Document:

Escrow Agt 7.15.04

EXHIBIT A

ESCROW AGREEMENT

ESCROW AGREEMENT (this “Agreement”), dated as of July 15th 2004, by and between Galaxy Minerals, Inc., a Florida corporation with its principal place of business at 500 Park Avenue, Suite 203, Lake Villa, IL 60046 (the “Target Company”); Gottbetter & Partners, LLP with its principal place of business at 488 Madison Avenue, New York, NY 10022 (the “Escrow Agent”); and Langley Park Investments Plc, a corporation organized under the laws of England and Wales with its offices at 30 Farringdon Street, London EC4A 4HJ (“Langley”).

Recitals

   A.   Simultaneously with the execution of this Agreement, Langley and the Target Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”), dated as of the date hereof and incorporated herein by reference, pursuant to which the Target Company has agreed to issue and Langley has agreed that the Langley Consideration Shares shall be deposited into escrow pursuant to this Agreement, including fifty percent (50%) of the Langley Consideration Shares to be deposited into escrow as Downside Price Protection (the “Langley Escrow Shares”).

   B.   The Escrow Agent is willing to act as escrow agent pursuant to the terms of this Agreement with respect to the purchase of the shares of Consideration Stock.

   C.   All capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Stock Purchase Agreement.

NOW, THEREFORE, IT IS AGREED:

   1.   Deposit into Escrow. At Closing, the Target Company shall (i) deposit the Langley Consideration Shares with the Escrow Agent, (ii) deliver blank stock powers (the “Stock Powers”) for the Langley Escrow Shares to the Escrow Agent and (iii) deposit the Consideration Stock with the Escrow Agent. The Escrow Agent shall hold the Langley Consideration Shares, the Consideration Stock and the Stock Powers in escrow when delivered.

2.   Terms of Escrow. (a) If the Market Value of the Common Stock two years after Closing is less than the Closing Price, the Target Company shall sell to Langley the number of Langley Escrow Shares (the “Langley Protection Shares”) equal to (a) the Langley Consideration Shares multiplied by (b) the Percentage Decrease, at a purchase price of 1p per Langley Consideration Share (the “Escrow Purchase Price”). The “Percentage Decrease” shall be equal to 1 – Market Value/the Closing Price. “Market Value” shall be the average of the ten (10) closing bid prices per share of the Common Stock during the ten (10) trading days immediately preceding the two year anniversary of the Closing. 

	 
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Within three (3) Business Days of the two year anniversary of the Closing, Langley shall (i) send a notice (“Sale Notice”) to the Target Company and the Escrow Agent of the Langley Protection Shares to be sold by the Target Company to Langley, if any, and (ii) deposit the Escrow Purchase Price with the Escrow Agent, if necessary. Within fourteen (14) Business Days of the Target Company’s and the Escrow Agent’s receipt of the Sale Notice and Escrow Agent’s receipt of the Escrow Purchase Price, the Escrow Agent is authorized and directed (i) to pay the Escrow Purchase Price to the Target Company, if any, (ii) to deliver the Langley Protection Shares, if any, and the Stock Powers to Langley, (iii) to deliver the remaining Langley Escrow Shares, if any, to the Target Company, and (iv) to deliver the Stock Powers to the Target Company if the total number of Langley Protection Shares is zero.

 

(b)    If at any time before September 30, 2004, the Langley Consideration Shares are admitted for trading on the London Stock Exchange plc (the “London Exchange”), the Escrow Agent is authorized and directed to distribute, within fourteen (14) Business Days of such admittance, (i) the Consideration Stock to Langley and (ii) fifty percent (50%) of the Langley Consideration Shares to the Target Company. If the Langley Consideration Shares are not admitted for trading on the London Exchange by September 30, 2004, the Escrow Agent is authorized and directed to distribute, no later than October 5, 2004, (i) the Consideration Stock to the Target Company and (ii) the Langley Consideration Shares to Langley.

3.   Duties and Obligations of the Escrow Agent.

   (a)   The parties hereto agree that the duties and obligations of the Escrow Agent shall be only those obligations herein specifically provided and no other. The Escrow Agent’s duties are those of a depositary only, and the Escrow Agent shall incur no liability whatsoever, except as a direct result of its willful misconduct or gross negligence in the performance of its duties hereunder;

   (b)   The Escrow Agent may consult with counsel of its choice, and shall not be liable for any action taken, suffered or omitted to be taken by it in accordance with the advice of such counsel;

   (c)   The Escrow Agent shall not be bound in any way by the terms of any other agreement to which Langley and the Target Company are parties, whether or not the Escrow Agent has knowledge thereof, and the Escrow Agent shall not in any way be required to determine whether or not any other agreement has been complied with by Langley and the Target Company, or any other party thereto. The Escrow Agent shall not be bound by any modification, amendment, termination, cancellation, rescission or supersession of this Agreement unless the same shall be in writing and signed jointly by Langley and the Target Company and agreed to in writing by the Escrow Agent;

   (d)   If the Escrow Agent shall be uncertain as to its duties or rights hereunder or shall receive instructions, claims or demands which, in its opinion, are in conflict with any of the provisions of this Agreement, the Escrow Agent shall be entitled to refrain from taking any action other than keeping safely the Consideration (as defined below) or taking certain action until the Escrow Agent is directed otherwise in writing jointly by Langley and the Target Company or by a final judgment of a court of competent jurisdiction;

 

	 
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   (e)   The Escrow Agent shall be fully protected in relying upon any written notice, demand, certificate or document which the Escrow Agent, in good faith, believes to be genuine. The Escrow Agent shall not be responsible for the sufficiency or accuracy of the form, execution, validity or genuineness of documents or securities now or hereafter deposited hereunder or of any endorsement thereon, or for any lack of endorsement thereon, or for any description therein; nor shall the Escrow Agent be responsible or liable in any respect on account of the identity, authority or rights of the persons executing or delivering or purporting to execute or deliver any such document, security or endorsement;

   (f)   The Escrow Agent shall not be required to institute legal proceedings of any kind and shall not be required to defend any legal proceedings which may be instituted against it or in respect of the Consideration;

   (g)   If the Escrow Agent at any time, in its sole discretion, deems it necessary or advisable to relinquish custody of any of the Securities (to the extent delivered to the Escrow Agent pursuant hereto, the “Consideration”), it may do so by delivering the same to another Person that agrees to act as escrow agent hereunder and whose substitution for the Escrow Agent is agreed upon in writing by Langley and the Target Company; provided, however, that such successor Escrow Agent must be resident in the United States. If no such escrow agent is selected within three (3) days after the Escrow Agent gives notice to Langley and the Target Company of the Escrow Agent’s desire to so relinquish custody of the Consideration and resign as Escrow Agent, then the Escrow Agent may do so by delivering the Consideration to the clerk or other proper officer of a state or federal court of competent jurisdiction situate in the state and county of New York. The fee of any court officer shall be borne by the Target Company. Upon such delivery, the Escrow Agent shall be discharged from any and all responsibility or liability with respect to the Consideration and this Agreement and each of the Target Company and Langley shall promptly pay all monies it may owe to the Escrow Agent for its services hereunder, including, but not limited to, reimbursement of its out-of-pocket expenses pursuant to paragraph (i) below;

   (h)   This Agreement shall not create any fiduciary duty on the Escrow Agent’s part to Langley or the Target Company, nor disqualify the Escrow Agent from representing either party hereto in any dispute with the other, including any dispute with respect to the Purchase Agreement or Debenture; provided, however, that in the event of such dispute, the Escrow Agent shall have the right to commence an interpleader action in any court of competent jurisdiction of the state of New York or of the United States located in the county and state of New York, deposit the Consideration with such court;

   (i)   The parties acknowledge and agree that the Escrow Agent is counsel to Langley. The parties agree to, and agree not to object to, the Escrow Agent’s engagement as Escrow Agent hereunder;

   (j)   Upon the full performance of this Agreement, the Escrow Agent shall be deemed released and discharged of any further obligations hereunder.

	 
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4.   Indemnification.

   (a)   Langley hereby indemnifies and holds free and harmless the Escrow Agent from any and all losses, expenses, liabilities and damages (including but not limited to reasonable attorney’s fees, and amounts paid in settlement) resulting from claims asserted by the Target Company against the Escrow Agent with respect to the performance of any of the provisions of this Agreement;

   (b)   The Target Company hereby indemnifies and holds free and harmless the Escrow Agent from any and all losses, expenses, liabilities and damages (including but not limited to reasonable attorney’s fees, and amount paid in settlement) resulting from claims asserted by Langley against the Escrow Agent with respect to the performance of any of the provisions of this Agreement;

   (c)   Langley and the Target Company, jointly and severally, hereby indemnify and hold the Escrow Agent harmless from and against any and all losses, damages, taxes, liabilities and expenses that may be incurred by the Escrow Agent, arising out of or in connection with its acceptance of appointment as the Escrow Agent hereunder and/or the performance of its duties pursuant to this Agreement, the Purchase Agreement and the Securities, including, but not limited to, all legal costs and expenses of the Escrow Agent incurred defending itself against any claim or liability in connection with its performance hereunder, provided that the Escrow Agent shall not be entitled to any indemnity for any losses, damages, taxes, liabilities or expenses that directly result from its willful misconduct or gross negligence in its performance as Escrow Agent hereunder

   (d)   In the event of any legal action or proceeding involving any of the parties to this Agreement which is brought to enforce or otherwise adjudicate any of the rights or obligations of the parties hereunder, the non-prevailing party or parties shall pay the legal fees of the prevailing party or parties and the legal fees, if any, of the Escrow Agent.

5.   Miscellaneous.

   (a)   All notices, including Notices of Conversion and Notices of Exercise, objections, requests, demands and other communications sent to any party hereunder shall be deemed duly given if (x) in writing and sent by facsimile transmission to the Person for whom intended if addressed to such Person at its facsimile number set forth below or such other facsimile number as such Person may designate by notice given pursuant to the terms of this Section 5 and (y) the sender has confirmation of transmission:

 

 

	             (i)     If to the Target Company	 Galaxy Minerals, Inc.	 
	 	 500 Park Avenue, Suite 203	 
	 	 Lake Villa, IL 60046	 
	 	 Attn: President	 
	 	  Tel: (847) 265 7600	 
	 	  Fax: (847) 265 0995   	 

  

        

	 
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	             (ii)     If to Langley:	 Langley Park Investments PLc	 
	 	30 Farringdon Street	 
	 	London EC4A 4HJ	 
	 	Attn: Harry Pearl	 
	 	Tel: 44.207.569.0044	 
	 	Fax: 44.207.724.0090	 

 

	             (iii)     If to the Escrow Agent:	Gottbetter & Partners, LLP	 
	 	488 Madison Ave.	 
	 	New York, New York 10022	 
	 	Attn: Adam S. Gottbetter, Esq.	 
	 	 Tel: (212) 400-6900	 
	 	 Fax: (212) 400-6901	 

                           

   (b)   This Agreement has been prepared, negotiated and delivered in the state of New York and shall be governed by and construed and enforced in accordance with the laws of the state of New York applicable to contracts entered into and performed entirely within New York, without giving effect to the principles of New York law relating to the conflict of laws.

   (c)   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) the same with the same force and effect as if such facsimile signature page were an original thereof.

   (d)   This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The assignment by a party of this Agreement or any rights hereunder shall not affect the obligations of such party under this Agreement.

6.   Termination of Escrow. The term of this Escrow Agreement shall begin upon the date hereof and shall continue until terminated upon the earlier to occur of (i) the Langley Escrow Shares are fully distributed or (ii) the written agreement of the parties to terminate this Agreement. Upon the termination of this Escrow Agreement pursuant to subsection (ii), the Escrow Agent shall distribute any of the Langley Escrow Shares then held by it pursuant to the terms of the written agreement of the parties.

 

[ SIGNATURE PAGE FOLLOWS ]

	 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed the day and year first above written.

	
Target Company:

	
 

	
Galaxy Minerals, Inc.

	
 

	
 

	
 

	
By:   /s/ Richard N. Jobling                                                                        

	
Name: Richard N. Jobling

	
Title: President

	
 

	
 

	
 

	
Langley:

	
 

	
Dungarvon Associates, Inc. on behalf of Langley Park Investments Plc.

	
 

	
 

	
 

	
By:         /s/ name unknown                                                                          

	
Name:    

	
Title:      

	 
	 
	 
	  Escrow Agent:
	 
	 Gottbetter & Partners, LLP
	 
	 
	 
	 By:   /s/ Adam S. Gottbetter                                                                        
	 Name:   Adam S Gottbetter
	 Title:      Managing Partner

 

 

	 
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EXHIBIT B

Galaxy Minerals, Inc.
OFFICER’S CERTIFICATE

I, Richard N. Jobling being the President of Galaxy Minerals, Inc., a Florida corporation (the “Target Company”), pursuant to Section 2.2(a)(ii) of that certain Stock Purchase Agreement (the “Purchase Agreement”), dated as of July 15th, 2004, by and between the Target Company and Langley Park Investments PLC, do hereby certify on behalf of the Target Company that attached hereto is a copy of the resolutions duly adopted by the Board of Directors of the Target Company authorizing the Target Company to execute and deliver the Transaction Documents, as such term is defined in the Purchase Agreement and to enter into the transactions contemplated thereby.

 

IN WITNESS WHEREOF, I have executed this Officer’s Certificate on behalf of the Target Company this 15th day of July, 2004.

 

	
Galaxy Minerals, Inc.

	
 

	
 

	
 

	
By:  /s/ Richard N. Jobling                                                                        

	
Name: Richard N. Jobling, President

 

	 
	 	C -1COMMON STOCK PURCHASE AGREEMENT

      COMMON STOCK PURCHASE  AGREEMENT (the  "Agreement"),  dated as of July 22,
2004, by and between ZAP, a California  corporation (the "Company"),  and FUSION
CAPITAL  FUND II, LLC, an Illinois  limited  liability  company  (the  "Buyer").
Capitalized  terms used herein and not otherwise  defined  herein are defined in
Section 10 hereof.

                                    WHEREAS:

      Subject  to the terms and  conditions  set  forth in this  Agreement,  the
Company  wishes  to sell to the  Buyer,  and the  Buyer  wishes  to buy from the
Company,  up to Twenty Four Million Five Hundred Thousand Dollars  ($24,500,000)
of the Company's common stock, no par value per share (the "Common Stock").  The
shares of Common Stock to be purchased hereunder, including the shares of Common
Stock  initially  purchased  pursuant to Section  1(a)  hereof,  are referred to
herein as the "Purchase Shares."

      NOW THEREFORE, the Company and the Buyer hereby agree as follows:

      1.    PURCHASE OF COMMON STOCK.

      Subject  to the terms and  conditions  set  forth in  Sections  6, 7 and 9
below,  the Company  hereby  agrees to sell to the Buyer,  and the Buyer  hereby
agrees to purchase from the Company, shares of Common Stock as follows:

      (a)  Commencement  of Purchases of Common Stock.  The purchase and sale of
Common Stock  hereunder  shall  commence  (the  "Commencement")  within five (5)
Trading Days following the date of satisfaction (or waiver) of the conditions to
the  Commencement  set forth in Sections 6 and 7 below (or such later date as is
mutually agreed to by the Company and Buyer) (the date of such Commencement, the
"Commencement  Date"),  provided,  however,  that on the date hereof,  the Buyer
agrees to purchase and the Company agrees to sell 200,000  Purchase  Shares at a
purchase price per share equal to $2.50 ("Initial Purchase Shares") and warrants
to purchase  500,000  shares of Common  Stock at an exercise  price of $2.50 per
share.  Upon receipt of the Initial  Purchase Shares in  certificated  form, the
Warrants,  and the Commitment Shares in accordance with Section 4(f) hereof, the
Buyer shall pay to the Company  $500,000 as full payment for the purchase of the
Initial Purchase Shares.

      (b) Buyer's  Purchase  Rights and  Obligations.  Subject to the  Company's
right to suspend  purchases  under  Section  1(d)(ii)  hereof,  the Buyer  shall
purchase  shares of Common Stock on each Trading Day during each Monthly  Period
equal to the Daily  Purchase  Amount  (as  defined in  Section  1(c)(i))  at the
Purchase Price.  Within one (1) Trading Day of receipt of Purchase  Shares,  the
Buyer  shall pay to the  Company an amount  equal to the  Purchase  Amount  with
respect to such Purchase Shares as full payment for the purchase of the Purchase
Shares so  received.  The  Company  shall not issue any  fraction  of a share of
Common Stock upon any purchase.  All shares of Common Stock (including fractions
thereof)  issuable upon a purchase under this Agreement  shall be aggregated for
purposes of  determining  whether the purchase would result in the issuance of a
fraction of a share of Common Stock. If, after the  aforementioned  aggregation,
the  issuance  would  result in the  issuance of a fraction of a share of Common
Stock,  the Company  shall round such  fraction of a share of Common Stock up or
down to the nearest whole share. All payments made under this Agreement shall be
made in lawful money of the United  States of America by check or wire  transfer
of immediately  available  funds to such account as the Company may from time to
time  designate by written  notice in  accordance  with the  provisions  of this
Agreement.  Whenever  any  amount  expressed  to be  due by the  terms  of  this
Agreement is due on any day that is not a Trading Day, the same shall instead be
due on the next succeeding day which is a Trading Day.

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      (c) The Daily Purchase Amount; Company's Right to Decrease or Increase the
Daily Purchase Amount.

            (i) The Daily  Purchase  Amount.  As used herein the term  "Original
      Daily Purchase  Amount" shall mean Thirty Thousand  Dollars  ($30,000) per
      Trading Day. As used herein,  the term "Daily Purchase  Amount" shall mean
      initially Thirty Thousand Dollars  ($30,000) per Trading Day, which amount
      may be increased or decreased  from time to time  pursuant to this Section
      1(c).

            (ii)  Company's  Right to Decrease the Daily  Purchase  Amount.  The
      Company  shall always have the right at any time to decrease the amount of
      the Daily Purchase Amount by delivering  written notice (a "Daily Purchase
      Amount  Decrease  Notice") to the Buyer which notice shall specify the new
      Daily Purchase  Amount.  The decrease in the Daily  Purchase  Amount shall
      become  effective  one Trading Day after receipt by the Buyer of the Daily
      Purchase Amount Decrease  Notice.  Any purchases by the Buyer which have a
      Purchase  Date on or prior to the first (1st) Trading Day after receipt by
      the Buyer of a Daily Purchase  Amount  Decrease  Notice must be honored by
      the  Company as  otherwise  provided  herein.  The  decrease  in the Daily
      Purchase  Amount shall remain in effect until the Company  delivers to the
      Buyer a Daily Purchase Amount Increase Notice (as defined below).

            (iii)  Company's  Right to Increase the Daily Purchase  Amount.  The
      Company  shall have the right (but not the  obligation)  to  increase  the
      amount  of the Daily  Purchase  Amount  in  accordance  with the terms and
      conditions  set forth in this  Section  1(c)(iii)  by  delivering  written
      notice to the Buyer stating the new amount of the Daily Purchase Amount (a
      "Daily Purchase Amount Increase Notice"). A Daily Purchase Amount Increase
      Notice  shall be  effective  five (5)  Trading  Days after  receipt by the
      Buyer. The Company shall always have the right at any time to increase the
      amount of the Daily  Purchase  Amount up to the  Original  Daily  Purchase
      Amount.  With respect to increases in the Daily Purchase  Amount above the
      Original Daily Purchase  Amount,  as the market price for the Common Stock
      increases  the Company  shall have the right from time to time to increase
      the  Daily  Purchase  Amount  as  follows.  For every  $0.20  increase  in
      Threshold  Price above  $2.00  (subject to  equitable  adjustment  for any
      reorganization,  recapitalization, non-cash dividend, stock split or other
      similar  transaction),  the Company  shall have the right to increase  the
      Daily  Purchase  Amount  by up to an  additional  $4,000  in excess of the
      Original  Daily Purchase  Amount.  "Threshold  Price" for purposes  hereof
      means the  lowest  Sale  Price of the  Common  Stock  during  the five (5)
      consecutive  Trading Days immediately prior to the submission to the Buyer
      of  a  Daily  Purchase   Amount  Increase  Notice  (subject  to  equitable
      adjustment for any  reorganization,  recapitalization,  non-cash dividend,
      stock split or other similar  transaction).  For example, if the Threshold
      Price is $2.40,  the Company  shall have the right to  increase  the Daily
      Purchase Amount to up to $38,000 in the aggregate.  If the Threshold Price
      is $2.80,  the Company shall have the right to increase the Daily Purchase
      Amount to up to $46,000 in the  aggregate.  Any  increase in the amount of
      the Daily  Purchase  Amount shall continue in effect until the delivery to
      the Buyer of a Daily Purchase Amount Decrease Notice.  However,  if at any
      time during any  Trading  Day the Sale Price of the Common  Stock is below
      the applicable Threshold Price, such increase in the Daily Purchase Amount
      shall be void and the Buyer's obligations to buy Purchase Shares hereunder
      in  excess  of the  applicable  maximum  Daily  Purchase  Amount  shall be
      terminated. Thereafter, the Company shall again have the right to increase
      the amount of the Daily Purchase Amount as set forth herein by delivery of
      a new Daily Purchase  Amount Increase Notice only if the Sale Price of the
      Common Stock is above the applicable  Threshold  Price on each of five (5)
      consecutive  Trading  Days  immediately  prior to such new Daily  Purchase
      Amount Increase Notice.

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<PAGE>

      (d) Limitations on Purchases.

            (i) Limitation on Beneficial Ownership. The Company shall not effect
      any sale under this  Agreement  and the Buyer  shall not have the right to
      purchase  shares of Common  Stock under this  Agreement to the extent that
      after  giving  effect  to  such  purchase  the  Buyer  together  with  its
      affiliates  would  beneficially  own in excess of 4.9% of the  outstanding
      shares of the Common Stock following such purchase.  For purposes  hereof,
      the number of shares of Common Stock  beneficially  owned by the Buyer and
      its  affiliates or acquired by the Buyer and its  affiliates,  as the case
      may be,  shall  include the number of shares of Common  Stock  issuable in
      connection  with a purchase under this Agreement with respect to which the
      determination  is being  made,  but shall  exclude the number of shares of
      Common Stock which would be issuable  upon (1) a purchase of the remaining
      Available  Amount  which  has not been  submitted  for  purchase,  and (2)
      exercise or conversion of the  unexercised or  unconverted  portion of any
      other  securities  of the  Company  (including,  without  limitation,  any
      warrants)  subject to a limitation on conversion or exercise  analogous to
      the limitation  contained herein  beneficially  owned by the Buyer and its
      affiliates.  If the 4.9% limitation is ever reached the Company shall have
      the option to  increase  such  limitation  to 9.9% by  delivery of written
      notice to the Buyer.  Thereafter,  if the 9.9%  limitation is ever reached
      this shall not affect or limit the  Buyer's  obligation  to  purchase  the
      Daily   Purchase   Amount  as  otherwise   provided  in  this   Agreement.
      Specifically,  even though the Buyer may not receive  additional shares of
      Common Stock in the event that the 9.9%  limitation is ever  reached,  the
      Buyer is still  obligated to pay to the Company the Daily Purchase  Amount
      on each Trading Day as otherwise  obligated under this Agreement,  e.g. no
      Event of Default (as defined in Section 9 hereof)  has  occurred,  nor any
      event which,  after notice and/or lapse of time,  would become an Event of
      Default.  Under  such  circumstances,  the Buyer  would  have the right to
      acquire  additional shares of Common Stock in the future only at such time
      as its ownership  subsequently  become less than the 9.9% limitation.  For
      purposes of this Section,  in determining the number of outstanding shares
      of Common Stock the Buyer may rely on the number of outstanding  shares of
      Common Stock as reflected  in (1) the  Company's  most recent Form 10-Q or
      Form 10-K,  as the case may be, (2) a more recent public  announcement  by
      the Company or (3) any other written  communication  by the Company or its
      Transfer  Agent  setting  forth the  number  of  shares  of  Common  Stock
      outstanding. Upon the reasonable written or oral request of the Buyer, the
      Company  shall  promptly  confirm  orally  and in writing to the Buyer the
      number of shares of Common Stock then outstanding. In any case, the number
      of  outstanding  shares of Common Stock shall be  determined  after giving
      effect to any purchases  under this  Agreement by the Buyer since the date
      as of which  such  number  of  outstanding  shares  of  Common  Stock  was
      reported.  Except as  otherwise  set forth  herein,  for  purposes of this
      Section  1(d)(i),  beneficial  ownership shall be determined in accordance
      with Section 13(d) of the Securities Exchange Act of 1934, as amended.

            (ii) Company's Right to Suspend  Purchases.  The Company may, at any
      time,  give written notice (a "Purchase  Suspension  Notice") to the Buyer
      suspending purchases of Purchase Shares by the Buyer under this Agreement.
      The Purchase  Suspension Notice shall be effective only for purchases that
      have a Purchase  Date later than one (1) Trading Day after  receipt of the
      Purchase  Suspension  Notice by the Buyer.  Any purchase by the Buyer that
      has a  Purchase  Date on or prior to the  first  (1st)  Trading  Day after
      receipt by the Buyer of a Purchase Suspension Notice from the Company must
      be honored by the Company as  otherwise  provided  herein.  Such  purchase
      suspension  shall  continue in effect until a revocation in writing by the
      Company,  at its sole discretion.  So long as a Purchase Suspension Notice
      is in effect,  the Buyer shall not be  obligated  to purchase any Purchase
      Shares from the Company under Section 1 of this Agreement.

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<PAGE>

            (iii) Purchase  Price Floor.  The Company shall not affect any sales
      under  this  Agreement  and the  Buyer  shall  not have the  right nor the
      obligation  to purchase  any Purchase  Shares under this  Agreement on any
      Trading Day where the Purchase Price for any purchases of Purchase  Shares
      would be less than the Floor Price.

      (e) Records of  Purchases.  The Buyer and the Company  shall each maintain
records  showing the remaining  Available  Amount at any give time and the dates
and  Purchase  Amounts  for each  purchase  or  shall  use  such  other  method,
reasonably satisfactory to the Buyer and the Company.

      (f) Taxes.  The Company shall pay any and all  transfer,  stamp or similar
taxes that may be payable  with  respect to the  issuance  and  delivery  of any
shares of Common Stock to the Buyer made under this Agreement.

      2.    BUYER'S REPRESENTATIONS AND WARRANTIES.

      The Buyer  represents  and  warrants  to the  Company  that as of the date
hereof and as of the Commencement Date:

      (a)  Investment  Purpose.  The Buyer is entering  into this  Agreement and
acquiring  the  Commitment  Shares,  (as defined in Section 4(f)  hereof)  (this
Agreement and the Commitment  Shares are collectively  referred to herein as the
"Securities"),  for its own  account  for  investment  only  and not with a view
towards,  or for resale in  connection  with,  the public  sale or  distribution
thereof;  provided however, by making the representations herein, the Buyer does
not agree to hold any of the Securities for any minimum or other specific term.

      (b) Accredited  Investor Status. The Buyer is an "accredited  investor" as
that term is defined in Rule 501(a)(3) of Regulation D.

      (c) Reliance on Exemptions.  The Buyer understands that the Securities are
being  offered  and  sold to it in  reliance  on  specific  exemptions  from the
registration requirements of United States federal and state securities laws and
that the  Company  is relying  in part upon the truth and  accuracy  of, and the
Buyer's   compliance   with,  the   representations,   warranties,   agreements,
acknowledgments  and  understandings  of the Buyer set forth  herein in order to
determine the  availability  of such exemptions and the eligibility of the Buyer
to acquire the Securities.

      (d) Information.  The Buyer has been furnished with all materials relating
to the business,  finances and operations of the Company and materials  relating
to the offer and sale of the Securities that have been  reasonably  requested by
the Buyer,  including,  without  limitation,  the SEC  Documents  (as defined in
Section  3(f)  hereof).  The  Buyer  understands  that  its  investment  in  the
Securities  involves  a high  degree of risk.  The Buyer (i) is able to bear the
economic risk of an investment in the  Securities  including a total loss,  (ii)
has such knowledge and  experience in financial and business  matters that it is
capable of  evaluating  the merits and risks of the proposed  investment  in the
Securities  and (iii) has had an  opportunity  to ask  questions  of and receive
answers from the officers of the Company concerning the financial  condition and
business of the  Company  and others  matters  related to an  investment  in the
Securities.  Neither such  inquiries nor any other due diligence  investigations
conducted by the Buyer or its representatives  shall modify, amend or affect the
Buyer's right to rely on the Company's  representations and warranties contained
in Section 3 below. The Buyer has sought such  accounting,  legal and tax advice
as it has  considered  necessary to make an informed  investment  decision  with
respect to its acquisition of the Securities.

                                       4
<PAGE>

      (e) No Governmental  Review.  The Buyer  understands that no United States
federal  or state  agency or any other  government  or  governmental  agency has
passed on or made any  recommendation  or  endorsement  of the Securities or the
fairness  or  suitability  of the  investment  in the  Securities  nor have such
authorities  passed  upon  or  endorsed  the  merits  of  the  offering  of  the
Securities.

      (f) Transfer or Resale.  The Buyer  understands that except as provided in
the Registration  Rights Agreement (as defined in Section 4(a) hereof):  (i) the
Securities have not been and are not being  registered under the 1933 Act or any
state  securities  laws,  and may not be offered  for sale,  sold,  assigned  or
transferred  unless (A) subsequently  registered  thereunder or (B) an exemption
exists  permitting such Securities to be sold,  assigned or transferred  without
such registration;  (ii) any sale of the Securities made in reliance on Rule 144
may be made only in accordance  with the terms of Rule 144 and further,  if Rule
144 is not applicable, any resale of the Securities under circumstances in which
the seller (or the person  through whom the sale is made) may be deemed to be an
underwriter  (as that term is  defined in the 1933 Act) may  require  compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder;  and (iii) neither the Company nor any other person is under any
obligation to register the Securities under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption thereunder.

      (g)  Validity;  Enforcement.  This  Agreement  has been  duly and  validly
authorized,  executed  and  delivered  on behalf of the Buyer and is a valid and
binding agreement of the Buyer enforceable  against the Buyer in accordance with
its terms,  subject as to enforceability to general  principles of equity and to
applicable bankruptcy, insolvency,  reorganization,  moratorium, liquidation and
other  similar laws  relating to, or affecting  generally,  the  enforcement  of
applicable creditors' rights and remedies.

      (h) Residency. The Buyer is a resident of the State of Illinois.

      (i) No Prior  Short  Selling.  The Buyer  represents  and  warrants to the
Company  that at no time  prior  to the  date of this  Agreement  has any of the
Buyer, its agents,  representatives or affiliates engaged in or effected, in any
manner whatsoever, directly or indirectly, any (i) "short sale" (as such term is
defined  in Rule  3b-3 of the 1934  Act) of the  Common  Stock  or (ii)  hedging
transaction,  which  establishes a net short position with respect to the Common
Stock.

                                       5
<PAGE>

      3.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      The  Company  represents  and  warrants  to the Buyer  that as of the date
hereof and as of the Commencement Date:

      (a) Organization  and  Qualification.  The Company and its  "Subsidiaries"
(which for  purposes of this  Agreement  means any entity in which the  Company,
directly or indirectly, owns 50% or more of the voting stock or capital stock or
other similar  equity  interests)  are  corporations  duly organized and validly
existing in good standing under the laws of the  jurisdiction  in which they are
incorporated,  and have the requisite corporate power and authority to own their
properties  and to carry on their business as now being  conducted.  Each of the
Company and its  Subsidiaries  is duly qualified as a foreign  corporation to do
business and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business  conducted by it makes such qualification
necessary,  except to the extent  that the failure to be so  qualified  or be in
good  standing  could not  reasonably  be  expected  to have a Material  Adverse
Effect. As used in this Agreement,  "Material Adverse Effect" means any material
adverse  effect on any of: (i) the  business,  properties,  assets,  operations,
results  of   operations   or  financial   condition  of  the  Company  and  its
Subsidiaries,  if any, taken as a whole, or (ii) the authority or ability of the
Company to perform its obligations  under the Transaction  Documents (as defined
in Section 3(b) hereof).  The Company has no Subsidiaries except as set forth on
Schedule 3(a).

      (b)  Authorization;   Enforcement;  Validity.  (i)  The  Company  has  the
requisite   corporate  power  and  authority  to  enter  into  and  perform  its
obligations under this Agreement,  the Registration Rights Agreement and each of
the other agreements  entered into by the parties on the  Commencement  Date and
attached hereto as exhibits to this Agreement  (collectively,  the  "Transaction
Documents"), and to issue the Securities in accordance with the terms hereof and
thereof,  (ii) the  execution and delivery of the  Transaction  Documents by the
Company and the consummation by it of the transactions  contemplated  hereby and
thereby, including without limitation, the issuance of the Commitment Shares and
the  reservation  for issuance and the issuance of the Purchase  Shares issuable
under  this  Agreement,  have been duly  authorized  by the  Company's  Board of
Directors and no further  consent or  authorization  is required by the Company,
its Board of Directors or its  shareholders,  (iii) this Agreement has been, and
each other Transaction Document shall be on the Commencement Date, duly executed
and delivered by the Company and (iv) this Agreement constitutes, and each other
Transaction  Document  upon  its  execution  on  behalf  of the  Company,  shall
constitute, the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may be
limited by general  principles of equity or applicable  bankruptcy,  insolvency,
reorganization,   moratorium,  liquidation  or  similar  laws  relating  to,  or
affecting  generally,  the  enforcement of creditors'  rights and remedies.  The
Board of Directors of the Company has approved  the  resolutions  (the  "Signing
Resolutions")  substantially  in the form as set forth as Exhibit  C-1  attached
hereto to authorize this Agreement and the transactions contemplated hereby. The
Signing  Resolutions  are  valid,  in full  forth and  effect  and have not been
modified or  supplemented in any respect other than by the resolutions set forth
in Exhibit C-2 attached hereto regarding the registration  statement referred to
in Section 4 hereof.  The Company has  delivered to the Buyer a true and correct
copy of a unanimous written consent adopting the Signing Resolutions executed by
all of the members of the Board of Directors of the Company.  No other approvals
or consents of the Company's Board of Directors and/or shareholders is necessary
under  applicable  laws and the Company's  Certificate of  Incorporation  and/or
Bylaws to authorize the  execution and delivery of this  Agreement or any of the
transactions contemplated hereby, including, but not limited to, the issuance of
the Commitment Shares and the issuance of the Purchase Shares.

                                       6
<PAGE>

      (c) Capitalization. As of the date hereof, the authorized capital stock of
the Company  consists of (i) 100,000,000  shares of Common Stock, of which as of
the date hereof, 18,888,305 shares are issued and outstanding,  none are held as
treasury  shares,  10,000,000  shares are reserved for issuance  pursuant to the
Company's stock option plans of which only approximately 7,365,447 shares remain
available for future grants and 43,145,857  shares are issuable and reserved for
issuance pursuant to securities (other than stock options issued pursuant to the
Company's stock option plans)  exercisable or  exchangeable  for, or convertible
into,  shares of Common Stock and (ii) 50,000,000  shares of Preferred Stock, of
which as of the date hereof 10,096.50 shares are issued and outstanding.  All of
such outstanding  shares have been, or upon issuance will be, validly issued and
are fully paid and  nonassessable.  Except as disclosed in Schedule 3(c), (i) no
shares of the Company's  capital  stock are subject to preemptive  rights or any
other similar rights or any liens or  encumbrances  suffered or permitted by the
Company,  (ii) there are no  outstanding  debt  securities,  (iii)  there are no
outstanding  options,   warrants,  scrip,  rights  to  subscribe  to,  calls  or
commitments  of any  character  whatsoever  relating to, or securities or rights
convertible  into,  any  shares of  capital  stock of the  Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the  Company  or  any of  its  Subsidiaries  is or may  become  bound  to  issue
additional  shares of capital stock of the Company or any of its Subsidiaries or
options,  warrants,  scrip,  rights to subscribe to, calls or commitments of any
character  whatsoever relating to, or securities or rights convertible into, any
shares of capital  stock of the Company or any of its  Subsidiaries,  (iv) there
are  no  agreements  or  arrangements  under  which  the  Company  or any of its
Subsidiaries is obligated to register the sale of any of their  securities under
the 1933 Act  (except  the  Registration  Rights  Agreement),  (v)  there are no
outstanding  securities or instruments of the Company or any of its Subsidiaries
which contain any redemption or similar provisions,  and there are no contracts,
commitments,  understandings  or arrangements by which the Company or any of its
Subsidiaries  is or may become  bound to redeem a security of the Company or any
of its  Subsidiaries,  (vi) there are no  securities or  instruments  containing
anti-dilution  or similar  provisions  that will be triggered by the issuance of
the  Securities  as described in this  Agreement  and (vii) the Company does not
have any stock appreciation rights or "phantom stock" plans or agreements or any
similar  plan or  agreement.  The  Company has  furnished  to the Buyer true and
correct copies of the Company's Certificate of Incorporation,  as amended and as
in effect on the date hereof (the "Certificate of Incorporation"), the Company's
By-laws,  as amended and as in effect on the date hereof  (the  "By-laws"),  the
Amended Plan of Reorganization,  dated as of June 17, 2002, and summaries of the
terms of all securities  convertible  into or exercisable  for Common Stock,  if
any, and copies of any documents  containing the material  rights of the holders
thereof in respect thereto.

      (d) Issuance of Securities. The Commitment Shares, Initial Purchase Shares
and Warrants have been duly authorized and, upon issuance in accordance with the
terms hereof,  the Commitment  Shares and Initial  Purchase  Shares shall be (i)
validly  issued,  fully  paid and  non-assessable  and (ii) free from all taxes,
liens and charges with respect to the issue thereof.  6,200,000 shares of Common
Stock have been duly  authorized  and reserved for issuance upon purchase  under
this Agreement.  255,000 shares of Common Stock (subject to equitable adjustment
for any  reorganization,  recapitalization,  non-cash  dividend,  stock split or
other similar  transaction)  have been duly authorized and reserved for issuance
as Additional  Commitment Shares in accordance with Section 4(f) this Agreement.
2,500,000  shares of Common  Stock  (subject  to  equitable  adjustment  for any
reorganization,  recapitalization,  non-cash  dividend,  stock  split  or  other
similar  transaction)  have been duly  authorized  and  reserved for issuance as
Warrant Shares.  Upon issuance and payment therefor in accordance with the terms
and  conditions  of this  Agreement  or the  Warrants,  as the case may be,  the
Purchase Shares and Warrant Shares, as the case may be, shall be validly issued,
fully paid and  nonassessable  and free from all taxes,  liens and charges  with
respect to the issue  thereof,  with the  holders  being  entitled to all rights
accorded to a holder of Common Stock.

                                       7
<PAGE>

      (e) No Conflicts.  Except as disclosed in Schedule  3(e),  the  execution,
delivery and  performance  of the  Transaction  Documents by the Company and the
consummation by the Company of the transactions  contemplated hereby and thereby
(including, without limitation, the reservation for issuance and issuance of the
Purchase  Shares)  will not (i)  result in a  violation  of the  Certificate  of
Incorporation,  any Certificate of  Designations,  Preferences and Rights of any
outstanding  series of  preferred  stock of the  Company or the  By-laws or (ii)
conflict  with,  or constitute a default (or an event which with notice or lapse
of time or both would become a default)  under,  or give to others any rights of
termination,   amendment,   acceleration  or  cancellation  of,  any  agreement,
indenture or  instrument  to which the Company or any of its  Subsidiaries  is a
party, or result in a violation of any law, rule, regulation, order, judgment or
decree  (including  federal and state  securities  laws and  regulations and the
rules and regulations of the Principal  Market  applicable to the Company or any
of its  Subsidiaries) or by which any property or asset of the Company or any of
its Subsidiaries is bound or affected, except in the case of conflicts, defaults
and  violations  under clause (ii),  which could not  reasonably  be expected to
result in a Material  Adverse  Effect.  Except as  disclosed  in Schedule  3(e),
neither the Company nor its  Subsidiaries  is in  violation of any term of or in
default under its Certificate of Incorporation,  any Certificate of Designation,
Preferences  and  Rights of any  outstanding  series of  preferred  stock of the
Company or By-laws or their  organizational  charter or  by-laws,  respectively.
Except as  disclosed  in  Schedule  3(e),  neither  the  Company  nor any of its
Subsidiaries  is in violation of any term of or is in default under any material
contract, agreement, mortgage,  indebtedness,  indenture,  instrument, judgment,
decree or order or any statute,  rule or regulation applicable to the Company or
its  Subsidiaries,  except for possible  conflicts,  defaults,  terminations  or
amendments  which could not  reasonably  be expected to have a Material  Adverse
Effect. The business of the Company and its Subsidiaries is not being conducted,
and shall not be conducted,  in violation of any law,  ordinance,  regulation of
any governmental entity, except for possible violations, the sanctions for which
either individually or in the aggregate could not reasonably be expected to have
a Material Adverse Effect. Except as specifically contemplated by this Agreement
and as required  under the 1933 Act or applicable  state  securities  laws,  the
Company is not  required to obtain any  consent,  authorization  or order of, or
make any filing or registration  with, any court or  governmental  agency or any
regulatory  or  self-regulatory  agency in order for it to  execute,  deliver or
perform  any  of its  obligations  under  or  contemplated  by  the  Transaction
Documents in accordance with the terms hereof or thereof. Except as disclosed in
Schedule 3(e), all consents,  authorizations,  orders, filings and registrations
which the Company is required to obtain pursuant to the preceding sentence shall
be obtained or effected on or prior to the Commencement  Date.  Except as listed
in Schedule  3(e),  since  January 1, 2003,  the Company  has not  received  nor
delivered any notices or  correspondence  from or to the Principal  Market.  The
Principal  Market  has not  commenced  any  delisting  proceedings  against  the
Company.

      (f) SEC Documents;  Financial Statements.  Except as disclosed in Schedule
3(f),  since  February  1,  2003,  the  Company  has timely  filed all  reports,
schedules, forms, statements and other documents required to be filed by it with
the SEC pursuant to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "1934 Act") (all of the foregoing  filed prior to the date
hereof and all exhibits included therein and financial  statements and schedules
thereto and  documents  incorporated  by  reference  therein  being  hereinafter
referred to as the "SEC  Documents").  As of their  respective  dates (except as
they have been correctly  amended),  the SEC Documents  complied in all material
respects with the  requirements of the 1934 Act and the rules and regulations of
the SEC promulgated thereunder applicable to the SEC Documents,  and none of the
SEC Documents, at the time they were filed with the SEC (except as they may have
been properly  amended),  contained  any untrue  statement of a material fact or
omitted to state a material fact  required to be stated  therein or necessary in
order to make the statements  therein, in light of the circumstances under which
they were made, not  misleading.  As of their  respective  dates (except as they
have been properly amended), the financial statements of the Company included in
the SEC Documents  complied as to form in all material  respects with applicable
accounting  requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance with
generally  accepted  accounting  principles,  consistently  applied,  during the
periods  involved  (except (i) as may be otherwise  indicated in such  financial
statements  or the  notes  thereto  or (ii) in the  case  of  unaudited  interim
statements,  to the extent they may exclude  footnotes  or may be  condensed  or
summary  statements)  and fairly present in all material  respects the financial
position  of  the  Company  as of the  dates  thereof  and  the  results  of its
operations  and cash flows for the periods then ended  (subject,  in the case of
unaudited statements, to normal year-end audit adjustments). Except as listed in
Schedule  3(f), the Company has received no notices or  correspondence  from the
SEC since January 1, 2003. The SEC has not commenced any enforcement proceedings
against the Company or any of its subsidiaries.

                                       8
<PAGE>

      (g) Absence of Certain  Changes.  Except as  disclosed  in Schedule  3(g),
since March 31, 2004, there has been no material adverse change in the business,
properties,  operations,  financial  condition or results of  operations  of the
Company or its  Subsidiaries.  The Company has not taken any steps, and does not
currently  expect  to  take  any  steps,  to  seek  protection  pursuant  to any
Bankruptcy  Law  nor  does  the  Company  or any of its  Subsidiaries  have  any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy or insolvency proceedings.  The Company is financially solvent and is
generally able to pay its debts as they become due.

      (h) Absence of Litigation.  There is no action, suit, proceeding,  inquiry
or  investigation  before or by any  court,  public  board,  government  agency,
self-regulatory organization or body pending or, to the knowledge of the Company
or any of its  Subsidiaries,  threatened  against or affecting the Company,  the
Common Stock or any of the Company's Subsidiaries or any of the Company's or the
Company's Subsidiaries' officers or directors in their capacities as such, which
could reasonably be expected to have a Material Adverse Effect. A description of
each action, suit, proceeding,  inquiry or investigation before or by any court,
public board, government agency,  self-regulatory organization or body which, as
of the date of this  Agreement,  is pending or threatened in writing  against or
affecting the Company, the Common Stock or any of the Company's  Subsidiaries or
any of the  Company's or the  Company's  Subsidiaries'  officers or directors in
their capacities as such, is set forth in Schedule 3(h).

      (i) Acknowledgment  Regarding Buyer's Status. The Company acknowledges and
agrees that the Buyer is acting solely in the capacity of arm's length purchaser
with respect to the  Transaction  Documents  and the  transactions  contemplated
hereby and  thereby.  The  Company  further  acknowledges  that the Buyer is not
acting as a  financial  advisor or  fiduciary  of the Company (or in any similar
capacity)  with  respect  to the  Transaction  Documents  and  the  transactions
contemplated  hereby and thereby and any advice given by the Buyer or any of its
representatives  or agents in connection with the Transaction  Documents and the
transactions contemplated hereby and thereby is merely incidental to the Buyer's
purchase of the Securities. The Company further represents to the Buyer that the
Company's decision to enter into the Transaction Documents has been based solely
on the  independent  evaluation  by the  Company  and  its  representatives  and
advisors.

      (j)  No  General  Solicitation.  Neither  the  Company,  nor  any  of  its
affiliates,  nor any person  acting on its or their  behalf,  has engaged in any
form of general  solicitation  or general  advertising  (within  the  meaning of
Regulation  D under  the 1933 Act) in  connection  with the offer or sale of the
Securities.

      (k) Intellectual  Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all material trademarks, trade names,
service  marks,  service mark  registrations,  service  names,  patents,  patent
rights,    copyrights,    inventions,    licenses,    approvals,    governmental
authorizations,  trade secrets and rights  necessary to conduct their respective
businesses as now conducted.  Except as set forth on Schedule 3(k),  none of the
Company's  material  trademarks,   trade  names,  service  marks,  service  mark
registrations,  service names, patents, patent rights,  copyrights,  inventions,
licenses,   approvals,   government  authorizations,   trade  secrets  or  other
intellectual  property  rights have expired or terminated,  or, by the terms and
conditions thereof,  could expire or terminate within two years from the date of
this  Agreement.  The Company and its  Subsidiaries do not have any knowledge of
any infringement by the Company or its  Subsidiaries of any material  trademark,
trade name rights, patents,  patent rights,  copyrights,  inventions,  licenses,
service names, service marks, service mark registrations,  trade secret or other
similar  rights of others,  or of any such  development  of similar or identical
trade  secrets or technical  information  by others and,  except as set forth on
Schedule  3(k),  there is no claim,  action or proceeding  being made or brought
against, or to the Company's knowledge, being threatened against, the Company or
its  Subsidiaries  regarding  trademark,  trade name,  patents,  patent  rights,
invention,  copyright,  license,  service  names,  service  marks,  service mark
registrations,  trade secret or other  infringement,  which could  reasonably be
expected to have a Material Adverse Effect.

                                       9
<PAGE>

      (l)  Environmental  Laws.  The  Company  and its  Subsidiaries  (i) are in
compliance with any and all applicable  foreign,  federal,  state and local laws
and  regulations  relating to the  protection  of human  health and safety,  the
environment  or  hazardous  or  toxic   substances  or  wastes,   pollutants  or
contaminants ("Environmental Laws"), (ii) have received all permits, licenses or
other approvals required of them under applicable  Environmental Laws to conduct
their  respective  businesses  and  (iii) are in  compliance  with all terms and
conditions of any such permit, license or approval, except where, in each of the
three  foregoing  clauses,  the  failure to so comply  could not  reasonably  be
expected to have, individually or in the aggregate, a Material Adverse Effect.

      (m) Title. The Company and its Subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all personal
property  owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and defects
except  such as are  described  in  Schedule  3(m) or such as do not  materially
affect the value of such  property  and do not  interfere  with the use made and
proposed to be made of such property by the Company and any of its Subsidiaries.
Any real property and facilities  held under lease by the Company and any of its
Subsidiaries  are held by them under valid,  subsisting and  enforceable  leases
with such  exceptions as are not material and do not interfere with the use made
and proposed to be made of such  property  and  buildings by the Company and its
Subsidiaries.

      (n)  Insurance.  The Company and each of its  Subsidiaries  are insured by
insurers of recognized  financial  responsibility  against such losses and risks
and in such  amounts as  management  of the  Company  believes to be prudent and
material  in the  businesses  in which  the  Company  and its  Subsidiaries  are
engaged.  Neither  the  Company  nor any such  Subsidiary  has been  refused any
insurance  coverage  sought or applied  for and neither the Company nor any such
Subsidiary  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 at a cost that would not materially and adversely affect the condition,
financial or otherwise,  or the earnings,  business or operations of the Company
and its Subsidiaries, taken as a whole.

      (o)  Regulatory  Permits.  The  Company and its  Subsidiaries  possess all
material  certificates,  authorizations  and permits  issued by the  appropriate
federal,  state or foreign  regulatory  authorities  necessary to conduct  their
respective  businesses,  and neither the  Company  nor any such  Subsidiary  has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.

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

                                       10
<PAGE>

      (q) Transactions With Affiliates. Except as set forth on Schedule 3(q) and
other than the grant or exercise of stock  options  disclosed on Schedule  3(c),
none of the  officers,  directors,  or  employees  of the Company is presently a
party to any transaction with the Company or any of its Subsidiaries (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 corporation, partnership, trust or other entity in
which any  officer,  director,  or any such  employee  has an  interest or is an
officer, director, trustee or partner.

      (r)  Application  of  Takeover  Protections.  The Company and its board of
directors have taken or will take prior to the  Commencement  Date 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  Certificate of
Incorporation  or the laws of the state of its  incorporation  which is or could
become  applicable to the Buyer as a result of the transactions  contemplated by
this Agreement,  including,  without  limitation,  the Company's issuance of the
Securities and the Buyer's ownership of the Securities.

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

      4.    COVENANTS.

      (a) Filing of Registration  Statement.  The Company shall by no later than
August 20,  2004,  file a new  registration  statement  covering the sale of the
Commitment  Shares,  Warrant  Shares,  Signing  Shares  and at  least  6,200,000
Purchase  Shares  in  accordance  with  the  terms  of the  Registration  Rights
Agreement  between  the  Company  and the  Buyer,  dated as of the  date  hereof
("Registration Rights Agreement.").

      (b) Blue Sky. The Company shall take such action, if any, as is reasonably
necessary in order to obtain an exemption for or to qualify (i) the initial sale
of the Commitment  Shares,  Warrant Shares and any Purchase  Shares to the Buyer
under this Agreement and (ii) any subsequent resale of the Commitment Shares and
any Purchase Shares by the Buyer, in each case, under  applicable  securities or
"Blue  Sky"  laws of the  states  of the  United  States  in such  states  as is
reasonably  requested by the Buyer from time to time, and shall provide evidence
of any such action so taken to the Buyer.

      (c) No Variable Priced  Financing.  Other than pursuant to this Agreement,
the Company  agrees that  beginning on the date of this  Agreement and ending on
the date of termination of this Agreement (as provided in Section 11(k) hereof),
neither the Company nor any of its Subsidiaries shall, without the prior written
consent of the Buyer,  contract  for any equity  financing  (including  any debt
financing  with an equity  component)  or issue  any  equity  securities  of the
Company or any Subsidiary or securities  convertible or exchangeable into or for
equity  securities of the Company or any Subsidiary  (including  debt securities
with an  equity  component)  which,  in any  case  (i) are  convertible  into or
exchangeable  for an  indeterminate  number of shares of common stock,  (ii) are
convertible  into or exchangeable  for Common Stock at a price which varies with
the market price of the Common Stock,  (iii) directly or indirectly  provide for
any "re-set" or adjustment of the purchase  price,  conversion  rate or exercise
price  after the  issuance of the  security,  or (iv)  contain any  "make-whole"
provision  based upon,  directly or  indirectly,  the market price of the Common
Stock after the issuance of the security,  in each case,  other than  reasonable
and customary  anti-dilution  adjustments for issuance of shares of Common Stock
at a price which is below the market price of the Common Stock.  Notwithstanding
anything  to the  contrary  herein,  this  Section  4(c)  shall not apply to the
following:  (a) the  granting of Common  Stock or Common  Stock  equivalents  to
employees,  officers or directors of the Company pursuant to any stock plan, (b)
the exercise of any security  issued by the Company in connection with the offer
and  sale of this  Company's  securities  pursuant  to this  Agreement,  (c) the
exercise of or conversion of any convertible  securities  issued and outstanding
on the date hereof as long the terms and conditions have not been amended in any
material way.

                                       11
<PAGE>

      (d) Listing.  The Company shall promptly  secure the listing of all of the
Purchase Shares,  Warrant Shares, Signing Shares and Commitment Shares upon each
national  securities exchange and automated quotation system, if any, upon which
shares of Common Stock are then listed  (subject to official notice of issuance)
and shall  maintain,  so long as any other  shares of Common  Stock  shall be so
listed, such listing of all such securities from time to time issuable under the
terms of the  Transaction  Documents.  The  Company  shall  maintain  the Common
Stock's authorization for quotation on the Principal Market. Neither the Company
nor any of its  Subsidiaries  shall  take any action  that  would be  reasonably
expected to result in the  delisting  or  suspension  of the Common Stock on the
Principal  Market.  The Company shall  promptly,  and in no event later than the
following  Trading  Day,  provide to the Buyer copies of any notices it receives
from the Principal  Market  regarding the  continued  eligibility  of the Common
Stock for listing on such automated quotation system or securities exchange. The
Company  shall pay all fees and  expenses  in  connection  with  satisfying  its
obligations under this Section.

      (e) Limitation on Short Sales and Hedging  Transactions.  The Buyer agrees
that  beginning  on the  date  of  this  Agreement  and  ending  on the  date of
termination of this  Agreement as provided in Section  11(k),  the Buyer and its
agents,  representatives and affiliates shall not in any manner whatsoever enter
into or effect,  directly or  indirectly,  any (i) "short sale" (as such term is
defined  in Rule  3b-3 of the 1934  Act) of the  Common  Stock  or (ii)  hedging
transaction,  which  establishes a net short position with respect to the Common
Stock.

      (f) Issuance of Commitment  Shares,  Initial  Purchase  Shares,  Warrants;
Limitation on Sales of Commitment Shares. Immediately upon the execution of this
Agreement,  the Company  shall  issue to the Buyer (i) 255,000  shares of Common
Stock (the "Initial Commitment Shares"), (ii) in connection with the purchase of
the Initial Purchase Shares on the date hereof,  (A) the Initial Purchase Shares
and (B) warrants to purchase 500,000 shares of Common Stock at an exercise price
of $2.50 per share and (iii)  warrants to purchase (A) 500,000  shares of Common
Stock at an  exercise  price of $2.50 per share,  (B)  500,000  shares of Common
Stock at an  exercise  price of $3.50 per share,  (C)  500,000  shares of Common
Stock at an exercise price of $4.50 per share,  and (D) 500,000 shares of Common
Stock at an exercise price of $5.50 per share.  The warrants  issued pursuant to
this Section 4(f),  (collectively "Warrants" and the shares issued upon exercise
of the Warrants,  "Warrant Shares") shall be exercisable for five (5) years from
the date  hereof  and shall be in the form of Exhibit F hereto.  Immediately  at
such time as the Available Amount is $12,000,000, the Company shall issue to the
Buyer 255.000  shares of Common Stock (the  "Additional  Commitment  Shares" and
together with the Initial  Commitment  Shares,  the "Commitment  Shares").  If a
registration  statement is effective covering the sale of the Commitment Shares,
such  certificate   representing  the  Commitment  Shares  shall  not  bear  any
restrictive legend. If a registration statement is not effective, the Commitment
Shares and Initial  Purchase  Shares  shall be issued in  certificated  form and
(subject to Section 5 hereof) shall bear the following restrictive legend:

                                       12
<PAGE>

      THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE  HAVE NOT BEEN REGISTERED
      UNDER  THE  SECURITIES  ACT OF  1933,  AS  AMENDED,  OR  APPLICABLE  STATE
      SECURITIES  LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
      NOT BE OFFERED FOR SALE,  SOLD,  TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
      AN  EFFECTIVE   REGISTRATION   STATEMENT  FOR  THE  SECURITIES  UNDER  THE
      SECURITIES ACT OF 1933, AS AMENDED,  OR APPLICABLE  STATE SECURITIES LAWS,
      OR AN OPINION OF BUYER'S COUNSEL,  IN A CUSTOMARY FORM, THAT  REGISTRATION
      IS NOT REQUIRED  UNDER SAID ACT OR  APPLICABLE  STATE  SECURITIES  LAWS OR
      UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.

The Buyer agrees that the Buyer shall not transfer or sell the Commitment Shares
until the earlier of 600 Trading Days (30 Monthly  Periods) from the date hereof
or the date on which this Agreement has been terminated, provided, however, that
such  restrictions  shall not apply:  (i) in connection with any transfers to or
among  affiliates  (as  defined in the 1934 Act),  (ii) in  connection  with any
pledge in connection with a bona fide loan or margin account, (iii) in the event
that the Commencement does not occur on or before September 30, 2004, due to the
failure of the Company to satisfy the  conditions set forth in Section 7 or (iv)
if an Event of Default has  occurred,  or any event which,  after notice  and/or
lapse of time,  would become an Event of Default,  including  any failure by the
Company to timely issue Purchase  Shares under this  Agreement.  Notwithstanding
the forgoing, the Buyer may transfer Commitment Shares to a third party in order
to settle a sale  made by the Buyer  where  the  Buyer  reasonably  expects  the
Company to deliver  Purchase Shares to the Buyer under this Agreement so long as
the Buyer  maintains  ownership of the same  overall  number of shares of Common
Stock by "replacing" the Commitment  Shares so transferred  with Purchase Shares
when the Purchase Shares are actually issued by the Company to the Buyer.

      (g) Due  Diligence.  The Buyer shall have the right,  from time to time as
the Buyer may reasonably deem appropriate,  to perform  reasonable due diligence
on the Company during normal  business  hours.  The Company and its officers and
employees shall provide  information and reasonably  cooperate with the Buyer in
connection  with any reasonable  request by the Buyer related to the Buyer's due
diligence of the Company,  including,  but not limited to, any such request made
by the Buyer in  connection  with (i) the filing of the  registration  statement
described  in Section 4(a) hereof and (ii) the  Commencement.  Each party hereto
agrees not to disclose any  Confidential  Information  of the other party to any
third party and shall not use the Confidential Information for any purpose other
than in connection  with, or in furtherance  of, the  transactions  contemplated
hereby. Each party hereto  acknowledges that the Confidential  Information shall
remain the  property of the  disclosing  party and agrees that it shall take all
reasonable  measures  to protect  the  secrecy of any  Confidential  Information
disclosed by the other party.

                                       13
<PAGE>

      (h) Participation  Rights. For a period of 24 months from the date of this
Agreement,  the Company hereby grants to the Buyer a right to participate in the
purchase of any New  Securities  (as defined  below) that the Company may,  from
time to  time,  propose  to  issue  and sell in  connection  with any  financing
transaction, as follows. Not later than 5 Trading Days prior to the execution of
any definitive  documentation  relating to the sale of any New Securities to any
person  or entity  other  than the  Buyer or an  Affiliate  of the Buyer (a "New
Person"),  the Company  shall deliver  written  notice to Buyer of its intent to
enter into any such  transaction,  describing the New Person and the type of New
Securities  in  reasonable  detail,  and attaching to such notice copies of such
definitive documentation.  The Buyer shall have 10 Trading Days after receipt of
such notice to purchase an equal  amount of such New  Securities  or any portion
thereof,  at the  price  and on the  terms  specified  in such  notice by giving
written  notice to the Company  specifying  the amount of New  Securities  to be
purchased  by the  Buyer.  In the  event  the  Company  has not  sold  such  New
Securities to the New Person within 10 Trading Days after notice  thereof to the
Buyer,  the Company shall not thereafter issue or sell any New Securities to any
New Person  without first again  complying with this Section.  "New  Securities"
shall  mean any  shares of Common  Stock,  preferred  stock or any other  equity
securities of the Company or securities  convertible or exchangeable  for equity
securities of the Company,  provided,  however,  that New  Securities  shall not
include,  (i) shares of Common Stock issuable upon conversion or exercise of any
securities  outstanding as of the date hereof, (ii) shares,  options or warrants
for Common Stock  granted to officers,  directors  and  employees of the Company
pursuant  to stock  option  plans  approved  by the  Board of  Directors  of the
Company,  (iii) shares of Common Stock or securities convertible or exchangeable
for Common  Stock  issued  pursuant  to the  acquisition  of another  company by
consolidation,  merger, or purchase of all or substantially all of the assets of
such  company,  (iv)  shares  of  Common  Stock  or  securities  convertible  or
exchangeable  into shares of Common Stock issued in connection  with a strategic
transaction  involving  the Company and issued to an entity or an  affiliate  of
such entity that is engaged in the same or substantially related business as the
Company,  or (v) securities  issued to  non-affiliates  as compensation for bona
fide services not in connection with any financing activities.  The Buyer rights
hereunder  shall  not  prohibit  or  limit  the  Company  from  selling  any New
Securities  so long as the Company makes the same offer to the Buyer as provided
herein.  Otherwise  the  Company  shall  be  prohibited  from  selling  any  New
Securities to any New Person until it fully complies herewith.

      5.    TRANSFER AGENT INSTRUCTIONS.

      Immediately  upon the  execution  of this  Agreement,  the  Company  shall
deliver  to the  Transfer  Agent a letter in the form as set forth as  Exhibit E
attached  hereto with respect to the issuance of the Initial  Commitment  Shares
and 200,000 Initial  Purchase  Shares.  At such time as the Available  Amount is
$12,000,000,  the Company  shall  immediately  deliver to the  Transfer  Agent a
letter in the form as set forth as Exhibit E attached hereto with respect to the
issuance of the  Additional  Commitment  Shares.On the  Commencement  Date,  the
Company  shall  cause any  restrictive  legend on the Initial  Purchase  Shares,
Initial  Commitment  Shares and the 45,000  shares of Common Stock issued to the
Buyer upon signing that certain Term Sheet between the Buyer and the Company and
dated as of May 3, 2004 (the  "Signing  Shares")  to be  removed  and all of the
Purchase Shares and Warrant  Shares,  to be issued under this Agreement shall be
issued  without any  restrictive  legend.  The Company  shall issue  irrevocable
instructions to the Transfer Agent, and any subsequent  transfer agent, to issue
Purchase  Shares  in  the  name  of the  Buyer  for  the  Purchase  Shares  (the
"Irrevocable  Transfer Agent  Instructions").  The Company warrants to the Buyer
that no  instruction  other than the  Irrevocable  Transfer  Agent  Instructions
referred  to in this  Section 5, will be given by the  Company  to the  Transfer
Agent  with  respect to the  Purchase  Shares  and that the  Commitment  Shares,
Warrant Shares, Signing Shares and the Purchase Shares shall otherwise be freely
transferable  on the books  and  records  of the  Company  as and to the  extent
provided in this Agreement and the Registration  Rights Agreement subject to the
provisions of Section 4(f) in the case of the Commitment Shares.

                                       14
<PAGE>

      6.    CONDITIONS TO THE COMPANY'S  OBLIGATION TO COMMENCE  SALES OF SHARES
            OF COMMON STOCK.

      The obligation of the Company  hereunder to commence sales of the Purchase
Shares is subject to the satisfaction of each of the following  conditions on or
before  the  Commencement  Date  (the  date  that  sales  begin)  and once  such
conditions  have  been  initially  satisfied,  there  shall  not be any  ongoing
obligation  to satisfy such  conditions  after the  Commencement  has  occurred;
provided that these  conditions  are for the  Company's  sole benefit and may be
waived by the Company at any time in its sole  discretion by providing the Buyer
with prior written notice thereof:

      (a) The Buyer shall have  executed each of the  Transaction  Documents and
delivered the same to the Company.

      (b) Subject to the Company's  compliance with Section 4(a), a registration
statement  covering the sale of all of the Commitment  Shares,  Signing  Shares,
Warrant Shares and at least  6,200,000  Purchase Shares shall have been declared
effective  under the 1933 Act by the SEC and no stop order  with  respect to the
Registration Statement shall be pending or threatened by the SEC.

      (c) The  representations  and  warranties  of the Buyer  shall be true and
correct  in  all  material  respects  as of the  date  when  made  and as of the
Commencement  Date as though made at that time (except for  representations  and
warranties  that  speak  as of a  specific  date),  and  the  Buyer  shall  have
performed,  satisfied and complied in all material  respects with the covenants,
agreements and conditions required by this Agreement to be performed,  satisfied
or complied with by the Buyer at or prior to the Commencement Date.

      7.    CONDITIONS TO THE BUYER'S OBLIGATION TO COMMENCE PURCHASES OF SHARES
            OF COMMON STOCK.

      The obligation of the Buyer to commence purchases of Purchase Shares under
this  Agreement  is  subject  to the  satisfaction  of  each  of  the  following
conditions  on or before the  Commencement  Date (the date that sales begin) and
once such  conditions  have been  initially  satisfied,  there  shall not be any
ongoing  obligation  to  satisfy  such  conditions  after the  Commencement  has
occurred;  provided that these  conditions  are for the Buyer's sole benefit and
may be waived by the Buyer at any time in its sole  discretion  by providing the
Company with prior written notice thereof:

      (a) The Company shall have executed each of the Transaction  Documents and
delivered the same to the Buyer.

      (b) The  Company  shall have  issued to the Buyer the  Initial  Commitment
Shares,  Warrants  and  Initial  Purchase  Shares  and shall  have  removed  the
restrictive  transfer  legend  from the  certificate  representing  the  Initial
Commitment Shares, Initial Purchase Shares and Signing Shares.

      (c) The Common Stock shall be  authorized  for  quotation on the Principal
Market, trading in the Common Stock shall not have been within the last 365 days
suspended by the SEC or the  Principal  Market and the  Purchase  Shares and the
Commitment Shares shall be approved for listing upon the Principal Market.

                                       15
<PAGE>

      (d) The Buyer shall have  received  the  opinions of the  Company's  legal
counsel dated as of the Commencement Date substantially in the form of EXHIBIT A
attached hereto.

      (e) The  representations  and  warranties of the Company shall be true and
correct  in all  material  respects  (except  to the  extent  that  any of  such
representations and warranties is already qualified as to materiality in Section
3 above, in which case, such  representations  and warranties  shall be true and
correct  without further  qualification)  as of the date when made and as of the
Commencement  Date as though made at that time (except for  representations  and
warranties  that  speak  as of a  specific  date)  and the  Company  shall  have
performed, satisfied and complied with the covenants,  agreements and conditions
required by the  Transaction  Documents to be  performed,  satisfied or complied
with by the Company at or prior to the  Commencement  Date. The Buyer shall have
received a  certificate,  executed by the CEO,  President or CFO of the Company,
dated as of the Commencement  Date, to the foregoing effect in the form attached
hereto as EXHIBIT B.

      (f) The Board of Directors of the Company  shall have adopted  resolutions
in the form attached hereto as EXHIBIT C which shall be in full force and effect
without any amendment or supplement thereto as of the Commencement Date.

      (g) As of the  Commencement  Date,  the Company shall have reserved out of
its  authorized  and  unissued  Common  Stock,  (A)  solely  for the  purpose of
effecting  purchases of Purchase Shares hereunder,  at least 6,200,000 shares of
Common Stock,  (B) as Additional  Commitment  Shares in accordance  with Section
4(f) hereof, 255,000 shares of Common Stock and (C) 2,500,000 Warrant Shares..

      (h) The Irrevocable Transfer Agent Instructions, in form acceptable to the
Buyer shall have been  delivered to and  acknowledged  in writing by the Company
and the Company's Transfer Agent.

      (i) The Company shall have delivered to the Buyer a certificate evidencing
the  incorporation  and good  standing of the Company in the State of California
issued by the  Secretary of State of the State of California as of a date within
ten (10) Trading Days of the Commencement Date.

      (j) The Company shall have  delivered to the Buyer a certified copy of the
Certificate of Incorporation as certified by the Secretary of State of the State
of California within ten (10) Trading Days of the Commencement Date.

      (k)  The  Company  shall  have   delivered  to  the  Buyer  a  secretary's
certificate  executed  by  the  Secretary  of  the  Company,  dated  as  of  the
Commencement Date, in the form attached hereto as EXHIBIT D.

      (l) A  registration  statement  covering the sale of all of the Commitment
Shares,  Signing Shares,  Warrant Shares and at least 6,200,000  Purchase Shares
shall  have been  declared  effective  under the 1933 Act by the SEC and no stop
order with respect to the registration  statement shall be pending or threatened
by the SEC. The Company  shall have  prepared and delivered to the Buyer a final
form of prospectus  to be used by the Buyer in connection  with any sales of any
Commitment  Shares,  Signing Shares,  Warrant Shares or any Purchase Shares. The
Company  shall have made all  filings  under all  applicable  federal  and state
securities  laws necessary to consummate the issuance of the Commitment  Shares,
Signing  Shares,  Warrant  Shares  and  the  Purchase  Shares  pursuant  to this
Agreement in compliance with such laws.

                                       16
<PAGE>

      (m) No Event of Default has  occurred,  or any event  which,  after notice
and/or lapse of time, would become an Event of Default has occurred.

      (n) On or prior to the  Commencement  Date,  the  Company  shall  take all
necessary action, if any, and such actions as reasonably requested by the Buyer,
in  order  to  render  inapplicable  any  control  share  acquisition,  business
combination,  shareholder rights plan or poison pill (including any distribution
under a rights  agreement) or other similar  anti-takeover  provision  under the
Certificate of Incorporation or the laws of the state of its incorporation which
is or could  become  applicable  to the  Buyer as a result  of the  transactions
contemplated by this Agreement,  including,  without  limitation,  the Company's
issuance of the Securities and the Buyer's ownership of the Securities.

      (o) The  Company  shall  have  provided  the  Buyer  with the  information
requested by the Buyer in connection with its due diligence  requests made prior
to, or in connection  with, the  Commencement,  in accordance  with the terms of
Section 4(g) hereof.

      8.    INDEMNIFICATION.

      In consideration of the Buyer's  execution and delivery of the Transaction
Documents and acquiring the  Securities  hereunder and in addition to all of the
Company's other obligations under the Transaction  Documents,  the Company shall
defend,  protect,  indemnify  and  hold  harmless  the  Buyer  and  all  of  its
affiliates,  shareholders, officers, directors, employees and direct or indirect
investors  and any of the  foregoing  person's  agents or other  representatives
(including,   without   limitation,   those  retained  in  connection  with  the
transactions contemplated by this Agreement)  (collectively,  the "Indemnitees")
from and against any and all actions,  causes of action, suits, claims,  losses,
costs,  penalties,  fees,  liabilities  and damages,  and expenses in connection
therewith  (irrespective of whether any such Indemnitee is a party to the action
for  which  indemnification  hereunder  is  sought),  and  including  reasonable
attorneys' fees and disbursements (the "Indemnified  Liabilities"),  incurred by
any  Indemnitee  as a result  of,  or  arising  out of, or  relating  to (a) any
misrepresentation  or  breach  of any  representation  or  warranty  made by the
Company in the  Transaction  Documents or any other  certificate,  instrument or
document  contemplated  hereby  or  thereby,  (b) any  breach  of any  covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby, or
(c) any cause of action,  suit or claim brought or made against such  Indemnitee
and arising out of or resulting  from the  execution,  delivery,  performance or
enforcement of the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby,  other than with respect to Indemnified
Liabilities  which  directly and primarily  result from the gross  negligence or
willful  misconduct  of  the  Indemnitee.  To  the  extent  that  the  foregoing
undertaking  by the Company  may be  unenforceable  for any reason,  the Company
shall make the maximum  contribution to the payment and  satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law.

      9.    EVENTS OF DEFAULT.

      An "Event of Default"  shall be deemed to have occurred at any time as any
of the following events occurs:

      (a)  while  any  registration  statement  is  required  to  be  maintained
effective  pursuant  to the  terms of the  Registration  Rights  Agreement,  the
effectiveness of such registration  statement lapses for any reason  (including,
without limitation, the issuance of a stop order) or is unavailable to the Buyer
for sale of all of the  Registrable  Securities (as defined in the  Registration
Rights  Agreement)  in  accordance  with the  terms of the  Registration  Rights
Agreement,  and such lapse or unavailability  continues for a period of ten (10)
consecutive  Trading  Days or for more than an  aggregate of thirty (30) Trading
Days in any 365-day period;

                                       17
<PAGE>

      (b) the  suspension  from  trading or  failure  of the Common  Stock to be
listed on the  Principal  Market for a period of three (3)  consecutive  Trading
Days;

      (c) the delisting of the Company's Common Stock from the Principal Market,
provided,  however, that the Common Stock is not immediately  thereafter trading
on the New York Stock Exchange,  the Nasdaq National Market, the Nasdaq SmallCap
Market, or the American Stock Exchange;

      (d) the failure  for any reason by the  Transfer  Agent to issue  Purchase
Shares to the Buyer within five (5) Trading Days after the  applicable  Purchase
Date which the Buyer is entitled to receive;

      (e) the Company breaches any representation,  warranty,  covenant or other
term or  condition  under any  Transaction  Document if such breach could have a
Material Adverse Effect and except,  in the case of a breach of a covenant which
is reasonably  curable,  only if such breach  continues for a period of at least
ten (10) Trading Days;

      (f) any payment default under any contract  whatsoever or any acceleration
prior to maturity of any mortgage, indenture, contract or instrument under which
there  may  be  issued  or by  which  there  may be  secured  or  evidenced  any
indebtedness  for  money  borrowed  by the  Company  or for money  borrowed  the
repayment of which is guaranteed by the Company,  whether such  indebtedness  or
guarantee now exists or shall be created  hereafter,  which, with respect to any
such  payment  default  or  acceleration  prior to  maturity,  is in  excess  of
$1,000,000;

      (g) if any Person  commences a proceeding  against the Company pursuant to
or within the meaning of any Bankruptcy Law;

      (h) if the Company  pursuant  to or within the  meaning of any  Bankruptcy
Law; (A) commences a voluntary  case,  (B) consents to the entry of an order for
relief against it in an involuntary  case, (C) consents to the  appointment of a
Custodian of it or for all or  substantially  all of its  property,  (D) makes a
general assignment for the benefit of its creditors,  (E) becomes insolvent,  or
(F) is generally unable to pay its debts as the same become due; or

      (i) a court of competent  jurisdiction enters an order or decree under any
Bankruptcy  Law that (A) is for relief  against  the  Company in an  involuntary
case, (B) appoints a Custodian of the Company or for all or substantially all of
its property, or (C) orders the liquidation of the Company or any Subsidiary.

In addition  to any other  rights and  remedies  under  applicable  law and this
Agreement, including the Buyer termination rights under Section 11(k) hereof, so
long as an Event of Default  has  occurred  and is  continuing,  or if any event
which, after notice and/or lapse of time, would become an Event of Default,  has
occurred  and is  continuing,  or so long as the  Purchase  Price is  below  the
Purchase Price Floor, the Buyer shall not be obligated to purchase any shares of
Common Stock under this  Agreement.  If pursuant to or within the meaning of any
Bankruptcy Law, the Company commences a voluntary case or any Person commences a
proceeding  against the Company, a Custodian is appointed for the Company or for
all or  substantially  all of its  property,  or the  Company  makes  a  general
assignment for the benefit of its creditors,  (any of which would be an Event of
Default as  described in Sections 9 (g),  9(h) and 9(i)  hereof) this  Agreement
shall  automatically  terminate  without any liability or payment to the Company
without  further  action or notice by any Person.  No such  termination  of this
Agreement  under  Section  11(k)(i)  shall  affect the  Company's or the Buyer's
obligations  under this  Agreement  with  respect to pending  purchases  and the
Company and the Buyer shall complete their  respective  obligations with respect
to any pending purchases under this Agreement.

                                       18
<PAGE>

      10.   CERTAIN DEFINED TERMS.

      For  purposes  of this  Agreement,  the  following  terms  shall  have the
following meanings:

      (a) "1933 Act" means the Securities Act of 1933, as amended.

      (b) "Available  Amount" means  initially  Twenty Four Million Five Hundred
Thousand Dollars ($24,500,000) in the aggregate which amount shall be reduced by
the  Purchase  Amount  each time the  Buyer  purchases  shares  of Common  Stock
pursuant to Section 1 hereof.

      (c) "Bankruptcy  Law" means Title 11, U.S. Code, or any similar federal or
state law for the relief of debtors.

      (d) "Closing Sale Price" means,  for any security as of any date, the last
closing  trade price for such  security on the  Principal  Market as reported by
Bloomberg,  or, if the Principal Market is not the principal securities exchange
or trading  market  for such  security,  the last  closing  trade  price of such
security  on the  principal  securities  exchange or trading  market  where such
security is listed or traded as reported by Bloomberg.

      (e) "Confidential  Information" means any information  disclosed by either
party to the other party, either directly or indirectly,  in writing,  orally or
by inspection of tangible objects  (including,  without  limitation,  documents,
prototypes,   samples,   plant   and   equipment),   which  is   designated   as
"Confidential,"   "Proprietary"   or  some  similar   designation.   Information
communicated  orally  shall  be  considered  Confidential  Information  if  such
information is confirmed in writing as being Confidential Information within ten
(10) business days after the initial  disclosure.  Confidential  Information may
also  include  information  disclosed to a  disclosing  party by third  parties.
Confidential  Information shall not, however,  include any information which (i)
was publicly  known and made  generally  available in the public domain prior to
the time of disclosure by the disclosing  party; (ii) becomes publicly known and
made  generally  available  after  disclosure  by the  disclosing  party  to the
receiving party through no action or inaction of the receiving  party;  (iii) is
already in the  possession of the  receiving  party at the time of disclosure by
the  disclosing  party as shown  by the  receiving  party's  files  and  records
immediately  prior to the time of disclosure;  (iv) is obtained by the receiving
party from a third party without a breach of such third party's  obligations  of
confidentiality;  (v) is independently  developed by the receiving party without
use of or reference to the disclosing party's Confidential Information, as shown
by documents and other competent  evidence in the receiving party's  possession;
or (vi) is required by law to be disclosed by the receiving party, provided that
the receiving  party gives the  disclosing  party prompt  written notice of such
requirement  prior to such  disclosure  and  assistance  in  obtaining  an order
protecting the information from public disclosure.

      (f)  "Custodian"  means any  receiver,  trustee,  assignee,  liquidator or
similar official under any Bankruptcy Law.

                                       19
<PAGE>

      (g) "Floor Price" means initially $2.50,  which amount may be increased or
decreased from time to time as provided below,  except that in no case shall the
Floor Price be less than $0.25.  The Company may at any time give written notice
(a "Floor Price Change Notice") to the Buyer  increasing or decreasing the Floor
Price.  The Floor Price Change Notice shall be effective only for purchases that
have a Purchase  Date later than one (1) Trading Day after  receipt of the Floor
Price Change Notice by the Buyer.  Any purchase by the Buyer that has a Purchase
Date on or prior to the first  Trading Day after receipt of a Floor Price Change
Notice from the Company  must be honored by the  Company as  otherwise  provided
herein. The Floor Price shall be appropriately  adjusted for any reorganization,
recapitalization, non-cash dividend, stock split or other similar transaction.

      (h)  "Maturity  Date" means the date that is 800 Trading  Days (40 Monthly
Periods) from the Commencement Date.

      (i)  "Monthly   Period"  means  each  successive  20  Trading  Day  period
commencing with the Commencement Date.

      (j) "Person" means an individual or entity including any limited liability
company,  a  partnership,   a  joint  venture,   a  corporation,   a  trust,  an
unincorporated  organization  and a  government  or  any  department  or  agency
thereof.

      (k)  "Principal  Market"  means the Nasdaq OTC  Bulletin  Board;  provided
however,  that in the event the Company's  Common Stock is ever listed or traded
on the Nasdaq National Market,  the Nasdaq SmallCap  Market,  the New York Stock
Exchange or the American Stock Exchange,  than the "Principal Market" shall mean
such other market or exchange on which the Company's Common Stock is then listed
or traded.

      (l)  "Purchase  Amount"  means the portion of the  Available  Amount to be
purchased by the Buyer pursuant to Section 1 hereof.

      (m)  "Purchase  Date"  means  the  actual  date  that the  Buyer is to buy
Purchase Shares pursuant to Section 1 hereof.

      (n) "Purchase Price" means, as of any date of  determination  the lower of
the (A) the lowest Sale Price of the Common Stock on such date of  determination
and (B) the  arithmetic  average of the three (3) lowest Closing Sale Prices for
the Common Stock during the twelve (12)  consecutive  Trading Days ending on the
Trading  Day   immediately   preceding  such  date  of   determination   (to  be
appropriately  adjusted  for  any  reorganization,   recapitalization,  non-cash
dividend, stock split or other similar transaction).

      (o) "Sale Price" means,  for any security as of any date,  any trade price
for such security on the Principal  Market as reported by Bloomberg,  or, if the
Principal Market is not the principal  securities exchange or trading market for
such  security,  the trade price of such  security on the  principal  securities
exchange or trading  market where such  security is listed or traded as reported
by Bloomberg.

      (p) "SEC" means the United States Securities and Exchange Commission.

      (q) "Transfer  Agent" means the transfer agent of the Company as set forth
in Section 11(f) hereof or such other person who is then serving as the transfer
agent for the Company in respect of the Common Stock.

      (r) "Trading Day" means any day on which the Principal  Market is open for
customary trading.

                                       20
<PAGE>

      11.   MISCELLANEOUS.

      (a) Governing  Law;  Jurisdiction;  Jury Trial.  The corporate laws of the
State of California  shall govern all issues  concerning the relative  rights of
the  Company  and  its   shareholders.   All  other  questions   concerning  the
construction, validity, enforcement and interpretation of this Agreement and the
other Transaction  Documents shall be governed by the internal laws of the State
of  Illinois,  without  giving  effect to any choice of law or  conflict  of law
provision or rule (whether of the State of Illinois or any other  jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of  Illinois.  Each party  hereby  irrevocably  submits  to the  exclusive
jurisdiction of the state and federal courts sitting in the City of Chicago, for
the  adjudication  of any  dispute  hereunder  or under  the  other  Transaction
Documents  or in  connection  herewith  or  therewith,  or with any  transaction
contemplated  hereby or discussed herein,  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  brought in an  inconvenient  forum or that the venue of such
suit,  action or proceeding is improper.  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  to such  party at the
address for such 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. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST,  A JURY TRIAL FOR THE ADJUDICATION
OF ANY  DISPUTE  HEREUNDER  OR IN  CONNECTION  HEREWITH  OR ARISING  OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

      (b) Counterparts.  This Agreement may be executed in two or more identical
counterparts,  all of which shall be considered  one and the same  agreement and
shall  become  effective  when  counterparts  have been signed by each party and
delivered  to the other  party;  provided  that a facsimile  signature  shall be
considered  due execution  and shall be binding upon the signatory  thereto with
the same force and effect as if the signature were an original,  not a facsimile
signature.

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

      (d)  Severability.  If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction  or the  validity  or  enforceability  of  any  provision  of  this
Agreement in any other jurisdiction.

      (e)  Entire  Agreement;  Amendments.  With  the  exception  of the  Mutual
Nondisclosure  Agreement  between  the  parties  dated as of May 3,  2004,  this
Agreement  supersedes  all other  prior oral or written  agreements  between the
Buyer,  the Company,  their  affiliates  and persons acting on their behalf with
respect  to  the  matters  discussed  herein,  and  this  Agreement,  the  other
Transaction  Documents and the instruments  referenced herein contain the entire
understanding  of the parties  with  respect to the matters  covered  herein and
therein and,  except as  specifically  set forth herein or therein,  neither the
Company  nor  the  Buyer  makes  any  representation,   warranty,   covenant  or
undertaking with respect to such matters.  No provision of this Agreement may be
amended  other than by an  instrument  in writing  signed by the Company and the
Buyer,  and no  provision  hereof may be waived other than by an  instrument  in
writing signed by the party against whom enforcement is sought.

                                       21
<PAGE>

      (f)  Notices.  Any  notices,  consents,  waivers  or other  communications
required or permitted to be given under the terms of this  Agreement  must be in
writing  and will be deemed  to have  been  delivered:  (i) upon  receipt,  when
delivered  personally;  (ii)  upon  receipt,  when sent by  facsimile  (provided
confirmation of transmission  is  mechanically or  electronically  generated and
kept on file by the sending party);  or (iii) one Trading Day after deposit with
a  nationally  recognized  overnight  delivery  service,  in each case  properly
addressed to the party to receive the same. The addresses and facsimile  numbers
for such communications shall be:

         If to the Company:

                  ZAP
                  501 Fourth Street
                  Santa Rosa, California 95401
                  Telephone:        707-525-8658
                  Facsimile:        707-525-8692
                  Attention:           President

         With a copy to:

                  Richardson & Patel, LLP
                  10900 Wilshire Blvd. Ste 500
                  Los Angles, CA  90024
                  Telephone:        (310) 208-1182
                  Facsimile:        (310) 208-1154
                  Attention:          Nimish Patel

         If to the Buyer:

                  Fusion Capital Fund II, LLC
                  222 Merchandise Mart Plaza, Suite 9-112
                  Chicago, IL 60654
                  Telephone:        312-644-6644
                  Facsimile:        312-644-6244
                  Attention:    Steven G. Martin

         If to the Transfer Agent:

                  Computershare Trust Company
                  350 Indiana Street, #800
                  Golden, CO 80401
                  Telephone:        (303) 262-0600
                  Facsimile:        (303) 262-0700
                  Attention:         Janine DeMark

or at such other address and/or facsimile number and/or to the attention of such
other person as the  recipient  party has  specified by written  notice given to
each other  party  three (3)  Trading  Days prior to the  effectiveness  of such
change.  Written  confirmation  of receipt  (A) given by the  recipient  of such
notice,   consent,   waiver  or  other   communication,   (B)   mechanically  or
electronically  generated by the sender's facsimile machine containing the time,
date, and recipient facsimile number or (C) provided by a nationally  recognized
overnight  delivery service,  shall be rebuttable  evidence of personal service,
receipt by facsimile or receipt from a nationally  recognized overnight delivery
service in accordance with clause (i), (ii) or (iii) above, respectively.

                                       22
<PAGE>

      (g) Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective  successors and assigns.  The
Company shall not assign this Agreement or any rights or  obligations  hereunder
without  the  prior  written  consent  of the  Buyer,  including  by  merger  or
consolidation.  The Buyer may not assign its  rights or  obligations  under this
Agreement.

      (h) No Third Party  Beneficiaries.  This  Agreement  is  intended  for the
benefit of the parties  hereto and their  respective  permitted  successors  and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.

      (i) Publicity.  The Buyer shall have the right to approve before  issuance
any press  releases or any other public  disclosure  (including any filings with
the  SEC)  with  respect  to the  transactions  contemplated  hereby;  provided,
however,  that the Company shall be entitled,  without the prior approval of the
Buyer,  to make any press  release or other  public  disclosure  (including  any
filings  with the SEC) with  respect  to such  transactions  as is  required  by
applicable  law and  regulations  (although  the Buyer shall be consulted by the
Company in  connection  with any such press  release or other public  disclosure
prior to its release and shall be provided with a copy thereof).

      (j) Further  Assurances.  Each party shall do and perform,  or cause to be
done and  performed,  all such  further acts and things,  and shall  execute and
deliver all such other agreements,  certificates,  instruments and documents, as
the other  party may  reasonably  request  in order to carry out the  intent and
accomplish  the  purposes  of  this  Agreement  and  the   consummation  of  the
transactions contemplated hereby.

      (k) Termination. This Agreement may be terminated only as follows:

            (i) By the Buyer any time an Event of  Default  exists  without  any
      liability or payment to the Company. However, if pursuant to or within the
      meaning of any Bankruptcy  Law, the Company  commences a voluntary case or
      any Person  commences a  proceeding  against the  Company,  a Custodian is
      appointed for the Company or for all or substantially all of its property,
      or  the  Company  makes  a  general  assignment  for  the  benefit  of its
      creditors,  (any of which  would be an Event of  Default as  described  in
      Sections 9(g),  9(h) and 9(i) hereof) this Agreement  shall  automatically
      terminate  without any liability or payment to the Company without further
      action or notice by any  Person.  No such  termination  of this  Agreement
      under this  Section  11(k)(i)  shall  affect the  Company's or the Buyer's
      obligations under this Agreement with respect to pending purchases and the
      Company and the Buyer shall complete  their  respective  obligations  with
      respect to any pending purchases under this Agreement.

            (ii) In the event that the Commencement shall not have occurred, the
      Company shall have the option to terminate  this  Agreement for any reason
      or for no reason without liability of any party to any other party.

            (iii) In the event that the Commencement  shall not have occurred on
      or before September 30, 2004, due to the failure to satisfy the conditions
      set forth in Sections 6 and 7 above with respect to the Commencement  (and
      the nonbreaching party's failure to waive such unsatisfied  condition(s)),
      the  nonbreaching  party shall have the option to terminate this Agreement
      at the close of business on such date or thereafter  without  liability of
      any party to any other party.

                                       23
<PAGE>

            (iv) If by the Maturity Date (including any extension thereof by the
      Company pursuant to Section 10(g) hereof), for any reason or for no reason
      the full  Available  Amount under this Agreement has not been purchased as
      provided  for in Section 1 of this  Agreement,  by the Buyer  without  any
      liability or payment to the Company.

            (v) At any time after the Commencement  Date, the Company shall have
      the option to terminate  this Agreement for any reason or for no reason by
      delivering notice (a "Company  Termination  Notice") to the Buyer electing
      to terminate this Agreement without any liability or payment to the Buyer.
      The  Company  Termination  Notice  shall  not be  effective  until one (1)
      Trading Day after it has been received by the Buyer.

            (vi) This Agreement shall  automatically  terminate on the date that
      the Company  sells and the Buyer  purchases the full  Available  Amount as
      provided herein, without any action or notice on the part of any party.

Except as set forth in  Sections  11(k)(i)  (in  respect  of an Event of Default
under  Sections  9(g),  9(h) and 9(i)) and  11(k)(vi),  any  termination of this
Agreement  pursuant to this  Section  11(k) shall be effected by written  notice
from the Company to the Buyer, or the Buyer to the Company,  as the case may be,
setting forth the basis for the  termination  hereof.  The  representations  and
warranties  of the Company and the Buyer  contained  in Sections 2 and 3 hereof,
the indemnification  provisions set forth in Section 8 hereof and the agreements
and covenants set forth in Section 11, shall  survive the  Commencement  and any
termination of this Agreement. No termination of this Agreement shall affect the
Company's  or the  Buyer's  obligations  under this  Agreement  with  respect to
pending  purchases and the Company and the Buyer shall complete their respective
obligations with respect to any pending purchases under this Agreement.

      (l) No Financial Advisor,  Placement Agent,  Broker or Finder. The Company
represents  and  warrants  to the Buyer that it has not  engaged  any  financial
advisor,  placement agent,  broker or finder in connection with the transactions
contemplated  hereby.  The Buyer  represents and warrants to the Company that it
has not engaged any  financial  advisor,  placement  agent,  broker or finder in
connection  with the  transactions  contemplated  hereby.  The Company  shall be
responsible for the payment of any fees or commissions, if any, of any financial
advisor,  placement  agent,  broker or finder  relating to or arising out of the
transactions  contemplated  hereby.  The Company  shall pay,  and hold the Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorneys' fees and out of pocket expenses)  arising in connection with any such
claim.

      (m) No Strict  Construction.  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.

      (n) Remedies,  Other  Obligations,  Breaches and  Injunctive  Relief.  The
Buyer's remedies  provided in this Agreement shall be cumulative and in addition
to all other remedies available to the Buyer under this Agreement,  at law or in
equity  (including  a decree of specific  performance  and/or  other  injunctive
relief),  no remedy of the Buyer  contained  herein  shall be deemed a waiver of
compliance  with the  provisions  giving rise to such remedy and nothing  herein
shall limit the Buyer's  right to pursue  actual  damages for any failure by the
Company to comply with the terms of this  Agreement.  The  Company  acknowledges
that a breach by it of its obligations  hereunder will cause irreparable harm to
the Buyer and that the remedy at law for any such breach may be inadequate.  The
Company  therefore  agrees that,  in the event of any such breach or  threatened
breach,  the  Buyer  shall be  entitled,  in  addition  to all  other  available
remedies,  to an  injunction  restraining  any breach,  without the necessity of
showing economic loss and without any bond or other security being required.

                                       24
<PAGE>

      (o)  Changes  to the  Terms  of this  Agreement.  This  Agreement  and any
provision  hereof may only be amended by an instrument in writing  signed by the
Company and the Buyer. The term "Agreement" and all reference  thereto,  as used
throughout this instrument,  shall mean this instrument as originally  executed,
or if later amended or supplemented, then as so amended or supplemented.

      (p)  Enforcement  Costs.  If: (i) this Agreement is placed by the Buyer in
the hands of an attorney for enforcement or is enforced by the Buyer through any
legal proceeding;  or (ii) an attorney is retained to represent the Buyer in any
bankruptcy,   reorganization,   receivership  or  other  proceedings   affecting
creditors'  rights  and  involving  a claim  under this  Agreement;  or (iii) an
attorney is retained to represent the Buyer in any other proceedings  whatsoever
in connection with this  Agreement,  then the Company shall pay to the Buyer, as
incurred by the Buyer,  all reasonable costs and expenses  including  attorneys'
fees  incurred in  connection  therewith,  in addition to all other  amounts due
hereunder.

      (q) Failure or Indulgence Not Waiver.  No failure or delay in the exercise
of any power,  right or privilege  hereunder  shall operate as a waiver thereof,
nor shall any single or partial  exercise of any such power,  right or privilege
preclude  other or  further  exercise  thereof or of any other  right,  power or
privilege.

                                    * * * * *

                                       25
<PAGE>

      IN WITNESS  WHEREOF,  the Buyer and the  Company  have  caused this Common
Stock Purchase Agreement to be duly executed as of the date first written above.

                                  THE COMPANY:
                                  ------------

                                  ZAP

                                  By: /s/ Steven Schneider
                                     ------------------------------------
                                  Name: Steven Schneider
                                  Title: Chief Executive Officer

                                  BUYER:
                                  ------

                                  FUSION CAPITAL FUND II, LLC
                                  BY: FUSION CAPITAL PARTNERS, LLC
                                  BY: SGM HOLDINGS CORP.

                                  By: /s/ Steven Martin
                                     ------------------------------------
                                  Name: Steven Martin
                                  Title: President

                                       26

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