall govern for purposes of  determining
whether the  Investor,  when  aggregating  all  purchases  of Common  Stock made
pursuant to this  Agreement  and, if any,  Warrant  Shares and Blackout  Shares,
would own more than 9.9% of the Common Stock following such Settlement Date.

      Section 7.10 Sufficient  Shares  Registered for Resale.  The Company shall
have sufficient  Shares,  calculated using the closing trade price of the Common
Stock as of the  Trading  Day  immediately  preceding  such  Draw  Down  Notice,
registered  under the  Registration  Statement  to issue and sell such Shares in
accordance with such Draw Down Notice.

      Section 7.11 Warrant. The Warrant shall have been duly executed, delivered
and  issued to the  Investor,  and the  Company  shall not be in  default in any
material respect under any of the provisions  thereof (it being acknowledged and
agreed  that any refusal by or failure of the  Company to issue  Warrant  Shares
when and as  requested  by the  Investor  in  accordance  with the  terms of the
Warrant shall be deemed to be a material default).

      Section  7.12  Opinion of Counsel.  The  Investor  shall have  received an
opinion of counsel to the Company,  dated as of the Effective  Date, in the form
of  Exhibit D hereof,  or in such  other  form  reasonably  satisfactory  to the
Investor and its counsel.

                                  ARTICLE VIII

              CONDITIONS TO THE OBLIGATIONS OF THE COMPANY TO SELL,
                  ISSUE AND DELIVER THE SHARES TO THE INVESTOR

The obligation of the Company hereunder to sell, issue and deliver Shares to the
Investor in accordance  with the terms of any Draw Down notice is subject to the
satisfaction or waiver,  at each Settlement  Date, of each of the conditions set
forth below. The conditions are for the Company's sole benefit and may be waived
by the Company at any time in its sole discretion.

      Section 8.01 Accuracy of the Investor's  Representations  and  Warranties.
Each of the  representations  and  warranties of the Investor  shall be true and
correct in all material respects as of the date when made as though made at that
time, except for  representations and warranties that are expressly made as of a
particular date.

                                       18
<PAGE>

      Section  8.02  Performance  by  the  Investor.  The  Investor  shall  have
performed,  satisfied and complied in all material  respects with all covenants,
agreements and conditions  required by this Agreement,  the Registration  Rights
Agreement  and the Warrant to be  performed,  satisfied or complied  with by the
Investor.

      Section 8.03  Compliance with Law. The Investor shall have complied in all
material  respects with all  applicable  federal,  state and local  governmental
laws,  rules,   regulations  and  ordinances,   including  all  NASD  rules  and
regulations, in connection with the execution,  delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby.

      Section 8.04 Effective Registration Statement. Neither the Company nor the
Investor shall have received notice that the Commission has issued or intends to
issue a stop  order  with  respect  to the  Registration  Statement  or that the
Commission  otherwise  has  suspended  or  withdrawn  the  effectiveness  of the
Registration  Statement,  either  temporarily or permanently,  or intends or has
threatened to do so (unless the  Commission's  concerns have been  addressed and
the Company is reasonably satisfied that the Commission no longer is considering
or  intends  to  take  such  action),  and no  other  suspension  of the  use or
withdrawal of the effectiveness of the Registration  Statement or the Prospectus
shall exist.

      Section 8.05 No  Knowledge.  The  Investor  shall have no Knowledge of any
event  more  likely  than not to have the  effect of  causing  the  Registration
Statement  with  respect  to the  resale of the  Registrable  Securities  by the
Investor to be suspended or  otherwise  ineffective  (which event is more likely
than not to occur within fifteen Trading Days following the Trading Day on which
a Draw Down Notice is delivered).

      Section 8.06 No  Suspension.  Trading in the Company's  Common Stock shall
not have been suspended by the Commission,  the Principal Market or the NASD and
trading in securities  generally as reported on the  Principal  Market shall not
have been suspended or limited.

      Section 8.07 No Injunction. No statute, rule, regulation, executive order,
decree,  ruling or injunction shall have been enacted,  entered,  promulgated or
endorsed by any court or governmental  authority of competent jurisdiction which
prohibits  the  consummation  of any of the  transactions  contemplated  by this
Agreement.

      Section 8.08 No Proceedings or Litigation.  No action,  suit or proceeding
before any arbitrator or any  governmental  authority shall have been commenced,
and no investigation  by any governmental  authority shall have been threatened,
against the  Investor,  the Company or any  subsidiary,  or any of the officers,
directors or affiliates of the Investor or the Company or any subsidiary seeking
to enjoin, prevent or change the transactions contemplated by this Agreement.

                                       19
<PAGE>

                                   ARTICLE IX

                                     LEGENDS

      Section 9.01 Legends.  Unless otherwise  provided below,  each certificate
representing   Registrable  Securities  will  bear  the  following  legend  (the
"Legend"):

         THE SECURITIES  EVIDENCED BY THIS  CERTIFICATE HAVE NOT BEEN REGISTERED
         UNDER THE U.S.  SECURITIES  ACT OF 1933,  AS AMENDED  (THE  "SECURITIES
         ACT"), OR ANY OTHER APPLICABLE  SECURITIES LAWS AND HAVE BEEN ISSUED IN
         RELIANCE UPON AN EXEMPTION FROM THE  REGISTRATION  REQUIREMENTS  OF THE
         SECURITIES ACT AND SUCH OTHER  SECURITIES  LAWS.  NEITHER THIS SECURITY
         NOR ANY  INTEREST  OR  PARTICIPATION  HEREIN  MAY BE  REOFFERED,  SOLD,
         ASSIGNED, TRANSFERRED,  PLEDGED, ENCUMBERED,  HYPOTHECATED OR OTHERWISE
         DISPOSED OF,  EXCEPT  PURSUANT TO AN EFFECTIVE  REGISTRATION  STATEMENT
         UNDER THE  SECURITIES  ACT OR PURSUANT TO A TRANSACTION  THAT IS EXEMPT
         FROM,  OR NOT  SUBJECT  TO,  SUCH  REGISTRATION.  THE  HOLDER  OF  THIS
         CERTIFICATE IS THE  BENEFICIARY  OF CERTAIN  OBLIGATIONS OF THE COMPANY
         SET  FORTH  IN  A  COMMON  STOCK  PURCHASE   AGREEMENT   BETWEEN  TEGAL
         CORPORATION  AND  KINGSBRIDGE  CAPITAL LIMITED DATED AS OF FEBRUARY 11,
         2004. A COPY OF THE PORTION OF THE AFORESAID AGREEMENT  EVIDENCING SUCH
         OBLIGATIONS MAY BE OBTAINED FROM THE COMPANY'S EXECUTIVE OFFICES.

As soon as practicable after the execution and delivery hereof, but in any event
within ten (10) Trading Days hereafter,  the Company shall issue to the transfer
agent for its Common Stock (and to any substitute or replacement  transfer agent
for its Common Stock upon the Company's  appointment  of any such  substitute or
replacement  transfer  agent)  instructions,  with a copy to the Investor.  Such
instructions  shall be irrevocable by the Company from and after the date hereof
or from and after the issuance  thereof to any such  substitute  or  replacement
transfer  agent, as the case may be, except as otherwise  expressly  provided in
the  Registration  Rights  Agreement.  It is the  intent  and  purpose  of  such
instructions,  as provided therein, to require the transfer agent for the Common
Stock from time to time upon transfer of Registrable  Securities by the Investor
to issue  certificates  or make DTC entries (as the case may be) evidencing such
Registrable Securities free of the Legend during the following periods and under
the following  circumstances and without consultation by the transfer agent with
the  Company or its  counsel  and  without  the need for any  further  advice or
instruction or documentation to the transfer agent by or from the Company or its
counsel or the Investor,  unless an opinion of Investor's  counsel is reasonably
required by the transfer agent or the Company:

            (a) At any time after the Effective  Date to the extent  accompanied
by a notice requesting the issuance of certificates free of the Legend; provided
that (i) the Company is  reasonably  able to confirm to the transfer  agent that
the  Registration  Statement  shall  then be  effective  and (ii) if  reasonably
requested by the transfer agent the Investor confirms to the transfer agent that
the Investor has complied with the  prospectus  delivery  requirement  under the
Securities Act.

                                       20
<PAGE>

            (b) At any  time  upon  any  surrender  of one or more  certificates
evidencing   Registrable   Securities  that  bear  the  Legend,  to  the  extent
accompanied by a notice  requesting the issuance of new certificates free of the
Legend to replace those surrendered and containing  representations that (i) the
Investor  is  permitted  to  dispose  of  such  Registrable  Securities  without
limitation  as to amount or manner of sale  pursuant  to Rule  144(k)  under the
Securities  Act and  there is no  requirement  for the  Investor  to  deliver  a
prospectus or (ii) the Investor has sold,  pledged or otherwise  transferred  or
agreed to sell,  pledge or otherwise  transfer such Registrable  Securities in a
manner  other  than  pursuant  to  an  effective  registration  statement,  to a
transferee  who shall  upon  such  transfer  be  entitled  to  freely  tradeable
securities.

      Section 9.02 No Other  Legend or Stock  Transfer  Restrictions.  No legend
other than the one  specified in Section 9.01 has been or shall be placed on the
share  certificates  representing the Common Stock issued to the Investor and no
instructions or "stop transfer orders," so called "stock transfer restrictions,"
or other  restrictions  have  been or shall be given to the  Company's  transfer
agent with respect thereto other than as expressly set forth in this Article IX.

                                   ARTICLE X
                                   TERMINATION

      Section 10.01 Term. Unless otherwise terminated in accordance with Section
10.02  below,  this  Agreement  shall  terminate  upon  the  expiration  of  the
Commitment Period.

      Section 10.02 Other Termination.

            (a) The Investor may terminate this Agreement upon (x) one (1) day's
notice if the Company  enters into any Other  Financing  as set forth in Section
6.07 or any  Prohibited  Transaction  as set forth in Section  6.08  without the
Investor's  prior written  consent,  or (y) one (1) day's notice within ten (10)
Trading Days after the Investor obtains actual knowledge that an event resulting
in a Material Adverse Effect has occurred;  provided, however, that the Investor
shall be deemed to possess  such actual  knowledge  within five (5) Trading Days
after such event has been publicly  disclosed by the Company in accordance  with
its periodic reporting requirements under the Exchange Act.

            (b) The Investor may  terminate  this  Agreement  upon one (1) day's
notice to the Company at any time in the event that the  Registration  Statement
is not declared effective in accordance with the Registration Rights Agreement.

            (c) The  Company may  terminate  this  Agreement  upon one (1) day's
notice;  provided,  however, that the Company shall not terminate this Agreement
pursuant to this Section 10.02(c) during any Draw Down Pricing Period;  provided
further;  that, in the event of any termination of this Agreement by the Company
hereunder,  so long as the  Investor  owns  Shares  purchased  hereunder  and/or
Warrant  Shares,  unless all of such shares of Common Stock may be resold by the
Investor without registration and without any time, volume or manner limitations
pursuant  to Rule  144(k) (or any similar  provision  then in effect)  under the
Securities  Act,  the Company  shall not suspend or  withdraw  the  Registration
Statement or otherwise cause the Registration  Statement to become  ineffective,
or delist the Common Stock from the Principal Market.

            (d) Each of the parties hereto may terminate this Agreement upon one
(1) day's  notice if the other  party has  breached a  material  representation,
warranty or covenant to this  Agreement  and such breach is not remedied  within
ten (10) Trading Days after notice of such breach is delivered to the  breaching
party.

                                       21
<PAGE>

            (e) The  obligation  of the  Investor to  purchase  shares of Common
Stock shall  terminate  permanently in the event that there shall occur any stop
order or  suspension  of  effectiveness  of the  Registration  Statement  for an
aggregate of thirty (30) calendar days during the Commitment Period.

      Section 10.03 Effect of Termination.

            (a) In the event of  termination  by the  Company  or the  Investor,
written  notice  thereof  shall  forthwith  be given to the other  party and the
transactions  contemplated by this Agreement shall be terminated without further
action by either party.  If this  Agreement is terminated as provided in Section
10.01 or 10.02 herein,  this Agreement shall become void and of no further force
and effect,  except as provided in Section 12.13.  Nothing in this Section 10.03
shall be deemed to release the Company or the Investor  from any  liability  for
any breach under this Agreement,  or to impair the rights of the Company and the
Investor to compel  specific  performance by the other party of its  obligations
under this Agreement.

            (b) In the event  that the  Company  fails to issue and sell  Common
Stock to the Investor for an amount (in  aggregate  Draw Down  Amounts) at least
equal to $3,000,000  under this Agreement during the Commitment  Period,  on the
first Trading Day following the expiration of the Commitment Period, the Company
shall pay to Investor  by wire  transfer of  immediately  available  funds to an
account  designated  by the Investor an amount  equal to  $300,000.  The parties
hereto  acknowledge  and agree that the sum payable  under this Section  9.03(b)
shall  represent  liquidated  damages  and not a penalty.  The  parties  further
acknowledge  that such amount (i) bears a reasonable  relation to the commitment
fee  that the  Investor  would  have,  in  light  of its  reasonable  investment
expectations,  otherwise charged the Company in consideration for the Investor's
commitment to purchase Common Stock hereunder and (ii) is not plainly or grossly
disproportionate  to the probable  loss likely to be incurred by the Investor in
connection with the failure by the Company to issue and sell Common Stock to the
Investor  for an amount  (in  aggregate  Draw Down  Amounts)  at least  equal to
$3,000,000 under this Agreement during the Commitment Period.

                                   ARTICLE XI

                                 INDEMNIFICATION

      Section 11.01 Indemnification.

            (a) Except as otherwise provided in this Article XI, unless disputed
as set forth in Section 11.02, the Company agrees to indemnify,  defend and hold
harmless  the  Investor  and  its  affiliates  and  their  respective  officers,
directors,  agents, employees,  subsidiaries,  partners, members and controlling
persons (each, an "Investor Indemnified Party"), to the fullest extent permitted
by law from and against any and all Damages directly  resulting from or directly
arising  out of any  breach  of any  representation  or  warranty,  covenant  or
agreement by the Company in this Agreement, the Registration Rights Agreement or
the Warrant; provided,  however, that the Company shall not be liable under this
Article XI to an  Investor  Indemnified  Party to the extent  that such  Damages
resulted  or arose  from the  breach  by an  Investor  Indemnified  Party of any
representation  or warranty of an Investor  Indemnified  Party contained in this

                                       22
<PAGE>

Agreement or the gross negligence, recklessness, willful misconduct or bad faith
of an Investor Indemnified Party. The parties intend that any Damages subject to
indemnification  pursuant to this Article XI will be net of insurance  proceeds.
Accordingly,  the amount  which the Company is  required to pay to any  Investor
Indemnified Party hereunder (a "Company  Indemnity  Payment") will be reduced by
any  insurance  proceeds  actually  recovered  by or on behalf  of any  Investor
Indemnified  Party in  reduction  of the related  Damages.  In  addition,  if an
Investor Indemnified Party receives a Company Indemnity Payment required by this
Article  XI in  respect  of any  Damages  and  subsequently  receives  any  such
insurance proceeds,  then the Investor Indemnified Party will pay to the Company
an amount equal to the Company Indemnity Payment received less the amount of the
Company Indemnity Payment that would have been due if the insurance proceeds had
been received,  realized or recovered before the Company  Indemnity  Payment was
made.

            (b) Except as otherwise provided in this Article XI, unless disputed
as set forth in Section 11.02, the Investor agrees to indemnify, defend and hold
harmless  the  Company  and  its  affiliates  and  their  respective   officers,
directors,  agents, employees,  subsidiaries,  partners, members and controlling
persons (each, a "Company  Indemnified  Party"), to the fullest extent permitted
by law from and against any and all Damages directly  resulting from or directly
arising  out of any  breach  of any  representation  or  warranty,  covenant  or
agreement  by the  Investor  in this  Agreement;  provided,  however,  that  the
Investor  shall not be liable  under this  Article  XI to a Company  Indemnified
Party to the extent  that such  Damages  resulted  or arose from the breach by a
Company  Indemnified  Party  of any  representation  or  warranty  of a  Company
Indemnified Party contained in this Agreement or gross negligence, recklessness,
willful  misconduct  or bad faith of a Company  Indemnified  Party.  The parties
intend that any Damages subject to  indemnification  pursuant to this Article XI
will be net of insurance proceeds. Accordingly, the amount which the Investor is
required  to  pay  to any  Company  Indemnified  Party  hereunder  (a  "Investor
Indemnity  Payment")  will be  reduced  by any  insurance  proceeds  theretofore
actually recovered by or on behalf of any Company Indemnified Party in reduction
of the related Damages.  In addition,  if a Company Indemnified Party receives a
Investor Indemnity Payment required by this Article XI in respect of any Damages
and subsequently receives insurance such proceeds,  then the Company Indemnified
Party will pay to the Investor an amount equal to the Investor Indemnity Payment
received less the amount of the Investor  Indemnity Payment that would have been
due if the insurance  proceeds had been received,  realized or recovered  before
the Investor Indemnity Payment was made.

      Section  11.02  Notification  of Claims  for  Indemnification.  Each party
entitled  to  indemnification  under this  Article XI (an  "Indemnified  Party")
shall,  promptly  after the receipt of notice of the  commencement  of any claim
against such Indemnified  Party in respect of which indemnity may be sought from
the party  obligated to indemnify such  Indemnified  Party under this Article XI
(the  "Indemnifying  Party"),  notify the  Indemnifying  Party in writing of the
commencement  thereof.  Any such notice shall  describe the claim in  reasonable
detail. The failure of any Indemnified Party to so notify the Indemnifying Party
of any such action shall not relieve the  Indemnifying  Party from any liability
which it may have to such  Indemnified  Party (a) other  than  pursuant  to this
Article XI or (b) under this  Article  XI unless,  and only to the extent  that,
such failure  results in the  Indemnifying  Party's  forfeiture  of  substantive
rights or defenses or the  Indemnifying  Party is prejudiced by such delay.  The
procedures  listed  below  shall  govern  the  procedures  for the  handling  of
indemnification claims.

            (a) Any claim for  indemnification  for  Damages  that do not result
from a Third  Party  Claim  as  defined  in the  following  paragraph,  shall be
asserted by written notice given by the  Indemnified  Party to the  Indemnifying
Party. Such Indemnifying Party shall have a period of thirty (30) days after the
receipt of such notice  within which to respond  thereto.  If such  Indemnifying
Party does not respond  within such  thirty (30) day period,  such  Indemnifying
Party shall be deemed to have refused to accept  responsibility  to make payment
as set forth in Section  10.01.  If such  Indemnifying  Party  does not  respond
within such  thirty  (30) day period or rejects  such claim in whole or in part,
the Indemnified Party shall be free to pursue such remedies as specified in this
Agreement,  including  the dispute  resolution  provisions  set forth in Section
11.03 below.

                                       23
<PAGE>

            (b) If an Indemnified  Party shall receive notice or otherwise learn
of the  assertion  by a person or entity  not a party to this  Agreement  of any
threatened  legal action or claim  (collectively  a "Third Party  Claim"),  with
respect  to  which  an   Indemnifying   Party  may  be   obligated   to  provide
indemnification,  the  Indemnified  Party  shall  give such  Indemnifying  Party
written  notice  thereof  within twenty (20) days after  becoming  aware of such
Third Party Claim.

            (c) An  Indemnifying  Party  may elect to defend  (and,  unless  the
Indemnifying  Party has specified any  reservations  or  exceptions,  to seek to
settle or  compromise)  at such  Indemnifying  Party's  own  expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within thirty (30) days
after the receipt of notice from an  Indemnified  Party (or sooner if the nature
of such Third Party Claim so requires),  the Indemnifying Party shall notify the
Indemnified Party whether the Indemnifying Party will assume  responsibility for
defending such Third Party Claim,  which election shall specify any reservations
or exceptions.  If such  Indemnifying  Party does not respond within such thirty
(30) day period or rejects such claim in whole or in part, the Indemnified Party
shall be free to pursue such remedies as specified in this Agreement,  including
the dispute resolution  provisions set forth in Section 11.03 below. In case any
such Third Party Claim shall be brought  against any Indemnified  Party,  and it
shall  notify  the  Indemnifying   Party  of  the  commencement   thereof,   the
Indemnifying  Party shall be  entitled to assume the defense  thereof at its own
expense,  with counsel  satisfactory to such Indemnified Party in its reasonable
judgment;  provided,  however,  that at any  Indemnified  Party may,  at its own
expense,  retain  separate  counsel to  participate  in such  defense at its own
expense.  Notwithstanding  the  foregoing,  in  any  claim  in  which  both  the
Indemnifying  Party,  on the one hand,  and an Indemnified  Party,  on the other
hand, are, or are reasonably  likely to become, a party,  such Indemnified Party
shall have the right to employ  separate  counsel and to control its own defense
of such claim if, in the  reasonable  opinion  of  counsel  to such  Indemnified
Party,  either (x) one or more defenses are available to the  Indemnified  Party
that are not available to the Indemnifying  Party or (y) a conflict or potential
conflict  exists  between  the  Indemnifying  Party,  on the one hand,  and such
Indemnified   Party,   on  the  other  hand,   that  would  make  such  separate
representation  advisable;  provided,  however,  that the Indemnifying Party (i)
shall not be liable for the fees and  expenses  of more than one  counsel to all
Indemnified  Parties and (ii) shall reimburse the  Indemnified  Parties for such
reasonable fees and expenses of such counsel incurred in any such action between
the Indemnifying  Party and the Indemnified  Parties or between such Indemnified
Parties and any third party,  as such  expenses are incurred.  The  Indemnifying
Party  agrees  that it will  not,  without  the  prior  written  consent  of the
Indemnified Party, settle, compromise or consent to the entry of any judgment in
any pending or threatened claim relating to the matters  contemplated hereby (if
any Indemnified  Party is a party thereto or has been actually  threatened to be
made a party thereto) unless such settlement,  compromise or consent includes an
unconditional  release of such Indemnified  Party from all liability  arising or
that may arise out of such claim. The Indemnifying Party shall not be liable for
any  settlement of any claim effected  against an Indemnified  Party without the
Indemnifying  Party's written  consent,  which consent shall not be unreasonably
withheld,  conditioned or delayed.  The rights accorded to an Indemnified  Party
hereunder shall be in addition to any rights that any Indemnified Party may have
at common law, by separate  agreement  or  otherwise;  provided,  however,  that
notwithstanding  the  foregoing  or anything to the  contrary  contained in this
Agreement,  nothing in this Article XI (other than Section 11.03) shall restrict
or limit  any  rights  that any  Indemnified  Party  may have to seek  equitable
relief.

                                       24
<PAGE>

      Section 11.03 Dispute  Resolution.  Any dispute under this Agreement,  the
Registration  Rights  Agreement or the Warrant shall be submitted to arbitration
(including,  without  limitation,  pursuant  to this  Article  XI) and  shall be
finally and  conclusively  determined by the decision of a board of  arbitration
consisting  of three (3)  members  (the  "Board  of  Arbitration")  selected  as
hereinafter  provided.  Each of the Indemnified Party and the Indemnifying Party
shall  select one (1) member and the third  member  shall be  selected by mutual
agreement of the other members,  or if the other members fail to reach agreement
on a third  member  within  twenty (20) days after their  selection,  such third
member shall thereafter be selected by the American Arbitration Association upon
application  made to it for such purpose by the Indemnified  Party. The Board of
Arbitration shall meet on consecutive business days in San Francisco, California
or such other  place as a majority  of the  members of the Board of  Arbitration
determines  more  appropriate,  and shall reach and render a decision in writing
(concurred  in by a majority  of the members of the Board of  Arbitration)  with
respect to the amount,  if any, which the Indemnifying  Party is required to pay
to the Indemnified  Party in respect of a claim filed by the Indemnified  Party.
In connection with rendering its decisions, the Board of Arbitration shall adopt
and follow such rules and  procedures  as a majority of the members of the Board
of  Arbitration  deems  necessary  or  appropriate.  To  the  extent  practical,
decisions of the Board of Arbitration shall be rendered no more than thirty (30)
calendar days following  commencement of proceedings with respect  thereto.  The
Board of  Arbitration  shall cause its written  decision to be  delivered to the
Indemnified Party and the Indemnifying  Party. Any decision made by the Board of
Arbitration  (either  prior to or  after  the  expiration  of such  thirty  (30)
calendar day period) shall be final,  binding and conclusive on the  Indemnified
Party and the  Indemnifying  Party and  entitled  to be  enforced to the fullest
extent permitted by law and entered in any court of competent jurisdiction. Each
party  to any  arbitration  shall  bear its own  expense  in  relation  thereto,
including  but not limited to such  party's  attorneys'  fees,  if any,  and the
expenses  and fees of the Board of  Arbitration  shall be  divided  between  the
Indemnifying  Party  and the  Indemnified  Party in the same  proportion  as the
portion  of the  related  claim  determined  by the Board of  Arbitration  to be
payable to the Indemnified  Party bears to the portion of such claim  determined
not to be so payable.

                                  ARTICLE XII

                                  MISCELLANEOUS

      Section 12.01 Fees and Expenses.

            (a)  The  Company  shall  pay on  demand  all  reasonable  fees  and
expenses,  including,  without  limitation,  all  reasonable  attorneys fees and
expenses,   incurred  by  the  Investor  in  connection  with  the  preparation,
negotiation,  execution and delivery of this Agreement,  the Registration Rights
Agreement  and the  Warrant,  which  payment  shall be made  whether  or not any
transactions contemplated hereunder are actually consummated.

            (b) The Company shall pay on demand $12,500 per calendar  quarter to
cover due diligence  expenses  incurred by the Investor  during the term of this
Agreement; provided, however, that the Company shall not be required to pay such
amounts with respect to the second and third calendar quarters of 2004.

                                       25
<PAGE>

            (c) The Company shall be solely  responsible  for (i) all reasonable
fees and expenses  incurred by the Investor in connection  with any  amendments,
modifications  or waivers of this  Agreement or incurred in connection  with the
Investor's  enforcement of this Agreement,  including,  without limitation,  all
reasonable  attorneys  fees and  expenses,  and (ii) all stamp or other  similar
taxes and  duties,  if any,  levied in  connection  with  issuance of the Shares
pursuant hereto.

      Section 12.02 Reporting  Entity for the Common Stock. The reporting entity
relied upon for the  determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this  Agreement  shall
be Bloomberg,  L.P. or any successor thereto.  The written mutual consent of the
Investor and the Company shall be required to employ any other reporting entity.

      Section 12.03 Brokerage. Except as set forth on Schedule 4.12, each of the
parties hereto  represents  that it has had no dealings in connection  with this
transaction  with any  finder or broker  who will  demand  payment of any fee or
commission from the other party.  The Company on the one hand, and the Investor,
on the other  hand,  agree to  indemnify  the other  against  and hold the other
harmless  from  any  and  all  liabilities  to any  Persons  claiming  brokerage
commissions  or  finder's  fees on account of  services  purported  to have been
rendered on behalf of the  indemnifying  party in connection with this Agreement
or the transactions contemplated hereby.

      Section  12.04  Notices.  All  notices,   demands,   requests,   consents,
approvals,  and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein,  shall be (i) personally served,
(ii) deposited in the mail,  registered or certified,  return receipt requested,
postage  prepaid,  (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other  address as such party shall have  specified
most  recently by written  notice given in  accordance  herewith.  Any notice or
other communication  required or permitted to be given hereunder shall be deemed
effective  (a) upon hand  delivery  or  delivery  by  facsimile,  with  accurate
confirmation  generated by the transmitting facsimile machine, at the address or
number  designated  below (if delivered on a business day during normal business
hours where such notice is to be received),  or the first business day following
such delivery (if delivered  other than on a business day during normal business
hours where such notice is to be  received)  or (b) on the second  business  day
following  the date of  mailing  by  express  courier  service,  fully  prepaid,
addressed to such address,  or upon actual  receipt of such  mailing,  whichever
shall first occur. The addresses for such communications shall be:

                  If to the Company:

      Tegal Corporation
      2201 South McDowell Blvd.
      Petaluma, California  94954
      Telephone:  (707) 763-5600
      Facsimile:  (707) 763 0436

      Attention:  Thomas R. Mika, Chief Financial Officer

                                       26
<PAGE>

with a copy (which shall not constitute notice) to:

      Scott Willoughby, Esq.
      Latham & Watkins LLP
      505 Montgomery Street #1900
      San Francisco, CA 94111
      Telephone:  (415) 646-8345
      Facsimile:  (415) 395-8095

if to the Investor:

      Kingsbridge Capital Limited/ c/o Kingsbridge Corporate Services Limited
      Main Street
      Kilcullen, County Kildare
      Republic of Ireland

      Telephone:  011-353-45-481-811
      Facsimile:  011-353-45-482-003
      Attention:  Adam Gurney, Managing Director

with a copy (which shall not constitute notice) to:

      Keith M. Andruschak, Esq.
      Clifford Chance US LLP
      200 Park Avenue
      New York, NY  10166
      Telephone: (212) 878-8000
      Facsimile: (212) 878-8375

Either party hereto may from time to time change its address or facsimile number
for notices  under this Section by giving at least ten (10) days' prior  written
notice of such changed address or facsimile number to the other party hereto.

      Section  12.05  Assignment.  Neither this  Agreement nor any rights of the
Investor or the Company  hereunder  may be assigned by either party to any other
Person.  Notwithstanding  the foregoing,  the provisions of this Agreement shall
inure to the benefit of, and be enforceable by, any private transferee of any of
the Common Stock purchased or acquired by the Investor hereunder with respect to
the Common Stock held by such Person.

      Section 12.06 Amendment;  No Waiver.  No party shall be liable or bound to
any other party in any manner by any  warranties,  representations  or covenants
except  as  specifically  set  forth in this  Agreement  or  therein.  Except as
expressly provided in this Agreement, neither this Agreement nor any term hereof
may be  amended,  waived,  discharged  or  terminated  other  than by a  written
instrument  signed by both  parties  hereto.  The failure of the either party to
insist on strict  compliance  with this  Agreement,  or to exercise any right or
remedy  under  this  Agreement,  shall not  constitute  a waiver  of any  rights
provided under this Agreement,  nor estop the parties from thereafter  demanding
full and  complete  compliance  nor prevent the parties from  exercising  such a
right or remedy in the future.

      Section 12.07 Entire Agreement.  This Agreement,  the Registration  Rights
Agreement and the Warrant set forth the entire  agreement and  understanding  of
the parties  relating to the subject  matter hereof and supersedes all prior and
contemporaneous agreements, negotiations and understandings between the parties,
both oral and written,  relating to the subject  matter  hereof,  including  the
Common Stock  Purchase  Agreement  by and between the Company and the  Investor,
dated February 11, 2004.

                                       27
<PAGE>

      Section  12.08  Severability.  In the  event  that any  provision  of this
Agreement  becomes or is declared  by a court of  competent  jurisdiction  to be
illegal,  unenforceable or void, this Agreement shall continue in full force and
effect  without  said  provision;  provided  that,  such  severability  shall be
ineffective if it materially  changes the economic  benefit of this Agreement to
any party.

      Section 12.09 Title and  Subtitles.  The titles and subtitles used in this
Agreement are used for the convenience of reference and are not to be considered
in construing or interpreting this Agreement.

      Section  12.10  Counterparts.  This  Agreement may be executed in multiple
counterparts,  each of which may be executed by less than all of the parties and
shall be deemed to be an original  instrument which shall be enforceable against
the parties actually executing such counterparts and all of which together shall
constitute one and the same instrument.

      Section 12.11 Choice of Law. This Agreement  shall be construed  under the
laws of the State of New York.

      Section 12.12 Specific Enforcement, Consent to Jurisdiction.

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

            (b) Subject to Section  11.03,  each of the Company and the Investor
(i) hereby irrevocably submits to the jurisdiction of the United States District
Court and other courts of the United States sitting in the State of New York for
the  purposes of any suit,  action or  proceeding  arising out of or relating to
this  Agreement  and (ii)  hereby  waives,  and agrees not to assert in any such
suit, action or proceeding,  any claim that it is not personally  subject to the
jurisdiction of such court, that the suit, action or proceeding is brought in an
inconvenient  forum or that the  venue of the  suit,  action  or  proceeding  is
improper.  Each of the Company and the Investor consents to process being served
in any such suit,  action or  proceeding by mailing a copy thereof to such party
at the address in effect for notices to it under this  Agreement and agrees that
such service shall constitute good and sufficient  service of process and notice
thereof.  Nothing  in this  Section  shall  affect  or limit  any right to serve
process in any other manner permitted by law.

      Section 12.13 Survival.  The representations and warranties of the Company
and the Investor  contained in Articles IV and V and the covenants  contained in
Article V and Article VI shall survive the execution and delivery hereof and the
Closing  until  the  termination  of  this  Agreement,  and the  agreements  and
covenants set forth in Article X and Article XI of this Agreement  shall survive
the execution and delivery hereof and the Closing hereunder.

      Section 12.14 Publicity. Prior to the Closing, neither the Company nor the
Investor shall issue any press release or otherwise make any public statement or
announcement  with respect to this  Agreement or the  transactions  contemplated
hereby or the existence of this Agreement.  In the event the Company is required
by law, based upon an opinion of the Company's counsel, to issue a press release
or  otherwise  make a public  statement  or  announcement  with  respect to this
Agreement  prior to the Closing,  the Company shall consult with the Investor on
the form and substance of such press release.  Promptly after the Closing,  each
party  may  issue a press  release  or  otherwise  make a  public  statement  or
announcement  with respect to this  Agreement or the  transactions  contemplated
hereby or the existence of this Agreement;  provided that,  prior to issuing any
such press release, making any such public statement or announcement,  the party
wishing to make such release,  statement or announcement consults and cooperates
in good faith with the other  party in order to  formulate  such press  release,
public statement or announcement in form and substance reasonably  acceptable to
both parties.

                                       28
<PAGE>

      Section  12.15  Further  Assurances.  From  and  after  the  date  of this
Agreement,  upon the request of the Investor or the Company, each of the Company
and the Investor shall execute and deliver such instruments, documents and other
writings as may be  reasonably  necessary  or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement.

                [Remainder of this page intentionally left blank]

                                       29
<PAGE>

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

                    KINGSBRIDGE CAPITAL LIMITED

                    By: /s/ Valentine O'Donoghue
                        -----------------------------------
                        Valentine O'Donoghue
                        Director

                    TEGAL CORPORATION

                    By: /s/ Thomas R. Mika
                        -----------------------------------
                        Thomas R. Mika
                        Executive Vice President and Chief Financial Officer

                                       30
<PAGE>

                                     ANNEX A

                              MARKET CAPITALIZATION

      The market  capitalization of Tegal Corporation shall be calculated on the
Trading Day preceding the first Trading Day of the Draw Down Pricing  Period and
shall be based upon the product of (x) the  closing  bid price of the  Company's
Common  Stock as reported by  Bloomberg  L.P.  using the AQR  function,  (y) the
number of  outstanding  shares of Common  Stock of the  Company as  reported  by
Bloomberg   L.P.   using  the  DES   function   (such   product,   the   "Market
Capitalization").

                                       31
<PAGE>

                                  SCHEDULE 4.03

                            CAPITALIZATION AND RIGHTS

                                 CAPITALIZATION

                  TOTAL SHARES ISSUED AND OUTSTANDING (5/19/04)

                                   44,031,658

                            OTHER REGISTRATION RIGHTS

Registration Rights Agreements covering stock:

1.    Registration Rights Agreements,  by and among the Company, Simplus Systems
      corporation  and Kiet  Nguyen,  dated as of December  5, 2003.  (1,500,000
      shares).  The Registration  Rights  Agreement  between the Company and the
      shareholders  of  Sputtered  Films,  Inc,  dated as of August 30, 2002 was
      satisfied by that S-3  Registration  Statement dated June 30, 2003,  which
      became effective August 21, 2003.

Registration Rights Agreements covering unexercised warrants:

1.   Registration  Rights Agreements,  by and among the Company and Financial
     West Group,  including Messrs.  Schacter,  R., Schacter,  D., Griesel,  T.,
     Pelletier,  K. and Shayne,  A.,  dated as of  February  15,  2000.  (50,000
     warrants unexercised; $7.71 strike price).

2.   Registration Rights Agreements, by and among the Company and Financial West
     Group,   including  Messrs.   Schacter,  R.,  Schacter,  D.,  Griesel,  T.,
     Pelletier,  K. and Shayne, A., dated as of March 28, 2000. (30,000 warrants
     unexercised; $6.14 strike price).

3.   Registration Rights Agreements, by and among the Company and Financial West
     Group,   including  Messrs.   Schacter,  R.,  Schacter,  D.,  Griesel,  T.,
     Pelletier,  K. and Shayne, A., dated as of April 13, 2000. (75,000 warrants
     unexercised; $4.69 strike price).

4.   Registration  Rights  Agreements,  by and among the Company  and  Hultquist
     Capital, LLC, dated as of February 15, 2001. (150,000 warrants unexercised;
     $5.00 strike price).

5.   Registration Rights Agreements between the Company and the Investors listed
     thereto,  dated as of December 31, 2001,  including  Messrs.  Beattie,  M.,
     Arnold, A., Allen Zaring Holdings,  Inc., Berol, J., Berol, D., Eyeman, E.,
     Paterson,  J., Polar Global,  Niehoff, K., Bunyon, E., Boal, H. Gerber, M.,
     Laudien,  G., Power,  J., and Berman,  A., (819,000  warrants  unexercised;
     $2.50 strike price)

6.   Registration  Rights  Agreements,  by and among the  Company  and  Fechtor,
     Detweiler,  LLC,  including  Messrs.  Wood,  M., Walsh,  R.,  Ramberg,  F.,
     McShane, D., Mitchell, J., Crowley, P., Frank, S., Hughes, E., Niehoff, K.,
     Martino,  S., Power,  J., dated as of December 31, 2001.  (31,665  warrants
     unexercised; $5.00 strike price).

                                       32
<PAGE>

7.   Registration  Rights  Agreements,  by and among the Company  and  Hultquist
     Capital, LLC, Block, Bowman Associates,  LLC, including Friends School, San
     Francisco,  Double H Investment Partners, and Adams, P., dated as of August
     30, 2002 (154,063 warrants unexercised; $1.20 strike price).

8.   Registration Rights Agreements between the Company and the Investors listed
     thereto,  dated as of June 30, 2003 (429,921  warrants  unexercised;  $0.50
     strike price).

9.   Registration Rights Agreements between the Company and the Investors listed
     thereto,  dated as of September 9, 2003  (3,132,952  warrants  unexercised;
     $0.50 strike price).

10.  Registration Rights Agreements by and among TSD Trading,  including Messrs.
     Pinto, A. and Ramberg,  F., dated as of September 9, 2003 (196,129 warrants
     unexercised; $0.35 strike price).

                                       33
<PAGE>

                                  SCHEDULE 4.10

                                 ACTIONS PENDING

                                      None

                                       34
<PAGE>

                                  SCHEDULE 4.12

                                     BROKERS

Dahlman Rose Weiss, LLC is serving as a broker to the Company in connection with
the  transactions  contemplated by the Agreement and will receive a broker's fee
of 6% of the  proceeds  of each Draw Down  Amount as it is paid to the  Company,
plus a warrant  to  purchase  a number of  shares  equal to 1% of the  number of
shares issued to the Investor at each Draw Down.

                                       35
<PAGE>

                                    EXHIBIT A

                      Form of Registration Rights Agreement

                                       36
<PAGE>

                                    EXHIBIT B

                                 Form of Warrant

                                       37
<PAGE>

                                    EXHIBIT C

                              Officer's Certificate

      I, [NAME OF OFFICER],  do hereby  certify to Kingsbridge  Capital  Limited
(the  "Investor"),  with respect to the common stock of Tegal  Corporation  (the
"Company") issuable in connection with the Draw Down Notice, dated _____________
(the  "Notice")  attached  hereto and  delivered  pursuant  to Article II of the
Common Stock Purchase Agreement,  dated [DATE],  2004 (the "Agreement"),  by and
between the Company and the Investor, as follows:

      1. I am the duly elected [OFFICER] of the Company.

      2. The  representations and warranties of the Company set forth in Article
IV of the Agreement are true and correct in all material respects as though made
on and as of the date hereof  (except for such  representations  and  warranties
that are made as of a particular date).

      3. The Company has  performed in all material  respects all  covenants and
agreements to be performed by the Company on or prior to the date hereof related
to the Notice and has satisfied  each of the conditions to the obligation of the
Investor set forth in Article VII of the Agreement.

      The undersigned has executed this Certificate this ____ day of ____, 2004.

                                            ____________________________________
                                            Name:
                                            Title:

                                       38
<PAGE>

                                    EXHIBIT D

                    FORM OF OPINION OF COUNSEL TO THE COMPANY

[Date]

Kingsbridge Capital Limited
c/o Kingsbridge Corporate Services Ltd.
Main Street
Kilcullen, County Kildare
Republic of Ireland

Re:      Tegal Corporation

Ladies and Gentlemen:

      We have  acted  as  special  counsel  to  Tegal  Corporation,  a  Delaware
corporation  (the  "Company"),  in connection with the sale to you (the "Selling
Stockholder")  on the date  hereof by the Company of shares  (the  "Shares")  of
common  stock of the Company,  par value $0.01 per share (the  "Common  Stock"),
pursuant to an Amended and Restated  Common Stock Purchase  Agreement  dated May
19, 2004 between you and the Company (the  "Purchase  Agreement").  Reference is
also made to a Registration Rights Agreement, dated as of February 11, 2004 (the
"Registration  Rights Agreement"),  between you and the Company and a warrant to
purchase  up to 300,000  shares of Common  Stock  dated  February  11, 2004 (the
"Warrant",  and the shares of Common Stock issuable  pursuant to exercise of the
Warrant,  the "Warrant Shares").  This letter is being delivered to you pursuant
to Section  7.12 of the Purchase  Agreement.  Capitalized  terms  defined in the
Purchase Agreement, used herein and not otherwise defined herein, shall have the
meanings given them in the Purchase Agreement.

            As such counsel, we have examined such matters of fact and questions
of law as we have  considered  appropriate  for purposes of this letter,  except
where a specified fact  confirmation  procedure is stated to have been performed
(in which case we have with your consent  performed the stated  procedure),  and
except where a statement  is  qualified  as to knowledge  (in which case we have
with your  consent  made no or limited  inquiry  as  specified  below).  We have
examined, among other things, the following:

            (a) the Purchase  Agreement,  the Registration  Rights Agreement and
the Warrant (the "Transaction Documents"); and

            (b) the Certificate of  Incorporation  and the Bylaws of the Company
(the "Governing Documents") and certain resolutions of the Board of Directors of
the Company.

            As to facts  material to the opinions,  statements  and  assumptions
expressed  herein,  we have,  with your  consent,  relied  upon oral or  written
statements  and  representations  of officers and other  representatives  of the
Company and others,  including the representations and warranties of the Company
and  the  Selling  Stockholder  in  the  Transaction  Documents.   We  have  not
independently verified such factual matters.

            Whenever a statement herein is qualified as to knowledge,  awareness
or a similar  phrase,  it is intended to indicate  that those  attorneys in this
firm who  have  rendered  legal  services  in  connection  with the  transaction
referenced  above do not have current actual knowledge of the inaccuracy of such
statement.  However,  except  as  otherwise  expressly  indicated,  we have  not
undertaken any independent  investigation  to determine the accuracy of any such
statement.

                                       39
<PAGE>

            We are opining  herein as to the effect on the  subject  transaction
only of the federal laws of the United States, the internal laws of the State of
New York and in numbered paragraphs 1, 2, 3, 5 and 7 of this letter, the General
Corporation Law of Delaware (the "DGCL"), and we express no opinion with respect
to the applicability  thereto,  or the effect thereon,  of the laws of any other
jurisdiction  or, in the case of Delaware,  any other laws,  or as to matters of
municipal law or the laws of any local agencies  within any state.  Our opinions
and  confirmations  herein  are  based  upon  our  consideration  of only  those
statutes,  rules  and  regulations  which,  in  our  experience,   are  normally
applicable to private placements of common equity  securities,  provided that no
opinion or  confirmation  is  expressed  herein with respect to federal or state
securities  laws (except to the extent stated in paragraph 6 herein),  tax laws,
antitrust or trade  regulation  laws,  insolvency or fraudulent  transfer  laws,
antifraud  laws,  NASD  rules,  pension or employee  benefit  laws or other laws
excluded by customary practice. We express no opinion as to any state or federal
laws or regulations applicable to the subject transactions because of the nature
or extent of the business of any parties to the Transaction Documents.

            Subject to the foregoing and the other matters set forth herein,  it
is our opinion that, as of the date hereof:

      1. The Company is a corporation under the DGCL. Based on certificates from
public  officials,  we confirm that the Company is validly  existing and in good
standing under the laws of the State of Delaware.

      2. The Company has the corporate  power and  corporate  authority to enter
into the Transaction Documents and perform its obligations thereunder.

      3. The execution,  delivery and performance of the  Transaction  Documents
have been duly authorized by all necessary corporate action of the Company,  and
each of the  Transaction  Documents  has been duly executed and delivered by the
Company.

      4. Each of the  Transaction  Documents  constitutes  a valid  and  binding
obligation of the Company,  enforceable  against the Company in accordance  with
its terms.

      5. The execution and delivery of the Transaction  Documents by the Company
and the consummation by the Company of the transactions  contemplated thereunder
on the date hereof do not (i) violate the provisions of the Governing  Documents
or (ii) violate any federal or New York statute,  rule or regulation known to us
to be applicable to the Company.

      6. Assuming that the representations and warranties of the Company and the
Investor  contained in the Transaction  Documents are true and correct as of the
date  hereof,  (i) the  issuance on the date hereof of the Shares in  accordance
with the Transaction  Documents is exempt from the registration  requirements of
the  Securities  Act of 1933,  as amended (the "Act"),  (ii) the issuance of any
shares of Common Stock  issued  pursuant to Section  1.1(e) of the  Registration
Rights Agreement (the "Blackout Shares"),  assuming issuance on the date hereof,
in  accordance  with  the  Transaction  Documents,  would  be  exempt  from  the
registration  requirements  of the Act and (iii)  the  issuance  of the  Warrant
Shares,  assuming  exercise of the Warrant on the date hereof,  and issuance and
delivery  and  payment  therefor  in the  manner  described  in the  Transaction
Documents,  would be exempt from the  registration  requirements  of the Act. We
express no opinion,  however, as to when or under what circumstances the Shares,
the Blackout  Shares and the Warrant Shares may be resold or as to the effect of
subsequent  issuances of  securities  of the Company or transfers of the Shares,
the Blackout  Shares or the Warrant  Shares to the extent that such issuances or
transfers may be integrated with the issuance of the Shares, the Blackout Shares
or the Warrant Shares.

                                       40
<PAGE>

      7. The Shares,  when issued to and paid for by you in accordance  with the
terms of the Purchase Agreement, and the Warrant Shares, when issued to and paid
for by you upon due exercise of the Warrant by you in accordance  with the terms
of the Warrant,  will be validly issued,  fully paid and non-assessable and free
of preemptive rights arising from the Governing Documents.

            The opinions  expressed in paragraph 4 above are further  subject to
the following  limitations,  qualifications  and  exceptions:  (a) the effect of
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other
similar laws related to or affecting  the rights or remedies of  creditors;  (b)
the effects of general principles of equity,  whether considered in a proceeding
in  equity  or  at  law  (including  the  possible  unavailability  of  specific
performance or injunctive relief), concepts of materiality, reasonableness, good
faith  and  fair  dealing,  and  the  discretion  of the  court  before  which a
proceeding is brought;  (c) the  unenforceability  under  certain  circumstances
under  law or  court  decisions  of  provisions  for the  indemnification  of or
contribution to a party with respect to a liability  where such  indemnification
or contribution is contrary to public policy; and (d) we express no opinion with
respect to the enforceability of (i) consents to, or restrictions upon, judicial
relief,  jurisdiction or venue; (ii) advance waivers of claims, defenses, rights
granted by law, or notice,  opportunity for hearing,  evidentiary  requirements,
statutes of  limitation,  trial by jury or at law, or other  procedural  rights;
(iii) provisions for exclusivity,  election or cumulation of rights or remedies;
(iv)  restrictions upon non-written  modifications  and waivers;  (v) provisions
authorizing  or validating  conclusive  or  discretionary  determinations;  (vi)
grants of setoff rights;  (vii)  provisions  for the payment of attorneys'  fees
where such payment is contrary to law or public policy;  (viii) proxies,  powers
and trusts;  (ix) provisions  prohibiting,  restricting or requiring  consent to
assignment or transfer of any right or property;  (x)  provisions for liquidated
damages,  default  interest,  late charges,  monetary  penalties,  prepayment or
make-whole premiums or other economic remedies; and (xi) provisions for specific
enforcement.

            With your  consent,  we have  assumed for  purposes of this  opinion
that:  all parties to the  Transaction  Documents  other than the  Company  have
complied with any applicable requirement to file returns and pay taxes under the
Franchise  Tax Law of the State of  California;  all parties to the  Transaction
Documents  other than the Company are duly  organized,  validly  existing and in
good standing under the laws of their respective  jurisdictions of organization;
all  parties  to the  Transaction  Documents  other  than the  Company  have the
requisite power and authority to execute and deliver the  Transaction  Documents
and to perform their respective  obligations under the Transaction  Documents to
which they are a party;  and the  Transaction  Documents  to which such  parties
other than the  Company  are a party  have been duly  authorized,  executed  and
delivered  by such  parties  and  constitute  their  legally  valid and  binding
obligations, enforceable against them in accordance with their terms.

            This opinion is furnished only to you and is solely for your benefit
in  connection  with the  transactions  covered  hereby.  This letter may not be
relied upon by you for any other purpose,  or furnished to,  assigned to, quoted
to or relied upon by any other  person,  firm or other  entity for any  purpose,
without our prior consent, which may be granted or withheld in our discretion.

                                                              Very truly yours,

                                       41

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