NEWGOLD INC
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>5
<FILENAME>ni_8kex101-60202.txt
<TEXT>


                          SECURITIES PURCHASE AGREEMENT
                          -----------------------------

         THIS  SECURITIES  PURCHASE  AGREEMENT (this  "AGREEMENT"),  dated as of
January 27,  2006,  by and among  NEWGOLD,  INC.,  a Delaware  corporation  (the
"COMPANY"), and the Buyers listed on Schedule I attached hereto (individually, a
"BUYER" or collectively "BUYERS").

                                   WITNESSETH
                                   ----------

         WHEREAS, the Company and the Buyer(s) are executing and delivering this
Agreement in reliance upon an exemption from securities registration pursuant to
Section 4(2) and/or Rule 506 of Regulation D ("REGULATION  D") as promulgated by
the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "SECURITIES ACT");

         WHEREAS,  the parties  desire  that,  upon the terms and subject to the
conditions  contained herein,  the Company shall issue and sell to the Buyer(s),
as provided  herein,  and the Buyer(s) shall purchase up to One Million  Dollars
($1,000,000) of secured convertible  debentures (the "CONVERTIBLE  DEBENTURES"),
which shall be convertible  into shares of the Company's common stock, par value
$0.001 (the "COMMON STOCK") (as converted, the "CONVERSION SHARES") of which Six
Hundred  Thousand  Dollars  ($600,000)  shall  be  funded  on the  business  day
following  the date  hereof  (the "FIRST  CLOSING"),  and Two  Hundred  Thousand
Dollars  ($200,000)  shall be funded two (2) business days prior to the date the
registration statement (the "REGISTRATION  STATEMENT") is filed, pursuant to the
Investor  Registration  Rights Agreement dated the date hereof,  with the United
States Securities and Exchange Commission (the "SEC") (the "SECOND CLOSING") and
Two  Hundred  Thousand  Dollars  ($200,000)  will  be  funded  on the  date  the
Registration  Statement is declared  effective by the SEC (the "THIRD  CLOSING")
(individually  referred  to as a  "CLOSING"  collectively  referred  to  as  the
"CLOSINGS"),   for  a  total  purchase  price  of  up  to  One  Million  Dollars
($1,000,000),  (the  "PURCHASE  PRICE")  in the  respective  amounts  set  forth
opposite each Buyer(s) name on Schedule I (the "SUBSCRIPTION AMOUNT"); and

         WHEREAS,  contemporaneously  with the  execution  and  delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement (the "INVESTOR  REGISTRATION RIGHTS AGREEMENT")  pursuant to which the
Company has agreed to provide certain  registration  rights under the Securities
Act and the rules and regulations  promulgated there under, and applicable state
securities laws; and

         WHEREAS,  contemporaneously  with the  execution  and  delivery of this
Agreement,  the parties hereto are executing and delivering a Security Agreement
(the "SECURITY  AGREEMENT")  pursuant to which the Company has agreed to provide
the Buyer a security interest in Pledged  Collateral (as this term is defined in
the  Security  Agreement)  to  secure  the  Company's   obligations  under  this
Agreement, the Transaction Documents, or any other obligations of the Company to
the Buyer;

         WHEREAS,  contemporaneously  with the  execution  and  delivery of this
Agreement,  the parties  hereto are executing and delivering a Pledge and Escrow
Agreement (the "PLEDGE AND ESCROW AGREEMENT")  pursuant to which the Company has
agreed to provide the Buyer a security



<PAGE>
interest in the Pledged Shares (as this term is defined in the Pledge and Escrow
Agreement)  to secure  the  Company's  obligations  under  this  Agreement,  the
Transaction Documents, or any other obligations of the Company to the Buyer

         WHEREAS,  contemporaneously  with the  execution  and  delivery of this
Agreement,  or no later January 30, 2006,  the parties  hereto are executing and
delivering a Memorandum of Security  Interest  pursuant to which the Company has
agreed to provide the Buyer a security  interest in the Company's  mining rights
at the Relief Canyon Mine located at located in Pershing County Nevada, 17 Miles
East of Lovelock, Nevada, in Township 27N, Range 34E Section 16,17,18, 20 and 21
to secure the  Company's  obligations  under  this  Agreement,  the  Transaction
Documents, or any other obligations of the Company to the Buyer (the "MEMORANDUM
OF SECURITY INTEREST"); and

         WHEREAS,  contemporaneously  with the  execution  and  delivery of this
Agreement,  the parties hereto are executing and delivering Irrevocable Transfer
Agent Instructions (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS")

         NOW,  THEREFORE,  in  consideration  of the mutual  covenants and other
agreements contained in this Agreement the Company and the Buyer(s) hereby agree
as follows:

                  1. PURCHASE AND SALE OF CONVERTIBLE DEBENTURES.

                           (a) PURCHASE OF  CONVERTIBLE  DEBENTURES.  Subject to
the satisfaction (or waiver) of the terms and conditions of this Agreement, each
Buyer  agrees,  severally  and not jointly,  to purchase at each Closing and the
Company  agrees to sell and issue to each Buyer,  severally and not jointly,  at
each  Closing,   Convertible   Debentures  in  amounts  corresponding  with  the
Subscription Amount set forth opposite each Buyer's name on Schedule I hereto.

                           (b) CLOSING  DATE.  The First Closing of the purchase
and sale of the Convertible  Debentures  shall take place at 10:00 a.m.  Eastern
Standard  Time on the  business  day  following  the  date  hereof,  subject  to
notification  of  satisfaction  of the conditions to the First Closing set forth
herein and in Sections 6 and 7 below (or such later date as is  mutually  agreed
to by the  Company and the  Buyer(s))  (the "FIRST  CLOSING  DATE"),  the Second
Closing of the purchase and sale of the Convertible  Debentures shall take place
at 10:00 a.m.  Eastern Standard Time two (2) business days prior to the date the
Registration  Statement  is filed  with  the SEC,  subject  to  notification  of
satisfaction  of the  conditions  to the Second  Closing set forth herein and in
Sections  6 and 7 below  (or such  later  date as is  mutually  agreed to by the
Company and the Buyer(s))  (the "SECOND  CLOSING DATE") and the Third Closing of
the purchase and sale of the  Convertible  Debentures  shall take place at 10:00
a.m. Eastern  Standard Time on the date the  Registration  Statement is declared
effective by the SEC,  subject to notification of satisfaction of the conditions
to the Second  Closing  set forth  herein and in Sections 6 and 7 below (or such
later date as is mutually agreed to by the Company and the Buyer(s)) (the "THIRD
CLOSING DATE")  (collectively  referred to a the "CLOSING  DATES").  The Closing
shall  occur  on the  respective  Closing  Dates  at the  offices  of  Yorkville
Advisors, LLC, 3700 Hudson Street, Suite 3700, Jersey City, New Jersey 07302 (or
such other place as is mutually agreed to by the Company and the Buyer(s)).







                                        2
<PAGE>
                           (c) FORM OF PAYMENT.  Subject to the  satisfaction of
the terms and conditions of this Agreement, on the Closing Dates, (i) the Buyers
shall  deliver  to the  Company  such  aggregate  proceeds  for the  Convertible
Debentures  to be issued  and sold to such  Buyer(s),  minus the fees to be paid
directly  from the  proceeds  the  Closings  as set forth  herein,  and (ii) the
Company shall deliver to each Buyer,  Convertible Debentures which such Buyer(s)
is  purchasing  in amounts  indicated  opposite such Buyer's name on Schedule I,
duly executed on behalf of the Company.

                  2. BUYER'S REPRESENTATIONS AND WARRANTIES.

         Each Buyer represents and warrants, severally and not jointly, that:

                           (a) INVESTMENT  PURPOSE.  Each Buyer is acquiring the
Convertible Debentures and, upon conversion of Convertible Debentures, the Buyer
will  acquire  the  Conversion  Shares  then  issuable,  for its own account for
investment only and not with a view towards,  or for resale in connection  with,
the public sale or distribution thereof,  except pursuant to sales registered or
exempted  under the  Securities  Act;  provided,  however,  that by  making  the
representations  herein,  such  Buyer  reserves  the  right  to  dispose  of the
Conversion  Shares at any time in  accordance  with or pursuant to an  effective
registration statement covering such Conversion Shares or an available exemption
under the Securities Act.

                           (b)  ACCREDITED  INVESTOR  STATUS.  Each  Buyer is an
"ACCREDITED INVESTOR" as that term is defined in Rule 501(a)(3) of Regulation D.

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

                           (d) INFORMATION. Each Buyer and its advisors (and his
or, its counsel), if any, have been furnished with all materials relating to the
business,  finances  and  operations  of the Company and  information  he deemed
material to making an informed investment decision regarding his purchase of the
Convertible  Debentures and the Conversion Shares,  which have been requested by
such  Buyer.  Each  Buyer  and its  advisors,  if any,  have been  afforded  the
opportunity to ask questions of the Company and its management and have received
responses  deemed  adequate to each Buyer.  Neither such inquiries nor any other
due diligence investigations conducted by such Buyer or its advisors, if any, or
its representatives  shall modify, amend or affect such Buyer's right to rely on
the Company's  representations and warranties contained in Section 3 below. Each
Buyer  understands  that its  investment in the  Convertible  Debentures and the
Conversion  Shares  involves a high degree of risk.  Each Buyer is in a position
regarding the Company,  which,  based upon  employment,  family  relationship or
economic bargaining power,  enabled and enables such Buyer to obtain information
from the Company in order to evaluate  the merits and risks of this  investment.
Each  Buyer  has  sought  such  accounting,  legal  and  tax  advice,  as it has
considered necessary to make an informed





                                        3
<PAGE>
investment   decision  with  respect  to  its  acquisition  of  the  Convertible
Debentures and the Conversion Shares.

                           (e) NO GOVERNMENTAL  REVIEW.  Each Buyer  understands
that no  United  States  federal  or state  agency or any  other  government  or
governmental  agency has passed on or made any  recommendation or endorsement of
the  Convertible  Debentures  or  the  Conversion  Shares,  or the  fairness  or
suitability  of the investment in the  Convertible  Debentures or the Conversion
Shares,  nor have such  authorities  passed upon or  endorsed  the merits of the
offering of the Convertible Debentures or the Conversion Shares.

                           (f) TRANSFER OR RESALE.  Each Buyer  understands that
except as  provided  in the  Investor  Registration  Rights  Agreement:  (i) the
Convertible  Debentures  have not been and are not  being  registered  under the
Securities  Act or any state  securities  laws, and may not be offered for sale,
sold, assigned or transferred unless (A) subsequently registered thereunder,  or
(B) such Buyer shall have  delivered to the Company an opinion of counsel,  in a
generally  acceptable  form,  to the  effect  that such  securities  to be sold,
assigned or  transferred  may be sold,  assigned or  transferred  pursuant to an
exemption from such registration requirements;  (ii) any sale of such securities
made in  reliance  on Rule 144 under the  Securities  Act (or a  successor  rule
thereto)  ("RULE 144") may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable,  any resale of such securities under
circumstances  in which the seller (or the person through whom the sale is made)
may be deemed to be an  underwriter  (as that term is defined in the  Securities
Act) may require  compliance  with some other exemption under the Securities Act
or the rules and  regulations  of the SEC  thereunder;  and  (iii)  neither  the
Company nor any other person is under any obligation to register such securities
under the  Securities  Act or any state  securities  laws or to comply  with the
terms and conditions of any exemption thereunder. The Company reserves the right
to place stop transfer  instructions against the shares and certificates for the
Conversion Shares.

                           (g)  LEGENDS.   Each  Buyer   understands   that  the
certificates or other instruments representing the Convertible Debentures and or
the  Conversion  Shares shall bear a  restrictive  legend in  substantially  the
following form (and a stop transfer order may be placed against transfer of such
stock certificates):

        THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE HAVE NOT BEEN
        REGISTERED  UNDER THE SECURITIES  ACT OF 1933, AS AMENDED,  OR
        APPLICABLE  STATE  SECURITIES  LAWS. THE SECURITIES  HAVE BEEN
        ACQUIRED  SOLELY FOR  INVESTMENT  PURPOSES AND NOT WITH A VIEW
        TOWARD  RESALE  AND  MAY  NOT  BE  OFFERED  FOR  SALE,   SOLD,
        TRANSFERRED  OR  ASSIGNED  IN  THE  ABSENCE  OF  AN  EFFECTIVE
        REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
        ACT OF 1933, AS AMENDED,  OR APPLICABLE STATE SECURITIES LAWS,
        OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
        REGISTRATION  IS NOT  REQUIRED  UNDER  SAID ACT OR  APPLICABLE
        STATE SECURITIES LAWS.









                                        4
<PAGE>
The  legend set forth  above  shall be removed  and the  Company  within two (2)
business days shall issue a certificate without such legend to the holder of the
Conversion  Shares upon which it is stamped,  if, unless  otherwise  required by
state securities laws, (i) in connection with a sale  transaction,  provided the
Conversion  Shares are registered under the Securities Act or (ii) in connection
with a sale transaction,  after such holder provides the Company with an opinion
of counsel,  which opinion shall be in form,  substance and scope  customary for
opinions  of counsel in  comparable  transactions,  to the effect  that a public
sale,  assignment  or  transfer  of the  Conversion  Shares may be made  without
registration under the Securities Act.

                           (h)  AUTHORIZATION,  ENFORCEMENT.  This Agreement has
been duly and validly authorized, executed and delivered on behalf of such Buyer
and is a valid and binding  agreement of such Buyer  enforceable  in  accordance
with  its  terms,  except  as such  enforceability  may be  limited  by  general
principles  of  equity or  applicable  bankruptcy,  insolvency,  reorganization,
moratorium,  liquidation  and other  similar  laws  relating  to,  or  affecting
generally, the enforcement of applicable creditors' rights and remedies.

                           (i) RECEIPT OF  DOCUMENTS.  Each Buyer and his or its
counsel has received and read in their  entirety:  (i) this  Agreement  and each
representation,  warranty  and  covenant  set forth  herein and the  Transaction
Documents (as defined  herein);  (ii) all due  diligence  and other  information
necessary  to verify the  accuracy  and  completeness  of such  representations,
warranties  and  covenants;  (iii) the Company's Form 10-KSB for the fiscal year
ended January 31, 2004;  (iv) the Company's Form 10-QSB for the fiscal  quarters
ended April 30, 2005,  July 31, 2005 and October 31, 2005 and (v) answers to all
questions  each Buyer  submitted to the Company  regarding an  investment in the
Company; and each Buyer has relied on the information  contained therein and has
not been furnished any other documents, literature, memorandum or prospectus.

                           (j) DUE FORMATION OF CORPORATE  AND OTHER BUYERS.  If
the Buyer(s) is a corporation, trust, partnership or other entity that is not an
individual  person,  it has been  formed  and  validly  exists  and has not been
organized for the specific purpose of purchasing the Convertible  Debentures and
is not prohibited from doing so.

                           (k) NO LEGAL  ADVICE  FROM THE  COMPANY.  Each  Buyer
acknowledges,  that it had the  opportunity  to review  this  Agreement  and the
transactions  contemplated  by this  Agreement with his or its own legal counsel
and  investment  and tax advisors.  Each Buyer is relying solely on such counsel
and advisors and not on any statements or  representations of the Company or any
of its  representatives  or agents  for legal,  tax or  investment  advice  with
respect to this investment,  the transactions  contemplated by this Agreement or
the securities laws of any jurisdiction.

                  3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

         The Company  represents  and  warrants as of the date hereof to each of
the Buyers that, except as set forth in the SEC Documents (as defined herein) or
in the Disclosure Schedule attached hereto (the "DISCLOSURE SCHEDULE"):








                                       5
<PAGE>
                           (a) ORGANIZATION AND QUALIFICATION.  The Company is a
corporation  duly organized and validly existing in good standing under the laws
of the jurisdiction in which it is incorporated, and has the requisite corporate
power to own  their  properties  and to carry on  their  business  as now  being
conducted. The Company is duly qualified as a foreign corporation to do business
and is in good  standing  in every  jurisdiction  in  which  the  nature  of the
business  conducted  by it makes  such  qualification  necessary,  except to the
extent that the failure to be so qualified or be in good standing would not have
a material adverse effect on the Company and its subsidiaries taken as a whole.

                           (b) AUTHORIZATION, ENFORCEMENT, COMPLIANCE WITH OTHER
INSTRUMENTS.  (i) The Company has the requisite corporate power and authority to
enter into and perform  this  Agreement,  the Security  Agreement,  the Investor
Registration  Rights Agreement,  the Irrevocable  Transfer Agent Agreement,  the
Pledge and Escrow  Agreement,  the  Memorandum  of  Security  Interest,  and any
related agreements  (collectively the "TRANSACTION  DOCUMENTS") and to issue the
Convertible  Debentures and the Conversion  Shares in accordance  with the terms
hereof and thereof, (ii) the execution and delivery of the Transaction Documents
by the  Company  and the  consummation  by it of the  transactions  contemplated
hereby  and  thereby,  including,   without  limitation,  the  issuance  of  the
Convertible  Debentures the Conversion  Shares and the  reservation for issuance
and the issuance of the Conversion  Shares  issuable upon conversion or exercise
thereof,  have been duly  authorized by the Company's  Board of Directors and no
further  consent or  authorization  is  required  by the  Company,  its Board of
Directors or its  stockholders,  (iii) the Transaction  Documents have been duly
executed and delivered by the Company, (iv) the Transaction Documents constitute
the valid and binding obligations of the Company enforceable against the Company
in accordance with their terms,  except as such enforceability may be limited by
general   principles   of   equity   or   applicable   bankruptcy,   insolvency,
reorganization,   moratorium,  liquidation  or  similar  laws  relating  to,  or
affecting  generally,  the  enforcement of creditors'  rights and remedies.  The
authorized  officer of the Company executing the Transaction  Documents knows of
no reason why the Company  cannot file the  registration  statement  as required
under the Investor Registration Rights Agreement or perform any of the Company's
other obligations under such documents.

                           (c)  CAPITALIZATION.  The authorized capital stock of
the Company  consists  of  250,000,000  shares of Common  Stock and no shares of
Preferred Stock, par value $0.001 ("PREFERRED STOCK") of which 63,104,072 shares
of Common Stock are issued and outstanding.  All of such outstanding shares have
been validly  issued and are fully paid and  nonassessable.  No shares of Common
Stock are subject to preemptive  rights or any other similar rights or any liens
or  encumbrances  suffered or permitted  by the Company.  As of the date of this
Agreement,  (i) there are no outstanding  options,  warrants,  scrip,  rights to
subscribe to, calls or commitments of any character  whatsoever  relating to, or
securities  or rights  convertible  into,  any  shares of  capital  stock of the
Company or any of its subsidiaries, or contracts, commitments, understandings or
arrangements  by which the Company or any of its  subsidiaries  is or may become
bound to issue  additional  shares of capital stock of the Company or any of its
subsidiaries  or options,  warrants,  scrip,  rights to  subscribe  to, calls or
commitments  of any  character  whatsoever  relating to, or securities or rights
convertible  into,  any  shares of  capital  stock of the  Company or any of its
subsidiaries,  (ii) there are no outstanding debt securities and (iii) there are
no agreements or arrangements under which the Company or any of its subsidiaries
is  obligated  to  register  the  sale  of any of  their  securities  under  the
Securities Act (except pursuant



                                        6
<PAGE>
to the  Registration  Rights  Agreement)  and  (iv)  there  are  no  outstanding
registration  statements and there are no outstanding  comment  letters from the
SEC or any other  regulatory  agency.  There are no  securities  or  instruments
containing  anti-dilution  or similar  provisions  that will be triggered by the
issuance of the  Convertible  Debentures  as  described in this  Agreement.  The
Company  has  furnished  to the Buyer true and correct  copies of the  Company's
Certificate  of  Incorporation,  as amended  and as in effect on the date hereof
(the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as in effect on
the date hereof (the  "BY-LAWS"),  and the terms of all  securities  convertible
into or  exercisable  for Common  Stock and the  material  rights of the holders
thereof in respect  thereto  other than stock  options  issued to employees  and
consultants.

                           (d)   ISSUANCE   OF   SECURITIES.   The   Convertible
Debentures are duly  authorized  and, upon issuance in accordance with the terms
hereof,  shall be duly issued,  fully paid and nonassessable,  are free from all
taxes,  liens and charges  with  respect to the issue  thereof.  The  Conversion
Shares  issuable upon  conversion of the  Convertible  Debentures have been duly
authorized and reserved for issuance.  Upon conversion or exercise in accordance
with the Convertible Debentures the Conversion Shares will be duly issued, fully
paid and nonassessable.

                           (e)  NO  CONFLICTS.   The  execution,   delivery  and
performance of the Transaction  Documents by the Company and the consummation by
the  Company of the  transactions  contemplated  hereby will not (i) result in a
violation of the Certificate of  Incorporation,  any certificate of designations
of any  outstanding  series of preferred  stock of the Company or the By-laws or
(ii)  conflict  with or  constitute  a default (or an event which with notice or
lapse of time or both  would  become a  default)  under,  or give to others  any
rights  of  termination,   amendment,   acceleration  or  cancellation  of,  any
agreement,  indenture  or  instrument  to  which  the  Company  or  any  of  its
subsidiaries is a party, or result in a violation of any law, rule,  regulation,
order,  judgment  or decree  (including  federal and state  securities  laws and
regulations  and the  rules  and  regulations  of The  National  Association  of
Securities  Dealers  Inc.'s  OTC  Bulletin  Board on which the  Common  Stock is
quoted)  applicable  to the Company or any of its  subsidiaries  or by which any
property  or  asset  of the  Company  or any of its  subsidiaries  is  bound  or
affected.  Neither the Company nor its  subsidiaries is in violation of any term
of or in default  under its  Certificate  of  Incorporation  or By-laws or their
organizational  charter or  by-laws,  respectively,  or any  material  contract,
agreement, mortgage,  indebtedness,  indenture,  instrument, judgment, decree or
order or any  statute,  rule or  regulation  applicable  to the  Company  or its
subsidiaries.  The business of the Company is not being conducted, and shall not
be conducted in violation of any material law,  ordinance,  or regulation of any
governmental entity.  Except as specifically  contemplated by this Agreement and
as required under the Securities Act and any applicable  state  securities laws,
the Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental  agency in order
for  it to  execute,  deliver  or  perform  any  of  its  obligations  under  or
contemplated  by  this  Agreement  or  the  Registration   Rights  Agreement  in
accordance  with the terms  hereof or  thereof.  All  consents,  authorizations,
orders,  filings  and  registrations  which the  Company is  required  to obtain
pursuant to the preceding sentence have been obtained or effected on or prior to
the date  hereof.  The  Company is unaware of any facts or  circumstance,  which
might give rise to any of the foregoing.




                                        7
<PAGE>
                           (f)  SEC  DOCUMENTS:   FINANCIAL  STATEMENTS.   Since
January 9, 2006, the Company has filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC under the Securities
Exchange Act of 1934,  as amended  (the  "EXCHANGE  ACT") (all of the  foregoing
filed prior to the date hereof or amended after the date hereof and all exhibits
included  therein and financial  statements and schedules  thereto and documents
incorporated by reference  therein,  being  hereinafter  referred to as the "SEC
DOCUMENTS").  The Company has delivered to the Buyers or their  representatives,
or made  available  through the SEC's website at  http://www.sec.gov.,  true and
complete  copies  of the  SEC  Documents.  As of  their  respective  dates,  the
financial  statements  of the  Company  disclosed  in  the  SEC  Documents  (the
"FINANCIAL  STATEMENTS")  complied  as to form  in all  material  respects  with
applicable  accounting  requirements  and the published rules and regulations of
the SEC with respect  thereto.  Such financial  statements have been prepared in
accordance with generally accepted accounting principles,  consistently applied,
during the periods  involved  (except (i) as may be otherwise  indicated in such
Financial  Statements  or the notes  thereto,  or (ii) in the case of  unaudited
interim statements, to the extent they may exclude footnotes or may be condensed
or  summary  statements)  and,  fairly  present  in all  material  respects  the
financial position of the Company as of the dates thereof and the results of its
operations  and cash flows for the periods then ended  (subject,  in the case of
unaudited   statements,   to  normal  year-end  audit  adjustments).   No  other
information  provided  by or on behalf of the  Company to the Buyer which is not
included  in the  SEC  Documents,  including,  without  limitation,  information
referred to in this Agreement,  contains any untrue statement of a material fact
or omits to state any material  fact  necessary in order to make the  statements
therein,  in the light of the  circumstances  under  which they were  made,  not
misleading.

                           (g)  10(B)-5.  The SEC  Documents  do not include any
untrue  statements of material fact, nor do they omit to state any material fact
required to be stated therein necessary to make the statements made, in light of
the circumstances under which they were made, not misleading.

                           (h) ABSENCE OF LITIGATION. Except as set forth in the
SEC Documents,  there is no action, suit,  proceeding,  inquiry or investigation
before  or by  any  court,  public  board,  government  agency,  self-regulatory
organization  or body pending  against or  affecting  the  Company's  the Common
Stock,  wherein an  unfavorable  decision,  ruling or  finding  would (i) have a
material adverse effect on the transactions  contemplated  hereby (ii) adversely
affect the  validity or  enforceability  of, or the  authority or ability of the
Company to perform its obligations under, this Agreement or any of the documents
contemplated  herein,  or (iii) have a material  adverse effect on the business,
operations,  properties,  financial  condition or results of  operations  of the
Company taken as a whole.

                           (i) ACKNOWLEDGMENT  REGARDING BUYER'S PURCHASE OF THE
CONVERTIBLE DEBENTURES. The Company acknowledges and agrees that the Buyer(s) is
acting solely in the capacity of an arm's length  purchaser with respect to this
Agreement  and  the  transactions   contemplated  hereby.  The  Company  further
acknowledges that the Buyer(s) is not acting as a financial advisor or fiduciary
of the Company (or in any similar  capacity)  with respect to this Agreement and
the transactions contemplated hereby and any advice given by the Buyer(s) or any
of their respective  representatives or agents in connection with this Agreement
and the transactions  contemplated  hereby is merely  incidental to such Buyer's
purchase of the



                                        8
<PAGE>
Convertible  Debentures or the Conversion Shares. The Company further represents
to the Buyer that the Company's  decision to enter into this  Agreement has been
based   solely  on  the   independent   evaluation   by  the   Company  and  its
representatives.

                           (j) NO GENERAL SOLICITATION. Neither the Company, nor
any of its affiliates, nor any person acting on its or their behalf, has engaged
in any form of general  solicitation or general  advertising (within the meaning
of Regulation D under the Securities  Act) in connection  with the offer or sale
of the Convertible Debentures or the Conversion Shares.

                           (k) NO INTEGRATED OFFERING.  Neither the Company, nor
any of its  affiliates,  nor any  person  acting  on its or  their  behalf  has,
directly or  indirectly,  made any offers or sales of any  security or solicited
any  offers  to  buy  any  security,  under  circumstances  that  would  require
registration  of the Convertible  Debentures or the Conversion  Shares under the
Securities  Act or cause this  offering  of the  Convertible  Debentures  or the
Conversion  Shares to be  integrated  with prior  offerings  by the  Company for
purposes of the Securities Act.

                           (l) EMPLOYEE  RELATIONS.  The Company is not involved
in any labor dispute nor, to the  knowledge of the Company,  is any such dispute
threatened.  None of the  Company's  employees  is a member  of a union  and the
Company believes that its relations with its employees are good.

                           (m) INTELLECTUAL  PROPERTY RIGHTS. The Company own or
possess adequate rights or licenses to use all trademarks,  trade names, service
marks,  service mark  registrations,  service  names,  patents,  patent  rights,
copyrights, inventions, licenses, approvals, governmental authorizations,  trade
secrets and rights  necessary  to conduct  their  respective  businesses  as now
conducted.  The Company does not have any knowledge of any  infringement  by the
Company or its  subsidiaries of trademark,  trade name rights,  patents,  patent
rights, copyrights,  inventions, licenses, service names, service marks, service
mark registrations,  trade secret or other similar rights of others, and, to the
knowledge of the Company there is no claim,  action or proceeding  being made or
brought against, or to the Company's  knowledge,  being threatened against,  the
Company regarding  trademark,  trade name,  patents,  patent rights,  invention,
copyright,  license,  service names,  service marks, service mark registrations,
trade secret or other  infringement;  and the Company is unaware of any facts or
circumstances which might give rise to any of the foregoing.

                           (n)  ENVIRONMENTAL   LAWS.  The  Company  is  (i)  in
compliance with any and all applicable  foreign,  federal,  state and local laws
and  regulations  relating to the  protection  of human  health and safety,  the
environment  or  hazardous  or  toxic   substances  or  wastes,   pollutants  or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable  Environmental Laws to conduct
their  respective  businesses  and  (iii) are in  compliance  with all terms and
conditions of any such permit, license or approval.

                           (o) TITLE.  Any real  property  and  facilities  held
under lease by the Company and its  subsidiaries  are held by them under  valid,
subsisting and  enforceable  leases with such exceptions as are not material and
do not interfere  with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.




                                        9
<PAGE>
                           (p)  INSURANCE.  The Company is currently not insured
against such losses and risks  customary in the  businesses in which the Company
is engaged.  The Company has not been refused any insurance  coverage  sought or
applied for and neither  the Company nor any such  subsidiary  has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage  expires or to obtain similar  coverage from similar insurers
as may be necessary to continue its business at a cost that would not materially
and adversely  affect the  condition,  financial or otherwise,  or the earnings,
business or operations of the Company taken as a whole.

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

                           (r)  INTERNAL   ACCOUNTING   CONTROLS.   The  Company
maintains  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
generally accepted accounting  principles and to maintain asset  accountability,
and (iii) the recorded  amounts for assets is compared with the existing  assets
at  reasonable  intervals  and  appropriate  action is taken with respect to any
differences.

                           (s) NO MATERIAL ADVERSE BREACHES, ETC. The Company is
not  subject  to any  charter,  corporate  or other  legal  restriction,  or any
judgment,  decree,  order,  rule or  regulation  which  in the  judgment  of the
Company's  officers has or is expected in the future to have a material  adverse
effect on the business, properties,  operations, financial condition, results of
operations  or  prospects  of the  Company.  The Company is not in breach of any
contract or agreement which breach,  in the judgment of the Company's  officers,
has  or is  expected  to  have  a  material  adverse  effect  on  the  business,
properties,  operations, financial condition, results of operations or prospects
of the Company.

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

                           (u)  CERTAIN  TRANSACTIONS.  Except for arm's  length
transactions pursuant to which the Company makes payments in the ordinary course
of business  upon terms no less  favorable  than the Company  could  obtain from
third  parties and other than the grant of



                                       10
<PAGE>
stock options disclosed in the SEC Documents,  none of the officers,  directors,
or  employees of the Company is  presently a party to any  transaction  with the
Company  (other  than  for  services  as  employees,  officers  and  directors),
including  any  contract,  agreement  or  other  arrangement  providing  for the
furnishing  of  services  to or by,  providing  for  rental of real or  personal
property to or from,  or  otherwise  requiring  payments to or from any officer,
director or such employee or, to the knowledge of the Company,  any corporation,
partnership,  trust or other entity in which any officer,  director, or any such
employee  has a  substantial  interest  or is an officer,  director,  trustee or
partner.

                           (v) FEES AND RIGHTS OF FIRST REFUSAL.  The Company is
not  obligated  to offer the  securities  offered  hereunder on a right of first
refusal basis or otherwise to any third parties  including,  but not limited to,
current or former shareholders of the Company, underwriters,  brokers, agents or
other third parties.

                  4. COVENANTS.

                           (a)  BEST  EFFORTS.  Each  party  shall  use its best
efforts  to timely  satisfy  each of the  conditions  to be  satisfied  by it as
provided in Sections 6 and 7 of this Agreement.

                           (b) FORM D. The Company  agrees to file a Form D with
respect to the Conversion Shares as required under Regulation D and to provide a
copy thereof to each Buyer promptly after such filing.  The Company shall, on or
before the  Closing  Date,  take such  action as the  Company  shall  reasonably
determine is necessary to qualify the Conversion  Shares, or obtain an exemption
for the Conversion Shares for sale to the Buyers at the Closing pursuant to this
Agreement  under  applicable  securities or "Blue Sky" laws of the states of the
United  States,  and shall  provide  evidence of any such action so taken to the
Buyers on or prior to the Closing Date.

                           (c)  REPORTING  STATUS.  Until the earlier of (i) the
date as of which the  Buyer(s)  may sell all of the  Conversion  Shares  without
restriction  pursuant to Rule 144(k)  promulgated  under the  Securities Act (or
successor  thereto),  or (ii) the date on which (A) the Buyer(s) shall have sold
all the  Conversion  Shares  and  (B)  none of the  Convertible  Debentures  are
outstanding  (the  "REGISTRATION  PERIOD"),  the Company  shall file in a timely
manner all reports  required to be filed with the SEC  pursuant to the  Exchange
Act and the  regulations  of the SEC  thereunder,  and  the  Company  shall  not
terminate  its status as an issuer  required to file reports  under the Exchange
Act even if the  Exchange  Act or the rules  and  regulations  thereunder  would
otherwise permit such termination.

                           (d)  USE  OF  PROCEEDS.  The  Company  will  use  the
proceeds from the sale of the Convertible  Debentures for general  corporate and
working capital purposes.

                           (e) RESERVATION OF SHARES. The Company shall take all
action  reasonably  necessary to at all times have authorized,  and reserved for
the  purpose  of  issuance,  such  number of shares of Common  Stock as shall be
necessary to effect the issuance of the  Conversion  Shares.  If at any time the
Company does not have  available  such shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all of the Conversion  Shares,
the Company  shall call and hold a special  meeting of the  shareholders  within
thirty (30)


                                       11
<PAGE>
days of such occurrence, for the sole purpose of increasing the number of shares
authorized. The Company's management shall recommend to the shareholders to vote
in favor of  increasing  the  number  of  shares  of  Common  Stock  authorized.
Management  shall also vote all of its shares in favor of increasing  the number
of authorized shares of Common Stock.

                           (f) LISTINGS OR QUOTATION. The Company shall promptly
secure the listing or  quotation  of the  Conversion  Shares upon each  national
securities  exchange,  automated quotation system or The National Association of
Securities  Dealers Inc.'s  Over-The-Counter  Bulletin Board  ("OTCBB") or other
market,  if any,  upon which  shares of Common  Stock are then  listed or quoted
(subject  to  official  notice of  issuance)  and shall use its best  efforts to
maintain,  so long as any other shares of Common Stock shall be so listed,  such
listing of all  Conversion  Shares from time to time issuable under the terms of
this Agreement.  The Company shall maintain the Common Stock's authorization for
quotation on the OTCBB.

                           (g) FEES AND EXPENSES.

                                    (i)  Each of the  Company  and the  Buyer(s)
shall pay all costs and expenses  incurred by such party in connection  with the
negotiation,   investigation,   preparation,   execution  and  delivery  of  the
Transaction Documents.  The Company shall pay Yorkville Advisors LLC a fee equal
to ten percent (10%) of the Purchase Price.

                                    (ii) The Company shall pay a structuring fee
to Yorkville Advisors LLC of Twelve Thousand Five Hundred Dollars ($12,500),  of
which Two  Thousand  Five  Hundred  Dollars has  previously  been paid,  and Ten
Thousand Dollars ($10,000) shall be paid directly from the proceeds of the First
Closing.

                                    (iii) The  Company  shall  pay the  Buyers a
non-refundable  due diligence fee of Five Thousand  Dollars ($5,000) which shall
be paid directly from the proceeds of the First Closing.

                                    (iv) The Company  shall issue to the Buyer a
warrant to purchase one million two hundred fifty thousand (1,250,000) shares of
the Company's  Common Stock for a period of four (4) years at an exercise  price
of $0.20 per share and a warrant to  purchase  one  million  two  hundred  fifty
thousand  (1,250,000)  shares of the Company's Common Stock for a period of four
(4) years at an exercise price of $0.30 per share  (collectively  referred to as
the  "WARRANTS").  The shares of Common Stock  issuable under the Warrants shall
collectively be referred to as the "WARRANT SHARES".

                                    (v)   The   Warrant    Shares   shall   have
"piggy-back" and demand registration rights.

                           (h)  CORPORATE  EXISTENCE.  So long as the  aggregate
principal amount on the Convertible Debentures remains unpaid and unconverted in
an aggregate amount over Two Hundred Thousand  Dollars  ($200,000),  the Company
shall  not  directly  or  indirectly  consummate  any  merger,   reorganization,
restructuring,  reverse stock split consolidation,  sale of all or substantially
all of the Company's assets or any similar  transaction or related  transactions
(each  such  transaction,  an  "ORGANIZATIONAL  CHANGE")  unless,  prior  to the
consummation an Organizational  Change,  the Company obtains the written consent
of each Buyer,  so long as the



                                       12
<PAGE>
aggregate  principal  amount on the  Convertible  Debentures  remains unpaid and
unconverted  in an  aggregate  amount  less than Two  Hundred  Thousand  Dollars
($200,000),  the Company shall be entitled to directly or indirectly  consummate
any Organizational  Change without,  prior to the consummation an Organizational
Change,  obtaining  the written  consent of each Buyer.  In each such case,  the
Company will make appropriate provision with respect to such holders' rights and
interests to insure that the provisions of this Section 4(h) will  thereafter be
applicable to the Convertible Debentures.

                           (i) TRANSACTIONS WITH RELATED PARTIES AND AFFILIATES.
So long as any Convertible  Debentures are  outstanding,  the Company shall not,
and shall cause each of its  subsidiaries not to, enter into,  amend,  modify or
supplement,  or permit any subsidiary to enter into, amend, modify or supplement
any agreement,  transaction,  commitment,  or arrangement with any of its or any
subsidiary's officers,  directors,  person who were officers or directors at any
time during the previous two (2) years,  stockholders  who beneficially own five
percent (5%) or more of the Common Stock,  or Affiliates  (as defined  below) or
with  any  individual  related  by  blood,  marriage,  or  adoption  to any such
individual or with any entity in which any such entity or individual owns a five
percent (5%) or more beneficial  interest (each a "RELATED  PARTY"),  except for
(a) customary employment  arrangements and benefit programs on reasonable terms,
(b)  any  investment  in  an  Affiliate  of  the  Company,  (c)  any  agreement,
transaction, commitment, or arrangement on an arms-length basis on terms no less
favorable than terms which would have been  obtainable  from a person other than
such Related Party, (d) any agreement,  transaction,  commitment, or arrangement
which is approved by a majority of the  disinterested  directors of the Company;
for purposes  hereof,  any director who is also an officer of the Company or any
subsidiary of the Company shall not be a disinterested  director with respect to
any such agreement,  transaction,  commitment,  or arrangement.  "AFFILIATE" for
purposes hereof means,  with respect to any person or entity,  another person or
entity that, directly or indirectly,  (i) has a ten percent (10%) or more equity
interest  in that person or entity,  (ii) has ten  percent  (10%) or more common
ownership with that person or entity,  (iii) controls that person or entity,  or
(iv) shares common  control with that person or entity.  "CONTROL" or "CONTROLS"
for  purposes  hereof  means that a person or entity  has the  power,  direct or
indirect, to conduct or govern the policies of another person or entity.

                           (j) TRANSFER AGENT. The Company  covenants and agrees
that,  in the event that the  Company's  agency  relationship  with the transfer
agent should be terminated for any reason prior to a date which is two (2) years
after the Closing  Date,  the Company shall  immediately  appoint a new transfer
agent and shall  require  that the new  transfer  agent  execute and agree to be
bound by the terms of the Irrevocable  Transfer Agent  Instructions  (as defined
herein).

                           (k)  RESTRICTION ON ISSUANCE OF THE CAPITAL STOCK. So
long as the aggregate  principal  amount on the Convertible  Debentures  remains
unpaid and unconverted in an aggregate  amount over Two Hundred Thousand Dollars
($200,000),  the Company  shall not,  without the prior  written  consent of the
Buyer(s),  (i) issue or sell shares of Common Stock or Preferred  Stock  without
consideration  or for a  consideration  per share less than the bid price of the
Common  Stock  determined  immediately  prior to its  issuance,  (ii)  issue any
preferred stock, warrant,  option, right,  contract,  call, or other security or
instrument granting the holder thereof the right to acquire Common Stock without
consideration  or for a  consideration  less than such




                                       13
<PAGE>
Common Stock's Bid Price determined  immediately  prior to it's issuance,  (iii)
enter into any security  instrument  granting the holder a security  interest in
any of the Pledged Property as defined in the Security  Agreement,  or (iv) file
any registration statement on Form S-8.

                           (l) Neither the  Buyer(s)  nor any of its  affiliates
have an open short position in the Common Stock of the Company, and the Buyer(s)
agrees that it shall not, and that it will cause its  affiliates  not to, engage
in any short sales of or hedging  transactions  with respect to the Common Stock
as long as any Convertible Debentures or Warrants shall remain outstanding.

                           (m) RIGHTS OF FIRST REFUSAL. For a period of eighteen
(18) months from each  Closing  Date,  excluding a raise of Two Million  Dollars
($2,000,000)  within  thirty days from January 27, 2006 on terms less  favorable
than this  Debenture,  so long as any  portion  of  Convertible  Debentures  are
outstanding,  if the Company intends to raise additional capital by the issuance
or sale of capital stock of the Company,  including without limitation shares of
any class of common stock,  any class of preferred stock,  options,  warrants or
any other  securities  convertible  or  exercisable  into shares of common stock
(whether the offering is conducted by the Company, underwriter,  placement agent
or any third  party) the Company  shall be obligated to offer to the Buyers such
issuance or sale of capital stock, by providing in writing the principal  amount
of capital it intends to raise and outline of the material terms of such capital
raise,  prior to offering  such  issuance or sale of capital  stock to any third
parties including,  but not limited to, current or former officers or directors,
current or former  shareholders  and/or investors of the obligor,  underwriters,
brokers,  agents or other third parties. The Buyers shall have five (5) business
days from  receipt of such notice of the sale or  issuance  of capital  stock to
accept or reject all or a portion of such capital raising offer.

                  5. TRANSFER AGENT INSTRUCTIONS.

                           (a) The Company shall issue the Irrevocable  Transfer
Agent Instructions to its transfer agent irrevocably  appointing David Gonzalez,
Esq.  as  the  Company's  agent  for  purpose  of  having  certificates  issued,
registered  in the name of the Buyer(s) or its  respective  nominee(s),  for the
Conversion  Shares  representing  such  amounts  of  Convertible  Debentures  as
specified  from time to time by the Buyer(s) to the Company upon  conversion  of
the  Convertible  Debentures,  for  interest  owed  pursuant to the  Convertible
Debenture,  and for any and all  Liquidated  Damages (as this term is defined in
the Investor Registration Rights Agreement).  David Gonzalez, Esq. shall be paid
a cash fee of Fifty  Dollars  ($50) for every  occasion they act pursuant to the
Irrevocable  Transfer  Agent  Instructions.  The  Company  shall not  change its
transfer agent without the express  written  consent of the Buyer(s),  which may
not be unreasonably  withheld by the Buyer(s) in its sole  discretion.  Prior to
registration  of the  Conversion  Shares  under  the  Securities  Act,  all such
certificates shall bear the restrictive legend specified in Section 2(g) of this
Agreement.  The Company warrants that no instruction  other than the Irrevocable
Transfer  Agent  Instructions  referred to in this Section 5, and stop  transfer
instructions  to  give  effect  to  Section  2(g)  hereof  (in  the  case of the
Conversion Shares prior to registration of such shares under the Securities Act)
will be given by the  Company  to its  transfer  agent  and that the  Conversion
Shares shall  otherwise be freely  transferable  on the books and records of the
Company  as and to the  extent  provided  in this  Agreement  and  the  Investor
Registration Rights Agreement. Nothing in this Section 5 shall affect in any way
the Buyer's



                                       14
<PAGE>
obligations  and agreement to comply with all  applicable  securities  laws upon
resale of  Conversion  Shares.  If the  Buyer(s)  provides  the Company  with an
opinion of counsel,  in form,  scope and  substance  customary  for  opinions of
counsel in comparable  transactions to the effect that  registration of a resale
by the  Buyer(s)  of any of the  Conversion  Shares  is not  required  under the
Securities  Act, the Company  shall within two (2)  business  days  instruct its
transfer  agent  to  issue  one or more  certificates  in such  name and in such
denominations as specified by the Buyer. The Company  acknowledges that a breach
by it of its obligations  hereunder will cause  irreparable harm to the Buyer by
vitiating  the  intent  and  purpose  of the  transaction  contemplated  hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations  under this Section 5 will be inadequate and agrees, in the event of
a breach or threatened  breach by the Company of the  provisions of this Section
5, that the  Buyer(s)  shall be  entitled,  in addition  to all other  available
remedies,  to an  injunction  restraining  any  breach and  requiring  immediate
issuance  and  transfer,  without the  necessity  of showing  economic  loss and
without any bond or other security being required.

                  6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

         The  obligation  of  the  Company  hereunder  to  issue  and  sell  the
Convertible  Debentures  to the  Buyer(s)  at the  Closings  is  subject  to the
satisfaction,  at or  before  the  Closing  Dates,  of  each  of  the  following
conditions,  provided that these  conditions  are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion:

                           (a) Each Buyer shall have  executed  the  Transaction
Documents and delivered them to the Company.

                           (b) The Buyer(s)  shall have delivered to the Company
the Purchase Price for Convertible Debentures in respective amounts as set forth
next to each Buyer as outlined on Schedule I attached hereto,  minus any fees to
be paid  directly  from the proceeds the Closings as set forth  herein,  by wire
transfer of immediately  available U.S. funds pursuant to the wire  instructions
provided by the Company.

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

                  7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.

                           (a)  The  obligation  of the  Buyer(s)  hereunder  to
purchase  the  Convertible  Debentures  at the First  Closing  is subject to the
satisfaction,  at or before the First  Closing  Date,  of each of the  following
conditions:

                                    (i) The  Company  shall  have  executed  the
Transaction Documents and delivered the same to the Buyer(s).





                                       15
<PAGE>
                                    (ii) The Common  Stock  shall be  authorized
for  quotation  on the OTCBB,  trading in the Common  Stock  shall not have been
suspended  for any  reason,  and all the  Conversion  Shares  issuable  upon the
conversion of the Convertible Debentures shall be approved by the OTCBB.

                                    (iii) The  representations and warranties of
the Company  shall be true and correct in all material  respects  (except to the
extent that any of such  representations  and warranties is already qualified as
to  materiality  in Section 3 above,  in which case,  such  representations  and
warranties  shall be true and correct without further  qualification)  as of the
date  when  made and as of the First  Closing  Date as though  made at that time
(except for representations and warranties that speak as of a specific date) and
the  Company  shall have  performed,  satisfied  and  complied  in all  material
respects  with  the  covenants,  agreements  and  conditions  required  by  this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the First  Closing  Date.  If  requested  by the Buyer,  the Buyer shall have
received a  certificate,  executed by the President of the Company,  dated as of
the First Closing Date, to the foregoing  effect and as to such other matters as
may be reasonably requested by the Buyer including, without limitation an update
as of the First Closing Date regarding the  representation  contained in Section
3(c) above.

                                    (iv) The  Company  shall have  executed  and
delivered to the Buyer(s) the Convertible  Debentures in the respective  amounts
set forth opposite each Buyer(s) name on Schedule I attached hereto.

                                    (v) The  Buyer(s)  shall  have  received  an
opinion of counsel  from  counsel to the Company in a form  satisfactory  to the
Buyer(s).

                                    (vi) The Company  shall have provided to the
Buyer(s) a  certificate  of good  standing  from the secretary of state from the
state in which the company is incorporated.

                                    (vii) The  Company  shall  have filed a form
UCC-1 or such other forms as may be required to perfect the Buyer's  interest in
the Pledged Property as detailed in the Security Agreement dated the date hereof
and provided proof of such filing to the Buyer(s).

                                    (viii) The Company shall have  delivered the
Pledged  Shares as well as executed  and  medallion  guaranteed  stock powers as
required pursuant to the Pledge and Escrow Agreement.

                                    (ix) The Company  shall have filed,  or will
file no later than January 30, 2006, with the Pershing County Recorder,  or such
other agency as may be required,  the  Memorandum  of Security  Interest or such
other forms as may be  required  to perfect  the Buyer's  interest in the mining
rights as at Relief  Canyon  Mine as  detailed  in the  Memorandum  of  Security
Interest dated the date hereof and provided proof of such filing to the Buyer(s)

                                    (x) The Company  shall have  provided to the
Buyer an  acknowledgement,  to the satisfaction of the Buyer, from the Company's
independent certified






                                       16
<PAGE>
public  accountants as to its ability to provide all consents  required in order
to file a registration statement in connection with this transaction.

                                    (xi) The Company  shall have reserved out of
its  authorized and unissued  Common Stock,  solely for the purpose of effecting
the conversion of the Convertible  Debentures,  shares of Common Stock to effect
the conversion of all of the Conversion Shares then outstanding.

                                    (xii)   The   Irrevocable   Transfer   Agent
Instructions,  in form and substance  satisfactory to the Buyer, shall have been
delivered to and acknowledged in writing by the Company's transfer agent.

                           (b)  The  obligation  of the  Buyer(s)  hereunder  to
accept  the  Convertible  Debentures  at the  Second  Closing  is subject to the
satisfaction,  at or before the Second  Closing  Date,  of each of the following
conditions:

(i) The Common Stock shall be authorized for quotation on the OTCBB,  trading in
the Common  Stock  shall not have been  suspended  for any  reason,  and all the
Conversion  Shares  issuable upon the conversion of the  Convertible  Debentures
shall be approved by the OTCBB.

                                    (ii) The  representations  and warranties of
the Company  shall be true and correct in all material  respects  (except to the
extent that any of such  representations  and warranties is already qualified as
to  materiality  in Section 3 above,  in which case,  such  representations  and
warranties  shall be true and correct without further  qualification)  as of the
date when made and as of the  Second  Closing  Date as though  made at that time
(except for representations and warranties that speak as of a specific date) and
the  Company  shall have  performed,  satisfied  and  complied  in all  material
respects  with  the  covenants,  agreements  and  conditions  required  by  this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Second  Closing  Date.  If requested  by the Buyer,  the Buyer shall have
received a certificate, executed by two officers of the Company, dated as of the
Second Closing Date, to the foregoing effect and as to such other matters as may
be reasonably requested by the Buyer including,  without limitation an update as
of the Second  Closing Date  regarding the  representation  contained in Section
3(c) above.

                                    (iii) The Company  shall have  executed  and
delivered to the Buyer(s) the Convertible  Debentures in the respective  amounts
set forth opposite each Buyer(s) name on Schedule I attached hereto.

                                    (iv) The Company shall have  certified  that
all  conditions to the Second  Closing have been  satisfied and that the Company
will file the  Registration  Statement with the SEC in compliance with the rules
and regulations  promulgated by the SEC for filing thereof two (2) business days
after the  Second  Closing.  If  requested  by the Buyer,  the Buyer  shall have
received a certificate, executed by the two officers of the Company, dated as of
the Second Closing Date, to the foregoing effect.  The Buyers have no obligation
to  fund at the  Second  Closing  if the  Company  has  filed  the  Registration
Statement.







                                       17
<PAGE>
                           (c)  The  obligation  of the  Buyer(s)  hereunder  to
accept  the  Convertible  Debentures  at the Third  Closing  is  subject  to the
satisfaction,  at or before the Third  Closing  Date,  of each of the  following
conditions:

                                    (i) The Common Stock shall be authorized for
quotation  on the  OTCBB,  trading  in the  Common  Stock  shall  not have  been
suspended  for any  reason,  and all the  Conversion  Shares  issuable  upon the
conversion of the Convertible Debentures shall be approved by the OTCBB.

                                    (ii) The  representations  and warranties of
the Company  shall be true and correct in all material  respects  (except to the
extent that any of such  representations  and warranties is already qualified as
to  materiality  in Section 3 above,  in which case,  such  representations  and
warranties  shall be true and correct without further  qualification)  as of the
date  when  made and as of the Third  Closing  Date as though  made at that time
(except for representations and warranties that speak as of a specific date) and
the  Company  shall have  performed,  satisfied  and  complied  in all  material
respects  with  the  covenants,  agreements  and  conditions  required  by  this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Third  Closing  Date.  If  requested  by the Buyer,  the Buyer shall have
received a certificate, executed by two officers of the Company, dated as of the
Third Closing Date, to the foregoing  effect and as to such other matters as may
be reasonably requested by the Buyer including,  without limitation an update as
of the Third Closing Date regarding the representation contained in Section 3(c)
above.

                                    (iii) The Company  shall have  executed  and
delivered to the Buyer(s) the Convertible  Debentures in the respective  amounts
set forth opposite each Buyer(s) name on Schedule I attached hereto.

                                    (iv) The Company shall have  certified  that
all  conditions  to the Third  Closing have been  satisfied and that the SEC has
declared the Registration  Statement effective.  The Buyer shall have received a
notice of  effectiveness,  executed  by counsel to the  Company  dated as of the
Third Closing Date.


                  8. INDEMNIFICATION.

                           (a) In  consideration  of the Buyer's  execution  and
delivery of this  Agreement  and acquiring the  Convertible  Debentures  and the
Conversion  Shares  hereunder,  and in  addition to all of the  Company's  other
obligations under this Agreement,  the Company shall defend, protect,  indemnify
and  hold  harmless  the  Buyer(s)  and each  other  holder  of the  Convertible
Debentures  and the Conversion  Shares,  and all of their  officers,  directors,
employees  and  agents  (including,   without  limitation,   those  retained  in
connection with the transactions  contemplated by this Agreement) (collectively,
the "BUYER INDEMNITEES") from and against any and all actions, causes of action,
suits, claims,  losses,  costs,  penalties,  fees,  liabilities and damages, and
expenses  in  connection  therewith  (irrespective  of  whether  any such  Buyer
Indemnitee  is a party to the  action  for which  indemnification  hereunder  is
sought),  and  including  reasonable  attorneys'  fees  and  disbursements  (the
"INDEMNIFIED LIABILITIES"),  incurred by the





                                       18
<PAGE>
Buyer  Indemnitees or any of them as a result of, or arising out of, or relating
to (a) any misrepresentation or breach of any representation or warranty made by
the  Company in this  Agreement,  the  Convertible  Debentures  or the  Investor
Registration  Rights Agreement or any other certificate,  instrument or document
contemplated  hereby or thereby,  (b) any breach of any  covenant,  agreement or
obligation  of  the  Company  contained  in  this  Agreement,  or  the  Investor
Registration  Rights Agreement or any other certificate,  instrument or document
contemplated  hereby  or  thereby,  or (c) any  cause of  action,  suit or claim
brought or made against such Indemnitee and arising out of or resulting from the
execution,  delivery,  performance or enforcement of this Agreement or any other
instrument, document or agreement executed pursuant hereto by any of the parties
hereto, any transaction financed or to be financed in whole or in part, directly
or indirectly,  with the proceeds of the issuance of the Convertible  Debentures
or the status of the Buyer. To the extent that the foregoing  undertaking by the
Company may be unenforceable for any reason,  the Company shall make the maximum
contribution  to the  payment  and  satisfaction  of  each  of  the  Indemnified
Liabilities, which is permissible under applicable law.

                           (b) In consideration  of the Company's  execution and
delivery  of  this  Agreement,  and in  addition  to all  of the  Buyer's  other
obligations under this Agreement, the Buyer shall defend, protect, indemnify and
hold  harmless the Company and all of its  officers,  directors,  employees  and
agents  (including,  without  limitation,  those retained in connection with the
transactions  contemplated  by  this  Agreement)  (collectively,   the  "COMPANY
INDEMNITEES") from and against any and all Indemnified  Liabilities  incurred by
the  Company  Indemnitees  or any of them as a result of, or arising  out of, or
relating  to (a)  any  misrepresentation  or  breach  of any  representation  or
warranty  made  by the  Buyer(s)  in  this  Agreement,  instrument  or  document
contemplated  hereby or thereby  executed  by the  Buyer,  (b) any breach of any
covenant,  agreement or obligation of the Buyer(s)  contained in this Agreement,
the Investor Registration Rights Agreement or any other certificate,  instrument
or document  contemplated  hereby or thereby  executed by the Buyer,  or (c) any
cause of action,  suit or claim brought or made against such Company  Indemnitee
based on material misrepresentations or due to a material breach and arising out
of or resulting from the execution, delivery, performance or enforcement of this
Agreement,  the Investor  Registration Rights Agreement or any other instrument,
document or agreement  executed pursuant hereto by any of the parties hereto. To
the extent that the foregoing undertaking by each Buyer may be unenforceable for
any reason,  each Buyer shall make the maximum  contribution  to the payment and
satisfaction of each of the Indemnified Liabilities,  which is permissible under
applicable law.

                  9. GOVERNING LAW: MISCELLANEOUS.

                           (a) GOVERNING LAW. This  Agreement  shall be governed
by and  interpreted  in  accordance  with  the laws of the  State of New  Jersey
without regard to the principles of conflict of laws. The parties  further agree
that any action  between them shall be heard in Hudson County,  New Jersey,  and
expressly  consent to the  jurisdiction  and venue of the Superior  Court of New
Jersey,  sitting in Hudson County and the United States  District  Court for the
District of New Jersey sitting in Newark, New Jersey for the adjudication of any
civil action asserted pursuant to this Paragraph.







                                       19
<PAGE>
                           (b)  COUNTERPARTS.  This Agreement may be executed in
two or more identical counterparts, all of which shall be considered one and the
same agreement and shall become effective when  counterparts have been signed by
each party and delivered to the other party.  In the event any signature page is
delivered  by  facsimile  transmission,  the party  using such means of delivery
shall  cause  four  (4)  additional  original  executed  signature  pages  to be
physically  delivered to the other party  within five (5) days of the  execution
and delivery hereof.

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

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

                           (e)  ENTIRE  AGREEMENT,  AMENDMENTS.  This  Agreement
supersedes all other prior oral or written agreements between the Buyer(s),  the
Company, their affiliates and persons acting on their behalf with respect to the
matters  discussed  herein,  and this Agreement and the  instruments  referenced
herein  contain  the entire  understanding  of the parties  with  respect to the
matters covered herein and therein and, except as specifically  set forth herein
or  therein,  neither  the  Company  nor any  Buyer  makes  any  representation,
warranty,  covenant or undertaking with respect to such matters. No provision of
this  Agreement  may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.

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

If to the Company, to:          Newgold, Inc.
                                400 Capital Mall - Suite 900
                                Sacramento, CA 95814
                                Attention: Scott Dockter
                                Telephone: (916) 449-3913
                                Facsimile: (916) 449-8259

With a copy to:                 James W. Kluber
                                327 Copperstone Trail
                                Coppell, TX 75019
                                Telephone: (214) 447-5336
                                Facsimile: (214) 359-0306







                                       20
<PAGE>
                                Weintraub Genshlea Chediak
                                400 Capital Mall - 11th Floor
                                Sacramento, CA 95814
                                Attention: Roger Linn, Esq.
                                Telephone: (916) 558-6000
                                Facsimile: (916) 446-1611

         If to the Buyer(s),  to its address and facsimile number on Schedule I,
with copies to the Buyer's  counsel as set forth on Schedule I. Each party shall
provide five (5) days' prior written  notice to the other party of any change in
address or facsimile number.

                           (g) SUCCESSORS AND ASSIGNS.  This Agreement  shall be
binding  upon and inure to the  benefit  of the  parties  and  their  respective
successors  and  assigns.  Neither the  Company nor any Buyer shall  assign this
Agreement  or any rights or  obligations  hereunder  without  the prior  written
consent of the other party hereto.

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

                           (i)  SURVIVAL.  Unless this  Agreement is  terminated
under Section 9(l),  the  representations  and warranties of the Company and the
Buyer(s)  contained in Sections 2 and 3, the  agreements and covenants set forth
in Sections 4, 5 and 9, and the indemnification  provisions set forth in Section
8, shall survive the Closing for a period of two (2) years following the date on
which the  Convertible  Debentures  are converted in full.  The Buyer(s) and the
Company  shall  be  responsible  only for its own  representations,  warranties,
agreements and covenants hereunder.

                           (j)  PUBLICITY.  The Company and the  Buyer(s)  shall
have the right to approve, before issuance any press release or any other public
statement  with  respect to the  transactions  contemplated  hereby  made by any
party; provided,  however, that the Company shall be entitled, without the prior
approval of the Buyer(s),  to issue any press release or other public disclosure
with respect to such transactions  required under applicable securities or other
laws or  regulations  (the  Company  shall use its best  efforts to consult  the
Buyer(s) in connection  with any such press  release or other public  disclosure
prior to its release and  Buyer(s)  shall be provided  with a copy  thereof upon
release thereof).

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

                           (l) TERMINATION.  In the event that the Closing shall
not have occurred with respect to the Buyers on or before five (5) business days
from the date hereof due to the Company's or the Buyer's  failure to satisfy the
conditions  set forth in Sections 6 and 7 above (and the  non-breaching  party's
failure to waive such unsatisfied  condition(s)),  the non-breaching party shall
have the option to terminate this Agreement with respect to such breaching party
at


                                       21
<PAGE>
the close of business on such date  without  liability of any party to any other
party; provided, however, that if this Agreement is terminated due to a material
breach by the Company  pursuant to this Section  9(l),  the Company shall remain
obligated  to  reimburse  the  Buyer(s)  for the fees and  expenses of Yorkville
Advisors LLC described in Section 4(g) (ii) and (iii) above.

                           (m) NO STRICT CONSTRUCTION. The language used in this
Agreement  will be deemed to be the  language  chosen by the  parties to express
their mutual intent, and no rules of strict construction will be applied against
any party.


                    [REMAINDER PAGE INTENTIONALLY LEFT BLANK]














































                                       22
<PAGE>
         IN WITNESS  WHEREOF,  the  Buyers  and the  Company  have  caused  this
Securities  Purchase  Agreement to be duly executed as of the date first written
above.


                                       COMPANY:
                                       NEWGOLD, INC.

                                       By: /s/ SCOTT DOCKTER
                                          ------------------------------------
                                       Name:  Scott Dockter
                                       Title: Chief Executive Officer















































                                       23
<PAGE>
                                   SCHEDULE I
                                   ----------

                               SCHEDULE OF BUYERS
                               ------------------


<TABLE>
<CAPTION>
                                                                                 Address/Facsimile             Amount of
                Name                              Signature                       Number of Buyer             Subscription
-------------------------------------  --------------------------------  ---------------------------------  -----------------
<S>                                    <C>                               <C>                                <C>
Cornell Capital Partners, LP           By:      Yorkville Advisors, LLC  101 Hudson Street - Suite 3700          $1,000,000
                                       Its:     General Partner          Jersey City, NJ  07303
                                                                         Facsimile: (201) 985-8266

                                       By: /s/ MARK ANGELO
                                          --------------------------
                                       Name: Mark Angelo
                                       Its: Portfolio Manager

With a copy to:                        David Gonzalez, Esq.              101 Hudson Street - Suite 3700
                                                                         Jersey City, NJ 07302
                                                                         Facsimile: (201) 985-8266

-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
































<PAGE>
                               DISCLOSURE SCHEDULE
                               -------------------


</TEXT>
</DOCUMENT>
