Document:

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                                                                Exhibit 10.1

                          MEMORANDUM OF SETTLEMENT
                          ------------------------

         This Memorandum of Settlement, including all exhibits, appendices
and other attachments hereto (hereinafter collectively "MOS"), is made and
entered into this 14th day of June, 2005, ("Effective Date"), by and between
Angelica Corporation, including its affiliated entities operating linen
management and laundry service facilities, (hereinafter collectively
referred to as "Angelica" or the "Employer"), and UNITE HERE, AFL-CIO, CLC,
each of the UNITE HERE local unions listed on MOS Appendix 1 (attached
hereto and incorporated herein by reference), each of the UNITE HERE joint
boards also listed on MOS Appendix 1 and all other UNITE HERE local unions,
joint boards, and affiliates, (hereinafter collectively referred to as
"Union").

         WHEREAS, Employer is engaged in the business of operating a linen
management and laundry services business through 35 laundry facilities
throughout the nation, (hereinafter referred to individually and
collectively as "Facility" or "Facilities"), and is the largest provider of
such services to the healthcare industry; and

         WHEREAS, Employer has a practice of exercising actual control over
the assignment of work and labor relations of other acquired firms and
facilities operating linen management and laundry services, and expects to
continue that practice in the future; and

         WHEREAS, the parties presently enjoy a collective bargaining
relationship through Union's representation of over 3,500 production
employees at 23 of Employer's 35 Facilities, and they are committed to
continuing and deepening such relationship in an amicable and collaborative
manner; and

         WHEREAS, Union seeks to represent certain other workers at
Employer's other Facilities at which such workers are presently not
represented for purposes of collective bargaining and has been engaged in
protracted, nationwide corporate campaign activities against Employer
relating to certain organizing disputes, and has planned a national labor
strike against Employer regarding local bargaining agreement terms; and

         WHEREAS, the current representation dispute has engendered strife
which is disadvantageous to Employer, Union and Employer's employees; and

         WHEREAS, the parties, having affirmed their shared belief in the
right of employees to freely choose whether or not they wish to be
represented by the Union without coercion, interference, intimidation or
threats from the Employer or the Union, have agreed upon a process that
achieves that purpose, and have set forth that agreement in the Employee
Free Choice Agreement, of even date herewith, (hereinafter referred to as
"EFC Agreement"), attached hereto as MOS Exhibit A, and incorporated herein
by reference, in its entirety; and

         WHEREAS, the parties, desiring to end Union's corporate campaign
activities against Employer and the labor strife between them, have agreed
upon labor peace, and have set forth that agreement in the certain Labor
Peace Agreement, of even date herewith, (hereinafter referred to as the "LP
Agreement"), attached hereto as MOS Exhibit B, and incorporated herein by
reference in its entirety; and

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         WHEREAS, the negotiations leading to the EFC Agreement, the LP
Agreement and this MOS, have involved the settlement of numerous disputed
claims, and the parties wish to set forth the terms of such settlement, as
well as other matters relating thereto, in this MOS.

         NOW, THEREFORE, in consideration of the terms and conditions set
forth herein, and in the exhibits attached hereto and incorporated herein by
reference, the parties hereby agree to settle and resolve issues arising out
of various representation disputes and the hostilities associated therewith,
as well as the bilateral negotiation of certain collective bargaining
agreements, and otherwise agree as follows:

TERM

         The respective terms of this MOS, the EFC Agreement and the LP
Agreement shall each commence on their respective Effective Date
(hereinabove defined for this MOS), and shall terminate at the end of ten
(10) years; provided, however, that the effectiveness of each agreement
shall remain subject to any conditions precedent set forth therein.

COLLECTIVE BARGAINING

         The parties recognize and agree that this MOS is a contract between
an employer and a labor organization representing employees in industry
affecting commerce within the meaning of Title 29, United States Code,
Section 185, as amended.

RATIFICATION OF LOCAL COLLECTIVE BARGAINING AGREEMENTS

         Contemporaneously with the negotiation of this MOS, the parties
have negotiated local collective bargaining agreements covering Employer
Facilities at Fresno, Stockton and Antioch, California; Tampa, Florida;
Batavia, New York; and Dallas and Wichita Falls, Texas. These local
collective bargaining agreements are attached hereto as MOS Exhibits C, D, E
and F, respectively. Union agrees to recommend to its members at each such
Facility that they ratify their respective Agreement and it is expressly
understood and agreed by the parties that this MOS shall become effective
only upon ratification of all of these local collective bargaining
agreements on or before thirty (30) days following the Effective Date of
this MOS. If any of these local collective bargaining agreements has not
been ratified by that date, Employer may immediately terminate this MOS,
along with the EFC Agreement and the LP Agreement, and they shall be of no
further force or effect.

         In accordance with the provisions of Section VI of the LP
Agreement, the LP Agreement shall become a supplement to, and incorporated
in, all existing collective bargaining agreements between Employer and
Union, as listed in the attached MOS Appendix 2, incorporated herein by
reference. Within thirty (30) days following the Effective Date of this MOS,
an individual Memorandum of Agreement, in the form set forth in the attached
MOS Appendix 3, will be executed with respect to each such bargaining
agreement. Each such Memorandum of Agreement shall be signed by the
appropriate Union official having legal authority to do so, and by an
appropriate and authorized representative of Employer. The parties further
agree that the Union shall not

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engage in any Organizing Campaign Activities as defined in Section III.D of
the EFC Agreement or otherwise until a Memorandum of Agreement set forth in
MOS Appendix 3 has been executed with respect to all such Local Collective
Bargaining Agreements, and delivered to Employer.

EXPIRATION OF COLLECTIVE BARGAINING AGREEMENTS AT CURRENTLY ORGANIZED FACILITIES

         The parties agree that they shall cooperate to ensure a limitation
on common collective bargaining agreement expiration dates. Local Collective
Bargaining Agreements (as defined in the LP Agreement) covering no more than
three (3) Facilities shall expire in any one month, nor more then five (5)
Facilities in any quarter.

COLTON, CALIFORNIA AND UNIONIZED FACILITIES NOT REPRESENTED BY THE UNION

      The Employer agrees to recognize the Western States Regional Joint
Board, UNITE HERE ("Western States") as the exclusive collective bargaining
agent for the Bargaining Unit at the Colton, CA Facility in accordance with
the provisions of the applicable Local Collective Bargaining Agreement and
with Western States' demonstrated majority support among the employees by
virtue of authorization cards. The Employer waives its right to contest
Western States' status as exclusive collective bargaining agent for the
Colton Facility before an arbitrator, the NLRB, or in any other forum.

         The Employer shall cooperate consistent with its legal obligations
in recognizing the Union in any facility in which the Union replaces another
union as the exclusive collective bargaining agent at that Facility.

SEVERANCE AND REFORMATION

         The parties shall cooperate to defend the enforceability and
lawfulness of this MOS, the EFC Agreement and the LP Agreement, and all
provisions thereof, against any action or challenge by any third party to
have any part of them declared not enforceable or unlawful.

         If any provision of this MOS, the EFC Agreement and/or the LP
Agreement, or the application of any such provision, is found by any court
or other duly authorized tribunal, to be unlawful or not enforceable, such
provision(s), or the application thereof, shall be severed, but in all other
respects the remaining provisions of this MOS, the EFC Agreement and/or the
LP Agreement, as the case may be, shall continue in full force and effect
according to its terms, except as set forth below.

         Within thirty (30) days of such finding, the parties shall commence
negotiations for the purpose of reforming the severed provision(s) of either
or both, as the case may be, so as to make such provision(s) consistent with
the findings of any such court or tribunal, and to preserve as fully as
possible the intent of such provision(s) and the bargain of the parties. If
the parties cannot reach a mutually acceptable negotiated reformation
agreement within (30) days after the commencement of such negotiations,
either Employer or Union may, at its sole and exclusive option, terminate
and declare null and void, either the EFC Agreement or the LP Agreement, or
both. If one or both of

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the EFC Agreement and/or the LP Agreement are terminated and declared null
and void under this process, such termination shall be effective
prospectively only, subject to applicable law; provided however,
notwithstanding the above or anything else in this MOS to the contrary, the
LP Agreement, as incorporated into and supplementing Local Collective
Bargaining Agreements by way of the Memorandum of Agreement described and
incorporated herein as MOS Appendix 3, shall continue to apply in full force
and effect to all signatories to MOS Appendix 3 for its entire ten-year
term.

SUCCESSORS AND ASSIGNS

         Sale of Individual Facility or Facilities. If the Employer sells or
otherwise divests all, or substantially all, of the business or assets of
any individual Facility or Facilities, or if the Employer discontinues
operations at any such Facility or Facilities, this MOS and, at Angelica's
option, any local collective bargaining agreements in effect at such
Facilities, shall immediately upon such sale, divestiture or discontinuation
of operations, terminate, and be of no further force or effect as to such
Facilities.

         Sale of Employer Company or Subsidiaries. If, at any time during
the term of this MOS, Angelica:

                  (a)      merges, consolidates or otherwise combines with
                           an unaffiliated entity after which Angelica is
                           not the surviving entity or sells a controlling
                           interest in its capital stock to an unaffiliated
                           entity or group of unaffiliated entities acting
                           together in one or a series of transactions,
                           either by tender offer, exchange offer or
                           otherwise; or

                  (b)      sells a controlling interest in the capital stock
                           of one or more of its subsidiaries in which its
                           linen management and laundry business is
                           conducted to an unaffiliated entity or group of
                           unaffiliated entities acting together in one or a
                           series of related transactions, either by tender
                           offer, exchange or otherwise; or

                  (c)      sells all or substantially all of its linen
                           management and laundry operating assets, or the
                           linen management operating and laundry assets of
                           one or more of its subsidiaries in which its
                           linen management and laundry business is
                           conducted,

                  then, in any such case, Angelica may, in its sole
                  discretion, and with respect to the Facility or Facilities
                  that are the subject of such transaction described in (a),
                  (b) or (c) above, terminate this MOS, the EFC Agreement
                  and the LP Agreement, and/or any local collective
                  bargaining agreement(s) in effect at such Facilities, as
                  of the effective date of such transaction; provided,
                  however, that if Angelica elects, in its sole discretion,
                  not to terminate the MOS, the EFC Agreement and the LP
                  Agreement, and, instead, to assign the MOS, the EFC
                  Agreement and the LP Agreement to the surviving or
                  acquiring entity, the MOS, the EFC Agreement and the LP
                  Agreement may only be assigned if the local collective
                  bargaining agreements then currently in effect at the
                  Facilities

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                  that are subject to such transaction, are assigned to and
                  assumed by the surviving or acquiring entity.

NO REPRISALS

         There shall be no reprisals, penalties, recriminations, fines,
discrimination, or disciplinary action by the Union or the Employer against
any employee on account of his/her participation in or non-participation in,
or support or non-support, of the Union or the Union's corporate or contract
campaign against Angelica.

RELEASE AND WAIVER

         General Release and Settlement. The benefits contained in this MOS,
including the EFC Agreement and the LP Agreement, have been bargained, in
relevant part, in exchange for the consideration of both parties releasing
each other from any and all actions, claims, complaints or liabilities of
whatever kind or nature arising prior to the Effective Date of this MOS. The
parties do hereby release and forever discharge each other and their agents,
employees, or representatives, from and against any and all such actions,
claims, complaints or liabilities of whatever kind or nature, known or
unknown, arising prior to the Effective Date of this MOS, except those which
cannot be waived or released as a matter of law. Neither party shall
institute or prosecute, or participate or cooperate with any other party in
instituting or prosecuting against the other, on its own behalf or on behalf
of any other party, any new litigation, unfair labor practice charge,
grievance, claim, investigation or other action, based upon any conduct or
action occurring prior to the Effective Date of this MOS. Nothing contained
herein will limit the ability of either party to defend itself in pending or
future litigation.

         Settlement and Release of Pending Matters. In addition to, and not
by way of limitation of, the general release and settlement above, Union
agrees to settle, withdraw and dismiss, with prejudice, the following
pending matters against Employer. To the extent any such settlement,
withdrawal and/or dismissal requires the approval, consent and/or other
action by any member of Union, by any governmental agency or official or any
other third party, Union will use its reasonable best efforts to obtain such
approval, consent and/or other such action from such party or parties.

                  (a) Unfair Labor Practice Charges.

                           (i) Within thirty (30) days following the
                  Effective Date of this MOS, and except as otherwise
                  provided below, Union agrees to withdraw all unfair
                  practice labor practice charges and to use its reasonable
                  best efforts to secure dismissal of all unfair labor
                  complaints filed against Employer with the National Labor
                  Relations Board, by Union, and/or on behalf of any present
                  or past member of Union, and pending as of the Effective
                  Date of this MOS, including, but not limited to all of the
                  unfair labor practice charges listed on the attached MOS
                  Appendix 4, incorporated herein by reference. Union
                  further agrees to use its reasonable best efforts, and to
                  take all reasonable measures including steps specified in
                  (iii) below, to secure the settlement, withdrawal and
                  dismissal, with prejudice, of those unfair labor practice
                  charges and complaints filed by any present or past member
                  of the Union or other

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                  bargaining unit employees listed on the attached MOS
                  Appendix 4, provided, however, Union will not be obligated
                  under the terms of this provision to dismiss or withdraw
                  the unfair labor practice charges and/or complaints listed
                  in the attached MOS Appendix 5, incorporated herein by
                  reference.

                           (ii) Within thirty (30) days following the
                  Effective Date of this MOS, Union agrees to use its
                  reasonable best efforts, and to take all reasonable
                  measures, to secure the settlement, withdrawal and
                  dismissal, with prejudice, of those unfair labor practice
                  charges and complaints listed on the attached MOS Appendix
                  6, incorporated herein by reference. To facilitate Union's
                  efforts in that regard, Employer agrees to make payments
                  directly to the complainants in such matters, in a total
                  sum of $15,000. Such payment shall be made only upon all
                  such matters being settled, withdrawn and dismissed, with
                  prejudice and upon Union delivering to Employer full and
                  complete releases, in a form reasonably acceptable to
                  Employer, duly executed by such complainants, releasing
                  Employer from any and all further liability with respect
                  to any and all claims, asserted or unasserted, against
                  Employer arising prior to the Effective Date of this MOS.

                           (iii) The parties further agree that the Union
                  shall not engage in any Organizing Campaign Activities as
                  defined in Section III.D of the EFC Agreement or otherwise
                  until the Union has requested withdrawal with prejudice of
                  all pending unfair labor practice charges listed in MOS,
                  Appendix 4; used its reasonable best efforts to have
                  withdrawn and dismissed all complaints listed in the MOS,
                  Appendix 4; has secured executed Settlement Agreements
                  that have become effective from individuals with pending
                  unfair labor practice charges listed in the Memorandum of
                  Settlement Appendix 6; and has provided the Employer with
                  a documentation evidencing all of the above.

                  (b) Occupational Safety and Health, and Other Regulatory
                  Matters. With respect to all complaints, investigations,
                  inspections and other matters pending against Employer
                  with the U.S. Occupational Safety and Health
                  Administration, or state equivalent agencies such as
                  CalOSHA, or with any other federal, state or local
                  regulatory agencies, including, but not limited to, the
                  matters listed on the attached MOS Appendix 7,
                  incorporated herein by reference, Union agrees that:

                           (i) Union shall withdraw as party from all such
                           matters and shall not provide financial support,
                           legal or technical counsel or other assistance to
                           any employee upon whose behalf such matter has
                           been initiated or prosecuted;

                           (ii) Union shall cooperate with Employer, and use
                           its best efforts to assist Employer to achieve
                           prompt settlement of all complaints,
                           investigations, inspections and other matters
                           listed in MOS Appendix 7.

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                           (iii) Union shall not seek party status in any
                           such case; and

                           (iv) Union shall not object to, resist or in any
                           way interfere with any settlement or attempt to
                           settle such matter on the part of Employer.

                  (c) Grievances. Within thirty (30) days following the
                  Effective Date of this MOS, and except as otherwise
                  provided below, Union agrees to dismiss and withdraw, with
                  prejudice those local labor contract grievances listed in
                  the attached MOS Appendix 8 that are noted to be dismissed
                  and withdrawn; provided, however, Union will be obligated
                  under the terms of this provision to dismiss or withdraw
                  those local labor contract grievances that are so noted on
                  MOS Appendix 8. The parties agree that the EFC Agreement
                  shall not become effective until all labor grievances to
                  be dismissed and withdrawn pursuant to this provision
                  have, in fact, been dismissed and withdrawn.

         Release of Unknown Claims. For the purpose of implementing a full
and complete release of all claims, the Parties hereto expressly acknowledge
that the releases given in this MOS are intended to include in their effect,
without limitation, claims that they did not know or suspect at the time of
execution hereof, regardless of whether the knowledge of such claims, or the
facts upon which they might be based, would materially have affected the
settlement of this matter, and that the consideration given under this MOS
is also for the release of those claims and contemplates the extinguishment
of any such unknown claims. In furtherance of this settlement, the Parties
waive any rights they may have under California Civil Code, Section 1542, or
other similar statutes. Section 1542 states:

                  A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
                  CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
                  THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
                  MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
                  DEBTOR.

         Notwithstanding the language contained in California Civil Code
Section 1542, or other similar statutes, it is the intent of the parties
that they waive and relinquish any and all such claims or causes of action.

SCOPE OF MOS

         To the fullest extent permitted by the National Labor Relations
Act, this MOS, including the EFC Agreement and the LP Agreement, applies to
all linen management and laundry service Facilities and/or subsidiaries over
which Employer exercises actual control of work assignments and labor
relations.

MANAGEMENT RIGHTS AT EXISTING UNITE HERE REPRESENTED FACILITIES

         It is mutually agreed that, unless clearly and specifically limited
by the provisions of this MOS, the EFC Agreement, the LP Agreement,
applicable law or any Local Collective Bargaining Agreements, Employer has
and will retain the exclusive right and power to manage its facilities,
including, but not limited to the right to hire, discharge or discipline for
just cause, to assign or transfer its employees, to decide the products and

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services to be provided, the methods and schedules of production and service
including the means and process of production and services to plan, direct,
control, increase, decrease, or diminish operations in whole or in part, to
increase or change production or service work equipment; to sell, close, or
remove any branch or facility, to transfer work; to change equipment,
methods, facilities, areas of production or service, types of production or
service; to introduce new methods, products, techniques, and/or equipment;
to change or discontinue any procedure used in connection with production or
service; to add to or reduce the number of shifts; to change the work
schedules and/or the number of overtime hours to be worked; to determine the
number of employees that it shall employ at any time or in any job
classifications; to determine the job duties and responsibilities of any job
classification; to determine the qualifications necessary to any of the jobs
it shall have or may create in the future; to adopt, modify; change and
enforce reasonable safety and plant work rules; to establish reasonable
production and performance standards; to install or modify piece rates,
change hourly paid jobs to piece rate or piece rate to hourly paid; to, in
its discretion, assign or reassign work duties both of regular and overtime
work in accordance with its determination of the needs of respective jobs
and operations; to discontinue or transfer a product line, process or
portion of the business; to determine the identity and selection of any
carrier, trustee or administrator including the method of handling thereof
for benefits provided under any Employer administered benefit plan; and to
perform all other functions inherent in the administration and/or management
of the business.

DISPUTE RESOLUTION

         To the extent that a dispute arises under this MOS, the parties
shall utilize the dispute resolution procedures outlined in V. D through I
of the LP Agreement to address such dispute.

COMPLETE AGREEMENT

         This Settlement Agreement, including all exhibits, appendices and
other attachments hereto, represents the entire Agreement of the parties
with respect to the matters covered herein and shall be dispositive in the
event of any conflict with any other written or oral understandings or
agreements between the parties or other expressions of the parties' intent.

         With the exception of proposals exchanged by the parties during the
negotiations of the Local Collective Bargaining Agreements attached hereto
as MOS Exhibits C, D, E and F, the proposals exchanged by the parties during
the negotiation of this MOS (and its respective subparts) shall not be
admissible in any dispute between the parties.

NO THIRD PARTY BENEFICIARIES

         This MOS is not intended to create any third party beneficiary
rights. Only parties to this MOS, including permitted successors and
assigns, may enforce its provisions.

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PRESS RELEASE AND COMMUNICATIONS

         The parties agree that promptly following the Effective Date of
this MOS, Employer may issue the Joint Press Release set forth on the
attached MOS Appendix 9, incorporated herein by reference. In addition, it
is understood and agreed that, in Employer's sole and exclusive option,
Employer may file or record with the Securities and Exchange Commission, or
with such other agency or authority which Employer determines in its
opinion, requires such filing or recordation, this MOS, along with any or
all of its exhibits.

         The parties further agree that any communications made by either of
them, after the Effective Date, regarding this MOS, the EFC Agreement, the
LP Agreement, any collective bargaining agreement, or other matter, and/or
regarding the negotiations which have culminated in such agreements, will
not malign or denigrate the other party, or portray any such agreement or
negotiation as a defeat of, or concession by, such other party. All such
communications will be made in a manner that portrays such agreements as
positive and favorable for both parties and for Employer's employees and
other constituencies of each party.

ANGELICA CORPORATION                        UNITE HERE, AFL-CIO, CLC

By: /s/ Stephen M. O'Hara                   By: /s/ Bruce Raynor
   -------------------------                   -----------------------------

Name: Stephen M. O'Hara                     Name: Bruce Raynor
     -----------------------                     ---------------------------

Title: CEO                                  Title: General President
      ----------------------                      --------------------------

Date: 6/14/05                               Date: 6/14/05
     --------------                              -------------

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                                     MOS

                                  EXHIBIT A

                       EMPLOYEE FREE CHOICE AGREEMENT
                       ------------------------------

         This Employee Free Choice Agreement (hereinafter "EFC Agreement"),
is made and entered into this 14th day of June, 2005 ("Effective Date"), by
and between Angelica Corporation, including its affiliated entities
operating linen management and laundry service facilities, (hereinafter
collectively referred to as "Angelica" or "Employer"), and UNITE HERE, AFL-
CIO, CLC, each of the UNITE HERE local unions listed on EFC Appendix 1
(attached hereto and incorporated herein by reference), each of the UNITE
HERE joint boards also listed on EFC Appendix 1 and all other UNITE HERE
local unions, joint boards and affiliates, (hereinafter collectively
referred to as "Union").

         WHEREAS, Employer is engaged in the business of operating a linen
management and laundry services business presently through 35 laundry
facilities throughout the nation (hereinafter referred to individually and
collectively as "Facility" or "Facilities"), and is the largest provider of
such services to the healthcare industry; and

         WHEREAS, Union presently represents over 3,500 employees at 23 of
Employer's 35 laundry Facilities; and

         WHEREAS, Union has been engaged in protracted, nationwide corporate
campaign activities against Employer relating to certain organizing
disputes, and has planned a national labor strike against Employer regarding
local collective bargaining agreement terms; and

         WHEREAS, the parties, desiring to put an end to the nationwide
corporate campaign activities and to avoid the planned national strike, have
negotiated in good faith with respect to all local contractual and all
national contractual and organizing, issues arising out of said corporate
campaign activities and planned strike action, and have entered into an
agreement to settle and resolve all such issues, (said agreement, being of
even date herewith, including all of its exhibits, attachments and
appendices, being hereinafter referred to as the "Memorandum of
Settlement"); and

         WHEREAS, the parties, desiring to include as part of the
aforementioned settlement agreement, an agreement relating to Employee Free
Choice to provide workers at certain of Employer's other laundry facilities
not presently represented by a union, a fair process by which they may
determine whether they wish to be represented by the Union, have entered
into this EFC Agreement, (said EFC Agreement being hereby attached to and
incorporated by reference into the Memorandum of Settlement).

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         NOW, THEREFORE, in consideration of the mutual promises and
agreements set forth herein, and set forth in such other aforementioned
agreements between them, the parties agree as follows:

I.       OVERVIEW

A.       NEUTRALITY
         ----------

                  The Employer and the Union agree that the Employer will
         take a neutral position when the Union undertakes a drive to
         organize employees at one of its facilities pursuant to the EFC
         Agreement. Neutrality means complying with the Ground Rules To
         Ensure Employee Free Choice ("Ground Rules") set forth in EFC
         Appendix 2 and incorporated herein by reference.

B.       ORGANIZING PROCEDURES
         ---------------------

         1.       The parties agree to employ two different procedures for
                  determining whether employees wish to be represented by
                  the Union.

         2.       In the Employer's Current Facilities (including Ballston
                  Spa, New York and Lorain, Ohio), and in After-Acquired
                  Facilities (as defined below) in states banning Union
                  security (so-called "Right to Work" states including those
                  listed in EFC Appendix 3) majority status will be
                  determined through verification of newly-acquired
                  authorization cards.

         3.       In After-Acquired Facilities (as defined below) in states
                  permitting union security (so-called non-"Right to Work"
                  states) majority status will be determined by the holding
                  of private, non-NLRB elections.

         4.       In all Facilities covered by paragraphs 2 and 3 above, the
                  parties shall be bound by the Ground Rules. The Ground
                  Rules governing the parties' conduct shall be effective
                  immediately upon the Effective Date of this EFC Agreement.

II.      DEFINITIONS

A.       EMPLOYEES
         ---------

                  Employees, for purposes of this EFC Agreement, are those
         Employees of Angelica in the bargaining units defined below at
         Current Facilities and After-Acquired Facilities of the Employer
         described herein.

B.       THE BARGAINING UNIT
         -------------------

                  The "bargaining unit" at each Employer Facility, for all
         purposes in this EFC Agreement, shall be a single facility unit and
         shall include all full-time and regular part-time production and
         unskilled maintenance employees working at

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         Employer's laundry processing facility excluding truck drivers,
         engineers/skilled maintenance, office employees and office
         clericals, supervisors, guards, managers and professionals as
         defined in the NLRA, employees represented by another labor union,
         and all other employees.

C.       CURRENT FACILITIES
         ------------------

                  "Current Facilities" shall include all laundry processing
         facilities owned or operated by the Employer as of the effective
         date of this EFC Agreement, excluding those facilities in which a
         union currently represents all of the employees in the bargaining
         unit (defined immediately above), and excluding the Worcester, MA
         and Pawtucket, RI facilities. A list of Current Facilities is
         attached as EFC Appendix 4 and incorporated herein by reference.

D.       AFTER-ACQUIRED FACILITIES
         -------------------------

         1.       "After-Acquired Facilities" shall include any laundry
                  processing facility that the Employer comes to own,
                  operate or establish after the effective date of this EFC
                  Agreement. For purposes of this EFC Agreement, the
                  Worcester, MA and Pawtucket, RI plants shall be deemed
                  After-Acquired Facilities.

         2.       The Employer shall provide written notice to the Union of
                  its intent to acquire an After-Acquired Facility when the
                  acquisition becomes public, or when the Company takes
                  control of a Facility, whichever occurs later. This notice
                  provision shall not apply to Worcester, MA or Pawtucket,
                  RI.

         3.       The Employer shall communicate to all employees at any
                  After-Acquired Facility and shall post the Initial
                  Employer Notice attached as EFC Appendix 7 or Appendix 8,
                  as applicable, informing the employees of this EFC
                  Agreement, within two (2) days of when the Company informs
                  the employees of its acquisition.

         4.       Within five (5) days of when the Employer posts the
                  Initial Employer Notice attached as EFC Appendix 7 or
                  Appendix 8, as applicable, informing employees of this EFC
                  Agreement, it shall provide the Union a list of the names
                  and addresses of all bargaining unit employees at the
                  Facility.

III.     THE ORGANIZING CAMPAIGN AT CURRENT FACILITIES AND AFTER-ACQUIRED
         FACILITIES

A.       THE ORGANIZING CAMPAIGN PERIOD
         ------------------------------

         1.       Prior to beginning any Organizing Campaign Activities (as
                  defined herein) at any Current Facility or After-Acquired
                  Facility, the Union shall provide written notice of its
                  intent to organize that Facility to the Employer's

                                     3

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<PAGE>

                  general counsel and the general manager at the Facility to
                  be organized (hereinafter "Notice of Intent"). The parties
                  agree that the Union shall not be entitled to send any
                  Notice of Intent or to engage in any Organizing Campaign
                  Activities as defined in Section III.D of this EFC
                  Agreement or otherwise engage in any union organizing
                  activities at or near any Employer Facility until the
                  Union has requested withdrawal with prejudice of all
                  pending unfair labor practice charges listed in the MOS,
                  Appendix 4; used its best efforts to have dismissed all
                  complaints listed in the MOS, Appendix 4; has secured
                  executed Settlement Agreements (in the form attached as
                  Appendix 6A to the MOS) that have become effective from
                  individuals with pending unfair labor practice charges
                  listed in the MOS Appendix 6, in accordance with the terms
                  of the MOS; and has provided the Employer with a
                  documentation evidencing all of the above. The Organizing
                  Campaign Period shall begin immediately following the
                  Employee Communication Meeting described in the Ground
                  Rules. The Organizing Campaign Period shall end upon the
                  earliest of any one of the following events:

                           (1)      the Neutral makes a final determination
                                    whether the Union has demonstrated that
                                    it represents a majority of bargaining
                                    unit employees under the card-check
                                    procedures described below,

                           (2)      a secret ballot election is held to
                                    determine whether a majority of
                                    employees within the unit wish to be
                                    represented by the Union (as described
                                    below).

                           (3)      twenty-eight (28) days after the date of
                                    the Employee Communication Meeting
                                    defined in the Ground Rules.

         2.       The Organizing Campaign Period shall be deemed to begin on
                  the day of the Employee Communication Meeting and shall
                  end at midnight on the 28th (twenty-eighth) day
                  thereafter. For example, if the Employee Communication
                  Meeting is held on Tuesday June 1st, the Organizing
                  Campaign Period will end at midnight on Tuesday June 29th.

B.       ORGANIZING PROCEDURES
         ---------------------

         1.       Following receipt by the Employer of the Notice of Intent,
                  the parties shall schedule an initial meeting with the
                  Neutral within two (2) business days (as defined in the
                  Ground Rules) to discuss the employee selection
                  process/procedures (hereinafter referred to as the
                  "Initial Meeting") and to schedule the Employee
                  Communication Meetings pursuant to the Ground Rules
                  (hereinafter referred to as the "Employee Communication
                  Meeting").

                                     4

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<PAGE>

         2.       The Initial Meeting shall take place no more than two (2)
                  business days after the Employer's receipt of the notice.

         3.       Within two (2) business days after the Initial Meeting,
                  the Employer shall provide to the Union employee names and
                  addresses and schedule Employee Communication Meetings
                  pursuant to the Ground Rules. The Employer will provide
                  updated lists to the Union during the campaign within two
                  (2) business days when there is any change to the
                  composition of the bargaining unit from the list
                  originally provided.

         4.       The Union shall keep the employee list confidential and
                  shall not disclose it to any party outside of the Union.

         5.       On or before the day of the Employee Communication Meeting
                  the Employer shall transmit to the Neutral signature
                  exemplars (such as W-4 forms) for all bargaining unit
                  employees. When the Employer transmits updates to the
                  Union under paragraph 3 above, it will simultaneously
                  transmit signature exemplars for new employees to the
                  Neutral.

C.       FREQUENCY OF ORGANIZING CAMPAIGNS
         ---------------------------------

         1.       The Union shall conduct no more than three (3) Organizing
                  Campaigns at Current Facilities and/or After-Acquired
                  Facilities of the Employer at one time.

         2.       Upon conclusion of the Organizing Campaign Period, if the
                  Union has not been recognized, the Union will immediately
                  cease Organizing Campaign Activities (as defined below) at
                  that Facility and shall not initiate another organizing
                  campaign at that Facility for at least one year after the
                  conclusion of the Organizing Campaign Period.

D.       ORGANIZING CAMPAIGN ACTIVITIES
         ------------------------------

                  Organizing Campaign Activities include any Union sponsored
         activities at or near any Employer Facility, publication and
         distribution of any written communications to employees at a
         Facility, distribution of authorization cards or other Union
         sponsored communications and/or activities with the purpose or
         effect of attempting to organize employees at any Current Facility
         or After-Acquired Facility.

E.       UNION COMMUNICATIONS TO EMPLOYEES OUTSIDE OF THE ORGANIZING CAMPAIGN
         --------------------------------------------------------------------
         PERIOD
         ------

                  The Union may communicate with employees of any Current
         Facility or After-Acquired Facility outside of the Organizing
         Campaign Period so long as such communications do not occur at or
         near any Employer Facility on any Employer premises or during work
         time.

                                     5

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<PAGE>

F.       SUBSEQUENT ORGANIZING CAMPAIGNS
         -------------------------------

                  The provisions of this EFC Agreement, including the Ground
         Rules for Employee Free Choice and the procedures for Organizing
         Current Facilities and After-Acquired Facilities shall govern any
         subsequent Union organizing efforts during the term of this EFC
         Agreement.

G.       EMPLOYER WAIVER
         ---------------

                  The Employer waives its right to file a representation
         petition with the NLRB in connection with any request for
         recognition by the Union or its affiliates in connection with this
         EFC Agreement.

H.       UNION WAIVER
         ------------

                  The Union waives its right to file a representation
         petition with the NLRB for Current or After-Acquired Facilities
         except for facilities, if any, in which the Employer may not
         lawfully recognize the Union pursuant to the provisions of this
         Agreement. This provision does not limit the Union's right to
         intervene in a NLRB representation proceeding filed by another
         party.

IV.      THE NEUTRAL

A.       SELECTION OF THE NEUTRAL
         ------------------------

                  The Parties agree that John Truesdale will be the Neutral
         for all Angelica Facilities covered by this Agreement. The parties
         shall endeavor to use a well-respected local leader from the
         community to assist the Neutral at each Facility. In the event that
         the parties cannot agree upon a local neutral representative within
         five (5) business days of the Union's notification of its intent to
         organize a Facility, the Neutral shall select a local neutral
         representative to assist him. Edward Archer or Janet Spencer shall
         function as the Neutral if Mr. Truesdale is unwilling or unable to
         do so. If neither Mr. Archer nor Ms. Spencer is able or willing to
         serve as the neutral, the parties shall select a Neutral within
         forty-eight (48) hours of such notification.

         The parties shall share the expenses and fees of the Neutral
         equally.

B.       REMINDER POSTCARD
         -----------------

                  Not later than two (2) weeks into the Campaign Period as
         defined in the Ground Rules, the Neutral shall send to all
         bargaining unit employees a postcard (in English and Spanish)
         reminding them of their ability to complain to the Neutral, the
         Union or the Employer if they feel that any party has acted in a
         manner inconsistent with the Ground Rules. The template for the
         Reminder Postcard is set forth in EFC Appendix 5 and incorporated
         herein by reference.

                                     6

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<PAGE>

C.       EMPLOYEE COMPLAINTS RECEIVED BY THE NEUTRAL
         -------------------------------------------

                  The Neutral may receive complaints from Employees that
         either party has violated this EFC Agreement or the Ground Rules.
         The Neutral shall forward such complaints to the Union and the
         Employer. The Neutral shall not make any determinations or issue
         any remedies relating to any such complaints.

                  If the Neutral receives questions from employees, he or
         she may answer them if he or she can do so by reference to this EFC
         Agreement and any of its Appendices or if in his or her discretion
         the question can be answered without compromising the principle of
         neutrality. Otherwise, the Neutral shall refer the question to the
         Parties.

V.       RECOGNITION PROCEDURES AT CURRENT FACILITIES

A.       PROCEDURE FOR DETERMINING MAJORITY STATUS AT CURRENT FACILITIES:
         ----------------------------------------------------------------

         1.       The Union will be given a four-week time period following
                  the Employee Communications Meeting during which to
                  solicit and deliver signed cards to the Neutral to achieve
                  majority status. At any time during that four-week period,
                  the Union may formally request recognition at which time
                  the Union shall deliver all signed authorization cards to
                  the Neutral and provide simultaneous written notice
                  thereof to the Employer. Delivery is defined as the date
                  when the Neutral receives the authorization cards.

         2.       (a.) If the Neutral determines that the Union does not
                  have majority status, the Union may deliver one submission
                  of additional cards to the Neutral within the four-week
                  period. The Union shall provide simultaneous written
                  notice thereof to the Employer. Delivery is defined as the
                  date when the Neutral receives the authorization cards.

                  (b.) If the Neutral determines that the Union does not
                  have majority status in its first submission, he or she
                  shall inform the Union of the identities of the
                  individuals whose cards were invalidated and the reasons
                  thereto. He or she shall inform the Employer only that the
                  Union did not achieve majority status.

         3.       To be valid for the purposes of this Agreement, the
                  authorization cards shall:

                  a.       Be dated and signed by bargaining unit employees
                           on or after the day of the Employee Communication
                           Meeting but on or before the last day of the
                           Organizing Campaign Period and

                                     7

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<PAGE>

                  b.       Shall include the following statement:

                           (1)      By signing this card I designate UNITE
                                    HERE as my exclusive collective
                                    bargaining representatives at Angelica's
                                    __________ facility.

                           (2)      I understand that the union will
                                    represent me without any election when
                                    and if a majority of my co-workers at
                                    this facility sign cards.

                           (3)      I will pay dues only when I have the
                                    benefits of a collective bargaining
                                    agreement.

                           (4)      I understand that my monthly/weekly dues
                                    will be _____.

                           (5)      There will be no union initiation fees
                                    for employees who are on Angelica's
                                    payroll at the time the first contract
                                    becomes effective.

                  c.       The authorization card template reflecting the
                           text of the card is attached as EFC Appendix 6
                           and incorporated herein by reference.

         4.       The Initial Employer Notice set forth in EFC Appendix 7 or
                  EFC Appendix 8, as may be appropriate, including the
                  Questions and Answers attached thereto (and incorporated
                  herein by reference) shall be communicated to all
                  employees at Current Facilities and posted in all Current
                  Facilities within five (5) business days of the Effective
                  Date of this EFC Agreement.

         5.       The Neutral or the local neutral representative need not
                  be physically present at the facility to count the cards.

B.       REVIEW OF AUTHORIZATION CARDS BY NEUTRAL
         ----------------------------------------

         1.       When the Union requests card-check recognition, the
                  Neutral shall review the Union's cards and make a
                  determination of majority support.

         2.       Majority support means that the Union has demonstrated to
                  the Neutral through the authorization cards that it
                  represents a majority of the bargaining unit employees at
                  the Facility who are on the payroll as of the date the
                  Union requested card check recognition by submitting the
                  cards to the Neutral.

         3.       The Neutral shall compare the signatures on the
                  authorization cards to signature specimens from the
                  employees' personnel files provided by the Employer.

         4.       The Neutral shall not disclose the identity of card
                  signers to the Employer.

                                     8

<PAGE>
<PAGE>

         5.       The Neutral shall not count a card if he /she determines
                  that it is untimely, not genuine or not delivered by the
                  Union in a manner consistent with the requirements of this
                  Agreement.

         6.       The Neutral, upon making a determination of majority
                  status, shall immediately provide written notice of his
                  determination to both parties.

         7.       Under this process, the Neutral is empowered to determine
                  issues that can be resolved from the face of the
                  authorization card itself compared to the Employer
                  exemplars. Issues requiring credibility determinations,
                  determinations on allegations of violations of the
                  provisions of this Agreement or the Ground Rules and all
                  other challenges to the process including the accuracy of
                  the Employer's list of eligible employees are to be
                  resolved by the Arbitrator pursuant to the Dispute
                  Resolution procedure described below.

C.       RESULTS OF ORGANIZING CAMPAIGN
         ------------------------------

                  If the Union secures majority status as determined by the
         Neutral by the end of the Organizing Campaign Period, the Employer
         shall recognize the Union as the exclusive bargaining
         representative of the Bargaining Unit employees at that Facility.

                  If the Union does not secure majority status by the end of
         the Organizing Campaign Period as determined by the Neutral, the
         Union will immediately cease and discontinue all organizing
         campaign activities at the Facility and follow the requirements set
         forth in Sections III. C. 2 above.

                  Both parties shall have the right to file challenges
         and/or objections under Section VII below.

D.       BALLSTON SPA, NY AND LORAIN, OH FACILITIES
         ------------------------------------------

                  If the Union is recognized through the card check process
         at either the Ballston Spa, New York or Lorain, Ohio facilities,
         then, after agreement on a collective bargaining agreement is
         reached, the Union shall conduct secret ballot votes on
         ratification on the collective bargaining agreement at those
         facilities.

VI.      RECOGNITION PROCEDURES AT AFTER-ACQUIRED FACILITIES.

A.       FOR STATES PROHIBITING UNION SECURITY
         -------------------------------------

         1.       The parties agree to utilize the card check process
                  described above in Section V above to determine the issue
                  of majority status at any After-Acquired Facility in any
                  state that prohibits union security (so-called "Right To
                  Work States" set forth in EFC Appendix 3).

                                     9

<PAGE>
<PAGE>

B.       FOR STATES PERMITTING UNION SECURITY
         ------------------------------------

         1.       As to any After-Acquired Facility located in a state where
                  union security clauses are permitted (so-called "non-Right
                  To Work states) the parties shall utilize the American
                  Arbitration Association ("AAA") to conduct a secret manual
                  ballot election among the employees. The parties shall
                  share AAA's costs equally.

         2.       The election shall be held on a date selected and agreed
                  to by the parties. Such election date shall be on a payday
                  no less than ten (10) days and no more than twenty (20)
                  days after the Employee Communication Meeting.

         3.       The election shall utilize the procedural safeguards of an
                  NLRB election, including posting an election notice,
                  ballots and notices in appropriate languages, and
                  convenient voting locations and hours.

         4.       Employees on the Employer's payroll as of the date of the
                  election shall be eligible to vote.

         5.       The parties shall endeavor to reach agreement on the
                  mechanics of the election. If they are unable to do so,
                  the Arbitrator (as defined in Section VII below) shall
                  make a final and binding written determination on these
                  issues within forty-eight (48) hours of hearing the
                  dispute.

C.       RESULTS OF ELECTION
         -------------------

                  If the Union obtains a majority of the valid votes cast in
         the election, the Employer shall recognize the Union as the
         exclusive bargaining representative of the bargaining unit
         employees at the Facility. If the Union fails to secure a majority
         of the valid votes case in the election, it will immediately cease
         and discontinue all organizing campaign activities at the Facility
         and follow the requirements set forth in Section III. C. 2.

                  Both parties shall have the right to file challenges
         and/or objections under Section VII below.

VII.     DISPUTE RESOLUTION

A.       SCOPE
         -----

                  This provision covers all disputes arising from the
         interpretation or application of this EFC Agreement and/or the
         Ground Rules except for the issues reserved for the Neutral in
         Section V.B. above.

B.       GOOD FAITH NEGOTIATIONS
         -----------------------

                  If either party believes the other has violated the
         provisions of this EFC Agreement or the Ground Rules set forth in
         EFC Appendix 2, the parties shall

                                     10

<PAGE>
<PAGE>

         first endeavor to resolve any disputes through good faith
         negotiations. If they cannot do so, written submission to
         arbitration shall be made no later than five (5) business days
         after the event giving rise to the dispute.

C.       SUBMISSION TO ARBITRATION
         -------------------------

                  If disputes cannot be resolved through good faith
         negotiations under Section VII.B above, then they may be submitted
         to arbitration by either party. Notice of the demand for
         arbitration shall be in writing and include a complete statement of
         the issue as well as a certification of the inability of the
         parties to resolve the matter through good faith negotiations.

D.       ARBITRATION HEARING
         -------------------

                  The Arbitrator (as selected below) shall hold a hearing
         within three (3) business days after written notification to the
         Arbitrator by a party. The Arbitrator shall issue a written order
         on whether a violation occurred, and, if so, on the appropriate
         remedy within five (5) business days after the close of the
         hearing. Any post-hearing written briefs must be submitted within
         two (2) business days after the close of hearing. The parties may
         mutually agree to waive these time limits.

E.       CEASE AND DESIST ORDERS
         -----------------------

                  If a party seeks only an order that prohibited conduct
         cease and desist from the Arbitrator, there shall be a hearing
         within twenty-four (24) hours and the Arbitrator shall issue a
         bench decision followed by a written decision. The Arbitrator's
         Decision and Order shall be limited to the dispute before him and
         will have no precedential effect.

F.       MATERIAL MISREPRESENTATION
         --------------------------

                  If the Employer believes that a statement by the Union is
         a material misrepresentation, the Employer shall inform the Union
         of its allegation and inform the Union of the corrective response
         which the Employer proposes to issue. If the parties cannot reach
         agreement on the content and form of Employer's response within six
         (6) hours after the Union's receipt of the Employer's proposal, the
         Employer may respond in the manner that it proposed to the Union.
         Such a response shall not involve an attack on the Union. The Union
         may request an order from the Arbitrator in relation to fairness of
         the Employer's response. The Employer's response or lack thereof
         shall not waive its right to seek arbitration over the Union's
         alleged misrepresentations but may be considered by the Arbitrator.

                                     11

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<PAGE>

G.       FINAL AND BINDING RESOLUTION
         ----------------------------

                  The Arbitrator (as identified and selected below) is
         authorized to issue final and binding resolutions of all disputes
         within the scope of this provision as defined in Section VII. A
         above.

H.       EXCLUSIVE METHOD OF DISPUTE RESOLUTION
         --------------------------------------

                  This Dispute Resolution procedure is the exclusive method
         of resolving disputes within the scope of this provision as defined
         in Section VII. A above. The parties waive their rights to resolve
         these issues through the National Labor Relations Board ("NLRB") or
         other judicial/administrative forum, except for enforcement
         proceedings as described below.

I.       REMEDIES
         --------

                  The Arbitrator is specifically authorized to resolve and
         remedy, as appropriate allegations of unfair labor practices by the
         parties or violations of the Ground Rules and challenges arising
         from the elections, and to order remedies consistent with the NLRB
         remedial scheme and the intent of this Agreement. The Arbitrator
         shall not have the power to add to or subtract from, or modify any
         of the terms of this Agreement.

J.       SELECTION OF ARBITRATOR
         -----------------------

                  Listed in EFC Appendix 9 is the panel of agreed-upon
         Arbitrators available to resolve disputes under this Agreement. If
         a dispute arises, they shall be asked to resolve it in rotating
         order, beginning with the First Arbitrator in EFC Appendix 9. The
         first Arbitrator available to hear the dispute within 24 hours or
         three days as appropriate shall be selected. If none are available,
         then the Arbitrator with the earliest availability shall resolve
         the dispute.

K.       COSTS OF ARBITRATOR
         -------------------

                  The fees of the Arbitrator and administrative expenses
         shall be shared equally between the Employer and the Union. Each
         party shall pay its own counsel and bear all its own costs and
         expenses.

L.       ENFORCEMENT
         -----------

                  If an Arbitrator's award is not followed, or if any party
         refuses to resolve a dispute through arbitration, the parties may
         seek enforcement under the provisions of Section 301 of the Labor
         Management Relations Act in federal court.

                                     12

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<PAGE>

ANGELICA CORPORATION                        UNITE HERE, AFL-CIO

By: /s/ Stephen M. O'Hara                   By: /s/ Bruce Raynor
   -------------------------                   -----------------------------

Name: Stephen M. O'Hara                     Name: Bruce Raynor
     -----------------------                     ---------------------------

Title: CEO                                  Title: General President
      ----------------------                      --------------------------

Date: 6/14/05                               Date: 6/14/05
     --------------                              -------------

                                     13

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<PAGE>

                                 APPENDIX A

         GROUND RULES TO ENSURE EMPLOYEE FREE CHOICE

         1.       The parties recognize that national labor law guarantees
                  employees the right to form or select any labor
                  organization to act as the employees' exclusive bargaining
                  representative for the purpose of collective bargaining,
                  as well as the right to refrain from engaging in any or
                  all such activities. These Ground Rules shall apply at the
                  Company's Current and will apply to After-Acquired
                  Facilities (as defined in Sections II and III above)
                  immediately upon the Effective Date of this EFC Agreement.

         2.       The Employer agrees to take a neutral approach to the
                  unionization of its employees. The Employer (and its
                  supervisors and agents) will not take any action or make
                  any statement in opposition to the selection by its
                  employees of a collective bargaining agent, nor shall it
                  state any preference for or opposition to the union as a
                  bargaining agent for its employees (or any segment
                  thereof). The Employer will indicate that it neither
                  supports nor opposes unionization by the Union.

                  Following the effective date of this EFC Agreement, except
                  in cases of material misrepresentations by the Union, the
                  Employer may only communicate to its employees at its
                  Current and After-Acquired facilities (as defined in
                  Sections II and III above) on subjects concerning the
                  Union by directing employees to EFC Appendices 7 or 8, as
                  applicable. All such documents shall be translated into
                  all appropriate languages, shall be posted on bulletin
                  boards at the facilities, and may be distributed to
                  employees by either party upon request.

         3.       The parties further recognize that organizing activity
                  conducted pursuant to this Agreement should be conducted
                  in an atmosphere of mutual respect toward one another and
                  toward the employees. Employees should have the choice to
                  be represented by a collective bargaining agent or not
                  without fear of coercion, intimidation, interference or
                  threats from either the Employer or the Union. To that
                  end, the Employer agrees not to discriminate against,
                  discharge or otherwise discipline any employees because
                  they joined the Union, signed authorization cards or
                  petitions, or engaged in protected concerted activity. The
                  Union agrees that its representatives will not intimidate,
                  coerce, restrain or threaten any employees of the Employer
                  in an effort to obtain authorization cards or employee
                  support.

         4.       The prohibited conduct set forth in Section III of the
                  Labor Peace Agreement entered into between the parties
                  contemporaneously with this EFC Agreement shall apply to
                  all Union activities covered under the EFC Agreement and
                  these Ground Rules.

                                     14

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<PAGE>

         5.       The Union agrees that it shall make no negative,
                  disparaging or derogatory comments about the Employer
                  related to, its products, operations, officers,
                  shareholders, stakeholders, managers or supervisors. There
                  shall be no attacks by either Union or the Employer upon
                  each other. The Union may advocate improvements in the
                  Employer's employment policies.

         6.       The Union shall not disclose Angelica financial
                  information, including management salaries and expenses.

         7.       The Union shall not make any material misrepresentations
                  to employees.

         8.       The Union will not communicate to the media, customers,
                  vendors, shareholders, politicians, community
                  organizations, advocacy organizations, clergy, financial
                  institutions, or any other third party regarding its
                  organizing campaign at any Employer Facility.

         9.       Both parties agree not to instruct, facilitate, condone,
                  advocate or support any employees' violation of this EFC
                  Agreement, including these Ground Rules. If any employee
                  or group of employees engages in actions which breach the
                  EFC Agreement independently, the Union and the Employer
                  shall publicly disavow this conduct in a manner that
                  communicates this message to all employees at the facility
                  and to any parties toward whom such actions were directed.

         10.      Access:

                  10.1     During the twenty-eight (28) day campaign period,
                  the Employer shall allow up to two designated Union
                  representatives access to the employee lunchroom or other
                  Employer designated non-work areas as set forth below for
                  the purpose of communicating with bargaining unit
                  employees during their non-work times.

                  10.2     Designated Union Representatives, while on the
                  Employer's premises, shall:

                           1.       Register with plant management prior to
                                    entering the plant and before leaving
                                    the plant.

                           2.       Behave in a professional, decorous and
                                    non-disruptive manner at all times.

                           3.       Obey all safety rules.

                           4.       Only communicate with employees during
                                    non-work time in designated non-work
                                    areas.

                                     15

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<PAGE>

                           5.       Not interfere with the Company's
                                    operations or production.

                           6.       Otherwise comply with these Ground
                                    Rules.

                  10.3     Designated Union Representatives access to the
                  Employer's premises and property shall be limited as
                  follows:

                           1.       Union representatives shall have access
                                    only to Employer designated lunch-rooms
                                    and/or other non-work areas.

                           2.       During the first two weeks of the
                                    campaign period Union representatives
                                    shall have access for up to three (3)
                                    days per week during Employer designated
                                    employee lunch periods on each shift.

                           3.       During the third and fourth week of the
                                    campaign period, Union representatives
                                    shall have access for up to two (2) days
                                    per week during Employer designated
                                    employee lunch periods on each shift.

                           4.       The Union may select which days it
                                    desires access. The Union shall give the
                                    Employer its schedule of selected dates
                                    at the Initial Meeting.

                  10.4     The Union may post leaflets at the sites where
                  Employer notices are customarily posted, so long as the
                  leaflets are not derogatory, disparaging or defamatory.

         11.      Employee Communications Meeting:

                  11.1     After receiving notice from the Union of an intent
                  to organize a facility, the Employer shall schedule a short
                  information meeting for each shift at the mutual
                  convenience of the parties but within five (5) business
                  days of such notice (the "Employee Communications
                  Meeting").

                  11.2     The Employer shall read the statement attached as
                  Ground Rules Attachment I, affirming employees rights to
                  freely choose unionization or not. The Union will be given
                  an opportunity to address the employees in order to
                  provide information about the Union and to answer
                  questions. The general outline of the Union's presentation
                  is attached as Ground Rules Attachment II. In no event
                  shall the Union solicit authorization cards in the
                  presence of any Employer representative. The Employer
                  representative shall leave after all of the initial
                  presentations are completed so that cards may be gathered
                  at the meeting. The Neutral shall end the meeting no later
                  than thirty (30) minutes after the Employer representative
                  leaves the meeting. The Union representative will leave
                  the Employer's premises with the Neutral at the end of the
                  meeting.

                                     16

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<PAGE>

                  11.3     The Neutral shall attend the meeting and present
                  the statement attached as Ground Rules Attachment III,
                  explaining either the card check process or election
                  process and informing employees of their right to lodge
                  complaints with the Neutral concerning coercion or
                  interference with their free choice.

<PAGE>
<PAGE>

                                     MOS

                                  EXHIBIT B

                       NATIONAL LABOR PEACE AGREEMENT

         This National Labor Peace Agreement, including all exhibits,
appendices and other attachments hereto (hereinafter collectively the "LP
Agreement"), is made and entered into this 14th day of June, 2005,
("Effective Date"), by and between Angelica Corporation, including its
affiliated entities operating linen management and laundry service
Facilities, (hereinafter collectively referred to as "Angelica" or the
"Employer"), and UNITE HERE, AFL-CIO, CLC, each of the UNITE HERE local
unions listed on LP Appendix 1 (attached hereto and incorporated herein by
reference), each of the UNITE HERE joint boards also listed on LP Appendix 1
and all other UNITE HERE local unions, joint boards and affiliates,
(hereinafter referred to collectively as "Union").

         WHEREAS, Employer is engaged in the business of operating a linen
management and laundry services business through 35 laundry Facilities
throughout the nation, (hereinafter referred to, along with all
After-Acquired Facilities defined below, individually and collectively as
"Facility" or "Facilities"), and is the largest provider of such services to
the healthcare industry; and

         WHEREAS, Union presently represents over 3,500 employees at 23 of
Employer's 35 laundry Facilities; and

         WHEREAS, Union has been engaged in protracted, nationwide corporate
campaign activities against Employer relating to certain organizing
disputes, and has planned a national labor strike against Employer regarding
local collective bargaining agreement terms; and

         WHEREAS, the parties, desiring to put an end to the nationwide
corporate campaign activities and to avoid the planned national strike, have
negotiated in good faith with respect to all local contractual and all
national contractual and organizing issues arising out of said corporate
campaign activities and planned strike action, and have entered into an
Agreement to settle and resolve all such issues, (said Agreement, being of
even date herewith, including all of its exhibits, attachments and
appendices, being hereinafter referred to as the "Memorandum of
Settlement"); and

         WHEREAS, the parties, desiring to include as part of the
aforementioned settlement Agreement, an Agreement relating to national labor
peace to end the labor strife between them and to establish alternative
means for resolving any differences that might arise between them in the
future, have entered into this LP Agreement, (said LP Agreement being hereby
attached to and incorporated by reference into the Memorandum of
Settlement).

<PAGE>
<PAGE>

         NOW, THEREFORE, in consideration of the mutual promises and
Agreements set forth herein, and set forth in such other aforementioned
Agreements between them, the parties agree as follows:

I.       OVERVIEW

         A.       This LP Agreement is a contract between an employer and a
                  labor organization representing employees in an industry
                  affecting commerce as defined by Section 301 of the Labor
                  Management Relations Act, 29 U.S.C. Section 185.

         B.       Immediately upon the execution of this LP Agreement, the
                  Union agrees to terminate its corporate campaign
                  activities, to settle its planned strike action, and to
                  cease all adverse economic activity and adverse publicity
                  of every nature whatsoever against the Employer, except as
                  permitted by this LP Agreement.

II.      DEFINITIONS

         A.       "After Acquired Facilities" means any laundry processing
                  Facility that the Employer comes to own, operate or
                  establish after the Effective Date of LP Agreement.

         B.       "Current Facilities" means all laundry processing
                  Facilities owned or operated by the Employer as of the
                  Effective Date of this LP Agreement excluding those
                  Facilities in which the Union currently represents all of
                  the employees in the bargaining unit.

         C.       "Corporate Campaign Activities" (CCA) means any Union
                  communication or action directed towards third parties,
                  either directly or through intermediaries, intended to,
                  likely to or that is reasonably foreseeable to influence
                  Angelica or affect Angelica's actions or decisions. CCA
                  includes actions or communications which: disparage the
                  motives, actions or legitimacy of the Employer, including
                  but not limited to its business, corporate structure,
                  finances, safety record, environmental, consumer
                  protection, or human rights records and labor relations
                  policies, except as noted below. CCA also include actions
                  or communications which denigrate or harm Angelica's
                  financial standing, reputation, business, customers,
                  customer relations, vendors, vendor relations, operations,
                  directors, employees or shareholders. intended to, likely
                  to or that are reasonably foreseeable to influence
                  Angelica or affect Angelica's actions or decisions. "Third
                  parties" includes the media, customers, vendors,
                  shareholders, politicians, community organizations,
                  advocacy organizations, clergy, financial institutions and
                  any other stakeholder groups except Angelica employees
                  represented by the Union.

         D.       "Existing Organized Facilities" means the twenty-three
                  (23) Angelica Facilities that are currently represented by
                  the Union as of the Effective Date of this LP Agreement.

                                     2

<PAGE>
<PAGE>

         E.       "Local Collective Bargaining Agreements" means collective
                  bargaining Agreements between the Employer and the Union
                  (and/or any of its affiliates) at an Existing Organized
                  Facility.

III.     PROHIBITED CONDUCT

         A.       The Union shall refrain from engaging in all Corporate
                  Campaign Activities (as defined in Paragraph II. C. above)
                  against the Employer or any of its Facilities.

         B.       The Union also agrees not to support, condone, sponsor or
                  advocate any slow downs, tie-up of equipment, "inside
                  game" activities, or "work to rule" campaigns, against the
                  Employer or any of its Facilities. In addition, the Union
                  shall not support, condone, sponsor or advocate any
                  demonstrations, picketing, disruption of work, walk outs,
                  strikes or sympathy strikes against the Employer or any of
                  its Facilities, except as set forth in Section IV. B. 3
                  below. Nothing in this LP Agreement, however, shall be
                  interpreted to limit the Union's right to communicate with
                  its members and the employees it represents, consistent
                  with existing access rights, if any, in Local Collective
                  Bargaining Agreements and in accordance with the
                  provisions with this LP Agreement.

         C.       The Union shall not provide financial or other support to
                  any employees, other individuals, groups or attorneys
                  bringing civil or administrative actions against Angelica.
                  However, nothing in this LP Agreement shall prohibit the
                  Union from informing employees of their legal rights.

         D.       The Union shall not sponsor, advocate, finance, condone or
                  support any employees, other individuals, or groups for
                  any third parties to engage in any of the activities
                  prohibited above. Upon the occurrence of one or more of
                  the prohibited activities specified in this LP Agreement,
                  the Union, upon notice from Angelica, will promptly
                  (within 24 hours) disavow the prohibited activity in a
                  manner that communicates this message to all employees at
                  the Facility and to any parties toward whom such actions
                  were directed, and to any other third parties that the
                  Employer indicates should receive the communication.

         E.       The Employer shall not communicate with or take action
                  toward third parties intended to denigrate or undermine
                  the legitimacy of the Union, except to enforce the terms
                  of this Agreement. Nothing herein shall restrict the
                  Employer's right to communicate with its employees
                  consistent with applicable law except as set forth in the
                  Employee Free Choice Agreement attached to and
                  incorporated into the Memorandum of Settlement
                  (hereinafter referred to as the "EFC Agreement").

         F.       Notwithstanding anything to the contrary contained above,
                  each party agrees that communications by either of them to
                  employees of the Employer, may be critical of the other
                  party's policies and practices as they related to issues
                  in dispute between the parties; provided, however,

                                     3

<PAGE>
<PAGE>

                  that no such communications shall denigrate or disparage
                  the other party or its personnel.

         G.       Nothing in this Agreement shall limit the ability of
                  either party to defend itself in pending or future
                  litigation.

IV.      LABOR DISPUTES

         A.       In connection with the collective bargaining of Local
                  Collective Bargaining Agreements, the parties jointly
                  agree to endeavor to resolve problems through direct
                  dialogue and negotiations without resorting to outside
                  authorities. In this regard, the parties shall develop an
                  approach to collective bargaining that maximizes mutual
                  gains and minimizes the chance for confrontation and
                  unresolved dispute.

         B.       If, despite these efforts, the parties are unable to
                  successfully negotiate a collective bargaining Agreement
                  (or a successor collective bargaining Agreement) at an
                  Angelica Facility after exhausting good faith
                  negotiations:

                  1.       The Union may strike that Facility, engage in
                           lawful primary picketing and inform employees of
                           its views concerning the issues in the strike.
                           "Lawful primary picketing" shall be defined as
                           lawful picketing at the struck Facility where the
                           labor dispute arose and lawful picketing of other
                           Angelica Facilities performing struck work.

                  2.       The Employer may inform employees of its views
                           concerning the issues in the strike; and exercise
                           its lawful rights, including locking out
                           employees of the Facility, unilaterally
                           implementing its final offer following good faith
                           impasse; and employing replacement workers to the
                           extent permitted by law.

                  3.       In the event of a strike or lockout, the Union
                           will not picket customers receiving struck work
                           or non-Angelica Facilities performing struck work
                           for a period of thirty (30) days after
                           commencement of the strike. Following such thirty
                           (30) day period, the Union may engage in
                           ambulatory picketing ("between the headlights")
                           of customers receiving struck work or in picketing
                           of non Angelica facilities performing struck work
                           consistent with applicable law. Any other
                           economic pressure involving customers or third
                           parties is prohibited by this Agreement.

                  4.       In the event of a strike or lockout, the Union
                           may inform the media of the contractual issues at
                           stake through general written press releases
                           explaining the issues. The Union shall not take
                           any other action inconsistent with the
                           prohibition on CCA contained in this Agreement.

                  5.       The Union shall not engage in any sympathy
                           strikes during the term of this LP Agreement at
                           any Angelica Facility.

                                     4

<PAGE>
<PAGE>

V.       DISPUTE RESOLUTION

         A.       The Employer and the Union agree that dispute resolution
                  procedures in this LP Agreement shall be the sole and
                  exclusive means for resolving all disputes arising between
                  the parties under this LP Agreement. To the extent a
                  dispute under the LP Agreement also implicates rights and
                  obligations under Local Collective Bargaining Agreements,
                  nothing herein is intended to diminish the Parties'
                  ability to enforce such rights and obligations under Local
                  Collective Bargaining Agreements.

         B.       During such time as Local Collective Bargaining Agreements
                  have expired such that the no-strike/no lockout provisions
                  of a Local Collective Bargaining Agreement are not in
                  effect, the arbitration provisions of this LP Agreement
                  shall remain in effect to resolve disputes arising under
                  this LP Agreement. Nothing in this LP Agreement, however,
                  shall require the parties to arbitrate the terms of any
                  new Local Collective Bargaining Agreement.

         C.       Nothing in this LP Agreement shall be interpreted to
                  preclude Union representation of or advocacy on behalf of
                  employees (to whom the Union owes a statutory duty) before
                  the NLRB. Moreover, this LP Agreement does not restrict
                  the rights of employees to invoke procedures and remedies
                  protected by statute, provided the Union shall not use
                  this exception to sponsor, advocate, finance, condone or
                  support the concerted filing of such employee charges.

         D.       Any alleged violation or dispute involving the terms of
                  this LP Agreement may be brought to a joint committee
                  composed of the General Counsels of the Union and the
                  Employer or their designees. If the alleged violations or
                  dispute cannot be satisfactorily resolved by the parties
                  within twenty four (24) hours of such notification
                  (excluding Saturdays, Sundays and holidays), either party
                  may submit such dispute to an Arbitrator for an expedited
                  hearing. The expedited hearing shall be held within five
                  (5) business days after written submission to the
                  Arbitrator by a party. The Arbitrator must render a
                  decision within five (5) business days of the close of the
                  hearing. Any post-hearing written briefs must be submitted
                  within three (3) business days after the close of the
                  hearing. The Arbitrator's decision shall be limited to
                  whether or not the LP Agreement has been violated. If the
                  Arbitrator finds that the LP Agreement has been violated,
                  he/she shall issue a cease and desist order. This
                  procedure for breaches of this LP Agreement shall be
                  utilized in the place of any applicable grievance and
                  arbitration provisions of any Local Collective Bargaining
                  Agreement.

         E.       Each party retains the right to seek judicial enforcement
                  of the Arbitrator's determination and order. The
                  prevailing party in the arbitration further retains the
                  right to seek monetary damages and other relief from a
                  court of competent jurisdiction for breach of this LP
                  Agreement through an action under Section 301 of the Labor
                  Management Relations Act. Each party also retains the
                  right to seek enforcement under the provisions of Section
                  301 of the Labor Management Relations Act in the event
                  that any party refuses to resolve a dispute through
                  arbitration.

                                     5

<PAGE>
<PAGE>

         F.       Notwithstanding the foregoing, this LP Agreement is not
                  intended to supplant or otherwise diminish each party's
                  ability to seek appropriate equitable remedies in a court
                  of competent jurisdiction. Each party hereby reserves its
                  right to seek such remedies, including but not limited to
                  injunctive relief in both state and Federal court in the
                  event of any violation of any Local Collective Bargaining
                  Agreement or other unlawful conduct.

         G.       Listed in LP Agreement Appendix 2 is the panel of agreed
                  upon Arbitrators available to resolve disputes under this
                  LP Agreement. If a dispute arises, the Arbitrator asked to
                  resolve this dispute shall be selected in rotating order
                  beginning with the first Arbitrator listed in LP Agreement
                  Appendix 2. If the initial Arbitrator is not available to
                  hear the dispute within five(5) business days, the parties
                  shall move down the list and select the first Arbitrator
                  available to hold the hearing within the period required
                  under this procedure. If no Arbitrator is available, then
                  the Arbitrator with the earliest availability shall
                  resolve the dispute.

         H.       The fees of the Arbitrator and administrative expenses
                  shall be shared equally between the Employer and the
                  Union. Each party shall pay its own counsel and bear its
                  own costs and expenses.

         I.       The Arbitrator shall not have the power to add to subtract
                  from, or modify any of the terms of this LP Agreement.

VI.      INCORPORATION INTO EXISTING LABOR AGREEMENTS

         A.       This LP Agreement, as it applies to Existing Organized
                  Facilities, shall become a supplement to the Local
                  Collective Bargaining Agreements of all Existing Organized
                  Facilities as of the Effective Date of this LP Agreement.
                  This LP Agreement is intended to add to and not diminish
                  or otherwise alter the prohibitions against strikes or
                  work stoppages in local Agreements including but not
                  limited to the rights of Angelica to discipline employees
                  for violations of local no-strike provisions.

         B.       The Union and the Employer agree that the provisions of
                  this LP Agreement, as it applies to Existing Organized
                  Facilities, shall be incorporated into all Local
                  Collective Bargaining Agreements for Existing Organized
                  Facilities set forth in Appendix 3 to this LP Agreement
                  through the execution of individual Memoranda of Agreement
                  in substantially the same form as set forth in Appendix 4
                  to this LP Agreement. Each such Memorandum of Agreement
                  shall be signed by the appropriate Employer representative
                  and by the appropriate official of the Union with legal
                  authority to execute collective bargaining Agreements with
                  Angelica. Notwithstanding anything to the contrary
                  contained herein, this LP Agreement shall continue in full
                  force and effect throughout the term of this LP Agreement,
                  including as to each Local Collective Bargaining
                  Agreement, notwithstanding the expiration of any such
                  Local Collective Bargaining Agreement or any successor
                  Local Collective Bargaining Agreements.

                                     6

<PAGE>
<PAGE>

         C.       Except as otherwise provided in this LP Agreement, in the
                  event of a conflict between this LP Agreement and any
                  Local Collective Bargaining Agreement between the parties,
                  this LP Agreement shall prevail.

VII.     NOTICE TO EMPLOYEES

                  The Union agrees to attach this LP Agreement to the
         Local Collective Bargaining Agreement at each Existing Organized
         Facility within thirty (30) days of the Effective Date of this LP
         Agreement and to disclose the existence of this LP Agreement prior
         to ratification of any Local Collective Bargaining Agreements
         referred to in Exhibits C, D, E and F of the Memorandum of
         Settlement, whichever occurs first. For all other Facilities, the
         Employer shall post this LP Agreement forty-eight (48) hours prior
         to the initial Employee Communications Meeting under the EFC
         Agreement.

VIII.    TERM OF AGREEMENT

                  This LP Agreement shall commence on the Effective Date
         (hereinabove defined), and shall remain in full force and effect,
         subject to earlier termination in accordance with its terms, for a
         period of ten (10) years, after which it will terminate by its own
         terms.

ANGELICA CORPORATION                        UNITE HERE, AFL-CIO, CLC

By: /s/ Stephen M. O'Hara                   By: /s/ Bruce Raynor
   -------------------------                   -----------------------------

Name: Stephen M. O'Hara                     Name: Bruce Raynor
     -----------------------                     ---------------------------

Title: CEO                                  Title: General President
      ----------------------                      --------------------------

Date: 6/14/05                               Date: 6/14/05
     --------------                              -------------

                                     7EXHIBIT 4.1
                                                                     -----------

                          SECURITIES PURCHASE AGREEMENT

         This Securities Purchase Agreement (this "Agreement") is dated as of
June 8, 2005 among Western Power & Equipment Corp., a Delaware corporation (the
"Company"), and each purchaser identified on the signature pages hereto (each,
including its successors and assigns, a "Purchaser" and collectively the
"Purchasers").

         WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act") and Rule 506 promulgated thereunder, the Company desires
to issue and sell to each Purchaser, and each Purchaser, severally and not
jointly, desires to purchase from the Company, securities of the Company as more
fully described in this Agreement.

         NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in
this Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agree
as follows:

                                   ARTICLE I.
                                   DEFINITIONS

         1.1 Definitions. In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debentures (as defined herein), and (b) the
following terms have the meanings indicated in this Section 1.1:

                  "Action" shall have the meaning ascribed to such term in
         Section 3.1(j).

                  "Affiliate" means any Person that, directly or indirectly
         through one or more intermediaries, controls or is controlled by or is
         under common control with a Person, as such terms are used in and
         construed under Rule 144 under the Securities Act. With respect to a
         Purchaser, any investment fund or managed account that is managed on a
         discretionary basis by the same investment manager as such Purchaser
         will be deemed to be an Affiliate of such Purchaser.

                  "APM Purchase Note" shall mean that certain Promissory Note of
         the Company issued on September 8, 2004 with a principal amount of
         $2,500,000 made payable to Basalite Concrete Products, LLC and Edith
         Greenberg Irrevocable Trust, which note is guaranteed by Advanced
         Mineral Technology of Nevada, Inc.

                  "Closing" means the closing of the purchase and sale of the
         Securities pursuant to Section 2.1.

                  "Closing Date" means the Trading Day when all of the
         Transaction Documents have been executed and delivered by the
         applicable parties thereto, and all conditions

<PAGE>

         precedent to (i) the Purchasers' obligations to pay the Subscription
         Amount and (ii) the Company's obligations to deliver the Securities
         have been satisfied or waived.

                  "Commission" means the Securities and Exchange Commission.

                  "Common Stock" means the common stock of the Company, par
         value $0.001 per share, and any other class of securities into which
         such securities may hereafter have been reclassified or changed into.

                  "Common Stock Equivalents" means any securities of the Company
         or its Subsidiaries which would entitle the holder thereof to acquire
         at any time Common Stock, including, without limitation, any debt,
         preferred stock, rights, options, warrants or other instrument that is
         at any time convertible into or exercisable or exchangeable for, or
         otherwise entitles the holder thereof to receive, Common Stock.

                  "Company Counsel" means Gersten Savage Kaplowitz Wolf &
         Marcus, LLP.

                  "Contingent Obligation" means, as to any Person, any direct or
         indirect liability, contingent or otherwise, of that Person with
         respect to any indebtedness, lease, dividend or other obligation of
         another Person if the primary purpose or intent of the Person incurring
         such liability, or the primary effect thereof, is to provide assurance
         to the obligee of such liability that such liability will be paid or
         discharged, or that any agreements relating thereto will be complied
         with, or that the holders of such liability will be protected (in whole
         or in part) against loss with respect thereto.

                  "Conversion Price" shall have the meaning ascribed to such
         term in the Debentures.

                  "Debentures" means, collectively, the Series A Debentures and
         the Series B Debentures.

                   "Disclosure Schedules" shall have the meaning ascribed to
         such term in Section 3.1.

                  "Effective Date" means the date that the initial Registration
         Statement filed by the Company pursuant to the Registration Rights
         Agreement is first declared effective by the Commission.

                  "Evaluation Date" shall have the meaning ascribed to such term
         in Section 3.1(s).

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

                  "Exempt Issuance" means the issuance of (a) shares of Common
         Stock or options to employees, officers or directors of the Company
         pursuant to any stock or option plan duly adopted by a majority of the
         non-employee members of the Board of Directors of the Company or a
         majority of the members of a committee of non-employee directors

                                        2
<PAGE>

         established for such purpose, provided in no event shall the Company
         issue shares of Common Stock or issue options to purchase shares of
         Common Stock in excess of, in the aggregate, 3% of the Company's issued
         and outstanding shares of Common Stock on the date hereof; (b)
         securities upon the exercise or exchange of or conversion of any
         Securities issued hereunder and/or securities exercisable or
         exchangeable for or convertible into shares of Common Stock issued and
         outstanding on the date of this Agreement, provided that such
         securities have not been amended since the date of this Agreement to
         increase the number of such securities or to decrease the exercise,
         exchange or conversion price of any such securities; and (c) securities
         issued pursuant to acquisitions of assets or securities of any other
         Person, mergers, joint ventures or other strategic transactions,
         provided any such issuance shall only be to a Person which is, itself
         or through its subsidiaries, an operating company in a business that,
         in the reasonable business judgment of the board of directors of the
         Company is complementary to the existing businesses of the Company and
         in which the Company receives benefits in addition to the investment of
         funds, but shall not include a transaction in which the Company is
         issuing securities primarily for the purpose of raising capital or to
         an entity whose primary business is investing in securities.

                  "Existing Indebtedness" shall mean the obligations set forth
         on Schedule 3.1(cc) annexed hereto.

                  "Existing Liens" shall mean the Liens listed on Schedule
         3.1(hh) annexed hereto.

                  "Existing Subsidiary" means any direct or indirect Subsidiary
         of the Company as set forth on Schedule 3.1(a).

                  "Factoring Agreement" shall mean that certain Master Factoring
         Agreement executed by the Company and each Subsidiary of the Company
         for the benefit of the Purchasers and attached to the Security
         Agreement as Annex C.

                   "FW" means Feldman Weinstein LLP with offices at 420
         Lexington Avenue, Suite 2620, New York, New York 10170-0002.

                  "GAAP" shall have the meaning ascribed to such term in Section
         3.1(h).

                  "GE Facility" means the Company's inventory floor plan and
         operating line of credit June 30, 1999 with GE Commercial Distribution
         Finance, as in effect on the date hereof.

                   "Indebtedness" of any Person means, without duplication (A)
         all indebtedness for borrowed money, (B) all obligations issued,
         undertaken or assumed as the deferred purchase price of property or
         services (other than trade payables entered into in the ordinary course
         of business), (C) all reimbursement or payment obligations with respect
         to letters of credit, surety bonds and other similar instruments, (D)
         all obligations evidenced by notes, bonds, debentures or similar
         instruments, including obligations so evidenced incurred in connection
         with the acquisition of property, assets or businesses,

                                        3
<PAGE>

         (E) all indebtedness created or arising under any conditional sale or
         other title retention agreement, or incurred as financing, in either
         case with respect to any property or assets acquired with the proceeds
         of such indebtedness (even though the rights and remedies of the seller
         or bank under such agreement in the event of default are limited to
         repossession or sale of such property), (F) all monetary obligations
         under any leasing or similar arrangement which, in connection with
         generally accepted accounting principles, consistently applied for the
         periods covered thereby, is classified as a capital lease, (G) all
         indebtedness referred to in clauses (A) through (F) above secured by
         (or for which the holder of such Indebtedness has an existing right,
         contingent or otherwise, to be secured by) any mortgage, lien, pledge,
         charge, security interest or other encumbrance upon or in any property
         or assets (including accounts and contract rights) owned by any Person,
         even though the Person which owns such assets or property has not
         assumed or become liable for the payment of such indebtedness, and (H)
         all Contingent Obligations in respect of indebtedness or obligations of
         others of the kinds referred to in clauses (A) through (G) above.

                  "Intellectual Property Rights" shall have the meaning ascribed
         to such term in Section 3.1(p).

                  "Legend Removal Date" shall have the meaning ascribed to such
         term in Section 4.1(c).

                  "Liens" means a lien, charge, security interest, mortgage,
         encumbrance, or other charge against assets of the Company or any of
         its Subsidiaries.

                  "Lock Box Agreement" shall mean a Four Party Wholesale Lockbox
         Agreement(s), by and among Wells Fargo Bank, the Company, each
         Subsidiary of the Company and the agent appointed by the Purchasers, in
         form and substance reasonably satisfactory to the Purchasers.

                  "Material Adverse Effect" shall mean any (i) material adverse
         effect on the legality, validity or enforceability of any Transaction
         Document, (ii) material adverse effect on the results of operations,
         assets, business, prospects or condition (financial or otherwise) of
         the Company and its Subsidiaries, when taken as a consolidated whole,
         or (iii) material adverse effect on the Company's ability to perform in
         any material respect on a timely basis its obligations under any
         Transaction Document.

                  "Material Permits" shall have the meaning ascribed to such
         term in Section 3.1(m).

                  "Maximum Rate" shall have the meaning ascribed to such term in
         Section 5.17.

                  "McLain/Rubin Notes" shall mean, collectively, that certain
         Promissory Note of the Company issued on September 8, 2004 with a
         principal amount

                                        4
<PAGE>

         of $100,000 made payable to McLain-Rubin Realty LLC due on September
         30, 2005, that certain Promissory Note of the Company issued on
         September 8, 2004 with a principal amount of $50,000 made payable to
         Cindy McLain as guardian for Cassidy Larsen, due on September 30, 2005,
         that certain Promissory Note of the Company issued on September 8, 2004
         with a principal amount of $50,000 made payable to Christina Walstrom,
         due on September 30, 2005, that certain Promissory Note of the Company
         issued on September 8, 2004 with a principal amount of $100,000 made
         payable to Stacy McLain Trust, due on September 30, 2005.

                  "Participation Maximum" shall have the meaning ascribed to
         such term in Section 4.13.

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

                  "Pre-Notice" shall have the meaning ascribed to such term in
         Section 4.13.

                  "Proceeding" means an action, claim, suit, investigation or
         proceeding (including, without limitation, an investigation or partial
         proceeding, such as a deposition), whether commenced or threatened.

                  "Purchaser Party" shall have the meaning ascribed to such term
         in Section 4.11.

                  "Registration Rights Agreement" means the Registration Rights
         Agreement, dated the date hereof, among the Company and the Purchasers,
         in the form of Exhibit B attached hereto.
                  "Registration Statement" means a registration statement
         meeting the requirements set forth in the Registration Rights Agreement
         and covering the resale of the Underlying Shares by each Purchaser as
         provided for in the Registration Rights Agreement.

                  "Required Approvals" shall have the meaning ascribed to such
         term in Section 3.1(e).

                  "Required Minimum" means, as of any date, the maximum
         aggregate number of shares of Common Stock then issued or potentially
         issuable in the future pursuant to the Transaction Documents, including
         any Underlying Shares issuable upon exercise or conversion in full of
         all Warrants and Debentures (including Underlying Shares issuable as
         payment of interest), ignoring any conversion or exercise limits set
         forth therein, and assuming that the Conversion Price is at all times
         on and after the date of determination 75% of the then Conversion Price
         on the Trading Day immediately prior to the date of determination.

                  "Rule 144" means Rule 144 promulgated by the Commission
         pursuant to the Securities Act, as such Rule may be amended from time
         to time, or any similar rule or regulation hereafter adopted by the
         Commission having substantially the same effect as such Rule.

                                        5
<PAGE>

                  "SEC Reports" shall have the meaning ascribed to such term in
         Section 3.1(h).

                  "Securities" means the Debentures, the Warrants and the
         Underlying Shares.

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

                  "Security Agreement" means the Security Agreement, dated the
         date hereof, among the Company and the Purchasers, in the form of
         Exhibit F attached hereto.

                  "Security Documents" shall mean the Security Agreement, the
         Subsidiary Guarantees and any other documents and filing required
         thereunder in order to grant the Purchasers a security interest in all
         of the assets of the Company, including all UCC-1 filing receipts.

                  "Series A Debentures" means, the Variable Rate Secured
         Convertible Debentures due, subject to the terms therein, 60 months
         from their date of issuance, issued by the Company to the Purchasers
         hereunder, in the form of Exhibit A.

                    "Series A Subscription Amount" means, as to each Purchaser,
         the aggregate amount to be paid for Series A Debentures and Series A
         Warrants purchased hereunder as specified below such Purchaser's name
         on the signature page of this Agreement and next to the heading "Series
         A Subscription Amount", in United States Dollars and in immediately
         available funds.

                  "Series A Warrants" means the Common Stock purchase warrants,
         in the form of Exhibit C delivered to the Purchasers at the Closing in
         accordance with Section 2.2(a)(iv) hereof, which Series A Warrants
         shall be exercisable immediately and have a term of exercise equal to
         five years.

                  "Series B Debentures" means, the Variable Rate Secured
         Debentures due, subject to the terms therein, 6 months after their date
         of issuance, issued by the Company to the Purchasers hereunder, in the
         form of Exhibit G.

                   "Series B Subscription Amount" means, as to each Purchaser,
         the aggregate amount to be paid for Series B Debentures and Series B
         Warrants purchased hereunder as specified below such Purchaser's name
         on the signature page of this Agreement and next to the heading "Series
         B Subscription Amount", in United States Dollars and in immediately
         available funds.

                  "Series B Warrants" means the Common Stock purchase warrants,
         in the form of Exhibit C delivered to the Purchasers at the Closing in
         accordance with Section 2.2(a)(vi) hereof, which Series B Warrants
         shall be exercisable immediately and have a term of exercise equal to
         five years.

                   "Series C Warrants" means the warrants to purchase additional
         Series A Debentures and Series A Warrants, in the form of Exhibit E
         delivered to the Purchasers at the Closing in accordance with Section
         2.2(a) hereof, which Series C Warrants shall be

                                        6
<PAGE>

         exercisable immediately and have a term of exercise equal to the
         earlier of (i) the 18 months anniversary of the Effective Date and (ii)
         the 3 year anniversary of the date hereof.

                  "Short Sales" shall include all "short sales" as defined in
         Rule 200 of Regulation SHO under the Exchange Act.

                  "Subscription Amount" means the Series A Subscription Amount
         and the Series B Subscription Amount.

                  "Subsequent Financing" shall have the meaning ascribed to such
         term in Section 4.13.

                  "Subsequent Financing Notice" shall have the meaning ascribed
         to such term in Section 4.13.

                  "Subsidiary" of any Person shall mean and include (i) any
         corporation more than 50% of whose stock of any class or classes having
         by the terms thereof ordinary voting power to elect a majority of the
         directors of such corporation (irrespective of whether or not at the
         time stock of any class or classes of such corporation shall have or
         might have voting power by reason of the happening of any contingency)
         is at the time owned by such Person directly or indirectly through
         Subsidiaries and (ii) any limited liability company, partnership,
         association, joint venture or other entity in which such Person
         directly or indirectly through Subsidiaries, has more than a 50% equity
         or ownership interest at the time.

                  "Subsidiary Guarantee" means the Subsidiary Guarantee, dated
         the date hereof, among each of its Subsidiaries and the Purchasers, in
         the form of Exhibit H attached hereto.

                  "Trading Day" means a day on which the Common Stock is traded
         on a Trading Market

                   "Trading Market" means the following markets or exchanges on
         which the Common Stock is listed or quoted for trading on the date in
         question: the Nasdaq SmallCap Market, the American Stock Exchange, the
         New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin
         Board.

                  "Transaction Documents" means this Agreement, the Debentures,
         the Warrants, the Registration Rights Agreement, the Security
         Agreement, the Subsidiary Guarantee, the Lock Box Agreement, the
         Factoring Agreement and any other documents or agreements executed in
         connection with the transactions contemplated hereunder.

                  "Trust Note" shall mean that certain Promissory Note of the
         Company issued on September 8, 2004 with a principal amount of $200,000
         made payable to the Rubin Family Irrevocable Stock Trust due on
         September 30, 2005.

                                        7
<PAGE>

                  "Underlying Shares" means the shares of Common Stock issuable
         and issued upon conversion of the Debentures and upon exercise of the
         Warrants and issuable and issued in lieu of the cash payment of
         interest on the Debentures in accordance with the terms of the
         Debentures.

                  "VWAP" means, for any date, the price determined by the first
         of the following clauses that applies: (a) if the Common Stock is then
         listed or quoted on a Trading Market, the daily volume weighted average
         price of the Common Stock for such date (or the nearest preceding date)
         on the primary Trading Market on which the Common Stock is then listed
         or quoted as reported by Bloomberg Financial L.P. (based on a Trading
         Day from 9:30 a.m. EST to 4:02 p.m. Eastern Time) using the VAP
         function; (b) if the Common Stock is not then listed or quoted on the
         Trading Market and if prices for the Common Stock are then reported in
         the "Pink Sheets" published by the Pink Sheets, LLC (or a similar
         organization or agency succeeding to its functions of reporting
         prices), the most recent bid price per share of the Common Stock so
         reported; or (c) in all other cases, the fair market value of a share
         of Common Stock as determined by a nationally recognized-independent
         appraiser selected in good faith by Purchasers holding a majority of
         the principal amount of the Debentures then outstanding.

                  "Warrants" means, collectively, the Series A Warrants, the
         Series B Warrants and the Series C Warrants.

                  "Warrant Shares" means the shares of Common Stock issuable
         upon exercise of the Series A Warrants and the Series B Warrants.

                                   ARTICLE II.
                                PURCHASE AND SALE

         2.1 Closing. On the Closing Date, upon the terms and subject to the
conditions set forth herein, concurrent with the execution and delivery of this
Agreement by the parties hereto, the Company agrees to sell, and each Purchaser
agrees to purchase in the aggregate, severally and not jointly, up to
$32,000,000 principal amount of the Debentures. Each Purchaser shall deliver to
the Company via wire transfer or a certified check immediately available funds
equal to their Subscription Amount and the Company shall deliver to each
Purchaser their respective Debenture and Warrants as determined pursuant to
Section 2.2(a) and the other items set forth in Section 2.2 issuable at the
Closing. Upon satisfaction of the conditions set forth in Sections 2.2 and 2.3,
the Closing shall occur at the offices of FW, or such other location as the
parties shall mutually agree.

         2.2 Deliveries.

                  a)       On the Closing Date, the Company shall deliver or
                           cause to be delivered to each Purchaser the
                           following:

                           (i)     this Agreement duly executed by the Company;

                                        8
<PAGE>

                           (ii)    a Series A Debenture with a principal amount
                                   equal to such Purchaser's Series A
                                   Subscription Amount, registered in the name
                                   of such Purchaser;

                           (iii)   a Series B Debenture with a principal amount
                                   equal to such Purchaser's Series B
                                   Subscription Amount (for each $1 million
                                   principal amount of Series A Debentures,
                                   $66,666 principal amount of Series B
                                   Debentures), registered in the name of such
                                   Purchaser;

                           (iv)    a Series A Warrant registered in the name of
                                   such Purchaser to purchase up to a number of
                                   shares of Common Stock equal to 35% of such
                                   Purchaser's Series A Subscription Amount
                                   divided by the arithmetic average of the 5
                                   consecutive VWAPs immediately prior to the
                                   date hereof, with an exercise price equal to
                                   $1.75, subject to adjustment therein;

                           (v)     a Series B Warrant registered in the name of
                                   such Purchaser, to purchase up to a number of
                                   shares of Common Stock equal to 20% of such
                                   Purchaser's Series B Subscription Amount
                                   divided by the arithmetic average of the 5
                                   consecutive VWAPs immediately prior to the
                                   date hereof, with an exercise price equal to
                                   $1.75, subject to adjustment therein;

                           (vi)    a Series C Warrant registered in the name of
                                   such Purchaser, to purchase (A) such
                                   principal amount of additional Series A
                                   Debentures equal to 25% of such Purchaser's
                                   Series A Subscription Amount and otherwise
                                   identical to the Series A Debentures issued
                                   at the Closing, and (B) a number of Series A
                                   Warrants equal to 35% of the shares of Common
                                   Stock issuable upon conversion of such
                                   additional Series A Debentures and otherwise
                                   identical to the Series A Warrants issued at
                                   the Closing;

                           (vii)   the Registration Rights Agreement duly
                                   executed by the Company;

                           (viii)  the Security Agreement, duly executed by the
                                   Company, along with all the Security
                                   Documents;

                           (ix)    a payoff letter for the GE Facility and UCC
                                   Form 3 termination statements of the Existing
                                   Liens securing the GE Facility;

                           (x)     pay-off for the APM Purchase Note and, if
                                   any, UCC Form 3 termination statements of the
                                   Existing Liens securing the APM Purchase
                                   Note;

                           (xi)    a first position deed of trust for the
                                   benefit of the Purchasers granting a
                                   first-position lien and encumbrance upon
                                   certain real

                                        9
<PAGE>

                                   property owned by Arizona Pacific Materials
                                   LLC, a wholly owned subsidiary of the
                                   Company, located in Pinal County, Arizona,
                                   and consisting of approximately 73.636 acres,
                                   commonly know as 9390 East Hiller Road,
                                   Florence, Arizona, and more particularly
                                   described in the Deed of Trust, in form and
                                   substance reasonably satisfactory to the
                                   Purchasers;

                           (xii)   a duly executed Lock Box Agreement, in form
                                   and substance reasonably satisfactory to the
                                   Purchasers, duly executed by the parties
                                   thereto;

                           (xiii)  a duly executed Factoring Agreement, in form
                                   and substance reasonably satisfactory to the
                                   Purchasers, duly executed by the parties
                                   thereto;

                           (xiv)   agreement to extend the maturity of the Trust
                                   Note until December 31, 2005; in form and
                                   substance reasonably satisfactory to the
                                   Purchasers;

                           (xv)    agreement to extend the maturity of the
                                   McLain/Rubin Notes until, as to 1/3 principal
                                   amount of such notes, December 31, 2006, as
                                   to 1/3 principal amount of such notes,
                                   December 31, 2007 and as to 1/3 principal
                                   amount of such notes, December 31, 2008, in
                                   form and substance reasonably satisfactory to
                                   the Purchasers; and

                           (xvi)   a legal opinion of Company Counsel, in the
                                   form of Exhibit D attached hereto.

                  b)       On the Closing Date, each Purchaser shall deliver or
                           cause to be delivered to the Company the following:

                           (i)     this Agreement duly executed by such
                                   Purchaser;

                           (ii)    such Purchaser's Subscription Amount by wire
                                   transfer to the account as specified in
                                   writing by the Company;

                           (iii)   the Security Agreement, duly executed by such
                                   Purchaser; and

                           (iv)    the Registration Rights Agreement duly
                                   executed by such Purchaser.

         2.3 Closing Conditions.

                  a)       The obligations of the Company hereunder in
                           connection with the Closing are subject to the
                           following conditions being met:

                           (i)     the accuracy in all material respects when
                                   made and on the Closing

                                       10
<PAGE>

                                   Date of the representations and warranties of
                                   the Purchasers contained herein;

                           (ii)    all obligations, covenants and agreements of
                                   the Purchasers required to be performed at or
                                   prior to the Closing Date shall have been
                                   performed; and

                           (iii)   the delivery by the Purchasers of the items
                                   set forth in Section 2.2(b) of this
                                   Agreement.

                  b)       The respective obligations of the Purchasers
                           hereunder in connection with the Closing are subject
                           to the following conditions being met:

                           (i)     the accuracy in all material respects on the
                                   Closing Date of the representations and
                                   warranties of the Company contained herein;

                           (ii)    all obligations, covenants and agreements of
                                   the Company required to be performed at or
                                   prior to the Closing Date shall have been
                                   performed;

                           (iii)   the delivery by the Company of the items set
                                   forth in Section 2.2(a) of this Agreement;

                           (iv)    there shall have been no Material Adverse
                                   Effect with respect to the Company since the
                                   date hereof; and

                           (v)     from the date hereof to the Closing Date,
                                   trading in the Common Stock shall not have
                                   been suspended by the Commission (except for
                                   any suspension of trading of limited duration
                                   agreed to by the Company, which suspension
                                   shall be terminated prior to the Closing),
                                   and, at any time prior to the Closing Date,
                                   trading in securities generally as reported
                                   by Bloomberg Financial Markets shall not have
                                   been suspended or limited, or minimum prices
                                   shall not have been established on securities
                                   whose trades are reported by such service, or
                                   on any Trading Market, nor shall a banking
                                   moratorium have been declared either by the
                                   United States or New York State authorities
                                   nor shall there have occurred any material
                                   outbreak or escalation of hostilities or
                                   other national or international calamity of
                                   such magnitude in its effect on, or any
                                   material adverse change in, any financial
                                   market which, in each case, in the reasonable
                                   judgment of each Purchaser, makes it
                                   impracticable or inadvisable to purchase the
                                   Debentures at the Closing.

                                  ARTICLE III.
                         REPRESENTATIONS AND WARRANTIES

                                       11
<PAGE>

         3.1 Representations and Warranties of the Company. Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the "Disclosure Schedules") which Disclosure
Schedules shall be deemed a part hereof, the Company hereby makes the
representations and warranties set forth below to each Purchaser.

                  (a) Subsidiaries. All of the Existing Subsidiaries are set
         forth on Schedule 3.1(a). The Company owns, directly or indirectly, all
         of the capital stock or other equity interests of each Subsidiary of
         the Company free and clear of any Liens, and all the issued and
         outstanding shares of capital stock of each Subsidiary of the Company
         are validly issued and are fully paid, non-assessable and free of
         preemptive and similar rights to subscribe for or purchase securities.
         The Company has no Subsidiaries other than the Existing Subsidiaries.

                  (b) Organization and Qualification. The Company and each of
         its Subsidiaries is an entity duly incorporated or otherwise organized,
         validly existing and in good standing under the laws of the
         jurisdiction of its incorporation or organization (as applicable), with
         the requisite power and authority to own and use its properties and
         assets and to carry on its business as currently conducted. Neither the
         Company nor any Subsidiary of the Company is in violation or default of
         any of the provisions of its respective certificate or articles of
         incorporation, bylaws or other organizational or charter documents.
         Each of the Company and its Subsidiaries is duly qualified to conduct
         business and is in good standing as a foreign corporation or other
         entity in each jurisdiction in which the nature of the business
         conducted or property owned by it makes such qualification necessary,
         except where the failure to be so qualified or in good standing, as the
         case may be, could not have or reasonably be expected to result in a
         Material Adverse Effect and no Proceeding has been instituted in any
         such jurisdiction revoking, limiting or curtailing or seeking to
         revoke, limit or curtail such power and authority or qualification.

                  (c) Authorization; Enforcement. The Company has the requisite
         corporate power and authority to enter into and to consummate the
         transactions contemplated by each of the Transaction Documents and
         otherwise to carry out its obligations hereunder and thereunder. The
         execution and delivery of each of the Transaction Documents by the
         Company and the consummation by it of the transactions contemplated
         hereby and thereby have been duly authorized by all necessary action on
         the part of the Company and no further action is required by the
         Company, its board of director or its stockholders in connection
         therewith other than in connection with the Required Approvals. Each
         Transaction Document has been (or upon delivery will have been) duly
         executed by the Company and, when delivered in accordance with the
         terms hereof and thereof, will constitute the valid and binding
         obligation of the Company enforceable against the Company in accordance
         with its terms except (i) as limited by applicable bankruptcy,
         insolvency, reorganization, moratorium and other laws of general
         application affecting enforcement of creditors' rights generally and
         (ii) as limited by laws relating to the availability of specific
         performance, injunctive relief or other equitable remedies.

                                       12
<PAGE>

                  (d) No Conflicts. The execution, delivery and performance of
         the Transaction Documents by the Company and the consummation by the
         Company of the other transactions contemplated hereby and thereby do
         not and will not: (i) conflict with or violate any provision of the
         Company's or any of its Subsidiary's certificate or articles of
         incorporation, bylaws or other organizational or charter documents, or
         (ii) conflict with, or constitute a default (or an event that with
         notice or lapse of time or both would become a default) under, result
         in the creation of any Lien upon any of the properties or assets of the
         Company or any Subsidiary of the Company, or give to others any rights
         of termination, amendment, acceleration or cancellation (with or
         without notice, lapse of time or both) of, any agreement, credit
         facility, debt or other instrument (evidencing a Company or Subsidiary
         of the Company debt or otherwise) or other understanding to which the
         Company or any Subsidiary of the Company is a party or by which any
         property or asset of the Company or any Subsidiary of the Company is
         bound or affected, or (iii) subject to the Required Approvals, conflict
         with or result in a violation of any law, rule, regulation, order,
         judgment, injunction, decree or other restriction of any court or
         governmental authority to which the Company or a Subsidiary of the
         Company is subject (including federal and state securities laws and
         regulations), or by which any property or asset of the Company or a
         Subsidiary of the Company is bound or affected; except in the case of
         each of clauses (ii) and (iii), such as could not have or reasonably be
         expected to result in a Material Adverse Effect.

                  (e) Filings, Consents and Approvals. The Company is not
         required to obtain any consent, waiver, authorization or order of, give
         any notice to, or make any filing or registration with, any court or
         other federal, state, local or other governmental authority or other
         Person in connection with the execution, delivery and performance by
         the Company of the Transaction Documents, other than (i) filings
         required pursuant to Section 4.6, (ii) the filing with the Commission
         of the Registration Statement, (iii) the notice and/or application(s)
         to each applicable Trading Market for the issuance and sale of the
         Debentures and Warrants and the listing of the Underlying Shares for
         trading thereon in the time and manner required thereby, (iv) the
         filing of Form D with the Commission and such filings as are required
         to be made under applicable state securities laws and (v) as related to
         the Existing Indebtedness (collectively, the "Required Approvals").

                  (f) Issuance of the Securities. The Securities are duly
         authorized and, when issued and paid for in accordance with the
         applicable Transaction Documents, will be duly and validly issued,
         fully paid and nonassessable, free and clear of all Liens imposed by
         the Company other than restrictions on transfer provided for in the
         Transaction Documents. The Underlying Shares, when issued in accordance
         with the terms of the Transaction Documents, will be validly issued,
         fully paid and nonassessable, free and clear of all Liens imposed by
         the Company. The Company has reserved from its duly authorized capital
         stock a number of shares of Common Stock for issuance of the Underlying
         Shares at least equal to the Required Minimum on the date hereof.

                  (g) Capitalization. The capitalization of the Company is as
         set forth on Schedule 3.1(g). The Company has not issued any capital
         stock since its most recently

                                       13
<PAGE>

         filed periodic report under the Exchange Act, other than pursuant to
         the exercise of employee stock options under the Company's stock option
         plans, the issuance of shares of Common Stock to employees pursuant to
         the Company's employee stock purchase plan and pursuant to the
         conversion or exercise of outstanding Common Stock Equivalents. No
         Person has any right of first refusal, preemptive right, right of
         participation, or any similar right to participate in the transactions
         contemplated by the Transaction Documents. Except as a result of the
         purchase and sale of the Securities or as set forth in the SEC Reports
         or on Schedule 3.1(g), there are no outstanding options, warrants,
         script rights to subscribe to, calls or commitments of any character
         whatsoever relating to, or securities, rights or obligations
         convertible into or exercisable or exchangeable for, or giving any
         Person any right to subscribe for or acquire, any shares of Common
         Stock, or contracts, commitments, understandings or arrangements by
         which the Company or any Subsidiary of the Company is or may become
         bound to issue additional shares of Common Stock or Common Stock
         Equivalents. The issuance and sale of the Securities will not obligate
         the Company to issue shares of Common Stock or other securities to any
         Person (other than the Purchasers) and will not result in a right of
         any holder of Company securities to adjust the exercise, conversion,
         exchange or reset price under such securities. All of the outstanding
         shares of capital stock of the Company are validly issued, fully paid
         and nonassessable, have been issued in compliance with all federal and
         state securities laws, and none of such outstanding shares was issued
         in violation of any preemptive rights or similar rights to subscribe
         for or purchase securities. No further approval or authorization of any
         stockholder, the Board of Directors of the Company or others is
         required for the issuance and sale of the Securities. There are no
         stockholders agreements, voting agreements or other similar agreements
         with respect to the Company's capital stock to which the Company is a
         party or, to the knowledge of the Company, between or among any of the
         Company's stockholders.

                  (h) SEC Reports; Financial Statements. The Company has filed
         all reports, schedules, forms, statements and other documents required
         to be filed by it under the Securities Act and the Exchange Act,
         including pursuant to Section 13(a) or 15(d) thereof, for the two years
         preceding the date hereof (or such shorter period as the Company was
         required by law to file such material) (the foregoing materials,
         including the exhibits thereto and documents incorporated by reference
         therein, being collectively referred to herein as the "SEC Reports") on
         a timely basis or has received a valid extension of such time of filing
         and has filed any such SEC Reports prior to the expiration of any such
         extension. As of their respective dates, the SEC Reports complied in
         all material respects with the requirements of the Securities Act and
         the Exchange Act and the rules and regulations of the Commission
         promulgated thereunder, and none of the SEC Reports, when filed,
         contained any untrue statement of a material fact or omitted to state a
         material fact required to be stated therein or necessary in order to
         make the statements therein, in the light of the circumstances under
         which they were made, not misleading. The financial statements of the
         Company included in the SEC Reports comply in all material respects
         with applicable accounting requirements and the rules and regulations
         of the Commission with respect thereto as in effect at the time of
         filing. Such financial statements have been prepared in accordance with
         United States generally accepted accounting principles applied on a
         consistent basis during the periods involved

                                       14
<PAGE>

         ("GAAP"), except as may be otherwise specified in such financial
         statements or the notes thereto and except that unaudited financial
         statements may not contain all footnotes required by GAAP, and fairly
         present in all material respects the financial position of the Company
         and its consolidated subsidiaries as of and for 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, immaterial,
         year-end audit adjustments.

                  (i) Material Changes. Since the date of the latest audited
         financial statements included within the SEC Reports, except as
         specifically disclosed in the SEC Reports, (i) there has been no event,
         occurrence or development that has had or that could reasonably be
         expected to result in a Material Adverse Effect, (ii) the Company has
         not incurred any liabilities (contingent or otherwise) other than (A)
         trade payables and accrued expenses incurred in the ordinary course of
         business consistent with past practice and (B) liabilities not required
         to be reflected in the Company's financial statements pursuant to GAAP
         or required to be disclosed in filings made with the Commission, (iii)
         the Company has not altered its method of accounting, (iv) the Company
         has not declared or made any dividend or distribution of cash or other
         property to its stockholders or purchased, redeemed or made any
         agreements to purchase or redeem any shares of its capital stock and
         (v) the Company has not issued any equity securities to any officer,
         director or Affiliate, except pursuant to existing Company stock option
         plans. The Company does not have pending before the Commission any
         request for confidential treatment of information.

                  (j) Litigation. There is no action, suit, inquiry, notice of
         violation, proceeding or investigation pending or, to the knowledge of
         the Company, threatened against or affecting the Company, any
         Subsidiary of the Company or any of their respective properties before
         or by any court, arbitrator, governmental or administrative agency or
         regulatory authority (federal, state, county, local or foreign)
         (collectively, an "Action") which (i) adversely affects or challenges
         the legality, validity or enforceability of any of the Transaction
         Documents or the Securities or (ii) could, if there were an unfavorable
         decision, have or reasonably be expected to result in a Material
         Adverse Effect. Neither the Company nor any Subsidiary of the Company,
         nor any director or officer thereof, is or has been the subject of any
         Action involving a claim of violation of or liability under federal or
         state securities laws or a claim of breach of fiduciary duty. There has
         not been, and to the knowledge of the Company, there is not pending or
         contemplated, any investigation by the Commission involving the Company
         or any current or former director or officer of the Company. The
         Commission has not issued any stop order or other order suspending the
         effectiveness of any registration statement filed by the Company or any
         Subsidiary of the Company under the Exchange Act or the Securities Act.

                  (k) Labor Relations. No material labor dispute exists or, to
         the knowledge of the Company, is imminent with respect to any of the
         employees of the Company which could reasonably be expected to result
         in a Material Adverse Effect.

                                       15
<PAGE>

                  (l) Compliance. Except as set forth on Schedule 3.1(l),
         neither the Company nor any Subsidiary of the Company (i) is in default
         under or in violation of (and no event has occurred that has not been
         waived that, with notice or lapse of time or both, would result in a
         default by the Company or any Subsidiary of the Company), nor has the
         Company or any Subsidiary of the Company received notice of a claim
         that it is in default under or that it is in violation of, any
         indenture, loan or credit agreement or any other agreement or
         instrument to which it is a party or by which it or any of its
         properties is bound (whether or not such default or violation has been
         waived), (ii) is in violation of any order of any court, arbitrator or
         governmental body, or (iii) is or has been in violation of any statute,
         rule or regulation of any governmental authority, including without
         limitation all foreign, federal, state and local laws applicable to its
         business except in each case as could not have a Material Adverse
         Effect.

                  (m) Regulatory Permits. The Company and its Subsidiaries
         possess all certificates, authorizations and permits issued by the
         appropriate federal, state, local or foreign regulatory authorities
         necessary to conduct their respective businesses as described in the
         SEC Reports, except where the failure to possess such permits could not
         have or reasonably be expected to result in a Material Adverse Effect
         ("Material Permits"), and neither the Company nor any Subsidiary of the
         Company has received any notice of proceedings relating to the
         revocation or modification of any Material Permit.

                  (n) Title to Assets. The Company and its Subsidiaries have
         good and marketable title in fee simple to all real property owned by
         them that is material to the business of the Company and its
         Subsidiaries and good and marketable title in all personal property
         owned by them that is material to the business of the Company and its
         Subsidiaries, in each case free and clear of all Liens, except for (i)
         Existing Liens, (ii) and other Liens as do not materially affect the
         value of such property and do not materially interfere with the use
         made and proposed to be made of such property by the Company and its
         Subsidiaries, and (iii) Liens for the payment of federal, state or
         other taxes, the payment of which is neither delinquent nor subject to
         penalties.

                  (o) Leases. All leases of material real property and
         facilities that are leased by the Company and its Subsidiaries from
         third parties are valid, subsisting and in full force and effect and
         neither the Company nor its Subsidiaries are in default thereunder,
         nor, to the knowledge of the Company, is any other party to such lease,
         in default in any material respect thereunder

                  (p) Patents and Trademarks. The Company and its Subsidiaries
         have, or have rights to use, all patents, patent applications,
         trademarks, trademark applications, service marks, trade names,
         copyrights, licenses and other similar rights necessary or material for
         use in connection with their respective businesses as described in the
         SEC Reports and which the failure to so have could have a Material
         Adverse Effect (collectively, the "Intellectual Property Rights").
         Neither the Company nor any Subsidiary of the Company has received a
         written notice that the Intellectual Property Rights used by the
         Company or any Subsidiary of the Company violates or infringes upon the
         rights of any Person. To the knowledge of the Company, all such
         Intellectual Property Rights are

                                       16
<PAGE>

         enforceable and there is no existing infringement by another Person of
         any of the Intellectual Property Rights of others.

                  (q) Insurance. The Company and its Subsidiaries are insured by
         insurers of recognized financial responsibility against such losses and
         risks and in such amounts as are prudent and customary in the
         businesses in which the Company and its Subsidiaries are engaged,
         including, but not limited to, directors and officers insurance
         coverage equal to the amount set forth on Schedule 3.1(q). To the
         knowledge of the Company, such insurance contracts and policies are
         accurate and complete. Neither the Company nor any Subsidiary of the
         Company has any reason to believe that it will not be able to renew its
         existing insurance coverage as and when such coverage expires or to
         obtain similar coverage from similar insurers as may be necessary to
         continue its business without a significant increase in cost.

                  (r) Transactions With Affiliates and Employees. Except as set
         forth in the SEC Reports or on Schedule 3.1(s) attached hereto, none of
         the officers or directors of the Company and, to the knowledge of the
         Company, none of the employees of the Company is presently a party to
         any transaction with the Company or any Subsidiary of the Company
         (other than for services as employees, officers and directors),
         including any contract, agreement or other arrangement providing for
         the furnishing of services to or by, providing for rental of real or
         personal property to or from, or otherwise requiring payments to or
         from any officer, director or such employee or, to the knowledge of the
         Company, any entity in which any officer, director, or any such
         employee has a substantial interest or is an officer, director, trustee
         or partner, in each case in excess of $60,000 other than (i) for
         payment of salary or consulting fees for services rendered, (ii)
         reimbursement for expenses incurred on behalf of the Company and (iii)
         for other employee benefits, including stock option agreements under
         any stock option plan of the Company.

                  (s) Sarbanes-Oxley; Internal Accounting Controls. To the best
         knowledge of the management of the Company, the Company is in material
         compliance with all provisions of the Sarbanes-Oxley Act of 2002 which
         are applicable to it as of the Closing Date. The Company and its
         Subsidiaries maintain a system of internal accounting controls
         sufficient to provide reasonable assurance that (i) transactions are
         executed in accordance with management's general or specific
         authorizations, (ii) transactions are recorded as necessary to permit
         preparation of financial statements in conformity with GAAP and to
         maintain asset accountability, (iii) access to assets is permitted only
         in accordance with management's general or specific authorization, and
         (iv) the recorded accountability for assets is compared with the
         existing assets at reasonable intervals and appropriate action is taken
         with respect to any differences. The Company has established disclosure
         controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
         15d-15(e)) for the Company and designed such disclosure controls and
         procedures to ensure that material information relating to the Company,
         including its Subsidiaries, is made known to the certifying officers by
         others within those entities, particularly during the period in which
         the Company's most recently filed periodic report under the Exchange
         Act, as the case may be, is being prepared. The Company's certifying
         officers have

                                       17
<PAGE>

         evaluated the effectiveness of the Company's controls and procedures as
         of the date prior to the filing date of the most recently filed
         periodic report under the Exchange Act (such date, the "Evaluation
         Date"). The Company presented in its most recently filed periodic
         report under the Exchange Act the conclusions of the certifying
         officers about the effectiveness of the disclosure controls and
         procedures based on their evaluations as of the Evaluation Date. Since
         the Evaluation Date, there have been no significant changes in the
         Company's internal controls (as such term is defined in Item 307(b) of
         Regulation S-K under the Exchange Act) or, to the knowledge of the
         Company, in other factors that could significantly affect the Company's
         internal controls.

                  (t) Certain Fees. No brokerage or finder's fees or commissions
         are or will be payable by the Company to any broker, financial advisor
         or consultant, finder, placement agent, investment banker, bank or
         other Person with respect to the transactions contemplated by the
         Transaction Documents. The Purchasers shall have no obligation with
         respect to any fees or with respect to any claims made by or on behalf
         of other Persons for fees of a type contemplated in this Section that
         may be due in connection with the transactions contemplated by the
         Transaction Documents.

                  (u) Private Placement. Assuming the accuracy of the Purchasers
         representations and warranties set forth in Section 3.2, no
         registration under the Securities Act is required for the offer and
         sale of the Securities by the Company to the Purchasers as contemplated
         hereby. The issuance and sale of the Securities hereunder does not
         contravene the rules and regulations of the Trading Market.

                  (v) Investment Company. The Company is not, and is not an
         Affiliate of, and immediately after receipt of payment for the
         Securities, will not be or be an Affiliate of, an "investment company"
         within the meaning of the Investment Company Act of 1940, as amended.
         Notwithstanding the foregoing, the Company makes no representation or
         warranty as to whether any Purchaser hereunder may be or become an
         "investment company" within the meaning of said act. The Company shall
         conduct its business in a manner so that it will not become subject to
         the Investment Company Act.

                  (w) Registration Rights. Other than each of the Purchasers, no
         Person has any right to cause the Company to effect the registration
         under the Securities Act of any securities of the Company.

                  (x) Listing and Maintenance Requirements. The Company's Common
         Stock is registered pursuant to Section 12(g) of the Exchange Act, and
         the Company has taken no action designed to, or which to its knowledge
         is likely to have the effect of, terminating the registration of the
         Common Stock under the Exchange Act nor has the Company received any
         notification that the Commission is contemplating terminating such
         registration. The Company has not, in the 12 months preceding the date
         hereof, received notice from any Trading Market on which the Common
         Stock is or has been listed or quoted to the effect that the Company is
         not in compliance with the listing or maintenance requirements of such
         Trading Market. The Company is, and has no reason

                                       18
<PAGE>

         to believe that it will not in the foreseeable future continue to be,
         in compliance with all such listing and maintenance requirements.

                  (y) Application of Takeover Protections. The Company and its
         Board of Directors have taken all necessary action, if any, in order to
         render inapplicable any control share acquisition, business
         combination, poison pill (including any distribution under a rights
         agreement) or other similar anti-takeover provision under the Company's
         Certificate of Incorporation (or similar charter documents) or the laws
         of its state of incorporation that is or could become applicable to the
         Purchasers as a result of the Purchasers and the Company fulfilling
         their obligations or exercising their rights under the Transaction
         Documents, including without limitation as a result of the Company's
         issuance of the Securities and the Purchasers' ownership of the
         Securities.

                  (z) Disclosure. The Company confirms that neither it nor any
         other Person acting on its behalf has provided any of the Purchasers or
         their agents or counsel with any information that constitutes or might
         constitute material, nonpublic information. The Company understands and
         confirms that the Purchasers will rely on the foregoing representations
         and covenants in effecting transactions in securities of the Company.
         All disclosure provided to the Purchasers regarding the Company, its
         business and the transactions contemplated hereby, including the
         Disclosure Schedules to this Agreement, furnished by or on behalf of
         the Company with respect to the representations and warranties made
         herein are true and correct with respect to such representations and
         warranties and do not contain any untrue statement of a material fact
         or omit to state any material fact necessary in order to make the
         statements made therein, in light of the circumstances under which they
         were made, not misleading. The Company acknowledges and agrees that no
         Purchaser makes or has made any representations or warranties with
         respect to the transactions contemplated hereby other than those
         specifically set forth in Section 3.2 hereof.

                  (aa) No Integrated Offering. Assuming the accuracy of the
         Purchasers' representations and warranties set forth in Section 3.2,
         neither the Company, nor any of its affiliates, nor any Person acting
         on its or their behalf has, directly or indirectly, made any offers or
         sales of any security or solicited any offers to buy any security,
         under circumstances that would cause this offering of the Securities to
         be integrated with prior offerings by the Company for purposes of the
         Securities Act or any applicable shareholder approval provisions,
         including, without limitation, under the rules and regulations of any
         Trading Market on which any of the securities of the Company are listed
         or designated.

                  (bb) Solvency. Based on the financial condition of the Company
         as of the Closing Date after giving effect to the receipt by the
         Company of the proceeds from the sale of the Securities hereunder, (i)
         the Company's fair saleable value of its assets exceeds the amount that
         will be required to be paid on or in respect of the Company's existing
         debts and other liabilities (including known contingent liabilities) as
         they mature; (ii) the Company's assets do not constitute unreasonably
         small capital to carry on its business for the current fiscal year as
         now conducted and as proposed to be conducted

                                       19
<PAGE>

         including its capital needs taking into account the particular capital
         requirements of the business conducted by the Company, and projected
         capital requirements and capital availability thereof; and (iii) the
         current cash flow of the Company, together with the proceeds the
         Company would receive, were it to liquidate all of its assets, after
         taking into account all anticipated uses of the cash, would be
         sufficient to pay all amounts on or in respect of its debt when such
         amounts are required to be paid. The Company does not intend to incur
         debts beyond its ability to pay such debts as they mature (taking into
         account the timing and amounts of cash to be payable on or in respect
         of its debt). The Company has no knowledge of any facts or
         circumstances which lead it to believe that it will file for
         reorganization or liquidation under the bankruptcy or reorganization
         laws of any jurisdiction within one year from the Closing Date. The SEC
         Reports set forth as of the dates thereof all outstanding secured and
         unsecured Indebtedness of the Company or any Subsidiary of the Company,
         or for which the Company or any Subsidiary of the Company has
         commitments.

                  (cc) Indebtedness. All of the Indebtedness of the Company is
         as set forth on Schedule 3.1(cc). Except as set forth on Schedule
         3.1(cc) annexed hereto, the Company is not in default under any
         Existing Indebtedness that could reasonably be expected to have a
         Material Adverse Effect.

                  (dd) Tax Status. Except for matters that would not,
         individually or in the aggregate, have or reasonably be expected to
         result in a Material Adverse Effect, the Company and each Subsidiary of
         the Company has filed all necessary federal, state and foreign income
         and franchise tax returns and has paid or accrued all taxes shown as
         due thereon, and the Company has no knowledge of a tax deficiency which
         has been asserted or threatened against the Company or any Subsidiary
         of the Company.

                  (ee) No General Solicitation. Neither the Company nor any
         person acting on behalf of the Company has offered or sold any of the
         Securities by any form of general solicitation or general advertising.
         The Company has offered the Securities for sale only to the Purchasers
         and certain other "accredited investors" within the meaning of Rule 501
         under the Securities Act.

                  (ff) Foreign Corrupt Practices. Neither the Company, nor to
         the knowledge of the Company, any agent or other person acting on
         behalf of the Company, has (i) directly or indirectly, used any funds
         for unlawful contributions, gifts, entertainment or other unlawful
         expenses related to foreign or domestic political activity, (ii) made
         any unlawful payment to foreign or domestic government officials or
         employees or to any foreign or domestic political parties or campaigns
         from corporate funds, (iii) failed to disclose fully any contribution
         made by the Company (or made by any person acting on its behalf of
         which the Company is aware) which is in violation of law, or (iv)
         violated in any material respect any provision of the Foreign Corrupt
         Practices Act of 1977, as amended.

                  (gg) Accountants. The Company's accountants are set forth on
         Schedule 3.1(gg) of the Disclosure Schedule. To the knowledge of the
         Company, such accountants, who the Company expects will express their
         opinion with respect to the

                                       20
<PAGE>

         financial statements to be included in the Company's Annual Report on
         Form 10-K for the year ending July 31, 2005 are a registered public
         accounting firm as required by the Securities Act.

                  (hh) Senior Liens. Except as disclosed on Schedule 3.1 (hh),
         as of the Closing Date, no Existing Indebtedness of the Company is
         secured by Existing Liens that are senior to the Liens securing payment
         of the Debentures, whether with respect to principal, interest or upon
         maturity, liquidation or dissolution.

                  (ii) No Disagreements with Accountants and Lawyers. There are
         no material disagreements of any kind presently existing, or reasonably
         anticipated by the Company to arise, between the accountants and
         lawyers presently employed by the Company and the Company is current
         with respect to any fees owed to its accountants and lawyers.

                  (jj) Acknowledgment Regarding Purchasers' Purchase of
         Securities. The Company acknowledges and agrees that each of the
         Purchasers is acting solely in the capacity of an arm's length
         purchaser with respect to the Transaction Documents and the
         transactions contemplated hereby. The Company further acknowledges that
         no Purchaser is acting as a financial advisor or fiduciary of the
         Company (or in any similar capacity) with respect to this Agreement and
         the transactions contemplated hereby and any advice given by any
         Purchaser or any of their respective representatives or agents in
         connection with this Agreement and the transactions contemplated hereby
         is merely incidental to the Purchasers' purchase of the Securities. The
         Company further represents to each Purchaser that the Company's
         decision to enter into this Agreement has been based solely on the
         independent evaluation of the transactions contemplated hereby by the
         Company and its representatives.

                  (kk) Acknowledgement Regarding Purchasers' Trading Activity.
         Anything in this Agreement or elsewhere herein to the contrary
         notwithstanding (except for Section 3.2(b) and Section 4.16 hereof), it
         is understood and agreed by the Company (i) that none of the Purchasers
         have been asked to agree, nor has any Purchaser agreed, to desist from
         purchasing or selling, long and/or short, securities of the Company, or
         "derivative" securities based on securities issued by the Company; (ii)
         that past or future open market or other transactions by any Purchaser,
         including Short Sales, and specifically including, without limitation,
         Short Sales or "derivative" transactions, before or after the closing
         of this or future private placement transactions, may negatively impact
         the market price of the Company's publicly-traded securities; (iii)
         that any Purchaser, and counter parties in "derivative" transactions to
         which any such Purchaser is a party, directly or indirectly, presently
         may have a "short" position in the Common Stock, and (iv) that each
         Purchaser shall not be deemed to have any affiliation with or control
         over any arm's length counter-party in any "derivative" transaction.
         The Company further understands and acknowledges that (a) one or more
         Purchasers may engage in hedging activities at various times during the
         period that the Securities are outstanding, including, without
         limitation, during the periods that the value of the Underlying Shares
         deliverable with respect to Securities are being determined and (b)
         such hedging activities (if any) could reduce the value of the existing
         stockholders' equity interests in the Company at and after

                                       21
<PAGE>

         the time that the hedging activities are being conducted. The Company
         acknowledges that such aforementioned hedging activities do not
         constitute a breach of any of the Transaction Documents.

                  (ll) Deed of Trust. The Company has caused its Subsidiary,
         Arizona Pacific Materials LLC, to execute and deliver a Deed of Trust,
         Assignment of Rents and Security Agreement (the "Deed of Trust"),
         granting a first-position lien and encumbrance upon certain real
         property located in Pinal County, Arizona, and consisting of
         approximately 73.636 acres, commonly know as 9390 East Hiller Road,
         Florence, Arizona, and more particularly described in the Deed of Trust
         (the "Property"). The Deed of Trust secures any and all of the
         obligations of the Company or its Subsidiaries to the Purchasers, under
         the Transaction Documents. The Company shall pay for and maintain an
         ALTA Extended Policy of Title Insurance insuring the Purchasers'
         first-position lien upon the Property in the amount of Seven Hundred
         Twenty-Nine Thousand Dollars ($729,000.00), subject only to such
         matters of record as the Agent (as defined in the Security Agreement),
         on behalf of the Purchasers, may approve in its sole and absolute
         discretion. The legally described Property is one and the same real
         property as the real property upon which the Company and/or its
         Subsidiaries intend to conduct the mining activities which are the
         underlying purpose of the financing evidenced by the Transaction
         Documents. Any default under the Deed of Trust shall be deemed to be a
         default under the Transaction Documents and any default under any of
         the Transaction Documents shall be deemed to be a default under the
         Deed of Trust.

         3.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby, for itself and for no other Purchaser, represents and warrants as of the
date hereof and as of the Closing Date to the Company as follows:

                  (a) Organization; Authority. Such Purchaser is an entity duly
         organized, validly existing and in good standing under the laws of the
         jurisdiction of its organization with full right, corporate or
         partnership power and authority to enter into and to consummate the
         transactions contemplated by the Transaction Documents and otherwise to
         carry out its obligations hereunder and thereunder. The execution,
         delivery and performance by such Purchaser of the transactions
         contemplated by this Agreement have been duly authorized by all
         necessary corporate or similar action on the part of such Purchaser.
         Each Transaction Document to which it is a party has been duly executed
         by such Purchaser, and when delivered by such Purchaser in accordance
         with the terms hereof, will constitute the valid and legally binding
         obligation of such Purchaser, enforceable against it in accordance with
         its terms, except (i) as limited by general equitable principles and
         applicable bankruptcy, insolvency, reorganization, moratorium and other
         laws of general application affecting enforcement of creditors' rights
         generally, (ii) as limited by laws relating to the availability of
         specific performance, injunctive relief or other equitable remedies and
         (iii) insofar as indemnification and contribution provisions may be
         limited by applicable law.

                  (b) Own Account. Such Purchaser understands that the
         Securities are "restricted securities" and have not been registered
         under the Securities Act or any

                                       22
<PAGE>

         applicable state securities law and is acquiring the Securities as
         principal for its own account and not with a view to or for
         distributing or reselling such Securities or any part thereof in
         violation of the Securities Act or any applicable state securities law,
         has no present intention of distributing any of such Securities in
         violation of the Securities Act or any applicable state securities law
         and has no arrangement or understanding with any other persons
         regarding the distribution of such Securities (this representation and
         warranty not limiting such Purchaser's right to sell the Securities
         pursuant to the Registration Statement or otherwise in compliance with
         applicable federal and state securities laws) in violation of the
         Securities Act or any applicable state securities law. Such Purchaser
         is acquiring the Securities hereunder in the ordinary course of its
         business. Such Purchaser does not have any agreement or understanding,
         directly or indirectly, with any Person to distribute any of the
         Securities.

                  (c) Purchaser Status. At the time such Purchaser was offered
         the Securities, it was, and at the date hereof it is, and on each date
         on which it exercises any Warrants or converts any Debentures it will
         be either: (i) an "accredited investor" as defined in Rule 501(a)(1),
         (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a
         "qualified institutional buyer" as defined in Rule 144A(a) under the
         Securities Act. Such Purchaser is not required to be registered as a
         broker-dealer under Section 15 of the Exchange Act.

                  (d) Experience of Such Purchaser. Such Purchaser, either alone
         or together with its representatives, has such knowledge,
         sophistication and experience in business and financial matters so as
         to be capable of evaluating the merits and risks of the prospective
         investment in the Securities, and has so evaluated the merits and risks
         of such investment. Such Purchaser is able to bear the economic risk of
         an investment in the Securities and, at the present time, is able to
         afford a complete loss of such investment.

                  (e) General Solicitation. Such Purchaser is not purchasing the
         Securities as a result of any advertisement, article, notice or other
         communication regarding the Securities published in any newspaper,
         magazine or similar media or broadcast over television or radio or
         presented at any seminar or any other general solicitation or general
         advertisement.

                  (f) Short Sales and Confidentiality. Other than the
         transaction contemplated hereunder, such Purchaser has not directly or
         indirectly, nor has any Person acting on behalf of or pursuant to any
         understanding with such Purchaser, executed any disposition, including
         Short Sales (but not including the location and/or reservation of
         borrowable shares of Common Stock), in the securities of the Company
         during the period commencing from the time that such Purchaser first
         received a term sheet from the Company or any other Person setting
         forth the material terms of the transactions contemplated hereunder
         until the date hereof ("Discussion Time"). Notwithstanding the
         foregoing, in the case of a Purchaser that is a multi-managed
         investment vehicle whereby separate portfolio managers manage separate
         portions of such Purchaser's assets and the portfolio managers have no
         direct knowledge of the investment decisions made by the portfolio
         managers managing other portions of such Purchaser's assets, the
         representation set forth above shall only apply with respect to the
         portion of assets managed by the

                                       23
<PAGE>

         portfolio manager that either (i) made the investment decision to
         purchase the Securities covered by this Agreement, or (ii) has
         knowledge of this Agreement. Other than to other Persons party to this
         Agreement, such Purchaser has maintained the confidentiality of all
         disclosures made to it in connection with this transaction (including
         the existence and terms of this transaction).

                  The Company acknowledges and agrees that each Purchaser does
         not make or has not made any representations or warranties with respect
         to the transactions contemplated hereby other than those specifically
         set forth in this Section 3.2.

ARTICLE IV.
                         OTHER AGREEMENTS OF THE PARTIES

         4.1 Transfer Restrictions.

                  (a) The Securities may only be disposed of in compliance with
         state and federal securities laws. In connection with any transfer of
         Securities other than pursuant to an effective registration statement
         or Rule 144, to the Company or to an affiliate of a Purchaser or in
         connection with a pledge as contemplated in Section 4.1(b), the Company
         may require the transferor thereof to provide to the Company an opinion
         of counsel selected by the transferor and reasonably acceptable to the
         Company, the form and substance of which opinion shall be reasonably
         satisfactory to the Company, to the effect that such transfer does not
         require registration of such transferred Securities under the
         Securities Act. As a condition of transfer, any such transferee shall
         agree in writing to be bound by the terms of this Agreement and shall
         have the rights of a Purchaser under this Agreement and the
         Registration Rights Agreement.

                  (b) The Purchasers agree to the imprinting, so long as is
         required by this Section 4.1(b), of a legend on any of the Securities
         in the following form:

         [NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE
         SECURITIES ARE [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH
         THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
         ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
         ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
         REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
         AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
         REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
         APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF
         COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL
         BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE
         SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN
         CONNECTION WITH

                                       24
<PAGE>

         A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

                  The Company acknowledges and agrees that a Purchaser may from
         time to time pledge pursuant to a bona fide margin agreement with a
         registered broker-dealer or grant a security interest in some or all of
         the Securities to a financial institution that is an "accredited
         investor" as defined in Rule 501(a) under the Securities Act and who
         agrees to be bound by the provisions of this Agreement and the
         Registration Rights Agreement and, if required under the terms of such
         arrangement, such Purchaser may transfer pledged or secured Securities
         to the pledgees or secured parties. Such a pledge or transfer would not
         be subject to approval of the Company and no legal opinion of legal
         counsel of the pledgee, secured party or pledgor shall be required in
         connection therewith. Further, no notice shall be required of such
         pledge. At the appropriate Purchaser's expense, the Company will
         execute and deliver such reasonable documentation as a pledgee or
         secured party of Securities may reasonably request in connection with a
         pledge or transfer of the Securities, including, if the Securities are
         subject to registration pursuant to the Registration Rights Agreement,
         the preparation and filing of any required prospectus supplement under
         Rule 424(b)(3) under the Securities Act or other applicable provision
         of the Securities Act to appropriately amend the list of Selling
         Stockholders thereunder.

                  (c) Certificates evidencing the Underlying Shares shall not
         contain any legend (including the legend set forth in Section 4.1(b)
         hereof): (i) while a registration statement (including the Registration
         Statement) covering the resale of such security is effective under the
         Securities Act, or (ii) following any sale of such Underlying Shares
         pursuant to Rule 144, or (iii) if such Underlying Shares are eligible
         for sale under Rule 144(k), or (iv) if such legend is not required
         under applicable requirements of the Securities Act (including judicial
         interpretations and pronouncements issued by the staff of the
         Commission). The Company shall cause its counsel to issue a legal
         opinion to the Company's transfer agent promptly after the Effective
         Date if required by the Company's transfer agent to effect the removal
         of the legend hereunder. If all or any portion of a Debenture or
         Warrant is converted or exercised (as applicable) at a time when there
         is an effective registration statement to cover the resale of the
         Underlying Shares, or if such Underlying Shares may be sold under Rule
         144(k) or if such legend is not otherwise required under applicable
         requirements of the Securities Act (including judicial interpretations
         thereof) then such Underlying Shares shall be issued free of all
         legends. The Company agrees that following the Effective Date or at
         such time as such legend is no longer required under this Section
         4.1(c), it will, no later than three Trading Days following the
         delivery by a Purchaser to the Company or the Company's transfer agent
         of a certificate representing Underlying Shares, as applicable, issued
         with a restrictive legend (such third Trading Day, the "Legend Removal
         Date"), deliver or cause to be delivered to such Purchaser a
         certificate representing such shares that is free from all restrictive
         and other legends. The Company may not make any notation on its records
         or give instructions to any transfer agent of the Company that enlarge
         the restrictions on transfer set forth in this Section. Certificates
         for Securities subject to legend removal hereunder shall be transmitted
         by the transfer agent of the Company to the Purchasers by

                                       25
<PAGE>

         crediting the account of the Purchaser's prime broker with the
         Depository Trust Company System.

                  (d) In addition to such Purchaser's other available remedies,
         the Company shall pay to a Purchaser, in cash, as partial liquidated
         damages and not as a penalty, for each $1,000 of Underlying Shares
         (based on the VWAP of the Common Stock on the date such Securities are
         submitted to the Company's transfer agent) delivered for removal of the
         restrictive legend and subject to Section 4.1(c), $10 per Trading Day
         (increasing to $20 per Trading Day 5 Trading Days after such damages
         have begun to accrue) for each Trading Day after the Legend Removal
         Date until such certificate is delivered without a legend. Nothing
         herein shall limit such Purchaser's right to pursue actual damages for
         the Company's failure to deliver certificates representing any
         Securities as required by the Transaction Documents, and such Purchaser
         shall have the right to pursue all remedies available to it at law or
         in equity including, without limitation, a decree of specific
         performance and/or injunctive relief.

                  (e) Each Purchaser, severally and not jointly with the other
         Purchasers, agrees that the removal of the restrictive legend from
         certificates representing Securities as set forth in this Section 4.1
         is predicated upon the Company's reliance that the Purchaser will sell
         any Securities pursuant to either the registration requirements of the
         Securities Act, including any applicable prospectus delivery
         requirements, or an exemption therefrom.

                  (f) Until the one year anniversary of the Effective Date, the
         Company shall not undertake a reverse or forward stock split or
         reclassification of the Common Stock without the prior written consent
         of the Purchasers holding a majority in principal amount outstanding of
         the Debentures.

         4.2 Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Securities may result in dilution of the outstanding shares of
Common Stock, which dilution may be substantial under certain market conditions.
The Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not subject to any right of set off, counterclaim, delay or reduction,
regardless of the effect of any such dilution or any claim the Company may have
against any Purchaser and regardless of the dilutive effect that such issuance
may have on the ownership of the other stockholders of the Company.

         4.3 Furnishing of Information. As long as any Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. As long as any Purchaser owns Securities, if the Company is not
required to file reports pursuant to the Exchange Act, it will prepare and
furnish to the Purchasers and make publicly available in accordance with Rule
144(c) such information as is required for the Purchasers to sell the Securities
under Rule 144. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell such Securities without

                                       26
<PAGE>

registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.

         4.4 Integration. The Company shall not sell, offer for sale or solicit
offers to buy or otherwise negotiate in respect of any security (as defined in
Section 2 of the Securities Act) that would be integrated with the offer or sale
of the Securities in a manner that would require the registration under the
Securities Act of the sale of the Securities to the Purchasers or that would be
integrated with the offer or sale of the Securities for purposes of the rules
and regulations of any Trading Market.

         4.5 Conversion and Exercise Procedures. The form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Debentures set forth the totality of the procedures required of the Purchasers
in order to exercise the Warrants or convert the Debentures. No additional legal
opinion or other information or instructions shall be required of the Purchasers
to exercise their Warrants or convert their Debentures. The Company shall honor
exercises of the Warrants and conversions of the Debentures and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.

         4.6 Securities Laws Disclosure; Publicity. The Company shall, by 8:30
a.m. Eastern time on the Trading Day following the date hereof, issue a press
release, reasonably acceptable to each Purchaser disclosing the material terms
of the transactions contemplated hereby. In addition, the Company shall, no
later than three (3) business days following the date hereof, file a Current
Report on Form 8-K and shall attach the Transaction Documents thereto. The
Company and each Purchaser shall consult with each other in issuing any other
press releases with respect to the transactions contemplated hereby, and neither
the Company nor any Purchaser shall issue any such press release or otherwise
make any such public statement without the prior consent of the Company, with
respect to any press release of any Purchaser, or without the prior consent of
each Purchaser, with respect to any press release of the Company, which consent
shall not unreasonably be withheld, except if such disclosure is required by
law, in which case the disclosing party shall promptly provide the other party
with prior notice of such public statement or communication. Notwithstanding the
foregoing, the Company shall not publicly disclose the name of any Purchaser, or
include the name of any Purchaser in any filing with the Commission or any
regulatory agency or Trading Market, without the prior written consent of such
Purchaser, except (i) as required by federal securities law in connection with
the registration statement contemplated by the Registration Rights Agreement and
(ii) to the extent such disclosure is required by law or Trading Market
regulations, in which case the Company shall provide the Purchasers with prior
notice of such disclosure permitted under subclause (i) or (ii).

         4.7 Shareholder Rights Plan. No claim will be made or enforced by the
Company or, to the knowledge of the Company, any other Person that any Purchaser
is an "Acquiring Person" under any shareholder rights plan or similar plan or
arrangement in effect or hereafter adopted by the Company, or that any Purchaser
could be deemed to trigger the provisions of any such plan or arrangement, by
virtue of receiving Securities under the Transaction Documents or under any

                                       27
<PAGE>

other agreement between the Company and the Purchasers. The Company shall
conduct its business in a manner so that it will not become subject to the
Investment Company Act.

         4.8 Non-Public Information. The Company covenants and agrees that
neither it nor any other Person acting on its behalf will provide any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such Purchaser
shall have executed a written agreement regarding the confidentiality and use of
such information. The Company understands and confirms that each Purchaser shall
be relying on the foregoing representations in effecting transactions in
securities of the Company.

         4.9 Use of Proceeds. Except for the retirement of the Existing
Indebtedness constituting the GE Facility and the APM Purchase Note, which shall
satisfied in full directly out of the net proceeds from the sale of the
Securities hereunder at the Closing, or as otherwise set forth on Schedule 4.9
attached hereto, the Company shall use the net proceeds from the sale of the
Securities hereunder for working capital purposes and not for the satisfaction
of any portion of the Existing Indebtedness, to redeem or repurchase any Common
Stock or Common Stock Equivalents or to settle any outstanding litigation.

         4.10 Reimbursement. If any Purchaser becomes involved in any capacity
in any Proceeding by or against any Person who is a stockholder of the Company
(except as a result of sales, pledges, margin sales and similar transactions by
such Purchaser to or with any current stockholder), solely as a result of such
Purchaser's acquisition of the Securities under this Agreement, the Company will
reimburse such Purchaser for its reasonable legal and other expenses (including
the cost of any investigation preparation and travel in connection therewith)
incurred in connection therewith, as such expenses are incurred. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers and any such Affiliate, and shall be binding upon and
inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any
such Person. The Company also agrees that neither the Purchasers nor any such
Affiliates, partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company solely as a result of acquiring the Securities under
this Agreement.

         4.11 Indemnification of Purchasers. Subject to the provisions of this
Section 4.11, the Company will indemnify and hold the Purchasers and their
directors, officers, shareholders, members, partners, employees and agents
(each, a "Purchaser Party") harmless from any and all losses, liabilities,
obligations, claims, contingencies, damages, costs and expenses, including all
judgments, amounts paid in settlements, court costs and reasonable attorneys'
fees and costs of investigation that any such Purchaser Party may suffer or
incur as a result of or relating to (a) any breach of any of the
representations, warranties, covenants or agreements made by the Company in this
Agreement or in the other Transaction Documents or (b) any action instituted
against a Purchaser, or any of them or their respective Affiliates, by any
stockholder of the Company who is not an Affiliate of such Purchaser, with
respect to any of the transactions contemplated by the

                                       28
<PAGE>

Transaction Documents (unless such action is based upon a breach of such
Purchaser's representation, warranties or covenants under the Transaction
Documents or any agreements or understandings such Purchaser may have with any
such stockholder or any violations by the Purchaser of state or federal
securities laws or any conduct by such Purchaser which constitutes fraud, gross
negligence, willful misconduct or malfeasance). If any action shall be brought
against any Purchaser Party in respect of which indemnity may be sought pursuant
to this Agreement, such Purchaser Party shall promptly notify the Company in
writing, and the Company shall have the right to assume the defense thereof with
counsel of its own choosing. Any Purchaser Party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such Purchaser
Party except to the extent that (i) the employment thereof has been specifically
authorized by the Company in writing, (ii) the Company has failed after a
reasonable period of time to assume such defense and to employ counsel or (iii)
in such action there is, in the reasonable opinion of such separate counsel, a
material conflict on any material issue between the position of the Company and
the position of such Purchaser Party. The Company will not be liable to any
Purchaser Party under this Agreement (i) for any settlement by a Purchaser Party
effected without the Company's prior written consent, which shall not be
unreasonably withheld or delayed; or (ii) to the extent, but only to the extent
that a loss, claim, damage or liability is attributable to any Purchaser Party's
breach of any of the representations, warranties, covenants or agreements made
by the Purchasers in this Agreement or in the other Transaction Documents.

         4.12 Reservation and Listing of Securities.

                  (a) The Company shall maintain a reserve from its duly
         authorized shares of Common Stock for issuance pursuant to the
         Transaction Documents in such amount as may be required to fulfill its
         obligations in full under the Transaction Documents.

                  (b) If, on any date, the number of authorized but unissued
         (and otherwise unreserved) shares of Common Stock is less than the
         Required Minimum on such date, then the Board of Directors of the
         Company shall use commercially reasonable efforts to amend the
         Company's certificate or articles of incorporation to increase the
         number of authorized but unissued shares of Common Stock to at least
         the Required Minimum at such time, as soon as possible and in any event
         not later than the 75th day after such date.

                  (c) The Company shall, if applicable: (i) in the time and
         manner required by the Trading Market, prepare and file with such
         Trading Market an additional shares listing application covering a
         number of shares of Common Stock at least equal to the Required Minimum
         on the date of such application, (ii) take all steps necessary to cause
         such shares of Common Stock to be approved for listing on the Trading
         Market as soon as possible thereafter, (iii) provide to the Purchasers
         evidence of such listing, and (iv) maintain the listing of such Common
         Stock on any date at least equal to the Required Minimum on such date
         on such Trading Market or another Trading Market.

         4.13 Participation in Future Financing.

                                       29
<PAGE>

                  (a) From the date hereof until the date that is the 12 month
         anniversary of the Effective Date, upon any financing by the Company or
         any of its Subsidiaries of Common Stock or Common Stock Equivalents (a
         "Subsequent Financing"), each Purchaser shall have the right to
         participate in up to an amount of the Subsequent Financing equal to
         100% of the Subsequent Financing (the "Participation Maximum").

                  (b) At least 5 Trading Days prior to the closing of the
         Subsequent Financing, the Company shall deliver to each Purchaser a
         written notice of its intention to effect a Subsequent Financing
         ("Pre-Notice"), which Pre-Notice shall ask such Purchaser if it wants
         to review the details of such financing (such additional notice, a
         "Subsequent Financing Notice"). Upon the request of a Purchaser, and
         only upon a request by such Purchaser, for a Subsequent Financing
         Notice, the Company shall promptly, but no later than 1 Trading Day
         after such request, deliver a Subsequent Financing Notice to such
         Purchaser. The Subsequent Financing Notice shall describe in reasonable
         detail the proposed terms of such Subsequent Financing, the amount of
         proceeds intended to be raised thereunder, the Person with whom such
         Subsequent Financing is proposed to be effected, and attached to which
         shall be a term sheet or similar document relating thereto.

                  (c) Any Purchaser desiring to participate in such Subsequent
         Financing must provide written notice to the Company by not later than
         5:30 p.m. (New York City time) on the 5th Trading Day after all of the
         Purchasers have received the Pre-Notice that the Purchaser is willing
         to participate in the Subsequent Financing, the amount of the
         Purchaser's participation, and that the Purchaser has such funds ready,
         willing, and available for investment on the terms set forth in the
         Subsequent Financing Notice. If the Company receives no notice from a
         Purchaser as of such 5th Trading Day, such Purchaser shall be deemed to
         have notified the Company that it does not elect to participate.

                  (d) If by 5:30 p.m. (New York City time) on the fifth Trading
         Day after all of the Purchasers have received the Pre-Notice,
         notifications by the Purchasers of their willingness to participate in
         the Subsequent Financing (or to cause their designees to participate)
         is, in the aggregate, less than the total amount of the Subsequent
         Financing, then the Company may effect the remaining portion of such
         Subsequent Financing on the terms and to the Persons set forth in the
         Subsequent Financing Notice.

                  (e) If by 5:30 p.m. (New York City time) on the fifth Trading
         Day after all of the Purchasers have received the Pre-Notice, the
         Company receives responses to a Subsequent Financing Notice from
         Purchasers seeking to purchase more than the aggregate amount of the
         Participation Maximum, each such Purchaser shall have the right to
         purchase the greater of (a) their Pro Rata Portion (as defined below)
         of the Participation Maximum and (b) the difference between the
         Participation Maximum and the aggregate amount of participation by all
         other Purchasers. "Pro Rata Portion" is the ratio of (x) the
         Subscription Amount of Securities purchased on the Closing Date by a
         Purchaser participating under this Section 4.13 and (y) the sum of the
         aggregate Subscription Amounts of Securities purchased on the Closing
         Date by all Purchasers participating under this Section 4.13.

                                       30
<PAGE>

                  (f) The Company must provide the Purchasers with a second
         Subsequent Financing Notice, and the Purchasers will again have the
         right of participation set forth above in this Section 4.13, if the
         Subsequent Financing subject to the initial Subsequent Financing Notice
         is not consummated for any reason on the terms set forth in such
         Subsequent Financing Notice within 60 Trading Days after the date of
         the initial Subsequent Financing Notice.

                  (g) Notwithstanding the foregoing, this Section 4.13 shall not
         apply in respect of an Exempt Issuance.

         4.14 Subsequent Equity Sales.

                  (a) From the date hereof until 90 days after the Effective
         Date, neither the Company nor any Subsidiary of the Company shall issue
         shares of Common Stock or Common Stock Equivalents; provided, however,
         the 90 day period set forth in this Section 4.14 shall be extended for
         the number of Trading Days during such period in which (i) trading in
         the Common Stock is suspended by any Trading Market, or (ii) following
         the Effective Date, the Registration Statement is not effective or the
         prospectus included in the Registration Statement may not be used by
         the Purchasers for the resale of the Underlying Shares. Notwithstanding
         the foregoing, this Section 4.14 shall not apply in respect of an
         Exempt Issuance.

                  (b) From the date hereof until such time as no Purchaser holds
         any of the Securities, the Company shall be prohibited from effecting
         or entering into an agreement to effect any Subsequent Financing
         involving a "Variable Rate Transaction". The term "Variable Rate
         Transaction" shall mean a transaction in which the Company (i) enters
         into any agreement, including, but not limited to, an equity line of
         credit, whereby the Company may sell securities at a future determined
         price, unless such future determined price shall be not less than 85%
         of the VWAP as of the date of issuance or sale of the overlying
         security; or (ii) issues or sells any debt or equity securities that
         are convertible into, exchangeable or exercisable for, or include the
         right to receive additional shares of Common Stock either (A) at a
         conversion, exercise or exchange rate or other price that is based upon
         and/or varies with the trading prices of or quotations for the shares
         of Common Stock at any time after the initial issuance of such debt or
         equity securities, or (B) with a conversion, exercise or exchange price
         that is subject to being reset at some future date after the initial
         issuance of such debt or equity security or upon the occurrence of
         specified or contingent events directly or indirectly related to the
         business of the Company or the market for the Common Stock, unless in
         either such event the conversion, exercise or exchange rate or other
         price is not less than 85% of the VWAP as at the date of issuance or
         sale of the overlying security.

         4.15 Equal Treatment of Purchasers. No consideration shall be offered
or paid to any person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents. Further, the
Company shall not make any payment of principal or interest on the Debentures in
amounts which are disproportionate to the respective principal

                                       31
<PAGE>

amounts outstanding on the Debentures at any applicable time. For clarification
purposes, this provision constitutes a separate right granted to each Purchaser
by the Company and negotiated separately by each Purchaser, and is intended to
treat for the Company the Debenture holders as a class and shall not in any way
be construed as the Purchasers acting in concert or as a group with respect to
the purchase, disposition or voting of Securities or otherwise.

         4.16 Short Sales and Confidentiality. Each Purchaser severally and not
jointly with the other Purchasers covenants that neither it nor any affiliates
acting on its behalf or pursuant to any understanding with it will execute any
Short Sales during the period after the Discussion Time and ending at the time
that the transactions contemplated by this Agreement are first publicly
announced as described in Section 4.6. Each Purchaser, severally and not jointly
with the other Purchasers, covenants that until such time as the transactions
contemplated by this Agreement are publicly disclosed by the Company as
described in Section 4.6, such Purchaser will maintain, the confidentiality of
all disclosures made to it in connection with this transaction (including the
existence and terms of this transaction). Each Purchaser understands and
acknowledges, severally and not jointly with any other Purchaser, that the
Commission currently takes the position that coverage of short sales of shares
of the Common Stock "against the box" prior to the Effective Date of the
Registration Statement with the Securities is a violation of Section 5 of the
Securities Act, as set forth in Item 65, Section 5 under Section A, of the
Manual of Publicly Available Telephone Interpretations, dated July 1997,
compiled by the Office of Chief Counsel, Division of Corporation Finance.
Notwithstanding the foregoing, no Purchaser makes any representation, warranty
or covenant hereby that it will not engage in Short Sales in the securities of
the Company after the time that the transactions contemplated by this Agreement
are first publicly announced as described in Section 4.6. Notwithstanding the
foregoing, in the case of a Purchaser that is a multi-managed investment vehicle
whereby separate portfolio managers manage separate portions of such Purchaser's
assets and the portfolio managers have no direct knowledge of the investment
decisions made by the portfolio managers managing other portions of such
Purchaser's assets, the covenant set forth above shall only apply with respect
to the portion of assets managed by the portfolio manager that made the
investment decision to purchase the Securities covered by this Agreement.

                                   ARTICLE V.
                                  MISCELLANEOUS

         5.1 Termination. This Agreement may be terminated by any Purchaser, as
to such Purchaser's obligations hereunder only and without any effect whatsoever
on the obligations between the Company and the other Purchasers, by written
notice to the other parties, if the Closing has not been consummated on or
before June 30, 2005; provided, however, that no such termination will affect
the right of any party to sue for any breach by the other party (or parties).

         5.2 Fees and Expenses. At the Closing, the Company has agreed to
reimburse Omicron Master Trust ("Omicron") up to $100,000, for its actual,
reasonable, out-of-pocket legal fees and expenses, $50,000 which shall be paid
prior to the Closing. Accordingly, in lieu of the foregoing payments, the
aggregate amount that Omicron is to pay for the Securities at the Closing shall
be reduced by $50,000 in lieu thereof. The Company shall deliver, prior to the
Closing, a completed and executed copy of the Closing Statement, attached hereto
as Annex A.

                                       32
<PAGE>

Except as expressly set forth in the Transaction Documents to the contrary, each
party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident to
the negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all transfer agent fees, stamp taxes and other
taxes and duties levied in connection with the delivery of any Securities.

         5.3 Entire Agreement. The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.

         5.4 Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto prior to 5:30 p.m. (New York
City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the second Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service, or (d) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as set forth on the signature pages attached
hereto.

         5.5 Amendments; Waivers. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by the Company and each Purchaser or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise any right hereunder in
any manner impair the exercise of any such right.

         5.6 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.

         5.7 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser. Any Purchaser may assign
any or all of its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided such transferee agrees
in writing to be bound, with respect to the transferred Securities, by the
provisions hereof that apply to the "Purchasers".

                                       33
<PAGE>

         5.8 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.11.

         5.9 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) 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 contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. The parties hereby waive all
rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its attorneys' fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.

         5.10 Survival. The representations and warranties contained herein
shall survive the Closing and the delivery, exercise and/or conversion of the
Securities, as applicable for the applicable statue of limitations.

         5.11 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.

         5.12 Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties

                                       34
<PAGE>

will attempt to agree upon a valid and enforceable provision that is a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.

         5.13 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights; provided,
however, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock subject to any such rescinded conversion or exercise notice.

         5.14 Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new certificate
or instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities.

         5.15 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.

         5.16 Payment Set Aside. To the extent that the Company makes a payment
or payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.

         5.17 Usury. To the extent it may lawfully do so, the Company hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and will
resist any and all efforts to be compelled to take the benefit or advantage of,
usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or proceeding that may be brought by any

                                       35
<PAGE>

Purchaser in order to enforce any right or remedy under any Transaction
Document. Notwithstanding any provision to the contrary contained in any
Transaction Document, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the
nature of interest shall not exceed the maximum lawful rate authorized under
applicable law (the "Maximum Rate"), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate. It is
agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser's election.

         5.18 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose. Each Purchaser has been represented by its own separate legal counsel
in their review and negotiation of the Transaction Documents. For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through FW. FW does not represent all of
the Purchasers but only Omicron. The Company has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of
the Company and not because it was required or requested to do so by the
Purchasers.

         5.19 Liquidated Damages. The Company's obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.

         5.20 Construction. The parties agree that each of them and/or their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the

                                       36
<PAGE>

normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.

                            (SIGNATURE PAGES FOLLOW)

                                       37
<PAGE>

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

WESTERN POWER & EQUIPMENT CORP.                              Address for Notice:
                                                             -------------------

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

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

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                      SIGNATURE PAGE FOR PURCHASER FOLLOWS]

                                       38
<PAGE>

        [PURCHASER SIGNATURE PAGES TO WPEC SECURITIES PURCHASE AGREEMENT]

         IN WITNESS WHEREOF, the undersigned have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.

Name of Purchaser: ______________________________________________________
SIGNATURE OF AUTHORIZED SIGNATORY OF PURCHASER: _________________________
Name of Authorized Signatory: ___________________________________________
Title of Authorized Signatory: __________________________________________
Email Address of Purchaser:______________________________________________

Address for Notice of Purchaser:

Address for Delivery of Securities for Purchaser (if not same as above):

Series A Subscription Amount:
Series A Warrant Shares:
Series B Subscription Amount (for each $1 million principal amount of Series A
Debentures, $66,666 principal amount of Series B Debentures): Series B Warrant
Shares:
Principal Amount of Debentures underlying Series C Warrant:
Warrant Shares underlying Series C Warrant:

EIN Number:

                                       39

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