Document:

Exhibit 10.1

    EXHIBIT
      10.1

    Non-Employee
      Directors

    Cash
      Directors’ Fees - 2006

    

    
      	
              NATIONAL
                PENN BANCSHARES

            	
               

              2006

            
	
              Outside
                Directors only

            	 
	
              Retainers:
                Board members must attend in person or by phone 75% of meetings (Board
                and
                Committee Meetings combined) to be paid retainer. Committees include:
                Audit, Executive, Compensation, Nominating/Corp.
                Governance

            	 
	
               

              Chairperson
                of Audit Committee

              Chairperson
                of Executive Committee

              Chairperson
                of Compensation Committee 

              Chairperson
                of Nominating/Corporate Governance Committee 

              Chairperson
                of Risk Committee 

              Additional
                Retainer - Lead Independent Director

              All
                Other Board Members

            	
               

              $15,000

              $12,500

              $12,500

              $12,500

              12,500

              $5,000

              $10,000

            
	
              Meeting
                Fees (per meeting attended)
                (Monthly Meetings)

            	
              $1,000
                

            
	
              Committee
                Fees (per meeting attended)

            	 
	
              Audit
                Committee members, including Chairperson

              Audit
                Committee Meeting by Conference Call

              Chairperson
                of Audit Committee also receives fee per phone meeting with
                accountants

              Audit
                Committee Chairperson attendance at Subsidiary Board Meeting

              Audit
                Committee Members attendance at Executive Disclosure

              Committee
                meeting

              All
                Other Committee Members, including Chairperson

              (Executive,
                Compensation, Nominating Corp/Governance 

              and
                Risk). 

              Committee
                Phone Meetings

            	
              $750

              $750

              $250

               

               

               

              $750

               

              $500

               

               

              $500

            
	
              Director
                Education

            	
              $750
                per day,

              (includes
                travel day)

            

    

    

    
      
        	
                NATIONAL
                  PENN BANK

              	
                 

                2006

              
	
                Strategic
                  Planning Meeting

              	 
	
                Day
                  #1

              	
                $1,000
                  Board Mtg Fee

                $500
                  Strat. Plan Mtg.

              
	
                Day
                  #2

              	
                $500
                  Strat Plan Mtg.

              
	 	 
	
                Outside
                  directors only (per meeting attended)

                (For
                  2006, only non-holding company directors are covered)

              	 
	
                Board
                  meetings (held quarterly)

                Phone
                  meeting

                Committees
                  (Executive Credit)

                Committee
                  Phone Meeting

              	
                $3,000

                $3,000

                $350

                $350

              

      

       

      
        
          
          

        

        
          31

          
            

          

        

        
          
          

        

      

      
        	 	 
	
                DIRECTOR
                  EMERITUS

              	 
	
                This
                  retainer covers all meetings attended. Includes Bank and Bancshares
                  Board
                  Meetings and any committee meetings the director emeritus may
                  attend.

              	
                $2,000

              

      

    

    

    
      	
              NATIONAL
                PENN BANK

            	
               

              2006

            
	
              ADVISORY
                BOARDS

            	 
	
              Outside
                directors only

            	 
	
              Philadephia
                Region Advisory Board

              Berks
                County Advisory Board

              Manufacturing
                Group Advisory Board

              FirstService
                Bank

               

               

              HomeTowne
                Heritage Advisory Board

              Peoples
                First 

              Nittany
                Bank

            	
              $250
                per mtg

              $250
                per mtg

              $250
                per mtg

              $250
                per mtg

              $250
                per mtg

               

               

               

            
	 	 
	
              NATIONAL
                PENN INVESTORS TRUST COMPANY

            	 
	
              Outside
                directors only

            	 
	
              Retainer
                for all non-bank board members

              Chairperson

              Board
                Meetings

              Phone
                Meetings

            	
              $1,000

              $750
                per mtg

              $500
                per mtg

              $500
                per mtg

            
	 	 

    

    

    
      	
              NATIONAL
                PENN MORTGAGE COMPANY

            	 
	
              Outside
                director(s) only

            	 
	
              Retainer
                for all non-bank board members

              Chairperson

              Board
                Meetings

              Phone
                Meetings

            	
              $1,000

              $750
                per mtg

              $500
                per mtg

              $500
                per mtg

            

    

    

    32Exhibit 10.1

                          SECURITIES PURCHASE AGREEMENT

     This  Securities  Purchase  Agreement  (this  "Agreement")  is  dated as of
January 20, 2006 among  Tidelands Oil & Gas  Corporation,  a Nevada  corporation
(the  "Company"),  and each purchaser  identified on the signature  pages hereto
(each,  including its successors and assigns, a "Purchaser" and collectively the
"Purchasers").

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

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

                                   ARTICLE I.
                                   DEFINITIONS

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

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

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

                                       1
<PAGE>

          "Authorized   Share  Approval"  means  (i)  the  affirmative  vote  by
     shareholders of the Company  pursuant to the laws of the State of Nevada to
     approve  an  amendment  to  the  Company's   certificate   or  articles  of
     incorporation  that  increases  the number of  authorized  shares of Common
     Stock of the Company from 100,000,000 to 250,000,000 (the  "Amendment") and
     (ii) the filing by the Company of the Amendment with the Secretary of State
     of the State of Nevada and the acceptance,  as effective,  of the Amendment
     by the Secretary of State of the State of Nevada.

          "Authorized Share Approval Date" means the 90th day following the date
     hereof.

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

          "Closing  Date"  means  the  Trading  Day when all of the  Transaction
     Documents  have been  executed  and  delivered  by the  applicable  parties
     thereto, and all conditions precedent to (i) the Purchasers' obligations to
     pay the Subscription  Amount and (ii) the Company's  obligations to deliver
     the Securities have been satisfied or waived.

          "Commission" means the Securities and Exchange Commission.

          "Common Stock" means the common stock of the Company,  par value $.001
     per share, and any other class of securities into which such securities may
     hereafter have been reclassified or changed into.

          "Common Stock  Equivalents" means any securities of the Company or the
     Subsidiaries  which would entitle the holder thereof to acquire at any time
     Common Stock,  including,  without limitation,  any debt,  preferred stock,
     rights,  options,  warrants  or  other  instrument  that  is  at  any  time
     convertible into or exercisable or exchangeable for, or otherwise  entitles
     the holder thereof to receive,  Common Stock. For purposes of clarity,  any
     securities of a Subsidiary  issued in connection  with the Mexican  Project
     Financing which shall not entitle the holder thereof to acquire at any time
     Common Stock or Common Stock Equivalents shall not be deemed a Common Stock
     Equivalent.

          "Company  Counsel"  means  Gregory M. Wilson,  Attorney at Law, with a
     principal  place  of  business  at  18610  East  32nd  Avenue,  Greenacres,
     Washington 99016.

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

          "Debentures" means, the Original Issue Discount Convertible Debentures
     due,  subject to the terms therein,  two years from their date of issuance,
     issued by the Company to the Purchasers  hereunder,  in the form of Exhibit
     A.

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

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

          "Escrow  Agent"  shall have the  meaning  ascribed to such term in the
     Escrow Agreement.

          "Escrow  Agreement"  shall  mean the  Escrow  Agreement  of event date
     herewith among the Company, the Purchasers and the Escrow Agent.

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

                                       2
<PAGE>

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

          "Exempt  Issuance" means the issuance of (a) shares of Common Stock or
     options  to  employees,   officers,  directors,  attorneys  or  consultants
     (provided  that such issuances to  consultants  shall not exceed  1,000,000
     shares  (subject to adjustment for reverse and forward stock splits and the
     like) in any 12 month period) of the Company  pursuant to any employment or
     consulting services agreement, stock grant or option plan or agreement duly
     adopted  by a majority  of the  members  of the Board of  Directors  of the
     Company  or  a  majority  of  the  members  of  a  committee  of  directors
     established for such purpose,  (b) securities upon the exercise or exchange
     of or conversion  of any  Securities  issued  hereunder  and/or  securities
     exercisable or exchangeable  for or convertible into shares of Common Stock
     issued and  outstanding on the date of this  Agreement,  provided that such
     securities  have not been  amended  since  the  date of this  Agreement  to
     increase  the  number  of such  securities  or to  decrease  the  exercise,
     exchange  or  conversion  price  of any  such  securities,  (c)  securities
     pursuant to acquisitions or strategic  transactions  approved by a majority
     of the disinterested directors,  provided that any such issuance shall only
     be to a Person which is, itself or through its  subsidiaries,  an operating
     company in a business  synergistic  with the business of the Company and in
     which the Company receives benefits in addition to the investment of funds,
     but shall not  include  a  transaction  in which  the  Company  is  issuing
     securities  primarily  for the  purpose of raising  capital or to an entity
     whose primary  business is investing in securities  and (d) up to 2,000,000
     shares of Common Stock (subject to adjustment for reverse and forward stock
     splits and the like) payable in connection  with the  settlement of pending
     litigation  arising  out of Sheerin  Litigation  pursuant  to a  settlement
     agreement (or similar agreement).

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

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

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

          "Knowledge"  means, with respect to any of the directors and executive
     officers  of the  Company  including,  without  limitation,  those  persons
     signatory to the SEC Reports, (i) the actual knowledge, awareness or belief
     possessed  by such person or (ii) the  knowledge,  awareness or belief that
     such person would have  possessed by using  reasonable  care and  diligence
     under the circumstances.

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

          "Liens" means a lien, charge, security interest, encumbrance, right of
     first refusal, preemptive right or other restriction.

                                       3
<PAGE>

          "Material Adverse Effect" shall have the meaning assigned to such term
     in Section 3.1(b).

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

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

          "Mexican Project Financing" means any debt financing or equity raising
     transaction  incurred by a  Subsidiary  of the Company in  connection  with
     exploratory  and  development  projects  within  the  Republic  of  Mexico;
     provided,  however,  that any such equity raising transaction shall include
     equity only of the operating  Subsidiary  undertaking  such exploratory and
     development projects and shall not include any adjustment,  whether debt or
     equity,  that  entitles  the holder  thereof to acquire at any time  Common
     Stock or Common Stock Equivalents.

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

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

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

          "Principal  Amount" shall mean, as to each Purchaser,  the amounts set
     forth below such Purchaser's  signature block on the signature pages hereto
     and next to the heading "Principal Amount," in United States Dollars, which
     shall equal such Purchaser's Subscription amount multiplied by 1.2175.

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

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

          "Registration   Rights   Agreement"  means  the  Registration   Rights
     Agreement,  dated the date hereof, among the Company and the Purchasers, in
     the form of Exhibit B attached hereto.

          "Registration  Statement" means a registration  statement  meeting the
     requirements  set forth in the  Registration  Rights Agreement and covering
     the resale of the  Underlying  Shares by each  Purchaser as provided for in
     the Registration Rights Agreement.

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

                                       4
<PAGE>

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

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

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

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

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

          "Series A  Warrants"  means  collectively  the Common  Stock  purchase
     warrants,  in the form of  Exhibit C  delivered  to the  Purchasers  at the
     Closing in accordance  with Section 2.2(a) hereof,  which Warrants shall be
     exercisable immediately and have a term of exercise equal to 3 years.

          "Series B  Warrants"  means  collectively  the Common  Stock  purchase
     warrants,  in the form of  Exhibit E  delivered  to the  Purchasers  at the
     Closing in accordance  with Section 2.2(a) hereof,  which Warrants shall be
     exercisable  immediately  after the  Effective  Date by the  Company and 12
     months  from the date  hereof by the  Purchasers  and shall  have a term of
     exercise equal to 13 months.

          "Sheerin  Litigation" means the litigation of the Company as described
     in Matter Number 1 under Legal Proceedings in the Company's Form 10-QSB for
     the period ended September 30, 2005 filed with the Commission.

          "Short  Sales" shall  include all "short sales" as defined in Rule 200
     of  Regulation  SHO  under  the  Exchange  Act (but  shall not be deemed to
     include the location  and/or  reservation  of  borrowable  shares of Common
     Stock).

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

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

                                       5
<PAGE>

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

          "Subsidiary"  means  any  subsidiary  of the  Company  as set forth on
     Schedule 3.1(a).

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

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

          "Transaction  Documents"  means this Agreement,  the  Debentures,  the
     Warrants,  the Registration Rights Agreement,  the Escrow Agreement and any
     other documents or agreements  executed in connection with the transactions
     contemplated hereunder.

          "Underlying  Shares"  means  the  shares of Common  Stock  issued  and
     issuable  upon  conversion  of the  Debentures  and  upon  exercise  of the
     Warrants.

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

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

          "Warrant  Shares"  means  the  shares of Common  Stock  issuable  upon
     exercise of the Warrants.

                                   ARTICLE II.
                                PURCHASE AND SALE

     2.1  Closing.  On the  Closing  Date,  upon the  terms and  subject  to the
conditions set forth herein,  concurrent with the execution and delivery of this
Agreement by the parties hereto,  the Company agrees to sell, and each Purchaser
agrees  to  purchase  in  the  aggregate,  severally  and  not  jointly,  up  to
$18,500,000 Principal Amount of the Debentures.  Each Purchaser shall deliver to

                                       6
<PAGE>

the Escrow Agent via wire transfer or a certified  check  immediately  available
funds equal to their  Subscription  Amount and the Company shall deliver to each
Purchaser  their  respective  Debenture and Warrants as  determined  pursuant to
Section  2.2(a) and the other  items set forth in Section  2.2  issuable  at the
Closing.  Upon satisfaction of the conditions set forth in Sections 2.2 and 2.3,
the  Closing  shall  occur at the  offices of FW, or such other  location as the
parties shall mutually agree.

     2.2 Deliveries.

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

               (i) this Agreement duly executed by the Company;

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

               (iii)  a  Debenture  with  a  Principal   Amount  equal  to  such
          Purchaser's  Subscription  Amount multiplied by 1.2175,  registered in
          the name of such Purchaser;

               (iv) a Series A Warrant  registered in the name of such Purchaser
          to purchase  up to a number of shares of Common  Stock equal to 33% of
          such Purchaser's  Principal Amount divided by $0.87,  with an exercise
          price equal to $0.935, subject to adjustment therein;

               (v) a Series B Warrant  registered in the name of such  Purchaser
          to purchase up to a number of shares of Common  Stock equal to 100% of
          such Purchaser's  Principal Amount divided by $0.87,  with an exercise
          price equal to $1.275, subject to adjustment therein;

               (vi) the  written  agreement,  in the form of  Exhibit E attached
          hereto, of the officers,  directors and shareholders holding more than
          10% of the issued and  outstanding  shares of Common Stock on the date
          hereof to vote all Common  Stock over which such  Persons  have voting
          control as of the record date for the meeting of  shareholders  of the
          Company in favor of Authorized  Share  Approval,  amounting to, in the
          aggregate, at least 25% of the issued and outstanding Common Stock;

               (vii) a warrant in the form of the Series A Warrant registered in
          the name of HPC Capital Management or its designees, to purchase up to
          10,000 shares of Common Stock per $1 million of  Subscription  Amounts
          from Purchasers, and otherwise identical to the Series A Warrant;

               (viii) the Escrow Agreement duly executed by the Company; and

               (ix) the  Registration  Rights  Agreement  duly  executed  by the
          Company.

                                       7
<PAGE>

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

               (i) this Agreement duly executed by such Purchaser;

               (ii) such Purchaser's Subscription Amount by wire transfer to the
          Escrow Agent;

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

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

     2.3 Closing Conditions.

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

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

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

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

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

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

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

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

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

               (v) from the date  hereof to the  Closing  Date,  trading  in the
          Common Stock shall not have been  suspended by the  Commission  or the
          Company's  principal  Trading  Market  (except for any  suspension  of
          trading of limited duration agreed to by the Company, which suspension

                                       8
<PAGE>

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

                                  ARTICLE III.
                         REPRESENTATIONS AND WARRANTIES

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

          (a) Subsidiaries.  All of the direct and indirect  subsidiaries of the
     Company are set forth on Schedule  3.1(a).  The Company  owns,  directly or
     indirectly,  all of the capital  stock or other  equity  interests  of each
     Subsidiary free and clear of any Liens,  and all the issued and outstanding
     shares of capital stock of each Subsidiary are validly issued and are fully
     paid, non-assessable and free of preemptive and similar rights to subscribe
     for or  purchase  securities.  If the  Company  has no  subsidiaries,  then
     references  in the  Transaction  Documents  to  the  Subsidiaries  will  be
     disregarded.

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

                                       9
<PAGE>

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

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

          (e) Filings,  Consents and  Approvals.  The Company is not required to
     obtain any consent, waiver,  authorization or order of, give any notice to,
     or make any filing or registration with, any court or other federal, state,
     local or other  governmental  authority or other Person in connection  with
     the execution,  delivery and  performance by the Company of the Transaction
     Documents,  other than Authorized  Share Approval and (i) filings  required
     pursuant  to  Section  4.6,  (ii) the  filing  with the  Commission  of the

                                       10
<PAGE>

     Registration  Statement,  (iii) the notice  and/or  application(s)  to each
     applicable  Trading  Market for the issuance and sale of the Debentures and
     Warrants and the listing of the  Underlying  Shares for trading  thereon in
     the time and manner required thereby and (iv) the filing of Form D with the
     Commission  and such  filings as are  required to be made under  applicable
     state securities laws (collectively, the "Required Approvals").

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

          (g)  Authorized  Shares.  As of the  Closing  Date,  the  Company  has
     9,000,000  shares of Common Stock which are  available to reserve and issue
     pursuant to the Transaction Documents. In order to comply with the terms of
     the Transaction Documents,  the Company's Board of Directors will recommend
     an increase in authorized  share capital from  100,000,000  to  250,000,000
     shares of Common Stock.  The Company will promptly file with the Commission
     all  documentation  required by the Exchange Act and will  promptly  call a
     special  meeting of the  shareholders  of the  Company  for the  purpose of
     obtaining   shareholder   approval  of  the  Amendment.   Upon  receipt  of
     shareholder approval, the Company will promptly file the Amendment with the
     Secretary of State of the State of Nevada.

          (h) Capitalization.  The capitalization of the Company is as set forth
     on Schedule 3.1(h).  The Company has not issued any capital stock since its
     most recently  filed  periodic  report under the Exchange  Act,  other than
     pursuant to the  exercise of employee  stock  grants and options  under the
     Company's  employment and consulting services  agreements,  stock grant and
     option plans, the issuance of shares of Common Stock to employees  pursuant
     to  the  Company's  employee  stock  purchase  plan  and  pursuant  to  the
     conversion or exercise of outstanding Common Stock  Equivalents.  No Person
     has any right of first refusal,  preemptive right,  right of participation,
     or any similar right to participate in the transactions contemplated by the
     Transaction  Documents.  Except as a result of the purchase and sale of the
     Securities  and as set forth on Schedule  3.1(h),  there are no outstanding
     options,  warrants,  script rights to subscribe to, calls or commitments of
     any character whatsoever relating to, or securities,  rights or obligations
     convertible  into or exercisable or exchangeable  for, or giving any Person
     any right to  subscribe  for or  acquire,  any shares of Common  Stock,  or
     contracts, commitments, understandings or arrangements by which the Company
     or any  Subsidiary  is or may become  bound to issue  additional  shares of
     Common  Stock or Common  Stock  Equivalents.  The  issuance and sale of the
     Securities will not obligate the Company to issue shares of Common Stock or
     other  securities  to any Person (other than the  Purchasers)  and will not

                                       11
<PAGE>

     result  in a right of any  holder  of  Company  securities  to  adjust  the
     exercise, conversion, exchange or reset price under such securities. All of
     the outstanding  shares of capital stock of the Company are validly issued,
     fully  paid and  nonassessable,  have been  issued in  compliance  with all
     federal and state securities laws, and none of such outstanding  shares was
     issued in violation of any preemptive rights or similar rights to subscribe
     for or  purchase  securities.  Other than  Authorized  Share  Approval,  no
     further  approval  or  authorization  of  any  stockholder,  the  Board  of
     Directors of the Company or others is required for the issuance and sale of
     the Securities. There are no stockholders agreements,  voting agreements or
     other similar  agreements  with respect to the  Company's  capital stock to
     which the Company is a party or, to the  Knowledge of the Company,  between
     or among any of the Company's stockholders.

          (i) SEC Reports; Financial Statements. Except as set forth on Schedule
     3.1(i), the Company has filed all reports, schedules, forms, statements and
     other documents required to be filed by it under the Securities Act and the
     Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the
     two years  preceding the date hereof (or such shorter period as the Company
     was  required  by law to file  such  material)  (the  foregoing  materials,
     including  the exhibits  thereto and  documents  incorporated  by reference
     therein,  being collectively  referred to herein as the "SEC Reports") on a
     timely basis or has  received a valid  extension of such time of filing and
     has  filed  any  such  SEC  Reports  prior  to the  expiration  of any such
     extension.  As of their  respective  dates, the SEC Reports complied in all
     material  respects  with the  requirements  of the  Securities  Act and the
     Exchange Act and the rules and  regulations of the  Commission  promulgated
     thereunder,  and none of the SEC Reports, when filed,  contained any untrue
     statement of a material  fact or omitted to state a material  fact required
     to be stated therein or necessary in order to make the statements  therein,
     in the  light  of  the  circumstances  under  which  they  were  made,  not
     misleading.  The financial  statements  of the Company  included in the SEC
     Reports  comply  in  all  material  respects  with  applicable   accounting
     requirements  and the rules and  regulations of the Commission with respect
     thereto as in effect at the time of filing. Such financial  statements have
     been  prepared  in  accordance  with  United  States   generally   accepted
     accounting  principles  applied on a  consistent  basis  during the periods
     involved ("GAAP"),  except as may be otherwise  specified in such financial
     statements  or the  notes  thereto  and  except  that  unaudited  financial
     statements  may not contain  all  footnotes  required  by GAAP,  and fairly
     present in all material respects the financial  position of the Company and
     its  consolidated  subsidiaries  as of and for the  dates  thereof  and the
     results of operations  and cash flows for the periods then ended,  subject,
     in the case of unaudited statements, to normal, immaterial,  year-end audit
     adjustments.

          (j) Material  Changes.  Since the date of the latest audited financial
     statements  included  within  the  SEC  Reports,   except  as  specifically
     disclosed in the SEC Reports,  (i) there has been no event,  occurrence  or
     development  that has had or that could reasonably be expected to result in
     a  Material  Adverse  Effect,   (ii)  the  Company  has  not  incurred  any
     liabilities  (contingent  or otherwise)  other than (A) trade  payables and
     accrued  expenses  incurred in the ordinary  course of business  consistent
     with past practice and (B)  liabilities not required to be reflected in the
     Company's financial statements pursuant to GAAP or required to be disclosed
     in filings made with the Commission,  (iii) the Company has not altered its

                                       12
<PAGE>

     method  of  accounting,  (iv)  the  Company  has not  declared  or made any
     dividend or distribution  of cash or other property to its  stockholders or
     purchased, redeemed or made any agreements to purchase or redeem any shares
     of its  capital  stock  and  (v) the  Company  has not  issued  any  equity
     securities to any officer,  director,  Affiliate,  attorney or  consultant,
     except  pursuant to Company stock grant or option plans or  employment  and
     consulting  services  agreements.  The Company does not have pending before
     the  Commission  any request for  confidential  treatment  of  information.
     Except for the issuance of the Securities contemplated by this Agreement or
     as set forth on Schedule  3.1(j),  no event,  liability or development  has
     occurred or exists with respect to the Company or its Subsidiaries or their
     respective business,  properties,  operations or financial condition,  that
     would  be  required  to  be  disclosed  by  the  Company  under  applicable
     securities laws at the time this  representation  is made that has not been
     publicly disclosed 1 Trading Day prior to the date that this representation
     is made.

          (k) Litigation.  Except as set forth on Schedule  3.1(k),  there is no
     action,  suit,  inquiry,  notice of violation,  proceeding or investigation
     pending  or,  to  the  Knowledge  of the  Company,  threatened  against  or
     affecting the Company, any Subsidiary or any of their respective properties
     before or by any court,  arbitrator,  governmental or administrative agency
     or  regulatory  authority  (federal,   state,  county,  local  or  foreign)
     (collectively,  an "Action") which (i) adversely  affects or challenges the
     legality, validity or enforceability of any of the Transaction Documents or
     the Securities or (ii) could, if there were an unfavorable  decision,  have
     or reasonably be expected to result in a Material  Adverse Effect.  Neither
     the Company nor any Subsidiary,  nor any director or officer thereof, is or
     has been the  subject of any Action  involving a claim of  violation  of or
     liability  under federal or state  securities  laws or a claim of breach of
     fiduciary  duty.  There has not been,  and to the Knowledge of the Company,
     there is not pending or contemplated,  any  investigation by the Commission
     involving  the Company or any current or former  director or officer of the
     Company.  The  Commission  has not  issued  any stop  order or other  order
     suspending the  effectiveness  of any  registration  statement filed by the
     Company or any  Subsidiary  under the Exchange Act or the  Securities  Act.
     None of the Company's or its Subsidiaries' employees is a member of a union
     that relates to such employee's  relationship with the Company, and neither
     the  Company  or  any  of  its  Subsidiaries  is a  party  to a  collective
     bargaining  agreement,  and the Company and its  Subsidiaries  believe that
     their relationships with their employees are good. No executive officer, to
     the Knowledge of the Company, is, or is now expected to be, in violation of
     any material term of any employment contract,  confidentiality,  disclosure
     or proprietary  information agreement or non-competition  agreement, or any
     other contract or agreement or any restrictive covenant,  and the continued
     employment of each such  executive  officer does not subject the Company or
     any of  its  Subsidiaries  to  any  liability  with  respect  to any of the
     foregoing matters.  The Company and its Subsidiaries are in compliance with
     all U.S. federal, state, local and foreign laws and regulations relating to
     employment and employment practices, terms and conditions of employment and
     wages and hours,  except where the failure to be in  compliance  could not,
     individually or in the aggregate, reasonably be expected to have a Material
     Adverse Effect.

                                       13
<PAGE>

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

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

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

          (o)  Title to  Assets.  Except  as set forth on  Schedule  3.1(o),  he
     Company and the  Subsidiaries  have good and marketable title in fee simple
     to all real property  owned by them that is material to the business of the
     Company and the  Subsidiaries and good and marketable title in all personal
     property  owned by them that is material to the business of the Company and
     the  Subsidiaries,  in each case free and clear of all  Liens,  except  for
     Liens as do not  materially  affect the value of such  property  and do not
     materially  interfere  with the use made  and  proposed  to be made of such
     property by the Company and the  Subsidiaries  and Liens for the payment of
     federal,  state or other taxes, the payment of which is neither  delinquent
     nor subject to penalties. Any real property and facilities held under lease
     by the  Company  and  the  Subsidiaries  are  held  by  them  under  valid,
     subsisting and enforceable leases of which the Company and the Subsidiaries
     are in compliance.

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

                                       14
<PAGE>

     Person.  To the Knowledge of the Company,  all such  Intellectual  Property
     Rights are  enforceable  and there is no existing  infringement  by another
     Person of any of the  Intellectual  Property Rights of others.  The Company
     and its Subsidiaries have taken reasonable security measures to protect the
     secrecy, confidentiality and value of all of their intellectual properties,
     except where failure to do so could not,  individually or in the aggregate,
     reasonably be expected to have a Material Adverse Effect.

          (q) Insurance. Except as set forth on Schedule 3.1(q), the Company and
     the   Subsidiaries   are  insured  by  insurers  of  recognized   financial
     responsibility  against  such  losses and risks and in such  amounts as are
     prudent  and  customary  in the  businesses  in which the  Company  and the
     Subsidiaries  are engaged,  including,  but not limited to,  directors  and
     officers  insurance  coverage at least equal to the aggregate  Subscription
     Amount. To the best Knowledge of the Company,  such insurance contracts and
     policies are accurate and complete.  Neither the Company nor any 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
     without a significant increase in cost.

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

          (s) Sarbanes-Oxley;  Internal Accounting  Controls.  The Company is in
     material  compliance with all provisions of the  Sarbanes-Oxley Act of 2002
     which are  applicable  to it as of the  Closing  Date.  The Company and the
     Subsidiaries  maintain a system of internal  accounting controls sufficient
     to provide  reasonable  assurance  that (i)  transactions  are  executed in
     accordance  with  management's  general or  specific  authorizations,  (ii)
     transactions  are recorded as necessary to permit  preparation of financial
     statements in conformity  with GAAP and to maintain  asset  accountability,
     (iii) access to assets is permitted  only in accordance  with  management's
     general or specific authorization, and (iv) the recorded accountability for
     assets is compared  with the existing  assets at  reasonable  intervals and
     appropriate  action is taken with respect to any  differences.  The Company
     has established  disclosure controls and procedures (as defined in Exchange
     Act Rules  13a-15(e)  and  15d-15(e))  for the  Company and  designed  such

                                       15
<PAGE>

     disclosure  controls and  procedures  to ensure that  material  information
     relating to the Company,  including its Subsidiaries,  is made known to the
     certifying  officers by others within those entities,  particularly  during
     the period in which the Company's most recently filed periodic report under
     the  Exchange  Act, as the case may be, is being  prepared.  The  Company's
     certifying  officers  have  evaluated  the  effectiveness  of the Company's
     controls and procedures as of the date prior to the filing date of the most
     recently  filed  periodic  report under the  Exchange  Act (such date,  the
     "Evaluation  Date").  The  Company  presented  in its most  recently  filed
     periodic  report under the Exchange Act the  conclusions  of the certifying
     officers about the effectiveness of the disclosure  controls and procedures
     based on their  evaluations as of the Evaluation Date. Since the Evaluation
     Date,  there have been no  significant  changes in the  Company's  internal
     controls  (as such term is defined in Item 307(b) of  Regulation  S-K under
     the Exchange  Act) or, to the  Knowledge of the Company,  in other  factors
     that could significantly affect the Company's internal controls.

          (t) Certain Fees. Except as set forth in Schedule 3.1(t), no brokerage
     or finder's  fees or  commissions  are or will be payable by the Company to
     any broker,  financial  advisor or  consultant,  finder,  placement  agent,
     investment  banker,  bank or other Person with respect to the  transactions
     contemplated by the  Transaction  Documents.  The Purchasers  shall have no
     obligation  with  respect to any fees or with respect to any claims made by
     or on  behalf  of other  Persons  for fees of a type  contemplated  in this
     Section that may be due in connection with the transactions contemplated by
     the Transaction Documents.

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

          (v)  Investment  Company.  The Company is not, and is not an Affiliate
     of, and immediately  after receipt of payment for the Securities,  will not
     be or be an Affiliate of, an "investment company" within the meaning of the
     Investment  Company Act of 1940, as amended.  The Company shall conduct its
     business in a manner so that it will not become  subject to the  Investment
     Company Act.

          (w)  Registration  Rights.  Except as set forth on Schedule 3.1(w) and
     other  than each of the  Purchasers,  no Person  has any right to cause the
     Company  to  effect  the  registration  under  the  Securities  Act  of any
     securities of the Company.

          (x) Listing and Maintenance  Requirements.  The Company's Common Stock
     is  registered  pursuant  to Section  12(g) of the  Exchange  Act,  and the
     Company  has taken no action  designed  to,  or which to its  Knowledge  is
     likely to have the effect of,  terminating  the  registration of the Common
     Stock under the Exchange Act nor has the Company  received any notification
     that the Commission is  contemplating  terminating such  registration.  The
     Company  has not,  in the 12 months  preceding  the date  hereof,  received

                                       16
<PAGE>

     notice  from any  Trading  Market on which the Common  Stock is or has been
     listed or quoted to the effect that the Company is not in  compliance  with
     the listing or maintenance requirements of such Trading Market. The Company
     is, and has no reason to believe that it will not in the foreseeable future
     continue  to be,  in  compliance  with all  such  listing  and  maintenance
     requirements.

          (y)  Application  of  Takeover  Protections.  Except  as set  forth on
     Schedule  3.1(y),  the  Company and its Board of  Directors  have taken all
     necessary action, if any, in order to render inapplicable any control share
     acquisition,  business combination, poison pill (including any distribution
     under a rights  agreement) or other similar  anti-takeover  provision under
     the Company's  Certificate of Incorporation (or similar charter  documents)
     or the  laws  of  its  state  of  incorporation  that  is or  could  become
     applicable to the  Purchasers as a result of the Purchasers and the Company
     fulfilling   their   obligations  or  exercising  their  rights  under  the
     Transaction  Documents,  including  without  limitation  as a result of the
     Company's  issuance of the Securities and the Purchasers'  ownership of the
     Securities.

          (z) Disclosure.  Except as set forth on Schedule  3.1(z),  the Company
     confirms  that  neither  it nor any other  Person  acting on its behalf has
     provided  any of the  Purchasers  or  their  agents  or  counsel  with  any
     information  that  constitutes  or  might  constitute  material,  nonpublic
     information.  The Company understands and confirms that the Purchasers will
     rely  on  the   foregoing   representations   and  covenants  in  effecting
     transactions in securities of the Company.  All disclosure  provided to the
     Purchasers  regarding  the  Company,  its  business  and  the  transactions
     contemplated hereby,  including the Disclosure Schedules to this Agreement,
     furnished   by  or  on  behalf  of  the   Company   with   respect  to  the
     representations  and  warranties  made  herein  are true and  correct  with
     respect to such  representations  and  warranties  and do not  contain  any
     untrue  statement  of a material  fact or omit to state any  material  fact
     necessary in order to make the  statements  made  therein,  in light of the
     circumstances  under  which they were made,  not  misleading.  The  Company
     acknowledges   and  agrees  that  no  Purchaser   makes  or  has  made  any
     representations or warranties with respect to the transactions contemplated
     hereby other than those specifically set forth in Section 3.2 hereof.

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

          (bb) Solvency.  Except as set forth on Schedule 3.1(bb),  based on the
     financial  condition  of the  Company as of the Closing  Date after  giving
     effect to the receipt by the Company of the  proceeds  from the sale of the
     Securities  hereunder,  (i) the Company's fair saleable value of its assets

                                       17
<PAGE>

     exceeds the amount that will be required to be paid on or in respect of the
     Company's existing debts and other liabilities  (including known contingent
     liabilities)  as they mature;  (ii) the Company's  assets do not constitute
     unreasonably  small capital to carry on its business for the current fiscal
     year as now conducted and as proposed to be conducted including its capital
     needs  taking  into  account the  particular  capital  requirements  of the
     business conducted by the Company,  and projected capital  requirements and
     capital  availability  thereof;  and  (iii)  the  current  cash flow of the
     Company,  together with the proceeds the Company would receive,  were it to
     liquidate all of its assets, after taking into account all anticipated uses
     of the cash, would be sufficient to pay all amounts on or in respect of its
     debt when such amounts are required to be paid. The Company does not intend
     to incur debts beyond its ability to pay such debts as they mature  (taking
     into  account the timing and amounts of cash to be payable on or in respect
     of its debt).  The Company has no Knowledge  of any facts or  circumstances
     which  lead  it  to  believe  that  it  will  file  for  reorganization  or
     liquidation under the bankruptcy or reorganization laws of any jurisdiction
     within one year from the Closing Date.  The SEC Reports set forth as of the
     dates thereof all  outstanding  secured and unsecured  Indebtedness  of the
     Company or any  Subsidiary,  or for which the Company or any Subsidiary has
     commitments. For the purposes of this Agreement,  "Indebtedness" shall mean
     (a) any liabilities for borrowed money or amounts owed in excess of $50,000
     (other  than trade  accounts  payable  incurred in the  ordinary  course of
     business),   (b)  all  guaranties,   endorsements   and  other   contingent
     obligations in respect of Indebtedness  of others,  whether or not the same
     are or should be reflected  in the  Company's  balance  sheet (or the notes
     thereto),  except  guaranties by endorsement of negotiable  instruments for
     deposit or collection  or similar  transactions  in the ordinary  course of
     business;  and (c) the  present  value of any lease  payments  in excess of
     $50,000 due under leases  required to be  capitalized  in  accordance  with
     GAAP.  Neither the Company nor any Subsidiary is in default with respect to
     any Indebtedness.

          (cc) Form SB-2  Eligibility.  The Company is eligible to register  the
     resale of the  Underlying  Shares for resale by the  Purchaser on Form SB-2
     promulgated under the Securities Act.

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

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

                                       18
<PAGE>

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

          (gg) Accountants.  The Company's accountants are set forth on Schedule
     3.1(gg) of the Disclosure Schedule.  To the Knowledge of the Company,  such
     accountants,  who the Company  expects  will  express  their  opinion  with
     respect to the financial  statements to be included in the Company's Annual
     Report on Form 10-KSB for the year ended December 31, 2005 are a registered
     public accounting firm as required by the Securities Act.

          (hh)  Seniority.  Except as set forth on Schedule  3.1(hh),  as of the
     Closing Date, no  indebtedness  or other equity of the Company is senior to
     the  Debentures  in right of payment,  whether  with respect to interest or
     upon  liquidation or  dissolution,  or otherwise,  other than  indebtedness
     secured by purchase  money security  interests  (which is senior only as to
     underlying assets covered thereby) and capital lease obligations  (which is
     senior only as to the property covered thereby).

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

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

          (kk) Acknowledgement Regarding Purchasers' Trading Activity.  Anything
     in this  Agreement  or  elsewhere  herein to the  contrary  notwithstanding
     (except  for  Section  4.16  hereof),  it is  understood  and agreed by the
     Company (i) that none of the Purchasers  have been asked to agree,  nor has

                                       19
<PAGE>

     any Purchaser  agreed,  to desist from  purchasing or selling,  long and/or
     short,  securities  of the Company,  or  "derivative"  securities  based on
     securities  issued  by the  Company  or to  hold  the  Securities  for  any
     specified term; (ii) that past or future open market or other  transactions
     by any  Purchaser,  including  Short  Sales,  and  specifically  including,
     without  limitation,  Short Sales or "derivative"  transactions,  before or
     after the closing of this or future  private  placement  transactions,  may
     negatively  impact  the  market  price  of  the  Company's  publicly-traded
     securities;  (iii) that any Purchaser,  and counter parties in "derivative"
     transactions  to  which  any  such  Purchaser  is  a  party,   directly  or
     indirectly,  presently may have a "short" position in the Common Stock, and
     (iv) that each Purchaser shall not be deemed to have any  affiliation  with
     or  control  over  any  arm's  length  counter-party  in  any  "derivative"
     transaction.  The Company further understands and acknowledges that (a) one
     or more Purchasers may engage in hedging activities at various times during
     the  period  that  the  Securities  are  outstanding,   including,  without
     limitation,  during the  periods  that the value of the  Underlying  Shares
     deliverable  with respect to Securities  are being  determined and (b) such
     hedging  activities  (if  any)  could  reduce  the  value  of the  existing
     stockholders'  equity  interests  in the Company at and after the time that
     the hedging activities are being conducted.  The Company  acknowledges that
     such aforementioned hedging activities do not constitute a breach of any of
     the Transaction Documents.

          (ll)  Manipulation of Price. The Company has not, and to its Knowledge
     no one acting on its behalf has,  (i) taken,  directly or  indirectly,  any
     action designed to cause or to result in the  stabilization or manipulation
     of the price of any  security  of the  Company  to  facilitate  the sale or
     resale of any of the Securities,  (ii) sold, bid for,  purchased,  or, paid
     any compensation for soliciting  purchases of, any of the Securities (other
     than for the placement agent's placement of the Securities),  or (iii) paid
     or agreed to pay to any person any compensation  for soliciting  another to
     purchase any other securities of the Company.

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

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

                                       20
<PAGE>

     creditors'  rights  generally,  (ii) as  limited  by laws  relating  to the
     availability of specific performance,  injunctive relief or other equitable
     remedies and (iii) insofar as indemnification  and contribution  provisions
     may be limited by applicable law.

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

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

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

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

          (f)  Information.  Such  Purchasers  has been  furnished all materials
     relating to the  business,  finance and  operations  of the Company and its
     subsidiaries  and  materials   relating  to  the  offer  and  sale  of  the
     Securities,  as set forth on Schedule 3.2(f),  which have been requested by
     such  Purchaser.  Such  Purchaser has been afforded the  opportunity to ask
     questions of the Company and has received what such  Purchaser  believes to
     be satisfactory answers to any such inquiries.  Such Purchaser  understands
     that its  investment  in the  Securities  involves  a high  degree of risk.

                                       21
<PAGE>

     Neither such inquiries nor any other due diligence  investigation conducted
     by  such  Purchaser  or its  counsel  or any of its  representatives  shall
     modify,  amend or affect such  Purchaser's  right to rely on the  Company's
     representations  and  warranties  as set  forth in  Section  3.1  hereof or
     elsewhere in the Transaction Documents.

          (g) Short Sales and  Confidentiality  Prior To The Date Hereof.  Other
     than  the  transaction  contemplated  hereunder,  such  Purchaser  has  not
     directly or indirectly,  nor has any Person acting on behalf of or pursuant
     to  any  understanding  with  such  Purchaser,  executed  any  disposition,
     including  Short Sales,  in the securities of the Company during the period
     commencing  from the time that such  Purchaser  first received a term sheet
     from the Company or any other Person  setting  forth the material  terms of
     the transactions  contemplated hereunder until the date hereof ("Discussion
     Time").  [Notwithstanding the foregoing, in the case of a Purchaser that is
     a multi-managed  investment  vehicle whereby  separate  portfolio  managers
     manage  separate  portions  of such  Purchaser's  assets and the  portfolio
     managers have no direct  knowledge of the investment  decisions made by the
     portfolio managers managing other portions of such Purchaser's  assets, the
     representation set forth above shall only apply with respect to the portion
     of  assets  managed  by the  portfolio  manager  that  made the  investment
     decision to purchase the Securities  covered by this Agreement.  Other than
     to other Persons party to this Agreement, such Purchaser has maintained the
     confidentiality  of all  disclosures  made to it in  connection  with  this
     transaction (including the existence and terms of this transaction).]

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

                                   ARTICLE IV.
                         OTHER AGREEMENTS OF THE PARTIES

     4.1 Transfer Restrictions.

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

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

                                       22
<PAGE>

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

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

          (c)  Certificates  evidencing the Underlying  Shares shall not contain
     any legend  (including the legend set forth in Section 4.1(b) hereof):  (i)
     while a  registration  statement  (including  the  Registration  Statement)
     covering the resale of such security is effective under the Securities Act,
     or (ii) following any sale of such Underlying  Shares pursuant to Rule 144,
     or (iii) if such Underlying Shares are eligible for sale under Rule 144(k),
     or (iv) if such legend is not required under applicable requirements of the
     Securities  Act  (including  judicial  interpretations  and  pronouncements
     issued by the staff of the Commission). The Company shall cause its counsel

                                       23
<PAGE>

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

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

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

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

     4.2 Acknowledgment of Dilution.  The Company acknowledges that the issuance
of the  Securities  may result in dilution of the  outstanding  shares of Common
Stock,  which dilution may be substantial under certain market  conditions.  The

                                       24
<PAGE>

Company  further   acknowledges  that  its  obligations  under  the  Transaction
Documents,  including without  limitation its obligation to issue the Underlying
Shares pursuant to the Transaction Documents, are unconditional and absolute and
not  subject  to any  right  of  set  off,  counterclaim,  delay  or  reduction,
regardless  of the effect of any such dilution or any claim the Company may have
against any Purchaser and  regardless of the dilutive  effect that such issuance
may have on the ownership of the other stockholders of the Company.

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

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

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

     4.6 Securities Laws Disclosure;  Publicity. The Company shall, by 8:30 a.m.
Eastern  time on the  Trading Day  following  the date  hereof,  issue a Current
Report on Form 8-K,  reasonably  acceptable  to each  Purchaser  disclosing  the
material terms of the  transactions  contemplated  hereby,  and shall attach the
Transaction Documents thereto. The Company and each Purchaser shall consult with
each other in issuing any other press releases with respect to the  transactions
contemplated  hereby,  and neither the Company nor any Purchaser shall issue any
such press release or otherwise make any such public statement without the prior
consent of the Company,  with respect to any press release of any Purchaser,  or
without the prior consent of each  Purchaser,  with respect to any press release
of the Company, which consent shall not unreasonably be withheld, except if such
disclosure is required by law, in which case the disclosing party shall promptly

                                       25
<PAGE>

provide  the  other  party  with  prior  notice  of  such  public  statement  or
communication.  Notwithstanding  the  foregoing,  the Company shall not publicly
disclose the name of any Purchaser,  or include the name of any Purchaser in any
filing with the Commission or any regulatory  agency or Trading Market,  without
the prior written consent of such Purchaser,  except (i) as required on the Form
8-K filed  pursuant to this Section 4.6, (ii) as required by federal  securities
law in  connection  with the future SEC  Reports of the Company and (iii) to the
extent such  disclosure  is required by law or Trading  Market  regulations,  in
which case the Company  shall provide the  Purchasers  with prior notice of such
disclosure permitted under subclause (i) or (ii).

     4.7  Shareholder  Rights  Plan.  No claim will be made or  enforced  by the
Company or, to the Knowledge of the Company, any other Person that any Purchaser
is an "Acquiring  Person" under any  shareholder  rights plan or similar plan or
arrangement in effect or hereafter adopted by the Company, or that any Purchaser
could be deemed to trigger the  provisions of any such plan or  arrangement,  by
virtue of  receiving  Securities  under the  Transaction  Documents or under any
other  agreement  between  the  Company and the  Purchasers.  The Company  shall
conduct  its  business  in a manner so that it will not  become  subject  to the
Investment Company Act.

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

     4.9 Use of Proceeds.  Except as set forth on Schedule 4.9 attached  hereto,
the Company shall use the net proceeds from the sale of the Securities hereunder
for working capital  purposes and not for the satisfaction of any portion of the
Company's debt (other than payment of trade  payables in the ordinary  course of
the  Company's  business  and prior  practices),  to redeem any Common  Stock or
Common Stock Equivalents or to settle any outstanding litigation.

     4.10  Reimbursement.  If any Purchaser  becomes involved in any capacity in
any  Proceeding  by or against  any Person who is a  stockholder  of the Company
(except as a result of sales, pledges,  margin sales and similar transactions by
such Purchaser to or with any current  stockholder),  solely as a result of such
Purchaser's acquisition of the Securities under this Agreement, the Company will
reimburse such Purchaser for its reasonable legal and other expenses  (including
the cost of any  investigation  preparation and travel in connection  therewith)
incurred  in  connection   therewith,   as  such  expenses  are  incurred.   The
reimbursement  obligations  of the  Company  under  this  paragraph  shall be in
addition to any  liability  which the Company may otherwise  have,  shall extend
upon the same terms and  conditions to any  Affiliates of the Purchasers who are
actually  named in such  action,  proceeding  or  investigation,  and  partners,
directors,  agents,  employees and controlling persons (if any), as the case may
be, of the  Purchasers  and any such  Affiliate,  and shall be binding  upon and
inure  to  the  benefit  of  any   successors,   assigns,   heirs  and  personal
representatives  of the Company,  the  Purchasers and any such Affiliate and any

                                       26
<PAGE>

such Person.  The Company also agrees that neither the  Purchasers  nor any such
Affiliates,  partners, directors, agents, employees or controlling persons shall
have any liability to the Company or any Person asserting claims on behalf of or
in right of the Company  solely as a result of acquiring  the  Securities  under
this Agreement.

     4.11  Indemnification  of  Purchasers.  Subject to the  provisions  of this
Section  4.11,  the  Company  will  indemnify  and hold each  Purchaser  and its
directors, officers, shareholders,  members, partners, employees and agents (and
any other Persons with a functionally  equivalent  role of a Person holding such
titles notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser  (within the meaning of Section 15 of the Securities Act
and  Section 20 of the  Exchange  Act),  and the  directors,  officers,  agents,
members,  partners  or  employees  (and any other  Persons  with a  functionally
equivalent role of a Person holding such titles  notwithstanding  a lack of such
title or any other title) of such controlling person (each, a "Purchaser Party")
harmless   from  any  and  all   losses,   liabilities,   obligations,   claims,
contingencies,  damages,  costs and expenses,  including all judgments,  amounts
paid in  settlements,  court costs and reasonable  attorneys'  fees and costs of
investigation  that any such Purchaser  Party may suffer or incur as a result of
or  relating  to (a)  any  breach  of any  of the  representations,  warranties,
covenants or  agreements  made by the Company in this  Agreement or in the other
Transaction  Documents or (b) any action instituted against a Purchaser,  or any
of them or their respective Affiliates, by any stockholder of the Company who is
not an Affiliate  of such  Purchaser,  with  respect to any of the  transactions
contemplated  by the Transaction  Documents  (unless such action is based upon a
breach of such  Purchaser's  representations,  warranties or covenants under the
Transaction  Documents or any  agreements or  understandings  such Purchaser may
have with any such  stockholder  or any  violations by the Purchaser of state or
federal  securities  laws or any  conduct by such  Purchaser  which  constitutes
fraud, gross negligence, willful misconduct or malfeasance). If any action shall
be brought  against any  Purchaser  Party in respect of which  indemnity  may be
sought  pursuant to this  Agreement,  such Purchaser Party shall promptly notify
the  Company  in  writing,  and the  Company  shall have the right to assume the
defense thereof with counsel of its own choosing. Any Purchaser Party shall have
the right to employ  separate  counsel in any such action and participate in the
defense  thereof,  but the fees and  expenses  of such  counsel  shall be at the
expense of such  Purchaser  Party  except to the extent that (i) the  employment
thereof has been  specifically  authorized  by the Company in writing,  (ii) the
Company has failed after a reasonable  period of time to assume such defense and
to employ counsel or (iii) in such action there is, in the reasonable opinion of
such separate  counsel,  a material  conflict on any material  issue between the
position of the Company and the position of such  Purchaser  Party.  The Company
will not be liable to any  Purchaser  Party  under  this  Agreement  (i) for any
settlement by a Purchaser  Party  effected  without the Company's  prior written
consent,  which  shall not be  unreasonably  withheld  or delayed or (ii) to the
extent,  but only to the extent,  that a loss,  claim,  damage or  liability  is
attributable  to any  Purchaser  Party's  breach of any of the  representations,
warranties,  covenants or agreements made by the Purchasers in this Agreement or
in the other Transaction Documents.

     4.12 Reservation and Listing of Securities.

          (a) On or before the Authorized Share Approval Date, the Company shall
     maintain  a reserve  from its duly  authorized  shares of Common  Stock for
     issuance pursuant to the Transaction Documents of at least 9,000,000 shares
     of Common Stock (subject to adjustment for reverse and forward stock splits
     and the like).

                                       27
<PAGE>

          (b) If, on any date after the  Authorized  Share Approval Date (or the
     90th calendar day in the event the Commission  reviews the proxy  statement
     under which the Company seeks shareholder approval for the Amendment),  the
     number of authorized  but unissued  (and  otherwise  unreserved)  shares of
     Common  Stock is less than 130% of (i) the  Required  Minimum on such date,
     minus (ii) the number of shares of Common Stock previously  issued pursuant
     to the Transactions  Documents,  then, as soon as possible and in any event
     no later than the 60th calendar day after such date, the Board of Directors
     of the Company shall use best efforts to amend the Company's certificate or
     articles of incorporation to increase the number of authorized but unissued
     shares of Common Stock such that at least 130% of the  Required  Minimum at
     such time  (minus the number of shares of Common  Stock  previously  issued
     pursuant to the Transaction  Documents) is reserved from the Company's duly
     authorized  shares of Common  Stock,  provided that the Company will not be
     required  at any time to  authorize  a number of  shares  of  Common  Stock
     greater than 130% of the maximum remaining number of shares of Common Stock
     that could  possibly be issued after such time pursuant to the  Transaction
     Documents.

          (c) The  Company  shall,  if  applicable:  (i) in the time and  manner
     required by the Trading  Market,  prepare and file with such Trading Market
     an additional  shares  listing  application  covering a number of shares of
     Common  Stock at least  equal to the  Required  Minimum on the date of such
     application,  (ii) take all steps  necessary to cause such shares of Common
     Stock to be approved for listing on the Trading  Market as soon as possible
     thereafter,  (iii) provide to the Purchasers evidence of such listing,  and
     (iv)  maintain  the listing of such Common Stock on any date at least equal
     to the  Required  Minimum  on such date on such  Trading  Market or another
     Trading  Market.  In addition,  the Company shall hold a special meeting of
     shareholders  (which may also be at the annual meeting of  shareholders) on
     or before the  Authorized  Share Approval Date (or the 90th calendar day in
     the event  the  Commission  reviews  the proxy  statement  under  which the
     Company seeks  shareholder  approval for the  Amendment) for the purpose of
     obtaining  Authorized  Share  Approval,  with  the  recommendation  of  the
     Company's  Board of  Directors  that such  proposal  be  approved,  and the
     Company shall solicit proxies from its shareholders in connection therewith
     in the  same  manner  as all  other  management  proposals  in  such  proxy
     statement  and  all  management-appointed  proxyholders  shall  vote  their
     proxies  in  favor  of  such  proposal.  If the  Company  does  not  obtain
     Authorized  Share Approval at the first  meeting,  the Company shall call a
     meeting every four months  thereafter  to seek  Authorized  Share  Approval
     until the earlier of the date Authorized  Share Approval is obtained or the
     Debentures are no longer outstanding.

     4.13 Participation in Future Financing.

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

                                       28
<PAGE>

          (b) At least 10 Trading  Days prior to the  closing of the  Subsequent
     Financing,  the Company shall deliver to each Purchaser a written notice of
     its  intention  to  effect a  Subsequent  Financing  ("Pre-Notice"),  which
     Pre-Notice  shall ask such  Purchaser  if it wants to review the details of
     such financing (such additional notice, a "Subsequent  Financing  Notice").
     Upon the request of a Purchaser, and only upon a request by such Purchaser,
     for a Subsequent Financing Notice, the Company shall promptly, but no later
     than 1 Trading  Day after  such  request,  deliver a  Subsequent  Financing
     Notice to such Purchaser. The Subsequent Financing Notice shall describe in
     reasonable  detail the proposed  terms of such  Subsequent  Financing,  the
     amount of proceeds intended to be raised  thereunder,  the Person with whom
     such Subsequent Financing is proposed to be effected, and attached to which
     shall be a term sheet or similar document relating thereto.

          (c) Any Purchaser desiring to participate in such Subsequent Financing
     must provide written notice to the Company by not later than 5:30 p.m. (New
     York City time) on the 10th  Trading Day after all of the  Purchasers  have
     received the Pre-Notice that the Purchaser is willing to participate in the
     Subsequent Financing, the amount of the Purchaser's participation, and that
     the Purchaser has such funds ready,  willing,  and available for investment
     on the terms set forth in the Subsequent  Financing  Notice. If the Company
     receives no notice  from a  Purchaser  as of such 10th  Trading  Day,  such
     Purchaser  shall be deemed to have  notified  the Company  that it does not
     elect to participate.

          (d) If by 5:30 p.m. (New York City time) on the 10th Trading Day after
     all of the Purchasers  have received the Pre-Notice,  notifications  by the
     Purchasers of their willingness to participate in the Subsequent  Financing
     (or to cause their  designees to  participate)  is, in the aggregate,  less
     than the total  amount of the  Subsequent  Financing,  then the Company may
     effect the remaining portion of such Subsequent  Financing on the terms and
     to the Persons set forth in the Subsequent Financing Notice.

          (e) If by 5:30 p.m. (New York City time) on the 10th Trading Day after
     all of the Purchasers  have received the Pre-Notice,  the Company  receives
     responses  to a  Subsequent  Financing  Notice from  Purchasers  seeking to
     purchase more than the aggregate amount of the Participation  Maximum, each
     such  Purchaser  shall have the right to purchase  the greater of (a) their
     Pro Rata Portion (as defined  below) of the  Participation  Maximum and (b)
     the difference  between the Participation  Maximum and the aggregate amount
     of participation by all other  Purchasers.  "Pro Rata Portion" is the ratio
     of (x) the Subscription Amount of Securities  purchased on the Closing Date
     by a Purchaser participating under this Section 4.13 and (y) the sum of the
     aggregate  Subscription Amounts of Securities purchased on the Closing Date
     by all Purchasers participating under this Section 4.13.

          (f) The Company must provide the Purchasers  with a second  Subsequent
     Financing  Notice,  and  the  Purchasers  will  again  have  the  right  of
     participation  set forth  above in this  Section  4.13,  if the  Subsequent

                                       29
<PAGE>

     Financing  subject  to  the  initial  Subsequent  Financing  Notice  is not
     consummated  for any  reason  on the  terms  set  forth in such  Subsequent
     Financing  Notice  within 60  Trading  Days  after the date of the  initial
     Subsequent Financing Notice.

(g)      Notwithstanding the foregoing, this Section 4.13 shall not apply in
         respect of (i) an Exempt Issuance, (ii) an underwritten public offering
         of the Company's securities with a nationally recognized and reputable
         underwriter or (iii) the Mexican Project Financing.

4.14     Subsequent Equity Sales.

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

          (b) From the date hereof until such time as no  Debentures or Warrants
     are  outstanding,  the Company and each Subsidiary shall be prohibited from
     (i) selling or granting  any option to  purchase,  (ii) selling or granting
     any right to reprice its  securities  or (iii)  issuing or disposing of (or
     announcing  any sale,  grant or option to  purchase  or other  disposition)
     Common  Stock or Common  Stock  Equivalents  which  entitles  any Person to
     acquire  shares of Common  Stock at an  effective  price per share  that is
     lower than the lesser of the then  Conversion  Price (subject to adjustment
     therein) or the then Exercise Price (subject to adjustment therein). If the
     holder of Common Stock or Common Stock  Equivalents  so issued shall at any
     time, whether by operation of purchase price adjustments, reset provisions,
     floating  conversion,  exercise or exchange prices or otherwise,  or due to
     warrants,  options or rights per share which are issued in connection  with
     such  issuance,  be  entitled  to  receive  shares  of  Common  Stock at an
     effective  price  per  share  which is lower  than the  lesser  of the then
     Conversion Price (subject to adjustment therein) or the then Exercise Price
     (subject to  adjustment  therein),  such  issuance  shall be deemed to have
     occurred for less than such  Conversion  Price or then Exercise  Price.  If
     there are no outstanding  Debentures,  such prohibition shall apply to such
     issuances  at an  effective  price  per share  that is lower  than the then
     Exercise Price (subject to adjustment therein). If there are no outstanding
     Warrants,  such  prohibition  shall apply to such issuances at an effective
     price per share that is lower than the then  Conversion  Price  (subject to
     adjustment therein).

          (c) From the date hereof until such time as no Purchaser  holds any of
     the Debentures,  the Company shall be prohibited from effecting or entering
     into an agreement to effect any Subsequent  Financing involving a "Variable
     Rate  Transaction".  The term  "Variable  Rate  Transaction"  shall  mean a
     transaction  in which  the  Company  issues or sells (i) any debt or equity
     securities that are convertible  into,  exchangeable or exercisable for, or
     include the right to receive  additional  shares of Common Stock either (A)
     at a  conversion,  exercise or  exchange  rate or other price that is based

                                       30
<PAGE>

     upon and/or varies with the trading  prices of or quotations for the shares
     of Common  Stock at any time  after the  initial  issuance  of such debt or
     equity  securities,  or (B) with a conversion,  exercise or exchange  price
     that is  subject  to being  reset at some  future  date  after the  initial
     issuance  of such  debt  or  equity  security  or upon  the  occurrence  of
     specified  or  contingent  events  directly  or  indirectly  related to the
     business of the  Company or the market for the Common  Stock or (ii) enters
     into any  agreement,  including,  but not  limited  to, an  equity  line of
     credit,  whereby  the Company may sell  securities  at a future  determined
     price.

          (d) Any  Purchaser  shall be  entitled  to  obtain  injunctive  relief
     against the Company to stay any  issuances  in  violation  of this  Section
     4.14,  which  remedy  shall be in  addition  to other  remedies  including,
     without limitation, the acceleration of the Debentures pursuant to an Event
     of Default.

          (e) Notwithstanding  the foregoing,  this Section 4.14 shall not apply
     in respect of an Exempt Issuance,  except that no Variable Rate Transaction
     shall be an Exempt Issuance.

     4.15 Equal Treatment of Purchasers.  No  consideration  shall be offered or
paid to any  person  to amend or  consent  to a waiver  or  modification  of any
provision of any of the Transaction  Documents unless the same  consideration is
also offered to all of the parties to the Transaction  Documents.  Further,  the
Company  shall not make any payment of  principal on the  Debentures  in amounts
which are  disproportionate  to the respective  principal amounts outstanding on
the  Debentures  at  any  applicable  time.  For  clarification  purposes,  this
provision  constitutes a separate right granted to each Purchaser by the Company
and negotiated separately by each Purchaser,  and is intended for the Company to
treat the  Purchasers  as a class and shall not in any way be  construed  as the
Purchasers  acting  in  concert  or as a group  with  respect  to the  purchase,
disposition or voting of Securities or otherwise.

     4.16 Short Sales and Confidentiality  After The Date Hereof. Each Purchaser
severally and not jointly with the other  Purchasers  covenants  that neither it
nor any Affiliates acting on its behalf or pursuant to any understanding with it
will  execute any Short Sales during the period  after the  Discussion  Time and
ending at the time that the  transactions  contemplated  by this  Agreement  are
first publicly announced as described in Section 4.6. Each Purchaser,  severally
and not jointly with the other Purchasers, covenants that until such time as the
transactions  contemplated  by this  Agreement  are  publicly  disclosed  by the
Company  as  described  in  Section  4.6,  such  Purchaser  will  maintain,  the
confidentiality   of  all  disclosures  made  to  it  in  connection  with  this
transaction  (including  the  existence  and  terms of this  transaction).  Each
Purchaser understands and acknowledges, severally and not jointly with any other
Purchaser,  that the  Commission  currently  takes the position that coverage of
short  sales of  shares  of the  Common  Stock  "against  the box"  prior to the
Effective Date of the Registration  Statement with the Securities is a violation
of Section 5 of the  Securities  Act,  as set forth in Item 65,  Section 5 under
Section A, of the Manual of Publicly Available Telephone Interpretations,  dated
July 1997,  compiled by the Office of Chief  Counsel,  Division  of  Corporation
Finance.  Notwithstanding the foregoing,  no Purchaser makes any representation,
warranty  or  covenant  hereby  that it will not  engage  in Short  Sales in the
securities of the Company after the time that the  transactions  contemplated by

                                       31
<PAGE>

this  Agreement  are first  publicly  announced  as  described  in Section  4.6.
Notwithstanding   the  foregoing,   in  the  case  of  a  Purchaser  that  is  a
multi-managed  investment  vehicle whereby  separate  portfolio  managers manage
separate portions of such Purchaser's  assets and the portfolio managers have no
direct  knowledge of the  investment  decisions  made by the portfolio  managers
managing other portions of such Purchaser's assets, the covenant set forth above
shall only apply with respect to the portion of assets  managed by the portfolio
manager that made the investment  decision to purchase the Securities covered by
this Agreement.

     4.17 Form D; Blue Sky Filings.  The Company  agrees to timely file a Form D
with respect to the Securities as required  under  Regulation D and to provide a
copy thereof,  promptly upon request of any Purchaser.  The Company shall, on or
before  or after  the  Closing  Date,  take such  action  as the  Company  shall
reasonably  determine is  necessary  in order to obtain an exemption  for, or to
qualify  the  Securities  for,  sale  to the  Purchasers  at the  Closing  under
applicable securities or "Blue Sky" laws of the states of the United States, and
shall provide evidence of such actions promptly upon request of any Purchaser.

                                   ARTICLE V.
                                  MISCELLANEOUS

     5.1 Termination.  This Agreement may be terminated by any Purchaser,  as to
such Purchaser's obligations hereunder only and without any effect whatsoever on
the obligations between the Company and the other Purchasers,  by written notice
to the other  parties,  if the  Closing  has not been  consummated  on or before
January 27, 2006;  provided,  however,  that no such termination will affect the
right of any party to sue for any breach by the other party (or parties).

     5.2 Fees and Expenses.  At the Closing, the Company has agreed to reimburse
HPC Capital  Management  ("HPC")  the  non-accountable  sum of $20,000,  for its
actual,  reasonable,  out-of-pocket legal fees and expenses,  $5,000 which shall
have been  paid  prior to the  Closing.  Except  as  expressly  set forth in the
Transaction  Documents  to the  contrary,  each  party  shall  pay the  fees and
expenses of its advisers,  counsel,  accountants and other experts,  if any, and
all  other  expenses  incurred  by  such  party  incident  to  the  negotiation,
preparation,  execution, delivery and performance of this Agreement. The Company
shall pay all transfer agent fees, stamp taxes and other taxes and duties levied
in connection with the delivery of any Securities.

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

     5.4  Notices.  Any and all notices or other  communications  or  deliveries
required or permitted to be provided  hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of  transmission,  if
such notice or  communication is delivered via facsimile at the facsimile number
set forth on the signature  pages  attached  hereto prior to 5:30 p.m. (New York
City  time)  on a  Trading  Day,  (b) the next  Trading  Day  after  the date of

                                       32
<PAGE>

transmission,  if such notice or communication is delivered via facsimile at the
facsimile  number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day,  (c) the 2nd Trading  Day  following  the date of mailing,  if sent by U.S.
nationally  recognized  overnight courier service, or (d) upon actual receipt by
the party to whom such  notice is  required  to be given.  The  address for such
notices and communications shall be as set forth on the signature pages attached
hereto.

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

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

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

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

     5.9 Governing  Law. All questions  concerning the  construction,  validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance  with the internal laws of the State of
New York,  without  regard to the  principles of conflicts of law thereof.  Each
party  agrees  that  all  legal  proceedings   concerning  the  interpretations,
enforcement and defense of the  transactions  contemplated by this Agreement and
any other Transaction  Documents  (whether brought against a party hereto or its
respective affiliates,  directors, officers, shareholders,  employees or agents)
shall be commenced  exclusively  in the state and federal  courts sitting in the
City of New  York.  Each  party  hereby  irrevocably  submits  to the  exclusive
jurisdiction  of the state and federal  courts  sitting in the City of New York,
Borough  of  Manhattan  for the  adjudication  of any  dispute  hereunder  or in
connection  herewith or with any  transaction  contemplated  hereby or discussed
herein  (including  with respect to the  enforcement  of any of the  Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,

                                       33
<PAGE>

action  or  proceeding,  any  claim  that it is not  personally  subject  to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or inconvenient venue for such proceeding.  Each party hereby irrevocably waives
personal  service of process and  consents to process  being  served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or  overnight  delivery  (with  evidence of  delivery) to such party at the
address in effect for  notices to it under this  Agreement  and agrees that such
service  shall  constitute  good and  sufficient  service of process  and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any right
to serve  process in any manner  permitted by law. The parties  hereby waive all
rights  to a trial  by jury.  If  either  party  shall  commence  an  action  or
proceeding to enforce any  provisions  of the  Transaction  Documents,  then the
prevailing  party in such action or proceeding  shall be reimbursed by the other
party for its  attorneys'  fees and other costs and expenses  incurred  with the
investigation, preparation and prosecution of such action or proceeding.

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

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

     5.12 Severability. If any provision of this Agreement is held to be invalid
or  unenforceable  in  any  respect,  the  validity  and  enforceability  of the
remaining  terms  and  provisions  of  this  Agreement  shall  not in any way be
affected or impaired  thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor,  and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

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

     5.14 Replacement of Securities. If any certificate or instrument evidencing
any Securities is mutilated,  lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange  and  substitution  for and upon  cancellation

                                       34
<PAGE>

thereof,  or  in  lieu  of  and  substitution  therefor,  a new  certificate  or
instrument,  but only upon receipt of evidence  reasonably  satisfactory  to the
Company  of such  loss,  theft  or  destruction  and  customary  and  reasonable
indemnity,  if requested.  The  applicants  for a new  certificate or instrument
under  such  circumstances  shall  also  pay any  reasonable  third-party  costs
associated with the issuance of such replacement Securities.

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

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

     5.17 Usury.  To the extent it may lawfully do so, the Company hereby agrees
not to insist upon or plead or in any manner  whatsoever  claim, and will resist
any and all efforts to be compelled  to take the benefit or advantage  of, usury
laws wherever enacted, now or at any time hereafter in force, in connection with
any claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Document.  Notwithstanding any
provision to the contrary contained in any Transaction Document, it is expressly
agreed  and  provided  that  the  total  liability  of  the  Company  under  the
Transaction  Documents  for payments in the nature of interest  shall not exceed
the maximum lawful rate authorized  under  applicable law (the "Maximum  Rate"),
and, without  limiting the foregoing,  in no event shall any rate of interest or
default  interest,  or both of them,  when aggregated with any other sums in the
nature  of  interest  that  the  Company  may  be  obligated  to pay  under  the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract  rate of  interest  allowed by law and  applicable  to the  Transaction
Documents is  increased  or  decreased  by statute or any official  governmental
action subsequent to the date hereof,  the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction  Documents
from the  effective  date  forward,  unless such  application  is  precluded  by
applicable law. If under any circumstances whatsoever, interest in excess of the
Maximum  Rate  is  paid  by  the  Company  to  any  Purchaser  with  respect  to
indebtedness  evidenced  by the  Transaction  Documents,  such  excess  shall be
applied  by  such  Purchaser  to  the  unpaid  principal  balance  of  any  such
indebtedness  or be refunded to the Company,  the manner of handling such excess
to be at such Purchaser's election.

                                       35
<PAGE>

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

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

     5.20  Construction.  The  parties  agree  that  each of them  and/or  their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved  against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.

                            (Signature Pages Follow)

                                       36
<PAGE>

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

TIDELANDS OIL & GAS CORPORATION                           Address for Notice:
                                                          -------------------

By:____________________________
   Name:
   Title:

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

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

                                       37
<PAGE>

        [PURCHASER SIGNATURE PAGES TO TIDE SECURITIES PURCHASE AGREEMENT]

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

Name of Purchaser: _____________________________________________________________
Signature of Authorized Signatory of Purchaser: ________________________________
Name of Authorized Signatory: __________________________________________________
Title of Authorized Signatory: _________________________________________________
Email Address of Purchaser:_____________________________________________________
Jurisdiction of Residence of Purchaser: ________________________________________

Address for Notice of Purchaser:

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

Subscription Amount:
Principal Amount (Subscription Amount x 1.2175)
Series A Warrant Shares:
Series B Warrant Shares:
                EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

                           [SIGNATURE PAGES CONTINUE]

                                       38

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