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THIS SENIOR SECURED CONVERTIBLE PROMISSORY NOTE (THIS “NOTE”) AND THE SECURITIES
ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND ARE SUBJECT TO RESTRICTIONS
ON TRANSFERABILITY AS SET FORTH HEREIN. NEITHER THIS NOTE NOR THE SECURITIES
ISSUABLE UPON CONVERSION HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT.
 
SURFECT HOLDINGS, INC.
 
10% Senior Secured Convertible Promissory Note 

     
$___________
 
As of June 1, 2007
 
 
New York, New York
     

Surfect Holdings, Inc., a Delaware corporation (the “Company”), for value
received, hereby promises to pay to ___________, or its successors or assigns
(the “Holder”), the principal amount of ___________($__________), in lawful
money of the United States of America, with interest thereon to be computed from
the date hereof, on the unpaid principal balance at the rate and as herein
provided.

All agreements herein made are expressly limited so that in no event whatsoever,
whether by reason of advancement of proceeds hereof, acceleration of maturity of
the unpaid balance hereof or otherwise, shall the amount paid or agreed to be
paid to the Holder for the use of the money advanced or to be advanced hereunder
exceed the maximum rate permitted by applicable law (the “Maximum Rate”). If,
for any circumstances whatsoever, the fulfillment of any provision of this Note
or any other agreement or instrument now or hereafter evidencing, securing or in
any way relating to the debt evidenced hereby shall involve the payment of
interest in excess of the Maximum Rate, then, ipso facto, the obligation to pay
interest hereunder shall be reduced to the Maximum Rate; and if for any
circumstance whatsoever, the Holder shall ever receive interest, the amount of
which would exceed the amount collectible at the Maximum Rate, such amount as
would be excessive interest shall be applied to the reduction of the principal
balance remaining unpaid hereunder and not to the payment of interest. This
provision shall control every other provision in any and all other agreements
and instruments existing or hereafter arising between the Company and the Holder
with respect to the debt evidenced hereby.

1. Securities Purchase Agreement: Security.

This Note is issued pursuant to, and is entitled to the benefits of, the
Securities Purchase Agreement, dated as of the date hereof, by and among the
Company and the Investors (the “Purchase Agreement”; capitalized terms that
appear but are not defined herein have the meanings ascribed to such terms in
the Purchase Agreement or the Security Agreement (as hereinafter defined)). This
Note and the Company’s obligations hereunder are collateralized by a security
interest in the Collateral, pursuant to a Security Agreement, dated as of the
date hereof (the “Security Agreement”), by and among the Company and the Buyers,
as secured parties. If an Event of Default (as hereinafter defined) shall have
occurred and the principal amount of this Note and all accrued and unpaid
interest thereon shall become due and payable, the Holder shall be entitled to
exercise, in addition to any right, power or remedy permitted in law or equity,
all its remedies under the Security Agreement or the Purchase Agreement, as
applicable.

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2. Maturity Date; Interest; Payments. (a) Principal of, and any accrued and
unpaid interest on, this Note shall be due and payable immediately on the
earlier to occur of (i) the consummation by the Company (or any Affiliate of the
Company) of any debt or equity financing, or indebtedness (in one or a series of
closings) in which the Company (or any Affiliate of the Company) receives gross
cash proceeds of at least One Million Five Hundred Thousand Dollars
($1,500,000), in which case the Maturity Date shall be the closing date of such
financing, or (ii) one hundred fifty (150) days after the Closing Date (the
“Maturity Date”), unless the principal of, and any accrued and unpaid interest
on this Note shall have been converted in accordance with the terms hereof.

(b) Until this Note is converted or paid in full, interest on this Note shall
accrue from the date hereof at the Applicable Rate (calculated on the basis of a
360-day year consisting of twelve 30-day months and compounded monthly). For
purposes of this Note, the Applicable Rate shall mean 10.0% per annum, except in
the event that the Company fails to pay to the Holder any portion of the
principal and/or interest due on the Maturity Date or if an Event of Default
shall have occurred in which case the Applicable Rate shall thereafter, during
the continuance of such failure, be the Maximum Rate.  

(c) If the Maturity Date would fall on a day that is not a Business Day, the
payment due on such Maturity Date will be made on the next succeeding Business
Day with the same force and effect as if made on the Maturity Date.

(d) Payment of principal and interest on this Note shall be made by wire
transfer of immediately available funds to an account designated by the Holder
or by check sent to the Holder as the Holder may designate for such purpose from
time to time by written notice to the Company, in such coin or currency of the
United States of America as at the time of payment shall be legal tender for the
payment of public and private debts.

(e) The obligations to make the payments provided for in this Note are absolute
and unconditional and not subject to any defense, setoff, counterclaim,
rescission, recoupment or adjustment whatsoever. The Company hereby expressly
waives demand and presentment for payment, notice of non-payment, notice of
dishonor, protest, notice of protest and diligence in taking any action to
collect any amount called for hereunder, and shall be directly and primarily
liable for the payment of all sums owing and to be owing hereon, regardless of
and without any notice, diligence, act or omission with respect to the
collection of any amount called for hereunder.

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(f) Notwithstanding anything to the contrary in this Note or any other
Transaction Document executed in connection herewith, the amounts owing under
this Note may be prepaid at any time without penalty or premium.

3.  Ranking of Note.

(a) The Company, for itself, its successors and assigns, covenants and agrees,
that the payment of the principal of and interest on this Note is senior in
right of payment to the payment of all existing and future Junior Debt. “Junior
Debt” shall mean all existing and future Indebtedness, except for any future
senior Indebtedness incurred by the Company from financial institutions and/or
venture debt lenders with the written consent of the Investors and expressly
made senior to the Company’s obligations under the Notes and the Purchase
Agreement.

(b) Upon any payment or distribution of the assets of the Company, to creditors
upon dissolution, total or partial liquidation or reorganization of, or similar
proceeding relating to the Company, the Holder of this Note shall be entitled to
receive payment in full before any holder of Junior Debt is entitled to receive
any payment.

4. Affirmative Covenants.

The Company covenants and agrees with the Holder that, so long as any amount
remains unpaid on this Note:

(a) the Company shall immediately after the Company shall obtain knowledge of
the occurrence of any Event of Default (as hereinafter defined) or any event
which with notice or lapse of time or both would become an Event of Default (an
Event of Default or such other event being a “Default”), deliver to the Holder a
notice specifying that such notice is a “Notice of Default” and describing such
Default in reasonable detail, and, in such Notice of Default or as soon
thereafter as practicable, a description of the action the Company has taken or
proposes to take with respect thereto; and

(b) the Company shall permit any Holder representative, including, but not
limited to its attorneys and accountants, to inspect, examine the books of
account and make copies and abstracts of the books and records of the Company
and its Subsidiaries at reasonable times and upon reasonable notice during
normal business hours. 

5. Conversion. (a) At the option of the Holder in its sole discretion, upon the
closing after the date hereof of a Financing by the Company, any portion or all
of the principal and accrued but unpaid interest then due on this Note (the
“Loan Amount”) may be converted into that number of shares of the class of
equity security or other securities issued in the Financing (the “Securities”)
determined by (i) in the case of an equity Financing, dividing the Loan Amount
by the lowest purchase price per Security
 

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established in the equity Financing or (ii) in the case of a debt Financing,
converting the Loan Amount into the right of the Holder to receive debt
securities with a principal amount equal to the Loan Amount. Any fraction of a
share resulting from this calculation shall be rounded upward to the next whole
share. Such Securities issued to the Holder shall be identical in all respects
to the Securities issued by the Company in the Financing and the Holder shall
have all the rights and benefits (including, but not limited to, the benefits of
any representations and warranties, preemptive rights, rights of first offer,
co-sale rights, registration rights and other similar rights) accorded to the
purchasers of such Securities. In the event the Holder elects to convert this
Note as aforesaid, it shall deliver to the Company written notice of such
election. The conversion of this Note into Securities shall take place at the
closing of the Financing or on such other date and at such other time as may be
mutually agreed to by the Company and the Holder (such date hereinafter referred
to as the “Conversion Date”).

(b) Upon conversion of this Note pursuant to Section 5(a), the Holder shall be
deemed to be the holder of record of the Securities issuable upon such
conversion (the “Conversion Securities”), notwithstanding that the transfer
books of the Company shall then be closed or certificates or other instruments
representing such Conversion Securities shall not then have been actually
delivered to the Holder. As soon as practicable after the Conversion Date, the
Company shall issue and deliver to the Holder certificate(s) or other
instruments for the Conversion Securities registered in the name of the Holder
or its designee(s); provided, however, that the Company, by notice given to the
Holder promptly after the Conversion Date, may require the Holder, as a
condition to the delivery of such certificate(s) or instruments, to present this
Note, or written evidence of its cancellation that is reasonably satisfactory to
the Company, to the Company.

(c) The issuance of any Conversion Securities, and the delivery of
certificate(s) or other instruments representing such Conversion Securities,
shall be made without charge to the Holder for any tax or other charge in
respect of such issuance. The Company shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the issue and
delivery of any certificate or other instruments in a name other than that of
the Holder, and the Company shall not be required to issue or deliver any such
certificate or other instrument unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax
has been paid.

(d) The Holder shall not have, solely on account of such status as a holder of
this Note, any rights of a shareholder of the Company, either at law or in
equity, or any right to any notice of meetings of shareholders or of any other
proceedings of the Company, except as provided in this Note or the Purchase
Agreement.

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6. Events of Default.

The occurrence of any of the following events shall constitute an event of
default (an “Event of Default”):

(a) A default in the payment of the principal or interest on the Note, when and
as the same shall become due and payable.

(b) A default in the performance, or a breach, of any of the covenants or
agreements of the Company or any Subsidiary contained in any Transaction
Document, which default (except as provided in Section 6(a)) is not cured within
ten (10) days after written notice thereof from the Holders.

(c) Any representation, warranty, certification or other statement made by or on
behalf of the Company or any Subsidiary in or pursuant to any Transaction
Document is untrue in any material respect when made.

(d) Any order to cease or suspend trading in any securities of the Company or
prohibiting or restricting the issuance by the Company of the Shares or the
Notes, is made, or any proceeding is announced or commenced for the making of
any such order, by the SEC, the OTCBB, any other securities regulatory
authority, stock exchange or any other Governmental Entity having jurisdiction
over the Company, which order has not been rescinded, revoked or withdrawn, and
trading of the Company’s securities does not resume, within two (2) weeks from
the date the order is issued.

(e) The Company’s President and Chief Executive Officer resigns, has his
employment terminated or suspended or has his responsibilities materially
reduced in any manner.

(f) A Change of Control occurs. “Change of Control” means a sale of all or
substantially all of the Company’s assets, or any merger or consolidation of the
Company with or into another corporation other than a merger or consolidation in
which the holders of more than 50% of the shares of capital stock of the Company
outstanding immediately prior to such transaction continue to hold (either by
the voting securities remaining outstanding or by their being converted into
voting securities of the surviving entity) more than 50% of the total voting
power represented by the voting securities of the Company, or such surviving
entity, outstanding immediately after such transaction.

(g) A final judgment or judgments for the payment of money in excess of $50,000
in the aggregate shall be rendered by one or more courts, administrative or
arbitral tribunals or other bodies having jurisdiction against the Company and
the same shall not be discharged (or provision shall not be made for such
discharge), or a stay of execution thereof shall not be procured, within 60 days
from the date of entry thereof and the Company shall not, within such 60-day
period, or such longer period during which execution of the same shall have been
stayed, appeal therefrom and cause the execution thereof to be stayed during
such appeal.

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(h) The entry of a decree or order by a court having jurisdiction adjudging the
Company a bankrupt or insolvent, or approving a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company, under
federal bankruptcy law, as now or hereafter constituted, or any other applicable
federal or state bankruptcy, insolvency or other similar law, and the
continuance of any such decree or order unstayed and in effect for a period of
60 days; or the commencement by the Company of a voluntary case under federal
bankruptcy law, as now or hereafter constituted, or any other applicable federal
or state bankruptcy, insolvency, or other similar law, or the consent by the
Company to the institution of bankruptcy or insolvency proceedings against it,
or the filing by the Company of a petition or answer or consent seeking
reorganization or relief under federal bankruptcy law or any other applicable
federal or state law, or the consent by the Company to the filing of such
petition or to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator or similar official of the Company or of any substantial part of
the property of the Company, or the making by the Company of an assignment for
the benefit of creditors, or the admission by the Company in writing of its
inability to pay its debts generally as they become due, or the taking of
corporate action by the Company in furtherance of any such action.

7.  Remedies Upon Default.

Upon the occurrence of an Event of Default referred to in Sections 6(a) through
(i) or at any time thereafter (unless such event of Default shall have been
waived in writing by the Holder), the Holder, by notice in writing given to the
Company, (a) may declare the entire principal amount then outstanding of, and
the accrued interest on, this Note to be due and payable immediately, and upon
any such declaration the same shall become and be due and payable immediately,
without presentation, demand, protest or other formalities of any kind, all of
which are expressly waived by the Company; provided, however, that if an event
described in Section 6(i) or 6(j) above shall occur, the result that would
otherwise occur only upon giving of notice by the Holder to the Company as
specified above shall occur automatically, without the giving of any such notice
or (b) may demand that the Company take all actions necessary and appropriate to
remedy such Event of Default to the Holder’s sole satisfaction on or before the
date that is thirty (30) days after the date notice is delivered by the Holder
to the Company, and, in the event that the Company does not so cure the Event of
Default within such 30 day period, the Company shall incur and be required to
pay an additional Two Hundred Thousand Dollars ($200,000), which payment shall
be paid immediately upon the expiration of such thirty (30) day period, or if
the Company fails to make such payment, be automatically added to the
outstanding principal balance hereof. The Holder may institute such actions or
proceedings in law or equity as it shall deem expedient for the protection of
its rights and may prosecute and enforce its claims against all assets of the
Company, and in connection with any such action or proceeding shall be entitled
to receive from the Company payment of the principal amount of this Note plus
accrued interest to the date of payment plus reasonable expenses of collection,
including, without limitation, reasonable attorneys’ fees and expenses actually
incurred.

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8.  Representations and Warranties of the Company. The representations and
warranties of the Company set forth in the Purchase Agreement and Security
Agreement are incorporated herein by reference.

9.  Miscellaneous. (a) The terms and conditions of this Note shall inure to the
benefit of and be binding upon the respective successors and assigns of the
parties; provided, however, that the Company may not assign, by operation of law
or otherwise, any of its rights or obligations hereunder without the prior
written consent of the Holder. The Holder may not assign all or any portion of
its rights hereunder unless Company receives an opinion from Investor’s counsel
or other evidence reasonably satisfactory to the Company to the effect that such
proposed assignment or other distribution may be made without registration or
qualification under any federal or state law then in effect. Nothing in this
Note, expressed or implied, is intended to confer upon any party other than the
parties hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Note, except as expressly
provided in this Note.

(b) Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, or by Federal Express, Express Mail or similar overnight
delivery or courier service or delivered (in person or by telecopy, telex or
similar telecommunications equipment) against receipt to the party to whom it is
to be given:

(i) if to the Company:

Surfect Holdings, Inc.
12000-G Candelaria NE
Albuquerque, New Mexico 87112
Attention: Chief Executive Officer
Facsimile: (505) 294 6311

with a copy to:

Brownstein Hyatt Farber Schreck, P.C.
201 Third Street NW, Suite 1700
Albuquerque, New Mexico 87102
Attention: Eduardo Duffy, Esq.
Facsimile: (505) 244 9266

(ii) if to the Holder:

[Address]

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with a copy to:

Greenberg Traurig, LLP
Met Life Building
200 Park Avenue
New York, New York 10166
Attention: Anthony Marsico, Escq.
Facsimile: (212) 801-6400

or (iii) in either case, to such other address as the party shall have furnished
in writing in accordance with the provisions of this Section 9(b). Notice to the
estate of any party shall be sufficient if addressed to the party as provided in
this Section 9(b). Any notice or other communication given by certified mail
shall be deemed given at the time of certification thereof, except for a notice
changing a party’s address which shall be deemed given at the time of receipt
thereof. Any notice given by other means permitted by this Section 9(b) shall be
deemed given at the time of receipt thereof.

(c)  Upon receipt of evidence satisfactory to the Company, of the loss, theft,
destruction or mutilation of this Note (and upon surrender of this Note if
mutilated), including an affidavit of the Holder thereof that this Note has been
lost, stolen, destroyed or mutilated together with an indemnity against any
claim that may be made against the Company on account of such lost, stolen,
destroyed or mutilated Note, and upon reimbursement of the Company’s reasonable
incidental expenses, the Company shall execute and deliver to the Holder a new
Note of like date, tenor and denomination.

(d)  No course of dealing and no delay or omission on the part of the Holder or
the Company in exercising any right or remedy shall operate as a waiver thereof
or otherwise prejudice the Holder’s or the Company’s rights, powers or remedies,
as the case may be. No right, power or remedy conferred by this Note upon the
Holder or the Company shall be exclusive of any other right, power or remedy
referred to herein or now or hereafter available at law, in equity, by statute
or otherwise, and all such remedies may be exercised singly or concurrently.

(e)  If one or more provisions of this Note are held to be unenforceable under
applicable law, such provision shall be excluded from this Note and the balance
of this Note shall be interpreted as if such provision were so excluded and
shall be enforceable in accordance with its terms. This Note may be amended only
by a written instrument executed by the Company and the Holder hereof. Any
amendment shall be endorsed upon this Note, and all future Holders shall be
bound thereby.

(f)  The provisions of this Note shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to any
choice of law or conflict of law rules or provisions. The Company hereby
irrevocably consents to the jurisdiction of all courts (state and federal)
sitting in the State of New York in connection with any claim, action or
proceeding relating to or for enforcement of this Note, and hereby waives any
defense of inconvenient forum or other such claim or defense in respect of the
lodging of any such claim, action or proceeding in any such court. THE COMPANY
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY CLAIM, ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT.
 
 

 
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IN WITNESS WHEREOF, the Company has caused this Note to be executed on and
effective as of the day and year first above written.
 

 
 
 
SURFECT HOLDINGS, INC.
 
 
 
By:___________________________
Name:
Its:
 

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SECURITY AGREEMENT
 
THIS SECURITY AGREEMENT (this “Agreement”) is entered into as of June 1, 2007,
by Surfect Holdings, Inc., a Delaware corporation (the “Company”), and Surfect
Technologies, Inc., a Delaware corporation and wholly-owned subsidiary of the
Company (“Surfect Technologies”), to and in favor of Birchten Investments, Ltd,
an International Business Company organized under the laws of the Bahamas, and
Gemini Strategies, LLC, a California Limited Liability Corporation (together,
the “Secured Parties”), as contemplated by the Securities Purchase Agreement,
dated of even date herewith, by and among the Company, the Secured Parties and
Granite Financial Group (the “Purchase Agreement”; capitalized terms used but
not defined herein shall have the meanings ascribed to such terms in the
Purchase Agreement), and the Notes.
 
RECITALS
 
WHEREAS, pursuant to the Purchase Agreement, the Company is issuing to each
Secured Party a 10% senior secured promissory note dated of even date herewith
in the combined principal amount of One Million Five Hundred Thousand Dollars
($1,500,000);
 
WHEREAS, in order to induce the Secured Parties to accept the Notes in
accordance with the Purchase Agreement, and in consideration therefor, the
Company has agreed to grant to the Secured Parties, on a pari passu basis, a
perfected lien on and security interest in the Collateral (as defined below) in
order to secure the due and punctual payment of (a) the principal and interest
(including, without limitation, interest accruing during the pendency of any
bankruptcy, insolvency, receivership or other similar proceeding, regardless of
whether allowed or allowable in such proceeding) on the Notes, when and as due,
whether at maturity, by acceleration, upon one or more dates set for prepayment
or otherwise, and (b) all other monetary obligations, including but not limited
to fees, costs, expenses and indemnities, whether primary, secondary, direct,
contingent, fixed or otherwise (including, without limitation, monetary
obligations incurred during the pendency of any bankruptcy, insolvency,
receivership or other similar proceeding regardless of whether allowed or
allowable in such proceeding), of the Company under the Notes and/or any of the
other Transaction Documents (collectively, the “Obligations”); and
 
WHEREAS, it is a condition precedent to the purchase and acceptance of the Notes
by the Secured Parties that the Company executes and delivers this Agreement.
 
NOW, THEREFORE, in consideration of the premises and in reliance on the
representations, warranties, covenants and agreements contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound hereby, the Company
hereby agree as follows:
 

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ARTICLE 1
SECURITY INTEREST
 
1.1 Grant of Security Interest. As security for the Obligations, the Company
hereby assigns, pledges and grants a continuing and unconditional security
interest, on a pari passu basis, to the Secured Parties and their respective
successors and assigns, in and to all of the personal property of the Company
and any existing or future Subsidiaries, wherever located, and whether now owned
or hereafter acquired, including:
 
(a) all equipment (including all “Equipment” as such term is defined in Section
9-102(a)(33) of the Uniform Commercial Code as in effect from time to time in
the State of New York (the “Code”)), machinery, vehicles, fixtures,
improvements, supplies, furniture, and other fixed assets, all as now owned or
hereafter acquired by the Company and any Subsidiary or in which the Company or
any Subsidiary has or hereafter acquires any interest, and any items substituted
therefor as replacements and any additions or accessions thereto (all of the
property described in this clause (a) being hereinafter collectively referred to
as “Equipment”);
 
(b) all goods (including all “Goods” as defined in Section 9-102(a)(44) of the
Code) and all inventory (including all “Inventory” as defined in Section
9-102(a)(48) of the Code) of the Company and any Subsidiary, now owned or
hereafter acquired by the Company or any Subsidiary or in which the Company or
any Subsidiary has or hereafter acquires any interest, including but not limited
to, raw materials, scrap inventory, work in process, products, packaging
materials, finished goods, documents of title, chattel paper and other
instruments covering the same and all substitutions therefor and additions
thereto (all of the property described in this clause (b) being hereinafter
collectively referred to as “Inventory”);
 
(c) all present and future accounts in which the Company or any Subsidiary has
or hereafter acquires any interest (including all “Accounts” as defined in
Section 9-102(a)(2) of the Code), contract rights (including all rights to
receive payments and other rights under all equipment and other leasing
contracts) and rights to payment and rights or accounts receivable evidencing or
representing indebtedness due or to become due of the Company or any Subsidiary
on account of goods sold or leased or services rendered, claims and instruments
(including tax refunds, royalties and all other rights to the payment of money
of every nature and description), including but not limited to, any such right
evidenced by chattel paper (whether in tangible, electronic or other form), and
all liens, securities, guaranties, remedies, security interests and privileges
pertaining thereto (all of the property described in this clause (c) being
hereinafter collectively referred to as “Accounts”); 
 
(d) all investment property now owned or hereafter acquired by the Company or
any Subsidiary (including all “Investment Property” as defined in Section
9-102(a)(49) of the Code), including, without limitation, all securities
(certificated and uncertificated), securities accounts, securities entitlements,
commodity contracts and commodity accounts, and all dividends and distributions
paid or payable thereon; provided, however, that with respect to securities
constituting capital stock or other equity interests in entities whose
jurisdiction of formation is other than the United States of America or any
state thereof, the Collateral shall not include more than 65% of the outstanding
equity securities of any class of any such issuers; 
 

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(e) all general intangibles now owned or hereafter acquired by the Company or
any Subsidiary or in which the Company or any Subsidiary has or hereafter
acquires any interest (including all “General Intangibles” as defined in Section
9-102(a)(42) of the Code), including but not limited to, payment intangibles
(including all “Payment Intangibles” as defined in Section 9-102(a)(61) of the
Code), chooses in action and causes of action and all licenses and permits (to
the extent the collateral assignment of such licenses and permits is not
prohibited by applicable law), registrations, franchises, corporate or other
business records, systems, designs, software, manuals, procedures, drawings,
goodwill, logos, indicia, business identifiers, inventions, processes,
production methods, proprietary information, know-how and trade-secrets of the
Company or any Subsidiary, and all Owned Intellectual Property, trade-names,
copyrights, patents, trademarks (including service marks) and copyright, patent
and trademark applications, all continuations thereof in whole or in part, and
contract rights (including but not limited to all rights to receive payments and
other rights under all equipment and other leasing contracts, instruments and
documents owned or used by the Company or any Subsidiary and any goodwill
relating thereto);
 
(f) all other personal property owned by the Company or any Subsidiary or in
which the Company or any Subsidiary has or hereafter acquires any interest,
wherever located, and of whatever kind or nature, tangible or intangible;
 
(g) all moneys, cash, chattel paper (including all “Chattel Paper” as defined in
Section 9-102(a)(11) of the Code), checks, notes, bills of exchange, documents
of title, money orders, negotiable instruments, commercial paper, and other
securities, letters of credit (including all “Letter-of-Credit Rights” as
defined in Section 9-102(a)(51) of the Code), supporting obligations (including
all “Supporting Obligations” as defined in Section 9-102(a)(77) of the Code),
instruments (including all “Instruments” as defined in Section 9-102(a)(47) of
the Code), documents (including all “Documents” as defined in Section
9-102(a)(30) of the Code) and deposit accounts (including all “Deposit Accounts”
as defined in Section 9-102(a)(29) of the Code), deposits and credits from time
to time whether or not in the possession of or under the control of the Secured
Parties;
 
(h) all commercial tort claims (as defined in Section 9-102(a)(13) of the Code);
 
(i) all books and records relating to any of the foregoing assets or property;
and
 
(j) any consideration received or receivable when all or any part of the
property referred to in clauses (a) through (i) above is sold, transferred,
exchanged, leased, collected or otherwise disposed of, or any value received or
receivable as a consequence of possession thereof, including but not limited to,
all products, proceeds (including all “Proceeds” as defined in Section
9-102(a)(64) of the Code), cash, negotiable instruments and other instruments
for the payment of money, chattel paper, security agreements or other documents,
insurance proceeds, condemnation awards or proceeds of other proceeds now or
hereafter owned by the Company or any Subsidiary or in which the Company or any
Subsidiary has an interest.
 

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The property set forth in clauses (a) through (j) of the preceding sentence is
referred to herein as the “Collateral.”
 
1.2 Perfection of Security Interests. (a) The Company hereby authorizes the
Secured Parties to file a financing statement or financing statements and other
filing or recording documents or instruments (collectively, the “Financing
Statements”) describing the Collateral in any and all jurisdictions and filing
offices where the Secured Parties deem such filing to be necessary or
appropriate including, without limitation, the jurisdiction of the debtor’s
location for purposes of the Code. For purposes of this Section 1.2(a), the
Financing Statements shall be deemed to include any amendment, modification,
assignment, continuation statement or other similar instrument consistent with
the rights granted to Secured Parties under this Agreement and the Purchase
Agreement.
 
(b) The Company shall cooperate with Secured Parties in obtaining control
(including “Control” as contemplated by Section 9-312(b) of the Code) with
respect to Collateral consisting of deposit accounts, investment property and
electronic chattel paper. 
 
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
 
2.1 Representations and Warranties. The Company represents and warrants that:
 
(a) The Company or a Subsidiary has and shall have good and indefeasible title
to all the Collateral owned by it, wherever and whenever acquired, free and
clear of any lien or encumbrance except for (i) any and all liens or security
interests granted by the Company or Surfect Technologies existing on the date
hereof, (ii) liens for taxes, assessments and other governmental charges or
levies not yet due or as to which the period of grace, if any, related thereto
has not expired or which are being contested in good faith and by appropriate
proceedings with adequate reserves on the books of the Company or a Subsidiary,
(iii) liens or claims of materialmen, mechanics, carriers, warehousemen,
processors or landlords for labor, materials, supplies or rentals incurred in
the ordinary course of business which are not overdue for a period of more than
thirty (30) days or which are being contested in good faith and by appropriate
proceedings, (iv) liens consisting of deposits or pledges made in the ordinary
course of business in connection with, or to secure payment of, obligations
under workers’ compensation, unemployment insurance, social security or similar
legislation, (v) liens securing purchase money indebtedness or capitalized
leases for the acquisition or leasing of capital assets provided that such liens
shall be created substantially simultaneously with the
 

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acquisition or lease of the subject assets, do not at any time encumber any
property or assets other than the assets acquired in such purchase money
financing or capitalized lease, and do not secure any amount exceeding the
original purchase price or lease payment amount of the acquired assets at the
time that such assets were acquired by the Company, and (vi) liens arising from
judgments, decrees or attachments to the extent and only so long as such
judgment, decree or attachment has not caused or resulted in an Event of
Default; (vii) leases, subleases, licenses and sublicenses granted to others in
the ordinary course of Grantor's business not interfering in any material
respect with the conduct of the business of Company and not materially
detracting from the value of the Collateral; (viii) liens arising solely by
virtue of any statutory or common law provision relating to banker's liens,
rights-of set-off or similar rights and remedies as to deposit accounts or other
funds maintained with a creditor depository institution; and (ix) the liens and
security interests of the Secured Parties pursuant to this Agreement
(collectively, “Permitted Liens”). Neither the Company nor any Subsidiary has
not filed, nor is there on record, a financing statement under the Code (or
similar statement or instrument of registration under the law of any
jurisdiction) covering any Collateral except for Permitted Liens. No consent of
any other person is required on the part of the Company or any Subsidiary for
the Company’s execution, delivery and performance of this Agreement and the
granting of the liens hereunder.
 
(b) Schedule A hereto lists, as to the Company, (i) the Company’s principal
executive office and other place(s) of business, (ii) the address where the
books and records relating to the Collateral are maintained, (iii) any other
location of any Equipment or tangible Collateral, (iv) the location of leased
facilities and name of each lessor/sublessor, (vi) all Owned Intellectual
Property and Licensed Intellectual Property of the Company (setting forth, with
respect to all owned patents, trademarks and copyrights or applications
therefor, the name, registered owner, filing date, registration number or serial
number, as applicable), and (vii) all other names by which the Company or any
Subsidiary has been known or under which the Company, any Subsidiary or any
respective predecessor has done business within the past five (5) years, and all
entities or businesses acquired by the Company or any Subsidiary (whether
through stock purchase, merger, consolidation, share exchange, acquisition of
assets or otherwise) within the past five (5) years.
 
(c) Each of the Company and the Subsidiaries has paid or will pay when due all
taxes, fees, assessments and other charges now or hereafter imposed upon the
Collateral except for any tax, fee, assessment or other charge the validity of
which is being contested in good faith by appropriate proceedings and so long as
the Company or such Subsidiary shall have set aside on its books adequate
reserves with respect thereto.
 
(d) As a result of the execution and delivery of this Agreement and the filing
of any financing statements or other documents necessary to assure, preserve and
perfect the security interest created hereby to the extent a lien may be
perfected by filing a financing statement, the Secured Parties shall have a
valid and perfected lien on, and a continuing security interest in, the
Collateral and such lien shall be superior and prior to all other liens,
subject, in each case, only to the Permitted Liens.
 

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(e) All Accounts represent bona fide transactions completed in accordance with
the terms and provisions contained in the contracts, agreements, invoices and
other documents governing or evidencing the same. As of the date hereof, there
are no setoffs, counterclaims or disputes existing or asserted with respect to
Accounts, subject only to non-material set off, return and similar rights
arising in the ordinary course of business. Neither the Company nor any
Subsidiary has made any agreement with any account debtor for any deduction
therefrom except non-material set-offs and claims arising in the ordinary course
of business. To the Company’s knowledge, at the date hereof, all account debtors
have the capacity to contract and are solvent, and each Account constitutes the
legally valid and binding obligation of the subject account debtor. To the
Company’s knowledge, the goods giving rise to Accounts are not subject to any
lien, claim or encumbrance except (i) set-off and claims arising in the ordinary
course of business, and (ii) liens, claims and encumbrances in favor of the
Secured Parties.
 
(f) All Inventory is of good and merchantable quality, free from any material
defects. To the Company’s knowledge, none of such Inventory is subject to any
licensing, patent, trademark, trade name or copyright with any person that
restricts the Company’s ability to manufacture and/or sell Inventory. The
completion of the manufacturing process of such Inventory by a person other than
the Company or a Subsidiary is permitted under each contract to which the
Company is a party or to which the subject Inventory is subject. All Inventory
has been and will be manufactured in compliance with the Fair Labor Standards
Act and other applicable law.
 
(g) None of the Collateral is held by a third party in any location as assignee,
trustee, bailee, consignee or in any similar capacity.
 
(h) The Company is a Delaware corporation whose legal name is Surfect Holdings,
Inc., whose federal tax identification number is 88-0513176, and whose Delaware
organizational identification number is 4217552. Surfect Technologies is a
Delaware corporation whose legal name is Surfect Technologies, Inc., whose
federal tax identification number is 85-0477420, and whose Delaware
organizational identification number is 4122366.
 
2.2 Survival. All representations, warranties and agreements of the Company and
the Subsidiaries contained in this Agreement shall survive the execution,
delivery and performance of this Agreement and shall, except for any covenants
which expressly continue thereafter, continue until the termination of this
Agreement pursuant to Section 5.5 hereof.
 
ARTICLE 3
COVENANTS
 
3.1 Covenants. The Company hereby covenants and agrees with the Secured Parties
that so long as this Agreement shall remain in effect, any Obligations shall
remain unpaid or unperformed, and/or the Post-Closing Commitment shall have
expired or been terminated, (a) the Company shall promptly give written notice
to the Secured Parties of any adverse claim or levy or attachment, execution or
other process
 

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against any of the Collateral; (b) at the Company’s own cost and expense, the
Company shall take or cause to be taken any and all lawful actions necessary or
desirable to defend the Collateral against the claims and demands of all persons
other than the Secured Parties and persons holding Permitted Liens, and to
defend the security interest of the Secured Parties in the Collateral and the
priority thereof against any lien or encumbrance of any nature other than
Permitted Liens; (c) the Company shall keep or cause to be kept all tangible
Collateral properly insured with financially sound and reputable insurers,
against loss by fire, explosion, theft, fraud and such other casualties; (d) the
Company shall keep, or cause to be kept, all Equipment and other tangible
Collateral in good order and repair (normal wear and tear excepted) and promptly
notify the Secured Parties of any event causing any material loss, damage or
depreciation in value of the Collateral in the aggregate and of the estimated
extent of such loss, damage or depreciation; (e) at the Secured Parties’
request, the Company shall mark, or cause to be marked, any Collateral that is
chattel paper with a legend showing the Secured Parties’ lien and security
interest therein, and/or shall deliver same to the Secured Parties; (f) the
Company shall promptly give, or cause to be given, written notice to the Secured
Parties of any change in or addition to the intellectual property rights
material to its business or any change in any of the information set forth on
Schedule A hereto, and update such Schedule A accordingly if so requested by the
Secured Parties; (g) the Company shall promptly notify the Secured Parties in
writing of the particulars of any and all commercial tort claims held or
acquired by the Company or any Subsidiary at any time and from time to time; and
(h) neither the Company nor any Subsidiary shall (i) amend or terminate any
contract or other document or instrument constituting part of the Collateral,
except for transactions in the ordinary course of business, (ii) voluntarily or
involuntarily exchange, lease, sell, transfer or otherwise dispose of any
Collateral other than in the ordinary course of business, (iii) make any
compromise, settlement, discharge or adjustment or grant any extension of time
for payment with respect to any Account or any lien, Guaranty or remedy
pertaining thereto, except for transactions in the ordinary course of business,
(iv) except upon thirty (30) days prior written notice to the Secured Parties,
change its name, or the location of any Collateral (other than Collateral that
constitutes goods that are mobile and that are of the type normally used in more
than one jurisdiction or otherwise in the ordinary course of business (including
without limitation, sales and shipments of inventory in the ordinary course of
business)) or (v) change the location of its principal executive office or
jurisdiction of incorporation.
 
3.2 Further Deliveries. The Company hereby covenants and agrees with the Secured
Parties that so long as this Agreement shall remain in effect, any Obligations
shall remain unpaid or unperformed, upon the reasonable request of the Secured
Parties, the Company shall, (a) at any time and from time to time, execute and
deliver, or cause to be executed and delivered, any and all specific collateral
assignments which the Secured Parties may reasonably request with respect to
Owned Intellectual Property, and the Secured Parties hereby consent to the
filing thereof with the United States Patent and Trademark Office, the United
States Copyright Office, and/or any other governmental agency or office
(domestic or foreign) in which such filing may be appropriate, (b) use all
reasonable efforts to cause each depository bank holding a deposit account of
the Company, and each securities intermediary holding any investment property
owned by the Company, to execute and deliver, or cause to be executed and
 

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delivered, a control agreement sufficient to provide the Secured Parties with
control of such deposit account or investment property, and otherwise in form
and substance reasonably satisfactory to the Secured Parties, and the Company
shall itself execute and deliver, or cause to be executed and delivered, any and
all such control agreements (and in the event that any such depository bank or
securities intermediary refuses to execute and deliver such control agreement,
the Secured Parties may require the applicable deposit account or investment
property to be transferred to another institution which will execute and deliver
such control agreement), (c) with respect to all letter of credit rights and
electronic chattel paper owned or held by the Company, take, or cause to be
taken, such actions and deliver, or cause to be delivered, such agreements to
provide the Secured Parties with control thereof, (d) with respect to any
Collateral which is the subject of or evidenced by a certificate of title, cause
the Secured Parties’ security interests to be officially noted on such
certificate of title, (e) obtain for the benefit of the Secured Parties a
landlord waiver or landlord subordination agreement pursuant to which, among
other things, the landlord of each premises at which any material amount of
Collateral is located agrees to treat all such Collateral as personal property
(and not as fixtures) and agrees to waive or subordinate in favor of the Secured
Parties any and all liens and security interests (whether pursuant to a lease
agreement, by statute, or otherwise) which such landlord may have for unpaid
rent or otherwise, and/or obtain such landlord’s written consent to a collateral
assignment of the subject lease in favor of the Secured Parties and (f) in the
event that any of the Collateral is at any time or from time to time held by any
bailee, warehouseman, consignee or other person, notify such person in writing
of the Secured Parties’ security interests in such Collateral, and shall use
reasonable best efforts to obtain such person’s written agreement to hold such
Collateral for the Secured Parties’ account and subject to the Secured Parties’
instructions and to deliver to the Secured Parties all warehouse receipts, bills
of lading or other similar documents (duly endorsed in favor of the Secured
Parties) relating to such Collateral. In addition the Company shall notify the
Secured Parties not less than thirty (30) days prior to acquiring any fee
interest in any real property, and shall execute and deliver, or cause to be
executed and delivered, to the Secured Parties a mortgage or deed of trust on
such real property to secure the Obligations, which shall be senior and in
priority to any other mortgage or deed of trust other than Permitted Liens. 

3.3 Intellectual Property. (a) Except as could not reasonably be expected to
have a Material Adverse Effect, the Company or a Subsidiary (either itself or
through licensees) (i) will continue to use each registered trademark (owned by
the Company or a Subsidiary) and trademark for which an application (owned by
the Company or a Subsidiary) is pending, to the extent reasonably necessary to
maintain such trademark in full force free from any claim of abandonment for
non-use, (ii) will maintain products and services offered under such trademark
at a level not less than the quality of such products and services as of the
date hereof, (iii) will not (and will not permit any licensee or sublicensee
thereof to) do any act or knowingly omit to do any act whereby such trademark
could reasonably be expected to become invalidated or impaired in any way, (iv)
will not do any act, or knowingly omit to do any act, whereby any issued patent
owned by the Company or a Subsidiary would reasonably be expected to become
forfeited, abandoned or dedicated to the public, (v) will not (and will not
permit any licensee or sublicensee thereof to) do any act or knowingly omit to
do any act whereby any registered copyright owned by the Company or a Subsidiary
or copyright for which an application is pending (owned by the Company or a
Subsidiary) could reasonably be expected to become invalidated or otherwise
impaired, and (vi) will not (either itself or through licensees) do any act
whereby any material portion of the Company’s or a Subsidiary’s owned copyrights
may fall into the public domain.

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(b) The Company will give prompt written notice to the Secured Parties if the
Company knows, or has reason to know, that any application or registration
relating to any material Owned Intellectual Property may become forfeited,
abandoned or dedicated to the public, or of any adverse determination or
development (including, without limitation, the institution of, or any such
determination or development in, any proceeding in the United States Patent and
Trademark Office, the United States Copyright Office or any court or tribunal in
any country) regarding the Company’s ownership of, or the validity of, any
material Owned Intellectual Property or the Company’s right to register the same
or to own and maintain the same.
 
(c) Whenever the Company or a Subsidiary, either by itself or through any agent,
employee, licensee or designee, shall file an application for the registration
of any Intellectual Property with the United States Patent and Trademark Office,
the United States Copyright Office or any similar office or agency in any other
country or any political subdivision thereof, the Company shall report such
filing to the Secured Parties in writing within five (5) Business Days after the
last day of the fiscal quarter in which such filing occurs. Upon request of the
Secured Parties, the Company shall execute and deliver, and have recorded, any
and all agreements, instruments, documents and papers as the Secured Parties may
reasonably request to evidence the Secured Parties’ security interests in any
material copyright, patent or trademark and the goodwill and general intangibles
of the Company and the Subsidiaries relating thereto or represented thereby.
 
(d) The Company will take, or cause to be taken, all reasonable and necessary
steps, at the Company’s sole cost and expense, including, without limitation, in
any proceeding before the United States Patent and Trademark Office, the United
States Copyright Office or any similar office or agency in any other country or
any political subdivision thereof, to maintain and pursue each application (and
to obtain the relevant registration) and to maintain each registration of the
material Owned Intellectual Property, including, without limitation, filing of
applications for renewal, affidavits of use and affidavits of incontestability.
 
(e) In the event that any material Owned Intellectual Property owned by the
Company or a Subsidiary is infringed, misappropriated or diluted by a third
party, the Company or such Subsidiary shall (i) at its sole cost and expense,
take such actions as the Secured Parties shall reasonably request or the Company
or such Subsidiary shall reasonably deem appropriate under the circumstances to
protect such Owned Intellectual Property, and (ii) if such Owned Intellectual
Property is of material economic value, promptly notify the Secured Parties
after the Company learns of such infringement, misappropriation or dilution.
 

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ARTICLE 4
REMEDIAL MATTERS
 
4.1 Event of Default. An “Event of Default” shall exist hereunder (a) if an
Event of Default shall occur under any of the Notes, or (b) if the Company or
any Subsidiary shall breach in any material respect any agreement contained
herein or otherwise default in any material respect in the observance or
performance of any of the covenants, terms, conditions or agreements on the part
of the Company contained in this Agreement and such non-observance or
non-performance continues for a period of thirty (30) days after the earlier of
(i) written notice from the Secured Parties of such default or (ii) actual
knowledge of the Company of such default.
 
4.2 Collections. Upon the occurrence and during the continuance of an Event of
Default, the Secured Parties may, in their sole discretion: (a) communicate with
the account debtors of any and all Accounts, and require the Company to notify
such account debtors and any and all parties to any contracts included in the
Collateral, notifying such account debtors and parties to contracts that the
subject Accounts and contracts have been assigned to the Secured Parties; (b)
demand, sue for, collect or receive any money or property at any time payable or
receivable on account of or in exchange for, or make any compromise or
settlement deemed desirable with respect to any of the Collateral, but shall be
under no obligation to do so; and/or (c) extend the time of payment, arrange for
payment in installments, or otherwise modify the term of, or release, any of the
Collateral, without thereby incurring responsibility to, or discharging or
otherwise affecting any liability of, the Company or any Subsidiary, other than
to discharge the Company or a Subsidiary in so doing with respect to liabilities
of the Company or a Subsidiary to the extent that the liabilities are paid or
repaid. After the occurrence and during the continuance of an Event of Default,
any money, checks, notes, bills, drafts, or commercial paper received by the
Company or a Subsidiary shall be held in trust for the Secured Parties and shall
be promptly (and in any event within ten (10) Business Days after receipt by the
Company) turned over to the Secured Parties as its interest shall appear. Upon
the occurrence and during the continuance of an Event of Default, the Secured
Parties may make such payments and take such actions as the Secured Parties deem
necessary to protect their security interests in the Collateral or the value
thereof, and the Secured Parties are hereby unconditionally and irrevocably
authorized (without limiting the general nature of the authority hereinabove
conferred) to pay, purchase, contest or compromise any liens which in the
judgment of the Secured Parties appear to be equal to, prior to or superior to
its security interest in the Collateral and any liens not expressly permitted by
this Agreement.
 
4.3 Possession; Sale of Collateral. (a) Upon the occurrence and during the
continuance of an Event of Default, the Secured Parties may: (i) require the
Company to assemble, or cause to be assembled, the tangible assets that comprise
part of the Collateral and make them available to the Secured Parties at any
place or places reasonably designated by the Secured Parties; (ii) to the extent
permitted by applicable law, with or without notice or demand for performance
and without liability for trespass, enter any premises where the Collateral may
be located and peaceably take possession of the same, and may demand and receive
such possession from any person who has
 

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possession thereof, and may take such measures as it may deem necessary or
proper for the care or protection thereof (including, but not limited to, the
right to remove all or any portion of the Collateral); and (iii) with or without
taking such possession may sell or cause to be sold, in one or more sales or
parcels, for cash, on credit or for future delivery, without assumption of any
credit risk, all or any portion of the Collateral, at public or private sale or
at any broker’s board or any securities exchange, without demand of performance
or notice of intention to sell or of time or place of sale, except ten (10)
days’ written notice to the Company of the time and place of such sale or sales
(and such other notices as may be required by applicable statute, if any, and
which cannot be waived), which the Company hereby expressly acknowledges is
commercially reasonable. The Secured Parties shall have no obligation to
clean-up or otherwise prepare any Collateral for sale. The Collateral may be
sold or disposed of for cash, upon credit or for future delivery as the Secured
Parties shall deem appropriate. Each such purchaser at any such sale shall hold
the property sold absolutely, free from any claim or right on the part of the
Company or any Subsidiary. At any such sale, the Collateral, or portion thereof,
to be sold may be sold in one lot as an entirety or in separate parcels, as the
Secured Parties may determine. The Secured Parties shall not be obligated to
make any sale of any Collateral if it shall determine not to do so, regardless
of the fact that notice of sale of such Collateral shall have been given. The
Secured Parties may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by announcement
at the time and place fixed for sale, and such sale may, without further notice,
be made at the time and place to which the same was so adjourned. The Secured
Parties may comply with any applicable state or federal law requirements in
connection with a disposition of the Collateral and compliance will not be
considered adversely to affect the commercial reasonableness of any disposition
of the Collateral. In case any sale of all or any part of the Collateral is made
on credit or for future delivery, the Collateral so sold may be retained by the
Secured Parties until the sale price is paid by the purchaser or purchasers
thereof. The Secured Parties shall not incur any liability for the failure to
collect or realize upon any or all of the Collateral or for any delay in doing
so and, in case of any such failure, shall not be under any obligation to take
any action with respect thereto; provided, such Collateral may be sold again
upon like notice. If any Collateral is sold upon credit, the Company will be
credited only with payments actually made by the purchaser, received by the
Secured Parties and applied to the Obligations in accordance with Section 4.4.
In the event the purchasers fail to pay for the Collateral, the Secured Parties
may resell the Collateral. At any public sale made pursuant to this Section 4.3,
the Secured Parties may bid for or purchase, free from any right of redemption,
stay or appraisal and all rights of marshalling, the Collateral and any other
security for the Obligations (all such rights being also hereby waived and
released by the Company to the fullest extent permitted by law), and may make
payment on account thereof by using any claim then due and payable to the
Secured Parties from the Company as a credit against the purchase price, and the
Secured Parties may, upon compliance with the terms of sale, hold, retain and
dispose of such property without further accountability to the Company or any
Subsidiary therefor. As an alternative to exercising the power of sale herein
conferred upon it, the Secured Parties may proceed by a suit or suits at law or
in equity to foreclose this Agreement and to sell the Collateral or any portion
thereof pursuant to a judgment or
 

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decree of a court or courts having competent jurisdiction or pursuant to a
proceeding by a court-appointed receiver. In any action hereunder, the Secured
Parties shall be entitled to the appointment of a receiver without notice, to
peaceably take possession of all or any portion of the Collateral and to
exercise such powers as the court shall confer upon the receiver.
Notwithstanding the foregoing, if an Event of Default shall occur and be
continuing, the Secured Parties shall be entitled, in its discretion, to apply
any cash or cash items constituting Collateral in its possession to payment of
the Obligations, and to set off the Obligations against any and all liabilities
or obligations owed by a Secured Party to the Company, in each case without
notice to the Company (any such notice being hereby expressly waived by the
Company); and the Secured Parties shall endeavor to notify the Company promptly
upon any such application or set-off, provided that the failure to give any such
notice shall not affect the validity of such application or set-off.
 
(b) If an Event of Default shall occur and be continuing, the Secured Parties
shall, in addition to exercising any and all rights and remedies afforded to it
hereunder, have all the rights and remedies of a secured party under all
applicable provisions of law, including but not limited to the Code.
 
(c) If an Event of Default shall occur and be continuing, the Secured Parties
shall be entitled (but shall not be required) to (i) operate any or all of the
Collateral, (ii) perform any and all obligations of the Company under any
contract included within the Collateral and exercise all rights of the Company
thereunder, (ii) do all other acts which the Secured Parties may deem necessary
or appropriate to protect its security interest hereunder, and (iv) sell,
assign, subcontract or otherwise transfer any such contract (subject, however,
to the prior approval of each other party to such contract to the extent
required thereunder). The Company agrees that notwithstanding anything to the
contrary contained in this Agreement, the Company shall remain liable under each
contract or other agreement giving rise to Accounts and general intangibles and
all other contracts or agreements constituting part of the Collateral and the
Secured Parties shall not have any obligation or liability in respect thereof.
 
(d) After the occurrence and during the continuance of an Event of Default, upon
the Secured Parties’ request, the Company shall deliver to the Secured Parties
all original and other documents, evidencing and relating to the sale and
delivery of Inventory or Accounts, including but not limited to, all original
orders, invoices and shipping receipts. The Company shall also furnish to the
Secured Parties, reasonably promptly upon the request of the Secured Parties, to
the extent available, such reports, reconciliations and aging balances regarding
Accounts as the Secured Parties may reasonably request from time to time.
 
(e) After the occurrence and during the continuance of an Event of Default, the
Secured Parties shall have the right (i) to receive any and all cash dividends,
payments or distributions paid or payable in respect of any investment property
included in the Collateral, (ii) to cause such investment property to be
registered in the name of the Secured Parties or their respective nominees, and
(iii) to exercise all voting and other rights pertaining to such investment
property and any and all rights of conversion, exchange and subscription and any
other rights, privileges or options pertaining to such investment property as if
the Secured Parties were the absolute owner thereof. The Company hereby
authorizes each issuer of investment property included in the Collateral to
rely, without investigation, on any notice given by the Secured Parties which
states the existence of an Event of Default and requires compliance with
instructions of the Secured Parties with respect to such investment property,
without requirement of any other or further instructions from the Company; and
the Company agrees that each such issuer shall be fully protected in so
complying with any such notice and instruction.
 

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4.4 Application of Proceeds. Unless the Secured Parties otherwise direct, the
proceeds of any sale of Collateral pursuant to this Agreement or otherwise shall
be applied after receipt by the Secured Parties as follows:
 
(a) First, to the payment of all costs, fees and expenses of the Secured Parties
and their respective agents, representatives and attorneys incurred in
connection with such sale or with the retaking, holding, handling, preparing for
sale (or other disposition) of the Collateral or otherwise in connection with
any of the Notes, this Agreement or any of the Obligations, including, but not
limited to, the reasonable fees and expenses of the Secured Parties’ agents and
attorneys and court costs (whether at trial, appellate or administrative
levels), if any, incurred by the Secured Parties in so doing;
 
(b) Second, to the payment of the outstanding principal balance, accrued
interest, fees and other amounts payable on the Obligations in such order as the
Secured Parties may determine; and
 
(c) Third, to the Company or to such other Person as a court may direct.
 
4.5 Authority of Secured Parties. The Secured Parties shall have and be entitled
to exercise all such powers hereunder as are specifically delegated to the
Secured Parties by the terms hereof, together with such powers as are reasonably
incidental thereto. The Secured Parties may execute any of its duties hereunder
by or through its agents or employees and shall be entitled to retain counsel
and to act in reliance upon the advice of such counsel concerning all matters
pertaining to its duties hereunder.
 
4.6 Certain Waivers; Company Not Discharged. The Company expressly and
irrevocably waives (to the extent permitted by applicable law) presentment,
demand for payment and protest of nonpayment in respect of its Obligations under
this Agreement. The obligations and duties of the Company hereunder are
irrevocable, absolute, and unconditional and shall not be discharged, impaired
or otherwise affected by (a) the failure of the Secured Parties to assert any
claim or demand or to enforce any right or remedy against the Company or any
grantee or any Collateral under the provisions of this Agreement or any waiver,
consent, extension, indulgence or other action or inaction in respect thereof,
(b) any extension or renewal of any part of the Obligations, (c) the release of
any security interests in any part of the Collateral or the release, sale or
exchange of or failure to foreclose against any security held by or for the
benefit of the Secured Parties for payment or performance of the Obligations,
(d) the bankruptcy, insolvency or reorganization of the Company or any grantee
or any other Persons, or (e) any change, restructuring or termination of the
corporate structure or existence of the Company or any grantee or any
restructuring, refinancing, subordination or other change or variation in the
terms of all or any portion of the Obligations.
 

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4.7 Transfer of Security Interest. The Secured Parties may transfer to any other
Person all or any part of the liens and security interests granted hereby, and
all or any part of the Collateral which may be in the Secured Parties’
possession. Upon such transfer, the transferee shall be vested with all the
rights and powers of the Secured Parties hereunder with respect to such of the
Collateral as is so transferred, but, with respect to any of the Collateral not
so transferred, the Secured Parties shall retain all of its rights and powers
(whether given to it in this Agreement, or otherwise).
 
ARTICLE 5
MISCELLANEOUS
 
5.1 Further Assurances. The Company agrees, at its expense, to do such further
things, to execute, acknowledge, deliver and cause to be duly filed all such
further instruments and documents and take all such actions as the Secured
Parties may from time to time reasonably request for the better preservation and
perfection of the security interests and the rights and remedies created hereby,
including but not limited to the execution and delivery of such schedules of
Collateral and additional assignments, agreements and instruments, the payment
of any fees and taxes required in connection with the execution and delivery of
this Agreement, the granting and maintenance of the security interests created
hereby and the execution, filing and recordation of any financing statements
(including fixture filings) or other documents as the Secured Parties may deem
reasonably necessary or desirable for the perfection of the security interests
granted hereunder. If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any promissory note or other
instrument, such note or instrument shall be immediately pledged and delivered
to the Secured Parties, duly endorsed in a manner satisfactory to the Secured
Parties. If any Collateral requires possession thereof to perfect the Secured
Parties’ security interests hereunder, such Collateral shall be immediately
delivered to the Secured Parties or their respective agents, upon the reasonable
request of the Secured Parties. If at any time the Company shall take and
perfect a security interest in any property to secure payment and performance of
an Account, the Company, upon the request of the Secured Parties, shall promptly
assign such security interest to the Secured Parties. The Company agrees that,
after the occurrence and during the continuance of an Event of Default, it shall
upon request of the Secured Parties, take, or cause to be taken, any and all
actions, to the extent permitted by applicable law, at its own expense, to
obtain the approval of any governmental authority for any action or transaction
contemplated by this Agreement that is then required by law, and specifically,
without limitation, upon request of the Secured Parties, to prepare, sign and
file with any governmental authority the Company’s portion of any application or
applications for consent to the assignment of licenses held by the Company, or
for consent to the possession and sale of any of the Collateral by or on behalf
of the Secured Parties. The Company and each Subsidiary shall at all times, at
its own expense and cost, keep accurate and complete records with respect to the
Collateral, including but not limited to a record of all payments and proceeds
received in connection therewith or as a result of the sale thereof and of all
credits granted, and agrees that the Secured Parties or its representatives
shall have the right at any reasonable time and from time to time to call at the
Company’s place or places of business to inspect the Collateral and to examine
or cause to be examined all of the books, records, journals and other data
relating to the Collateral and to make extracts therefrom or copies thereof as
are reasonably requested; provided that such inspections shall occur no more
often than quarterly unless an Event of Default has occurred and is continuing..
 

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5.2 Effectiveness. This Security Agreement shall take effect immediately upon
execution and delivery by the Company.
 
5.3 Indemnity; Reimbursement of Secured Parties; Deficiency. In connection with
the administration and enforcement or exercise of any right or remedy granted to
the Secured Parties hereunder or under any other security documents, the Company
shall, subject to the limitations set forth hereafter, (a) indemnify, defend and
hold harmless each Secured Party from and against any and all claims, demands,
losses, judgments and liabilities (including but not limited to liabilities for
taxes and penalties) of whatever nature, incurred by or assessed against such
Secured Party in connection with such administration, enforcement or exercise
(including in connection with any workout, restructuring, bankruptcy or any
similar proceeding), and (b) reimburse each Secured Party for all reasonable
costs and expenses, including but not limited to the reasonable fees and
disbursements of attorneys, incurred by or assessed against such Secured Party
in connection with such administration, enforcement or exercise (including in
connection with any workout, restructuring, bankruptcy or any similar
proceeding. The foregoing indemnity agreement includes all reasonable costs
incurred by the Secured Parties in connection with any litigation relating to
the Collateral whether or not the Secured Party shall be a party to such
litigation, including but not limited to the reasonable fees and disbursements
of attorneys for the Secured Parties, and any out-of-pocket costs incurred by
the Secured Parties in appearing as a witness or in otherwise complying with
legal process served upon it. The obligations of the Company in this Section 5.3
shall not apply to any claims or losses that arise from the gross negligence or
willful misconduct of a Secured Party. All indemnities contained in this Section
5.3 and elsewhere in this Agreement shall survive the expiration or earlier
termination of this Agreement. After application of the proceeds by the Secured
Parties pursuant to Section 4.4 hereof, the Company shall remain liable to the
Secured Parties for any deficiency. The provisions of this Section 5.3 shall
survive any termination of this Agreement and release of liens hereunder.
 
5.4 Continuing Lien. It is the intent of the parties hereto that (a) this
Agreement shall constitute a continuing agreement as to any and all future, as
well as existing transactions, between the Company and the Secured Parties under
or in connection with the Notes, the Purchase Agreement and the other
Transaction Documents, and (b) the security interest provided for herein shall
attach to after-acquired as well as existing Collateral.
 

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5.5 Release. Upon payment in full of the Obligations or the conversion of the
entire principal balance and all accrued and unpaid interest under the Notes,
the Secured Parties shall reassign, redeliver and release (or cause to be so
reassigned, redelivered and released), without recourse upon or warranty by the
Secured Parties, and at the sole expense of the Company, to the Company, against
receipt therefor, such of the Collateral (if any) as shall not have been sold or
otherwise applied by the Secured Parties pursuant to the terms hereof and not
theretofore reassigned, redelivered and released to the Company, together with
appropriate instruments of reassignment and release.
 
5.6 Notices. Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, or by Federal Express, Express Mail or similar overnight
delivery or courier service or delivered (in person or by telecopy, telex or
similar telecommunications equipment) against receipt to the party to whom it is
to be given:
 
(i) if to the Company:

Surfect Holdings, Inc.
12000-G Candelaria NE
Albuquerque, New Mexico 87112
Attention: Chief Executive Officer
Facsimile: (505) 294 6311

with a copy to:

Brownstein Hyatt Farber Schreck, P.C.
201 Third Street NW, Suite 1700
Albuquerque, New Mexico 87102
Attention: Eduardo Duffy, Esq.
Facsimile: (505) 244 9266

(ii) if to an Investor:

At the address set forth opposite such Investor’s name on Exhibit A.

with a copy to:

Greenberg Traurig, LLP
Met Life Building
200 Park Avenue
New York, New York 10166
Attention: Anthony Marsico, Escq.
Facsimile: (212) 801-6400

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

or (iii) in either case, to such other address as the party shall have furnished
in writing in accordance with the provisions of this Section 5.6. Notice to the
estate of any party shall be sufficient if addressed to the party as provided in
this Section 5.6. Any notice or other communication given by certified mail
shall be deemed given at the time of certification thereof, except for a notice
changing a party’s address which shall be deemed given at the time of receipt
thereof. Any notice given by other means permitted by this Section 5.6 shall be
deemed given at the time of receipt thereof.
 
5.7 Successors and Assigns. This Security Agreement shall be binding upon and
inure solely to the benefit of each party hereto and their successors and
assigns, and nothing in this Agreement, express or implied, is intended to or
shall confer upon any other person any right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement. The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the Secured Parties. The Secured Parties may assign their respective
rights hereunder without prior written consent of the Company.
 
5.8 Governing Law; Jurisdiction; Waiver of Jury Trial. The provisions of this
Agreement shall be governed by and construed in accordance with the laws of the
State of New York, without giving effect to any choice of law or conflict of law
rules or provisions. The Company hereby irrevocably consents to the jurisdiction
of all courts (state and federal) sitting in the State of New York in connection
with any claim, action or proceeding relating to or for enforcement of this
Agreement, and hereby waives any defense of inconvenient forum or other such
claim or defense in respect of the lodging of any such claim, action or
proceeding in any such court. THE COMPANY HEREBY IRREVOCABLY WAIVES ALL RIGHT TO
TRIAL BY JURY IN ANY CLAIM, ACTION OR PROCEEDING RELATING TO THIS AGREEMENT.
 
5.9 Waivers. No failure or delay of the Secured Parties in exercising any power
or right hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
future exercise thereof or the exercise of any other right or power. The rights
and remedies of the Secured Parties hereunder are cumulative, may be exercised
singly or concurrently, and are not exclusive of any rights or remedies which it
would otherwise have. No course of conduct or course of dealing, or any delay,
indulgence or other act or omission of the Secured Parties, shall affect or
impair, or constitute a waiver of, any of the Secured Parties’ rights or
remedies hereunder, except to the extent set forth in a written agreement as
provided in Section 5.10. No waiver of any provision of this Agreement or
consent to any departure by the Company therefrom shall in any event be
effective unless the same shall be evidenced as provided in Section 5.10, and
then such waiver or consent shall be effective only in the specific instance and
for the purpose for which given. No notice to or demand on the Company in any
case shall entitle the Company to any other or further notice or demand in
similar or other circumstances.
 
5.10 Amendments. Neither this Agreement nor any provision hereof may be amended
or modified, and no required performance hereunder may be waived, except
pursuant to an agreement or agreements in writing signed by the party to be
charged therewith.
 

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5.11 Severability. In the event any one or more of the provisions contained in
this Agreement shall be held invalid, illegal or unenforceable in any respect by
a court of competent jurisdiction, such provision shall be limited in scope or
effect to the extent necessary so as to permit such provision to be enforceable
to the fullest extent permitted by applicable law, and the validity, legality
and enforceability of the remaining provisions contained herein or therein shall
not in any way be affected or impaired thereby.
 
5.12 Counterparts. This Security Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute but one contract, and shall become effective
when copies hereof which, when taken together, bear the signatures of each of
the parties hereto shall be delivered or mailed to the Secured Parties.
 
5.13 Headings. Article and Section headings used herein are for convenience of
reference only and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
 
5.15 Interpretation. In the event of any express conflict between this Agreement
and the Purchase Agreement, the terms of the Purchase Agreement shall control;
provided, that the imposition of any greater or more specific standard of
performance or obligation in this Agreement shall not constitute a conflict with
the Purchase Agreement.
5.16 Appointment of Agent. Gemini Strategies, LLC hereby appoints Birchten
Investments, Ltd. (the “Agent”) to act as its agent for purposes of exercising
any and all rights and remedies of it and the Secured Parties hereunder. All
action required or permitted to be taken by Gemini Strategies, LLC hereunder
shall be taken through the Agent. The Agent shall have the rights,
responsibilities and immunities set forth in Schedule B hereto.

5.17. Rights and Obligations between Secured Parties. If an Event of Default
occurs and any Secured Party receives payment from the Company, the other
Secured Party shall be immediately notified and such payment shall be shared
with such other Secured Party. Notwithstanding anything to the contrary
contained in the Purchase Agreement, this Agreement or any document executed in
connection with the Obligations and irrespective of: (i) the time, order or
method of attachment or perfection of the security interests created in favor of
the Secured Parties, (ii) the time or order of filing or recording of financing
statements or other documents filed or recorded to perfect security interests in
any Collateral; (iii) anything contained in any filing or agreement to which any
Secured Party now or hereafter may be a party; and (iv) the rules for
determining perfection or priority under the Code or any other law governing the
relative priorities of secured creditors, each Secured Party acknowledges that
(x) the other Secured Party has a valid security interest in the Collateral and
(y) the security interests of the Secured Parties in any Collateral pursuant to
any outstanding Obligations shall be pari passu with each other.

 

[Remainder of page intentionally left blank]
 
 

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IN WITNESS WHEREOF, this Agreement has been duly executed by each of the
undersigned as of the date first set forth above.
 
SURFECT HOLDINGS, INC.

By:___________________________
Name:
Title:

SURFECT TECHNOLOGIES, INC.

By:___________________________
Name:
Title:

BIRCHTEN INVESTMENTS, LTD.

By:___________________________
Name:
Title:

GEMINI MASTER FUND, LTD.

By:___________________________
Name:
Title:

LONDON FAMILY TRUST

By:___________________________
Name:
Title:

JACOB HONIG IRREVOCABLE TRUST

By::__________________________
Name:
Title:

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Schedule A
 
Location of Asset and Record
 
 
 
 

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Schedule B
 
The Agent

1. Appointment. The Secured Parties (all capitalized terms used herein and
otherwise defined shall have the respective meanings provided in the Security
Agreement to which this Schedule B is attached (the “Agreement”)), by their
acceptance of the benefits of the Agreement, hereby designate Birchten
Investments, Ltd. (the “Agent”) as the Agent to act as specified herein and in
the Agreement. Each Secured Party shall be deemed irrevocably to authorize the
Agent to take such action on its behalf under the provisions of the Agreement
and any other Transaction Document and to exercise such powers and to perform
such duties hereunder and thereunder as are specifically delegated to or
required of the Agent by the terms hereof and thereof and such other powers as
are reasonably incidental thereto. The Agent may perform any of its duties
hereunder by or through its agents or employees.

2. Nature of Duties. The Agent shall have no duties or responsibilities except
those expressly set forth in the Agreement. Neither the Agent nor any of its
partners, members, shareholders, officers, directors, employees or agents shall
be liable for any action taken or omitted by it as such under the Agreement or
hereunder or in connection herewith or therewith, be responsible for the
consequence of any oversight or error of judgment or answerable for any loss,
unless caused solely by its or their gross negligence or willful misconduct as
determined by a final judgment (not subject to further appeal) of a court of
competent jurisdiction. The duties of the Agent shall be mechanical and
administrative in nature; the Agent shall not have by reason of the Agreement or
any other Transaction Document a fiduciary relationship in respect of the
Company or any Secured Party; and nothing in the Agreement or any other
Transaction Document, expressed or implied, is intended to or shall be so
construed as to impose upon the Agent any obligations in respect of the
Agreement or any other Transaction Document except as expressly set forth herein
and therein.

3.  Lack of Reliance on the Agent. Independently and without reliance upon the
Agent, each Secured Party, to the extent it deems appropriate, has made and
shall continue to make (i) its own independent investigation of the financial
condition and affairs of the Company and its Subsidiaries in connection with
such Secured Party’s investment in the Company, the creation and continuance of
the Obligations, the transactions contemplated by the Transaction Documents, and
the taking or not taking of any action in connection therewith, and (ii) its own
appraisal of the creditworthiness of the Company and its subsidiaries, and of
the value of the Collateral from time to time, and the Agent shall have no duty
or responsibility, either initially or on a continuing basis, to provide any
Secured Party with any credit, market or other information with respect thereto,
whether coming into its possession before any Obligations are incurred or at any
time or times thereafter. The Agent shall not be responsible to the Company or
any Secured Party for any recitals, statements, information, representations or
warranties herein or in any document, certificate or other writing delivered in
connection herewith, or for the execution, effectiveness, genuineness, validity,
enforceability, perfection, collectibility, priority or sufficiency of the
Agreement or any other Transaction Document, or for the financial condition of
the Company or the value of any of the Collateral, or be required to make any
inquiry concerning either the performance or observance of any of the terms,
provisions or conditions of the Agreement or any other Transaction Document, or
the financial condition of the Company, or the value of any of the Collateral,
or the existence or possible existence of any default or Event of Default under
the Agreement, the Notes or any of the other Transaction Documents.
 

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4.  Certain Rights of the Agent. The Agent shall have the right to take any
action with respect to the Collateral, on behalf of all of the Secured Parties.
Without limiting the foregoing, (a) no Secured Party shall have any right of
action whatsoever against the Agent as a result of the Agent acting or
refraining from acting hereunder in accordance with the terms of the Agreement
or any other Transaction Document, and the Company shall have no right to
question or challenge the authority of, or the instructions given to, the Agent
pursuant to the foregoing and (b) the Agent shall not be required to take any
action which the Agent believes (i) could reasonably be expected to expose it to
personal liability or (ii) is contrary to this Agreement, the Transaction
Documents or applicable law.

5.  Reliance. The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any writing, resolution, notice, statement, certificate, telex,
teletype or telecopier message, cablegram, radiogram, order or other document or
telephone message signed, sent or made by the proper person or entity, and, with
respect to all legal matters pertaining to the Agreement and the other
Transaction Documents and its duties thereunder, upon advice of counsel selected
by it and upon all other matters pertaining to this Agreement and the other
Transaction Documents and its duties thereunder, upon advice of other experts
selected by it. Anything to the contrary notwithstanding, the Agent shall have
no obligation whatsoever to any Secured Party to assure that the Collateral
exists or is owned by the Company or is cared for, protected or insured or that
the liens granted pursuant to the Agreement have been properly or sufficiently
or lawfully created, perfected, or enforced or are entitled to any particular
priority.

6.  Indemnification. To the extent that the Agent is not reimbursed and
indemnified by the Company, the Secured Parties will jointly and severally
reimburse and indemnify the Agent, in proportion to their initially purchased
respective principal amounts of Notes, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind or nature whatsoever which may be imposed
on, incurred by or asserted against the Agent in performing its duties hereunder
or under the Agreement or any other Transaction Document, or in any way relating
to or arising out of the Agreement or any other Transaction Document except for
those determined by a final judgment (not subject to further appeal) of a court
of competent jurisdiction to have resulted solely from the Agent’s own gross
negligence or willful misconduct. Prior to taking any action hereunder as Agent,
the Agent may require each Secured Party to deposit with it sufficient sums as
it determines in good faith is necessary to protect the Agent for costs and
expenses associated with taking such action.

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7.  Resignation by the Agent. (a) The Agent may resign from the performance of
all its functions and duties under the Agreement and the other Transaction
Documents at any time by giving 30 days’ prior written notice (as provided in
the Agreement) to the Company and the Secured Parties. Such resignation shall
take effect upon the appointment of a successor Agent pursuant to clauses (b)
and (c) below.

(b)  Upon any such notice of resignation, the Secured Parties shall appoint a
successor Agent hereunder.

(c)  If a successor Agent shall not have been so appointed within said 30-day
period, the Agent shall then appoint a successor Agent who shall serve as Agent
until such time, if any, as the Secured Parties appoint a successor Agent as
provided above. If a successor Agent has not been appointed within such 30-day
period, the Agent may petition any court of competent jurisdiction or may
interplead the Company and the Secured Parties in a proceeding for the
appointment of a successor Agent, and all fees, including, but not limited to,
extraordinary fees associated with the filing of interpleader and expenses
associated therewith, shall be payable by the Company on demand.

8.  Rights with respect to Collateral. Each Secured Party agrees with all other
Secured Parties and the Agent (i) that it shall not, and shall not attempt to,
exercise any rights with respect to its security interest in the Collateral,
whether pursuant to any other agreement or otherwise (other than pursuant to
this Agreement), or take or institute any action against the Agent or any of the
other Secured Parties in respect of the Collateral or its rights hereunder
(other than any such action arising from the breach of this Agreement) and (ii)
that such Secured Party has no other rights with respect to the Collateral other
than as set forth in this Agreement and the other Transaction Documents. Upon
the acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent and the retiring
Agent shall be discharged from its duties and obligations under the Agreement.
After any retiring Agent’s resignation or removal hereunder as Agent, the
provisions of the Agreement including this Schedule B shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was Agent.
 

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Surfect Holdings Options and Warrants as of: May 21, 2007                       
     Options Outstandinq   
Shares covered by Options/Warrants 
                                 Steven Anderson    955,462                     
             Miles Prim    456,686                                   Tony
Maffia    325,000                                   Mark Eichhorn    224,846   
                               Yixiang Xie    217,803                           
       Thomas T . Griego    108,036                                   Doug
Auker    90,000                                   Larry Wagner    89,310       
                           Qiang Fu    72,024                                 
 Solomon Basame    72,024                                   Greg Perry   
50,000                                   Joe Krutel    44,655                   
               Dennis Barnes    25,000                                   John
Torvik    25,000                                   Bance Horn    18,294         
                         Lee Levine    10,000                                 
 Tom Obertleitner    10,000                                   Mike O'Brien   
3,601                                   Peter Elenius    3,601                 
                 Thomas Goodman    3,601                                   Joel
Camarda    1,440                                   Joseph Monkowski    1,440   
                               Robert (Jim) Walker    1,440                     
             Bruce Lipisko            1,008      2,810,273                     
   Warrants Outstandinq                                       David Khaghan   
25,000                                   Brad and Allison Feinberg    25,000   
                               Alan Horowitz    50,000                         
         David J . Adelman    25,000                                   Jonathan
Alpert    12,500                                   Brian Cam    12,500         
                         David Rounick    12,500                               
   Greg Wallace    12,500                                   David Goldstein   
12,500                                   Jeff and Amy Cohan    12,500           
                       Elinor Ganz IRA    25,000                               
   Harold Gelber Rev . Trust    12,500                                   Aharon
Ungar & Jennifer Ungar    25,000                                   Chocolate
Chip Investments    50,000                                 
 DiMarino-Kroop-Prieto Gastroin    12,500                                 
 Aaron McKie    12,500                                   Ira M . Lubert   
125,000                                   Natalie Rounick    12,500             
                     Lester E . Lipschutz    12,500                             
     Peddle Partners    25,000                                   Elinor Ganz as
Trustee for Amy Ganz    12,500                                   Ira Saligman   
25,000                                   Serpentine Group Inc ., Defined Benefit
Pension Plan    25,000                                   Alfred Gladstone 401K 
  12,500                                   Sidney Ulreich 401k    18,750       
                           Frank & Suzanne Pearl    25,000                     
             Beverly Pinnas    12,500                                   Jeffrey
and Robin Feinberg    25,000                                   Elinor Ganz as
Trustee for Susan Ganz    12,500                                   Sandor
Capital Master Fund I, L .P . (Funds delivered through UBS Account)    125,000 
                                 John Fries    125,000                         
         Frank Trimboli    50,000                                   Mark
Nicosia    75,000                                   Phyllis Ulreich    18,750   
                               Joseph Papa and Marylee Pratnicki    125,000     
                             Gemini Master Fund    100,000                     
             Schreiber Living Trust    100,000 
                                 ITU Ventures West I, LP    250,000 
                                 Granite Financial Group    32,000             
                     Williams Financial Group    20,000                         
         Westminster Securities         56,250      1,758,250 

 

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